<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Filed Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 18, 1999
--------------
DEXTERITY SURGICAL, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 0-20532 74-2559866
---------------------------- ----------------------- ------------------
<S> <C> <C>
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
</TABLE>
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
--------------------------
LIFEQUEST MEDICAL, INC.
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(Former name or former address, if changed since last report)
<PAGE> 2
Item 1. Changes in Control of Registrant.
Not Applicable.
Item 2. Acquisition or Disposition of Assets.
In January 1998, Dexterity Surgical, Inc., a Delaware corporation
formerly known as LifeQuest Medical, Inc. (the Company), acquired
approximately 20 percent of the outstanding capital stock of
Dexterity Incorporated. Subsequent sales of Dexterity
Incorporated capital stock to others had reduced the Company's
ownership of Dexterity Incorporated to approximately 17.28
percent of the outstanding capital stock of Dexterity
Incorporated at March 18, 1999. On March 18, 1999, the Company
acquired the remaining capital stock of Dexterity Incorporated
(the Merger) pursuant to a Plan of Merger and Acquisition
Agreement (the Merger Agreement) between the Company and
Dexterity Incorporated. Simultaneously with the Merger, the
Company changed its name from LifeQuest Medical, Inc., to
Dexterity Surgical, Inc. The consideration given to the
stockholders of Dexterity Incorporated, other than the Company,
consisted of (i) $1,500,000, (ii) 3,000,000 shares of the common
stock, $.001 par value (Common Stock), of the Company, (iii)
warrants to purchase 1,500,000 shares of Common Stock, (iv)
promissory notes in the aggregate amount of $1,000,000, bearing
interest at 12 percent and payable on March 18, 2000, and (v)
royalties in an amount equal to 15 percent of sales of Dexterity
products for a period of seven years. Such royalty is subject to
minimum payments which aggregate approximately $9,700,000 over
the seven-year royalty period. The Company's working capital was
the source of funds for the $1,500,000 payment. The Company has
determined that the fair value of the above consideration is
approximately $16,000,000. The Merger was accounted for using the
purchase method of accounting.
K. C. Fadem, a director and officer of the Company, owns 10.5
percent of the outstanding capital stock of Surgical Visions I,
Inc. (SVI). Robert L. Evans, a director of the Company, together
with his wife, owns 7 percent of the outstanding capital stock of
SVI. SVI held 165 shares, or approximately 13 percent of the
outstanding shares of the capital stock of Dexterity
Incorporated. K. C. Fadem and Robert L. Evans each abstained from
voting on the Merger and the Merger Agreement on all votes
related to the Merger by the board of directors of the Company.
Robert Fadem, an officer of the Company, owns 5.6 percent of SVI.
Pursuant to the terms of the Merger Agreement, SVI will receive
approximately $210,000, approximately 420,000 shares of Common
Stock, a warrant to purchase 210,000 shares of Common Stock, a
promissory note made by the Company in the original principal
amount of $140,000 and an undivided approximate 13 percent
interest in the royalty to be paid pursuant to the Merger
Agreement.
Prior to the Merger, the stockholders of Dexterity Incorporated
were TFX Equities Incorporated, SVI, Christopher K. Black,
Frederic C. Feiler, Jr., Jerome F. Flaherty and Clark Gerhart,
M.D.
Item 3. Bankruptcy or Receivership.
Not Applicable.
Item 4. Changes in Registrant's Certifying Accountant.
Not Applicable.
Item 5. Other Events.
Not Applicable.
Item 6. Resignations of Registrant's Directors.
Not Applicable.
2
<PAGE> 3
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired.
Dexterity Incorporated
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
1. Report of Independent Public Accountants 4
2. Balance Sheets as of December 31, 1998 and 1997 5
3. Statements of Operations for the Years Ended December 31, 1998 and 1997 6
4. Statements of Stockholders' Equity for the Years Ended December 31, 7
1998 and 1997
5. Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 8
6. Notes to Financial Statements 9
(b) Pro Forma Financial Information.
1. Pro Forma Condensed Consolidated Financial Statements Introduction 14
2. Pro Forma Condensed Consolidated Balance Sheet as of December 31,
1998 16-17
3. Pro Forma Condensed Consolidated Statements of Operations for the Year 18
Ended December 31, 1998
4. Notes to Pro Forma Condensed Consolidated Financial Statements 19
(c) Exhibit Index.
Exhibit Number Identification of Exhibit
-------------- -------------------------
2.1 Plan of Merger and Acquisition Agreement dated December 18, 1998, between
Dexterity Incorporated and the Company (incorporated herein by reference
to Exhibit 2.8 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998).
</TABLE>
Item 8. Change in Fiscal Year.
Not applicable.
3
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Dexterity Incorporated:
We have audited the accompanying balance sheets of Dexterity Incorporated (a
Delaware corporation) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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 Incorporated as of
December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/S/ ARTHUR ANDERSEN LLP
San Antonio, Texas
March 18, 1999
4
<PAGE> 5
DEXTERITY INCORPORATED
BALANCE SHEETS - - DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,660,434 $ --
Accounts receivable 322,395 --
Inventories 345,368 --
Prepaid and other assets 30,000 --
----------- -----------
Total current assets 2,358,197 --
----------- -----------
PROPERTY AND EQUIPMENT 299,318 268,700
Less- Accumulated depreciation (34,806) --
----------- -----------
Total property and equipment 264,512 268,700
----------- -----------
INTANGIBLE ASSETS, net 1,368,447 1,027,046
----------- -----------
Total assets $ 3,991,156 $ 1,295,746
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 239,126 $ --
Accrued liabilities 19,382 --
Payable to stockholder 399,305 --
----------- -----------
Total current liabilities 657,813 --
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value, 1,000 shares authorized, no shares issued or
outstanding at December 31, 1998 and 1997 -- --
Common stock, $1 par value, 4,000 shares authorized, 1,263 shares and
731 shares issued and outstanding at December 31, 1998 and 1997,
respectively
1,263 731
Stock subscriptions receivable, 469 shares at December 31, 1997 -- (2,180,000)
Additional paid-in capital 5,789,508 5,330,015
Accumulated deficit (2,457,428) (1,855,000)
----------- -----------
Total stockholders' equity 3,333,343 1,295,746
----------- -----------
Total liabilities and stockholders' equity $ 3,991,156 $ 1,295,746
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DEXTERITY INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
REVENUES $ 899,165 $ --
----------- -----------
COST AND EXPENSES:
Cost of sales 425,182 --
Selling, general and administrative 1,021,248 1,132,273
Depreciation and amortization 132,550 --
----------- -----------
1,578,980 1,132,273
----------- -----------
LOSS FROM OPERATIONS (679,815) (1,132,273)
----------- -----------
INTEREST INCOME 77,387 --
----------- -----------
NET LOSS $ (602,428) $(1,132,273)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DEXTERITY INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Stock
----------------------------- Subscriptions
Shares Amount Receivable
------ ------ ----------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ -- $ -- $ --
CONTRIBUTED CASH CAPITAL -- -- --
ISSUANCE OF COMMON STOCK 731 731 --
SUBSCRIPTION RECEIVABLE -- -- (2,180,000)
NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1997 -- -- --
----------- ----------- -----------
BALANCE, December 31, 1997 731 731 (2,180,000)
ISSUANCE OF SUBSCRIBED COMMON STOCK FOR CASH 530 530 2,180,000
ISSUANCE OF COMMON STOCK FOR CASH 2 2 --
CONTRIBUTED CASH CAPITAL -- -- --
RESTRICTED OPTION AND STOCK GRANTS -- -- --
NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1998 -- -- --
----------- ----------- -----------
BALANCE, December 31, 1998 1,263 $ 1,263 $ --
=========== =========== ===========
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
------- ------- -----
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ 1,749,773 $ (722,727) $ 1,027,046
CONTRIBUTED CASH CAPITAL 1,400,973 -- 1,400,973
ISSUANCE OF COMMON STOCK (731) -- --
SUBSCRIPTION RECEIVABLE 2,180,000 -- --
NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1997 -- (1,132,273) (1,132,273)
----------- ----------- -----------
BALANCE, December 31, 1997 5,330,015 (1,855,000) 1,295,746
ISSUANCE OF SUBSCRIBED COMMON STOCK FOR CASH (530) -- 2,180,000
ISSUANCE OF COMMON STOCK FOR CASH 5,878 -- 5,880
CONTRIBUTED CASH CAPITAL 439,145 -- 439,145
RESTRICTED OPTION AND STOCK GRANTS 15,000 -- 15,000
NET LOSS FOR THE YEAR ENDED DECEMBER 31, 1998 -- (602,428) (602,428)
----------- ----------- -----------
BALANCE, December 31, 1998 $ 5,789,508 $(2,457,428) $ 3,333,343
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
DEXTERITY INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (602,428) $(1,132,273)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 132,550 --
Option and stock grant expense 15,000 --
(Increase) in-
Accounts receivable (322,395) --
Inventories (345,368) --
Prepaid and other assets (30,000) --
Increase in-
Accounts payable 239,126 --
Accrued liabilities 19,382 --
----------- -----------
Net cash used in operating activities (894,133) (1,132,273)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (30,618) (268,700)
Purchase of intangible assets (439,145) --
----------- -----------
Net cash used in investing activities (469,763) (268,700)
----------- -----------
FINANCING ACTIVITIES:
Payable to stockholder 399,305 --
Contributed capital 439,145 1,400,973
Issuance of common stock 2,185,880 --
----------- -----------
Net cash provided by financing activities 3,024,330 1,400,973
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,660,434 --
CASH AND CASH EQUIVALENTS, beginning of year -- --
----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 1,660,434 $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
DEXTERITY INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND DESCRIPTION OF THE COMPANY:
Dexterity Incorporated (Dexterity), formerly TFX Holding Co., Inc. (TFX), and
formerly a majority owned subsidiary of TeleFlex Incorporated (TeleFlex), is a
medical device company incorporated by TeleFlex in the first quarter of 1998.
For financial reporting purposes, Dexterity is assumed to have had its
inception on September 1, 1994, the first month in which advances were made by
TeleFlex for the funding of certain selling, general and administrative
expenses and for the contract third-party research and development activities
which led to the technology that evolved into the Dexterity products described
below. Such research and development activities were primarily performed by
Medical Creative Technologies, Inc. (MCT), see Note 3. Dexterity had no
revenues prior to 1998. As described in Note 4, the majority of Dexterity's
sales during 1998 were to one of its former minority stockholders who has,
subsequent to December 31, 1998, purchased the remaining shares of Dexterity as
described in Note 7. Prior to Dexterity's incorporation, TeleFlex operated
Dexterity as a business unit through TFX. During the fourth quarter of 1997,
TFX entered into an agreement whereby LifeQuest Medical, Inc. (LifeQuest),
Christopher K. Black (Black) and Vision Investments, Inc. (Vision), committed
to purchase an investment in TFX as described in Note 5. On March 18, 1999,
LifeQuest changed its name to Dexterity Surgical, Inc., as described in Note 7.
Dexterity was created to advance the minimally invasive surgery (MIS) market
through the development of disposable devices for hand-assisted laparoscopic
surgery (HALS). The Dexterity product line includes the Dexterity(R) Pneumo
Sleeve and Dexterity(R) Protractor. The Pneumo Sleeve is a device that allows
the surgeon to insert one hand into the abdominal cavity while preserving
pneumopreperitoneum during laparoscopic surgery. This new surgical modality,
called HALS, is a hybrid between open and laparoscopic surgery. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
Product sales are recognized upon the shipment of products to the customer.
Customers may return products in the event of product defect or inaccurate
order fulfillment. Returns to date have not been significant. All adjustments
necessary to reflect actual and anticipated sales returns have been reflected
in the accompanying financial statements.
Inventory
Inventory consists of finished goods which are stated at the lower of cost
(determined on a first-in, first-out basis) or market.
9
<PAGE> 10
Fixed Assets and Depreciation
Fixed assets are recorded at cost less accumulated depreciation. Depreciation
is provided utilizing the straight-line method over an estimated useful life of
eight years. Additions and improvements that extend the useful life of the
asset are capitalized. 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. Substantially all of Dexterity's fixed
assets are located at MCT's manufacturing facility pursuant to the
manufacturing agreement described in Note 3.
Intangible Assets
During 1997, TeleFlex, through a wholly owned subsidiary, assigned to Dexterity
all rights to a distribution and licensing agreement with MCT for the Dexterity
products. TeleFlex had previously paid $1,027,046 to acquire this distribution
and licensing agreement and paid an additional $439,145 during 1998 related to
these rights. These are reflected as intangible assets on the accompanying
balance sheets and are being amortized on a straight-line basis over 15 years.
Dexterity recognized $97,744 in amortization expense related to these
intangibles during the year ended December 31, 1998. As distribution of
Dexterity products commenced in 1998, no amounts had been amortized in periods
prior to 1998. The contribution of these rights to Dexterity by TeleFlex are
reflected as a component of contributed capital in the accompanying statements
of stockholders' equity.
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
Dexterity considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. The following provides
supplemental disclosure of noncash investing and financing activities for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Stock subscriptions receivable $ - $ 2,180,000
</TABLE>
The stock subscriptions receivable were paid in cash in 1998 as described in
Note 5.
3. COMMITMENTS AND CONTINGENCIES:
In June 1998, Dexterity and MCT entered into an agreement whereby Dexterity
agreed to pay MCT royalties on sales of current and future generations of
specified Dexterity products in amounts ranging from 2.5 percent to 5 percent
of net sales, as defined in the agreement. Minimum annual royalties shall
accrue in the amount of $50,000 per year for each of the five years in the
period ending June 30, 2003. The term of the royalty agreement shall end on the
earlier of (i) the date when no patent application shall be pending and all
U.S. patents have expired or (ii) all claims of unexpired patents are subject
to a Declaration of Invalidity, as defined in the agreement. Dexterity and MCT
also entered into a manufacturing agreement in June 1998 whereby MCT agreed to
manufacture the Dexterity products and Dexterity committed to purchase a
minimum of 7,200 units of certain Dexterity products at a price of $88 per
unit, subject to MCT's ability to
10
<PAGE> 11
produce the units, on a "take or pay" basis by December 31, 1998. After
December 31, 1998, Dexterity is not obligated to purchase any minimum
quantities from MCT, and the manufacturing agreement is terminable by Dexterity
upon 60 days' notice commencing January 1, 1999. In connection with entering
into the manufacturing agreement, Dexterity advanced MCT $30,000 for the
purchase of raw materials. This amount is reflected as prepaid and other assets
on the accompanying balance sheet at December 31, 1998. Subsequent to December
31, 1998, this advance was satisfied by a $30,000 reduction of a trade payable
payment due to MCT that was made in January 1999.
In July 1998, Dexterity entered into consulting arrangements with two
individuals to assist in the marketing of Dexterity products. The monthly
consulting fees described below are maximums and may be reduced to the extent
that full-time efforts were not devoted to consulting efforts on behalf of
Dexterity. The term and monthly fees are described below. At the end of the
original term, the consulting arrangements are terminable by either party as
indicated:
Notice to
Arrangement Term Monthly Fees Terminate
----------- --------- ------------ ---------
A 12 months $ 11,667 30 days
B 6 months $ 8,700 60 days
In July 1998, Dexterity and MCT entered into an agreement with another entity
(Identified Patent Holder) and its licensee (collectively, Identified Parties),
whereby Dexterity and MCT, collectively, and the Identified Parties,
collectively, obtained perpetual covenants not to be sued from each other. The
Identified Patent Holder and MCT each own certain patents and patent
applications in the area of hand-assisted minimally invasive surgery and the
Identified Patent Holder's licensee and Dexterity are exclusive licensees,
respectively, of the patented products.
4. RELATED-PARTY TRANSACTIONS:
Substantially all of Dexterity's accounts receivable and revenues as of and for
the year ended December 31, 1998, have been to LifeQuest, one of Dexterity's
former minority stockholders. As described in Note 7, in December 1998,
LifeQuest and Dexterity entered into an agreement whereby Dexterity would be
merged with and into LifeQuest. The following table provides detail of
Dexterity's accounts receivable from LifeQuest at December 31, 1998, and
revenues from sales to LifeQuest for the year ended December 31, 1998:
<TABLE>
<S> <C> <C>
Accounts receivable from LifeQuest $ 313,878 97.4%
Accounts receivable from others 8,517 2.6
---------- -------
Total $ 322,395 100.0%
========== =======
Revenues from sales to LifeQuest $ 812,590 90.4%
Revenues from sales to others 86,575 9.6
---------- -------
Total $ 899,165 100.0%
========== =======
</TABLE>
Under an informal arrangement with TeleFlex, Dexterity has historically been
allocated certain selling, general and administrative expenses incurred by
TeleFlex on behalf of Dexterity. Management of Dexterity believes that such
allocations represent reasonable charges for the expenses incurred. During
1997, TeleFlex paid to MCT, on behalf of Dexterity, $767,622 under a prior
obligation to either purchase certain quantities of
11
<PAGE> 12
Dexterity products or pay a specified minimum. Dexterity determined that the
products subject to the minimum purchase requirements, while commercially
viable, could benefit from certain enhancements to increase their
marketability. Dexterity chose to pay the specified minimum, $767,622, under
the prior obligation rather than take delivery of such products as inventory,
and this amount is a component of selling, general and administrative expenses
for the year ended December 31, 1997. Dexterity has no further minimum purchase
requirements under this prior obligation.
5. STOCKHOLDERS' EQUITY:
During the fourth quarter of 1997, LifeQuest, Vision and Black subscribed to
purchase 215, 146 and 108 shares of Dexterity, respectively. Pursuant to the
terms of the purchase commitment agreements, LifeQuest, Vision and Black
received an additional 28, 19 and 14 shares, respectively, during 1998 based
upon the occurrence of certain events subsequent to December 31, 1997. In the
first quarter of 1998, the subscriptions receivable were funded and the shares
were issued. During 1998, an additional two shares were granted to an
individual as described below. The ownership of Dexterity is as follows:
<TABLE>
<CAPTION>
Investment at
December 31
Shares Approximate --------------------------------
Owned Percentage 1998 1997
----- ---------- ---- ----
<S> <C> <C> <C> <C>
TeleFlex 731 58% $3,589,891 $3,150,746
LifeQuest 243(a) 19 1,000,000 1,000,000(a)
Vision 165(a) 13 680,000 680,000(a)
Black 122(a) 10 500,000 500,000(a)
Others 2(a) -- 5,880(a) --
---------- ---------- ---------- ----------
Total 1,263 100% $5,775,771 $5,330,746
========== ========== ========== ==========
</TABLE>
(a) Represents subscription receivable at December 31, 1997, and
additional shares issued during 1998 as described above.
In December 1998, LifeQuest entered into an agreement with the remaining
stockholders (Selling Stockholders) to purchase the Selling Stockholders'
interests in Dexterity (see Note 7).
In June 1998, Dexterity granted to certain individuals who have provided
consulting services to Dexterity the option to purchase a cumulative of 35
shares of Dexterity's common stock at an option price of $5,500 per share. The
options vest at the rate of 20 percent per year beginning in June 1999 and are
immediately exercisable upon the occurrence of a change in control of
Dexterity, as defined in the option agreement. Dexterity also granted to an
individual, in June 1998, the right to receive two shares of restricted stock
which are scheduled to vest in June 1999. The vesting period is accelerated in
the event of a change in control. Included as a component of selling, general
and administrative expenses for the nine months ended December 31, 1998, is
$15,000 representing the restricted stock and option grants described above.
The fair value of the options were derived from an option pricing model using
the minimum value method with an expected volatility of zero, expected dividend
yield of zero, an expected life of one year and a risk-free interest rate of
5.1 percent.
12
<PAGE> 13
6. FEDERAL INCOME TAXES:
At December 31, 1998, Dexterity's net operating loss (NOL) carryforwards for
federal income tax purposes approximated its net loss for financial reporting
purposes for the year ended December 31, 1998, as Dexterity had no significant
permanent or temporary differences during that period. Prior to 1998, Dexterity
was not a taxable entity. As there is no assurance of future income, a 100
percent valuation reserve has been established against Dexterity's primary
deferred tax asset, its NOL. Dexterity's NOL will expire in 2018 if not sooner
utilized. Dexterity's ability to use its NOL carryforwards to offset future
taxable income is subject to restrictions enacted in the United States Internal
Revenue Code of 1986, as amended (Code). These restrictions provide for
limitations on Dexterity's utilization of its NOL carryforwards following
certain ownership changes described in the Code, including the transaction
described in Note 7. As a result of ownership changes, Dexterity's existing NOL
carryforwards could become subject to limitation and could expire unused.
7. MERGER AND ACQUISITION:
On December 18, 1998, LifeQuest and Dexterity entered into a Plan of Merger and
Acquisition Agreement (Agreement) whereby Dexterity, subject to LifeQuest
shareholder approval which was obtained on March 18, 1999, was merged with and
into LifeQuest (Merger), and LifeQuest was the surviving corporation.
Contemporaneously with the Merger, the surviving corporation changed its name
to Dexterity Surgical, Inc. LifeQuest accounted for this business combination
as a purchase. The consideration given the Selling Stockholders by LifeQuest
for the Dexterity shares it did not previously own consisted of:
(a) $1.5 million cash.
(b) Three million restricted shares of LifeQuest common stock.
(c) Warrants to purchase 1.5 million restricted shares of LifeQuest common
stock.
(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.
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<PAGE> 14
DEXTERITY SURGICAL, INC. (FORMERLY LIFEQUEST MEDICAL, INC.)
AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997
(Unaudited)
INTRODUCTION
The following unaudited pro forma condensed consolidated financial statements
include the accounts of Dexterity Surgical, Inc., formerly LifeQuest Medical,
Inc. (LifeQuest, a Delaware corporation), and subsidiaries (Company) and
Dexterity Incorporated (a Delaware corporation). All significant intercompany
accounts and transactions have been eliminated in consolidation. The pro forma
condensed consolidated financial statements of the Company have been adjusted
to reflect the effects of the Company's acquisition of Dexterity Incorporated
(Dexterity). Under the terms of the Plan of Merger and Acquisition Agreement
(Agreement) by and between LifeQuest and Dexterity, Dexterity was acquired
(Acquisition) through the issuance of 3 million shares of LifeQuest common
stock valued at $5.63 million; warrants to purchase 1.5 million shares of
LifeQuest common stock valued at $2.31 million; a one year, $1 million note
payable bearing interest at 12 percent per annum; a royalty to be paid to
Dexterity stockholders, other than LifeQuest, for seven years in an amount
equal to 15 percent of all sales of Dexterity products, subject to minimum
guaranteed royalties on future sales of Dexterity products, discounted at 12
percent per annum, valued at approximately $5.95 million; and $1.5 million
cash. Contemporaneously with the Acquisition, LifeQuest changed its name to
Dexterity Surgical, Inc. There are no unidentified intangible assets in the pro
forma adjustments and all identified intangible assets relate to Dexterity's
distribution and licensing agreement for certain minimally invasive surgical
devices. The identified intangible asset associated with the minimum royalty
obligations will be amortized over the term of the minimum royalty payments
(seven years) and the remaining identified intangible asset will be amortized
over the life of the latest patent issued to the licensor of the surgical
devices (17 years). Immediately prior to the effectiveness of the Merger,
Dexterity distributed all of its cash to its stockholders. The Dexterity
stockholders other than LifeQuest received the first $1.5 million of such cash
and the remainder of such cash was distributed to all stockholders of
Dexterity, including LifeQuest, based on their respective pro rata percentage
stockholdings of Dexterity. LifeQuest previously owned approximately 19.2
percent of the capital stock of Dexterity. The Acquisition was recorded using
the purchase method of accounting. The aggregate amount of consideration paid
by LifeQuest is shown in the table below (dollars in millions):
<TABLE>
<S> <C>
LifeQuest common stock $ 5.63
Warrants to purchase LifeQuest common stock 2.31
One-year note payable 1.00
Minimum guaranteed royalties discounted at 12 percent 5.95
Cash 1.50
-------
Total $ 16.39
=======
</TABLE>
14
<PAGE> 15
The guaranteed minimum royalty payments, gross and discounted at 12 percent,
are shown by year in the table below (dollars in millions):
<TABLE>
<CAPTION>
Gross Discounted
----- ----------
<S> <C> <C>
1999 $ .44 $ .41
2000 .83 .68
2001 1.31 .97
2002 1.78 1.15
2003 1.78 1.02
2004 1.78 .91
2005 1.78 .81
-------- --------
Total $ 9.70 $ 5.95
======== ========
</TABLE>
The Dexterity Surgical, Inc., and Dexterity Incorporated columns in the
following pro forma condensed consolidated financial statements reflect the
preacquisition historical financial statements. The unaudited pro forma
condensed consolidated balance sheet assumes the Acquisition occurred on
December 31, 1998. The unaudited pro forma condensed consolidated statement of
operations assumes the Acquisition occurred on January 1, 1998. The pro forma
adjustments relate to the consideration given in the Acquisition, amortization
of the intangibles associated with the purchase transaction, interest expense
on the note payable given as consideration and interest expense on the
guaranteed minimum royalty obligation. In the opinion of management of the
Company, all adjustments necessary to present fairly the unaudited pro forma
condensed consolidated financial statements have been made.
These unaudited pro forma condensed consolidated financial statements should be
read in conjunction with the Company's historical financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
15
<PAGE> 16
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1998
Dexterity
Surgical, Inc.
(Formerly LifeQuest Dexterity
ASSETS Medical, Inc.) Incorporated Eliminations
------ ------------------- ------------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,644,535 $ 1,660,434 $ (1,629,952)(a)
Short-term investments 983,714 --
Accounts receivable 2,786,909 322,395 (313,878)(b)
Accounts receivable from related party 56,619 --
Inventories, net 1,482,899 345,368
Prepaid and other assets 49,715 30,000
------------ ------------ ------------
Total current assets 7,004,391 2,358,197 (1,943,830)
------------ ------------
PROPERTY, PLANT AND EQUIPMENT 1,604,043 299,318
Less- Accumulated depreciation (1,051,117) (34,806)
------------ ------------
Net property, plant and equipment 552,926 264,512
------------ ------------
DEFERRED FINANCE CHARGES 155,139 --
------------ ------------
INVESTMENTS, at cost 2,202,500 -- (1,000,000)(c)
------------ ------------
DISTRIBUTION AND LICENSING ROYALTY INTANGIBLES, net 680,912 --
------------ ------------
INTANGIBLE ASSETS, net 1,673,818 1,368,447
------------ ------------ ------------
Total assets $ 12,269,686 $ 3,991,156 $ (2,943,830)
============ ============ ============
<CAPTION>
Final Consolidated,
Pro Forma December 31,
Adjustments 1998
----------- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ (1,500,000)(d) $ 175,017
Short-term investments 983,714
Accounts receivable 2,795,426
Accounts receivable from related party 56,619
Inventories, net 1,828,267
Prepaid and other assets 79,715
------------ ------------
Total current assets (1,500,000) 5,918,758
------------
PROPERTY, PLANT AND EQUIPMENT (34,806)(e) 1,868,555
Less- Accumulated depreciation 34,806(e) (1,051,117)
------------
Net property, plant and equipment 817,438
------------
DEFERRED FINANCE CHARGES 155,139
------------
INVESTMENTS, at cost 1,202,500
------------
DISTRIBUTION AND LICENSING ROYALTY INTANGIBLES, net 5,945,609 (f) 6,626,521
------------
INTANGIBLE ASSETS, net 9,731,609 (f) 12,773,874
------------ ------------
Total assets $ 14,177,218 $ 27,494,230
============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
<PAGE> 17
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
December 31, 1998
Dexterity
Surgical, Inc.
(Formerly LifeQuest Dexterity
LIABILITIES AND STOCKHOLDERS' EQUITY Medical, Inc.) Incorporated Eliminations
---------------------- ------------ ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,633,032 $ 239,126 $ (313,878)(b)
Accrued liabilities 645,605 19,382
Current portion of long-term debt and capital lease obligations 116,310 --
Payable to stockholder -- 399,305
------------ ------------ -----------
Total current liabilities 3,394,947 657,813 (313,878)
------------ ------------
OTHER LONG-TERM OBLIGATIONS -- --
------------ ------------
CONVERTIBLE DEBENTURES 3,000,000 --
------------ ------------
MINORITY INTEREST 106,544 --
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock 2 --
Common stock 7,213 1,263
Additional paid-in capital 25,095,313 5,789,508 (1,629,952)(a)
Deferred compensation (6,857) -- 1,000,000 (c)
Accumulated deficit (19,327,476) (2,457,428)
------------ ------------ ------------
Total stockholders' equity 5,768,195 3,333,343 (2,629,952)
------------ ------------ ------------
Total liabilities and stockholders' equity $ 12,269,686 $ 3,991,156 $ (2,943,830)
============ ============ ============
<CAPTION>
Final Consolidated,
Pro Forma December 31,
Adjustments 1999
------------- -------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ $ 2,558,280
Accrued liabilities 411,287(g) 1,076,274
Current portion of long-term debt and capital lease obligations 1,000,000(h) 1,116,310
Payable to stockholder 399,305
------------ ------------
Total current liabilities 1,411,287 5,150,169
------------
OTHER LONG-TERM OBLIGATIONS 5,534,322(g) 5,534,322
------------
CONVERTIBLE DEBENTURES 3,000,000
------------
MINORITY INTEREST 106,544
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock 2
Common stock 3,000(i) 10,213
(1,263)(j)
Additional paid-in capital (3,159,556)(j) 33,027,313
5,622,000(i)
2,310,000(k)
Deferred compensation (6,857)
Accumulated deficit 2,457,428(j) (19,327,476)
------------ ------------
Total stockholders' equity 7,231,609 13,703,195
------------ ------------
Total liabilities and stockholders' equity $ 14,177,218 $ 27,494,230
============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
17
<PAGE> 18
DEXTERITY SURGICAL, INC., AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
Dexterity
Surgical, Inc.
(Formerly LifeQuest Dexterity Pro Forma
Medical, Inc.) Incorporated Eliminations Adjustments
-------------------- ------------- ------------ ------------
NET SALES:
<S> <C> <C> <C> <C>
Product sales $ 17,325,096 $ 899,165 $ (812,590)(l) $
Commissions earned 1,166,945 --
------------ ------------
18,492,041 899,165
------------ ------------
COST AND EXPENSES:
Cost of sales 10,313,931 425,182 (812,590)(l)
Selling, general and administrative 9,819,634 1,021,248
Depreciation and amortization 404,881 132,550 1,421,820 (m)
------------ ------------
20,538,446 1,578,980
------------ ------------
LOSS FROM OPERATIONS (2,046,405) (679,815)
OTHER INCOME (EXPENSE):
Gain (loss) on sale of assets 389,503 --
Investment income 56,374 --
Interest (expense) income (330,620) 77,387 (120,000) (n)
------------ ------------
(713,473) (o)
NET LOSS BEFORE MINORITY INTEREST (1,931,148) (602,428)
MINORITY INTEREST IN NET LOSS OF
CONSOLIDATED SUBSIDIARY 2,258 --
------------ ------------
NET LOSS (1,928,890) (602,428)
LESS: DIVIDEND REQUIREMENT ON
CUMULATIVE PREFERRED STOCK (45,548) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (1,974,438) $ (602,428)
============ ============
BASIC AND DILUTED LOSS PER SHARE OF
COMMON STOCK $ (.28)
============
WEIGHTED-AVERAGE SHARES OUTSTANDING
USED IN COMPUTING
BASIC AND DILUTED LOSS PER SHARE OF
COMMON STOCK 6,989,951 3,000,000
============ =========
</TABLE>
<TABLE>
<CAPTION>
Final Consolidated,
Year Ended
December 31,
1998
------------
NET SALES:
<S> <C>
Product sales $ 17,411,671
Commissions earned 1,166,945
------------
18,578,616
------------
COST AND EXPENSES:
Cost of sales 9,926,523
Selling, general and administrative 10,840,882
Depreciation and amortization 1,959,251
------------
22,726,656
------------
LOSS FROM OPERATIONS (4,148,040)
OTHER INCOME (EXPENSE):
Gain (loss) on sale of assets 389,503
Investment income 56,374
Interest (expense) income (1,086,706)
------------
NET LOSS BEFORE MINORITY INTEREST (4,788,869)
MINORITY INTEREST IN NET LOSS OF
CONSOLIDATED SUBSIDIARY 2,258
------------
NET LOSS (4,786,611)
LESS: DIVIDEND REQUIREMENT ON
CUMULATIVE PREFERRED STOCK (45,548)
------------
NET LOSS APPLICABLE TO COMMON STOCK (4,832,159)
============
BASIC AND DILUTED LOSS PER SHARE OF
COMMON STOCK $ (.48)
============
WEIGHTED-AVERAGE SHARES OUTSTANDING
USED IN COMPUTING
BASIC AND DILUTED LOSS PER SHARE OF
COMMON STOCK 9,989,951
============
</TABLE>
See accompanying notes to pro forma condensed consolidated
financial statements.
18
<PAGE> 19
DEXTERITY SURGICAL, INC. (FORMERLY LIFEQUEST MEDICAL, INC.)
AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Unaudited)
PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS ADJUSTMENTS:
(a) Reflects the dividend of $1.5 million cash to Dexterity stockholders
other than LifeQuest as well as the dividend of 80.8 percent of the
remaining cash ($160,434) to Dexterity stockholders other than
LifeQuest. Immediately prior to the effectiveness of the Merger,
Dexterity distributed all of its cash to its stockholders. The
Dexterity stockholders other than LifeQuest received the first $1.5
million of such cash and the remainder of such cash was distributed to
all stockholders of Dexterity, including LifeQuest, based on their
respective pro rata percentage stockholdings of Dexterity. LifeQuest
formerly owned approximately 19.2 percent of the capital stock of
Dexterity.
(b) Reflects the elimination of intercompany receivables and payables
between LifeQuest and Dexterity.
(c) Reflects the elimination of LifeQuest's initial $1 million investment
to acquire a 19.2 percent interest in Dexterity.
(d) Represents cash consideration paid in the Acquisition.
(e) Pro forma entry to record acquired property at net book value on date
of Acquisition.
(f) Represents present value of minimum royalty obligations ($5.95
million) and excess of the remaining consideration given ($9.73
million) over net assets acquired in the Acquisition. These identified
intangible assets relate to Dexterity's distribution and licensing
agreement for certain minimally invasive surgical devices. The
identified intangible asset associated with the minimum royalty
obligations will be amortized over the term of the minimum royalty
payments (seven years) and the remaining identified intangible asset
will be amortized over the life of the latest patent issued to the
licensor of the surgical devices referred to above (17 years).
Management of Dexterity Surgical, Inc., will periodically assess the
recoverability of these identified intangible assets and adjust, if
necessary, the remaining estimated useful lives.
(g) Represents net present value of guaranteed minimum royalty to be paid
as consideration in the Acquisition.
(h) Represents $1 million, one-year note payable given as consideration in
the Acquisition.
(i) Represents fair value of 3,000,000 LifeQuest common shares, $.001 par
value, given as consideration in the Acquisition.
19
<PAGE> 20
(j) Reflects the elimination of Dexterity's equity accounts.
(k) Represents estimated fair value of 1.5 million warrants, vesting at
the rate of 20 percent per year, to purchase LifeQuest common shares
given as consideration in the Acquisition. The fair value of the
warrants was calculated by using an option pricing model which
approximates the Black-Scholes option pricing model. Assumptions used
included a market price per share of $1.875, an exercise price of $2
per share, an expected term of 10 years, anticipated volatility of
approximately 77 percent, anticipated annual rate of quarterly
dividends of 0 and a risk-free interest rate of approximately 5
percent.
(l) Eliminates intercompany sales between LifeQuest and Dexterity.
(m) Pro forma amortization of the intangible assets acquired in the
Acquisition based upon an estimated useful life of seven years for the
intangible asset associated with the minimum royalty obligations and
17 years for the remaining intangible asset associated with the
distribution and licensing agreement of certain minimally invasive
surgical devices. See Note (f) for further detail.
(n) Pro forma interest expense on note payable given as consideration in
the Acquisition.
(o) Pro forma accretion of interest on guaranteed minimum royalty.
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEXTERITY SURGICAL, INC.
By: /s/ Randall K. Boatright
------------------------------------------
Randall K. Boatright
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
DATE: March 31, 1999
21
