<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From ____________to _____________
Commission File Number 0-20532
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)
(210) 495-8787
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ----
---------------
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
On November 9, 1999, there were outstanding 10,212,742 shares of Common
Stock, $.001 par value, of the registrant.
<PAGE> 2
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
----
PART I. FINANCIAL INFORMATION
- ------- ---------------------
<S> <C>
Item 1: Consolidated Financial Statements - (Unaudited)
Consolidated Balance Sheets - December 31, 1998, and September 30, 1999 3
Consolidated Statements of Operations - For the Three Months and Nine Months
Ended September 30, 1998 and 1999 4
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1998 and 1999 5
Condensed Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,644,535 $ 475,245
Short-term investments 983,714 --
Accounts receivable (net of allowance for doubtful accounts of
$219,829 in 1998 and $216,743 in 1999) 2,786,909 3,144,474
Accounts receivable from related party 56,619 46,067
Inventories, net 1,482,899 2,880,156
Prepaid and other assets 49,715 76,061
------------ ------------
Total current assets 7,004,391 6,622,003
------------ ------------
Property, Plant and Equipment 1,604,043 1,312,046
Less-accumulated depreciation (1,051,117) (584,284)
------------ ------------
Net property, plant and equipment 552,926 727,762
Investments, at cost 2,062,500 1,202,500
Intangible Assets:
Licensed technology rights, net 680,912 11,975,005
Royalty obligation, net -- 5,520,923
Goodwill, net 1,673,818 1,516,758
Deferred finance charges 155,139 297,315
Other -- 38,120
------------ ------------
Total assets $ 12,129,686 $ 27,900,386
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,633,032 $ 4,550,335
Accrued expenses 645,605 696,175
Current portion of long-term obligations 116,310 2,904,855
------------ ------------
Total current liabilities 3,394,947 8,151,365
------------ ------------
Convertible Debentures 3,000,000 3,000,000
------------ ------------
Royalty Obligation -- 5,455,822
------------ ------------
Minority Interest 106,544 106,544
------------ ------------
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized;
shares issued and outstanding: 2,170 (1998) and 2,195 (1999) 2 2
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued and outstanding: 7,212,742 (1998) and
10,212,742 (1999) 7,213 10,213
Additional paid-in capital 25,095,313 33,052,313
Deferred compensation (6,857) --
Accumulated deficit (19,467,476) (21,875,873)
------------ ------------
Total stockholders' equity 5,628,195 11,186,655
------------ ------------
Total liabilities and stockholders' equity $ 12,129,686 $ 27,900,386
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE> 4
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------------- ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales
Product sales $ 4,594,231 $ 4,700,569 $ 13,012,510 $ 15,589,770
Commissions earned 364,945 148,125 959,409 547,265
------------ ------------ ------------ ------------
4,959,176 4,848,694 13,971,919 16,137,035
------------ ------------ ------------ ------------
Cost And Expenses:
Cost of sales 2,872,591 2,484,651 8,001,679 9,166,942
Research and development -- 2,915 -- 63,796
Selling, general and administrative 2,437,286 2,288,265 7,146,249 7,468,854
Depreciation and amortization 104,930 479,262 302,728 1,050,754
------------ ------------ ------------ ------------
5,414,807 5,255,093 15,450,656 17,750,346
------------ ------------ ------------ ------------
Loss From Operations (455,631) (406,399) (1,478,737) (1,613,311)
Other Income (Expense):
Gain/Loss on sale of assets (18,792) -- 395,169 61,878
Investment income 17,620 11,444 36,019 51,062
Interest expense (76,773) (347,404) (225,002) (746,443)
Loss on investment in affiliate (35,000) -- (105,000) (30,000)
------------ ------------ ------------ ------------
Net Loss Before Minority Interest (568,576) (742,359) (1,377,551) (2,276,814)
Minority Interest in Net Loss of
Consolidated Subsidiary 342 -- 2,637 --
------------ ------------ ------------ ------------
Net Loss (568,234) (742,359) (1,374,914) (2,276,814)
Less dividend requirement on
cumulative preferred stock (13,256) (43,900) (13,256) (131,583)
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (581,490) $ (786,259) $ (1,388,170) $ (2,408,397)
============ ============ ============ ============
Basic and Diluted Loss Per Share of
Common Stock $ (.08) $ (.08) $ (.20) $ (.26)
============ ============ ============ ============
Weighted Average Shares Used In
Computing Basic and Diluted Loss
Per Share of Common Stock 7,212,742 10,212,742 6,921,910 9,357,186
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE> 5
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
---------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (1,374,914) $ (2,276,814)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities -
Depreciation and amortization 302,728 1,050,754
Accretion of short term royalty obligation -- 366,756
Amortization of deferred finance charges 19,392 42,206
Deferred compensation 22,248 6,857
(Gain) loss on disposal of fixed assets 23,187 (61,878)
Disposal of intangible asset 11,066 --
Loss on investment in affiliate 105,000 30,000
Minority interest in net loss of consolidated subsidiary (2,637) --
Changes in operating assets and liabilities-
Increase in accounts receivable, net (269,656) (155,764)
(Increase) decrease in accounts receivable from related party (22,661) 10,552
Decrease in interest receivable (1,262) --
(Increase) decrease in inventories, net 620,833 (1,309,257)
(Increase) decrease in prepaid and other assets 52,835 (26,346)
Increase (decrease) in accounts payable (876,255) 1,915,909
Decrease in accrued expenses (189,410) (350,731)
------------ ------------
Net cash used in operating activities (1,579,506) (757,756)
------------ ------------
Cash Flows From Investing Activities:
Additions to property and equipment (76,806) (141,473)
Proceeds from sale of assets -- 154,835
Investment in affiliate (1,000,000) --
Purchases of investments (1,261,160) --
Investment redemptions 291,085 983,714
Payments made to obtain distribution rights -- (40,126)
Acquisitions, net of cash received -- (2,009,521)
------------ ------------
Net cash used in investing activities (2,046,881) (1,052,571)
------------ ------------
Cash Flows From Financing Activities:
Proceeds from exercise of stock options 253,800 --
Dividends paid to preferred stockholders (13,256) (131,583)
Payments on debt (6,838) (9,903,769)
Proceeds from debt -- 11,037,500
Payments on royalty obligations -- (201,729)
Payments of deferred finance charges -- (184,382)
Issuance of preferred stock 1,170,000 25,000
------------ ------------
Net cash provided by financing activities 1,403,706 641,037
------------ ------------
Net decrease in cash and cash equivalents (2,222,681) (1,169,290)
Cash and cash equivalents, beginning of period 3,236,307 1,644,535
------------ ------------
Cash and cash equivalents, end of period $ 1,013,626 $ 475,245
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE> 6
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dexterity
Surgical, Inc. (the "Company") and the Company's 82% ownership interest in
ValQuest Medical, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation. The consolidated financial statements
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. However,
all adjustments have been made which are, in the opinion of the Company,
necessary for a fair presentation of the results of operations for the periods
covered. In addition, all such adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto for the fiscal year ended December 31, 1998, included in the Company's
Form 10-KSB. Certain reclassifications have been made in the prior period
financial statements to conform with the current period presentation.
The accounts and operations of Dexterity Incorporated have been included in the
consolidated financial statements from March 18, 1999. Prior to the March 18,
1999 merger with Dexterity Incorporated, the Company's 19.2% investment in
Dexterity Incorporated had been accounted for using the cost method. The
resulting change in ownership qualifies as a change in reporting entity. See
"Note 5 - Merger" for a discussion of the effect on the consolidated financial
statements.
The Company has obtained a waiver for certain affirmative financial covenant
requirements associated with its convertible debentures through December 31,
1999. The Company is presently in negotiations to amend these requirements to
more accurately reflect the Company's current financial characteristics. If the
Company is unable to renegotiate these covenants or 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 plan for long term
profitability by the acquisition of Dexterity Incorporated (see "Note 5 -
Merger") and the closing of two unprofitable divisions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Product sales are recognized upon the shipment of products to customers.
Commissions earned are recognized when customer orders are placed with product
suppliers. Customers may return products in the event of product defect or
inaccurate order fulfillment. The Company maintains an allowance for sales
returns based upon an historical analysis of returns.
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. Except for the royalty obligation
component, licensed technology rights acquired in conjunction with the merger
with Dexterity Incorporated (see "Note 5 - Merger) are amortized over a 17 year
period. The royalty obligation component of licensed technology rights is
amortized over the royalty agreement period of 7 years.
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<PAGE> 7
NOTE 3 - BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. As the Company had a net loss for
the three months and the six months ended September 30, 1998 and 1999, Diluted
EPS equals Basic EPS as potentially dilutive common stock equivalents are
antidilutive in loss periods.
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Raw materials $ 29,250 $ 34,322
Work-in-process 431,986 522,497
Finished Goods 1,186,279 2,700,569
Allowances (164,616) (377,232)
------------ ------------
$ 1,482,899 $ 2,880,156
============ ============
</TABLE>
NOTE 5 - MERGER
On March 18, 1999, the Company's stockholders approved the Merger between the
Company and Dexterity Incorporated ("DI"). Contemporaneously with the Merger,
the Company changed its name to Dexterity Surgical, Inc. The Company accounted
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 an aggregate 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 DI 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.
The financial statements have been retroactively restated to account for the
Company's original investment in Dexterity Incorporated under the equity method
as appropriate for a step-acquisition. This investment was previously accounted
for using the cost method. The result of this restatement was a decrease in the
"Investments, at cost" and an increase in "Accumulated deficit" at December 31,
1998 of approximately $140,000, as well as an increase in net loss for the nine
months ended September 30, 1998 and 1999 of $105,000 and $30,000 respectively.
The effect of the restatement on earnings per share for the three months ended
September 30, 1998 was a decrease in basic and diluted earnings per share of
less than $.01. There was no effect on earnings per share for the three months
ended September 30, 1999.
The results of operation for the nine months ended September 30, 1999, include
the operations of Dexterity Incorporated from March 18, 1999. Unaudited pro
forma consolidated results of operations, assuming the Dexterity Incorporated
merger had occurred at January 1, 1998, would have been as follows:
<TABLE>
<CAPTION>
Pro Forma (Unaudited) Pro Forma (Unaudited)
Three months ended September 30, Nine months ended September 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 4,980,820 $ 4,848,694 $ 14,036,850 $ 16,157,118
Net loss $ (1,270,220) $ (742,359) $ (3,474,434) $ (2,973,245)
Basic and diluted loss per share of
common stock $ (.13) $ (.08) $ (.35) $ (.30)
</TABLE>
-7-
<PAGE> 8
The foregoing pro forma information is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the Dexterity
Incorporated merger occurred at the beginning of 1998, nor is it indicative of
future results of operations.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company is a party to claims and legal proceedings arising in the ordinary
course of business. The Company believes it is unlikely that the final outcome
of any of the claims or proceedings to which the Company is a party would have a
material adverse effect on the Company's financial statements; however, due to
the inherent uncertainty of litigation, the range of possible loss, if any,
cannot be estimated with a reasonable degree of precision and there can be no
assurance that the resolution of any particular claim or proceeding would not
have an adverse effect on the Company's results of operations for the interim
period in which such resolution occurred.
NOTE 7 - OBLIGATIONS
The Company had the following current and long-term obligations:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C> <C>
Unsecured note payable for a distributorship agreement, bearing interest
at 6 percent, principal and interest due monthly, maturing in 1999 $ 100,000 $ -0-
Secured note payable for a vehicle loan, bearing interest at 9 percent,
principal and interest due monthly, maturing in 1999 16,310 -0-
Unsecured note payable related to Dexterity acquisition, bearing interest
at 12 percent, interest due quarterly, maturing in 2000 -- 1,000,000
Revolving line of credit secured by accounts receivable, inventories and
intangible assets bearing interest at prime rate plus 1.5 percent. The
line of credit has a maximum of $5 million and expires in 2003 -- 1,250,041
Royalty obligation related to Dexterity acquisition, subject to annual minimum
payments over a period of seven years discounted at 12%. The minimum payments
aggregate approximately $9.7 million over the seven year royalty period -- 6,110,636
Convertible Debentures, see Note 8 3,000,000 3,000,000
------------ ------------
Total obligations 3,116,310 11,360,677
Less - Current portion 116,310 2,904,855
------------ ------------
Long-term obligations $ 3,000,000 $ 8,455,822
============ ============
</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.
NOTE 8 - CONVERTIBLE DEBENTURES
In December 1997, the Company sold 250,000 shares of Common Stock to two
affiliates of Renaissance Capital Group, Inc. (collectively, such affiliates
referred to herein as "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
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<PAGE> 9
and require monthly payments of interest beginning in February 1998 and, unless
sooner paid, redeemed or converted, require monthly principal payments
commencing in December 2000 of $10 per $1000 of the then remaining principal
amount. The remaining principal balance will mature in December 2004. The
Debentures require the Company to comply with the following financial covenants
(all as defined in the Debentures): (i) a Debt to Net Worth Ratio of no greater
than .85:1; (ii) an Interest Coverage Ratio of at least 5:1; (iii) a Debt
Coverage Ratio of at least .10:1; and (iv) a Current Ratio of at least 1.8:1.
The Company is currently not in compliance with and has obtained a waiver from
Renaissance to suspend the Debt to Net Worth Ratio, Interest Coverage Ratio,
Debt Coverage Ratio, and Current Ratio covenants through December 31, 1999. The
Company is presently in negotiations to amend these requirements to more
accurately reflect the Company's current financial characteristics. However, if
the Company is unable to renegotiate these covenants or to comply with such
covenants in the future, the Company could be found to be in technical default
under the Debentures and 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 a
price of $1.60 per share of Common Stock for a maximum of 1,875,000 shares of
Common Stock.
NOTE 9 - 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 Renaissance 1,000 shares of 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 convertible into shares of Common Stock at a
conversion price of $1.60 per share, for an aggregate of 640,625 shares of
Common Stock.
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 convertible into shares of Common Stock at a conversion price of
$1.60 per share, for an aggregate of 731,250 shares of Common Stock.
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<PAGE> 10
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Certain statements contained in this Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Specifically, all statements other than statements of historical
fact included in this Item 2 regarding Dexterity Surgical, Inc. and its
subsidiary's 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
Annual Report on Form 10-KSB for the year ended December 31, 1998 filed with the
Securities and Exchange Commission ("SEC") on March 31, 1999, 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 minimally invasive surgical 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 is investing moderate amounts
in research and development in 1999. As of September 30, 1999, the Company had
an accumulated deficit of approximately $21,876,000. 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.
In January 1998, the Company acquired approximately 20% of the common
stock of Dexterity Incorporated ("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"). Simultaneous with the effectiveness of
the Dexterity Merger, the Company changed its name to Dexterity Surgical, Inc.
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;
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
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<PAGE> 11
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 Merger was accounted for using the purchase method of
accounting.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had current assets of $6,622,000 and
current liabilities of $8,151,000 resulting in a working capital deficit of
$1,529,000. This compares to a working capital position of $3,609,000 at
December 31, 1998. The decline in working capital is primarily due to the
obligations incurred relative to the Dexterity Merger.
In April 1999, the Company acquired a new maximum $5,000,000 revolving
line of credit from a financial institution whereby all inventories, accounts
receivable and intangibles of the Company are pledged as collateral. At
September 30, 1999, the outstanding balance due on such line of credit was
$1,250,000 and an additional $1,556,000 was available under the current
borrowing base.
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. Such shares of Series B Preferred are convertible into
15,625 shares of Common Stock.
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 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. Such shares of Series B Preferred are
convertible into shares of Common Stock at a conversion price of $1.60 per
share, for an aggregate of 625,000 shares of Common Stock.
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 convertible into shares of Common Stock
at a conversion price of $1.60 per share, for an aggregate of 731,250 shares of
Common Stock.
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 September 30, 1999, the
Company was not in compliance with the Debt to Net Worth Ratio, Interest
Coverage Ratio, Debt Coverage Ratio, and Current Ratio covenants, and has
obtained a waiver from Renaissance to suspend the Debt to Net Worth Ratio,
Interest Coverage Ratio, Debt Coverage Ratio and Current Ratio covenants through
December 31, 1999. The Company is presently in negotiations to amend these
requirements to more accurately reflect the Company's current financial
characteristics. If the Company is unable to renegotiate these covenants or to
comply with such covenants, 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 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 a price of $1.60 per share of Common
Stock for a maximum of 1,875,000 shares of Common Stock.
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
-11-
<PAGE> 12
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.
For the nine month period ended September 30, 1999, operating
activities used cash of $758,000. Investment activities during the period
utilized cash of $1,053,000 primarily due to the acquisition of Dexterity.
During the period, the Company's financing activities provided $641,000
primarily from the net increase in the outstanding balance of the line of
credit.
For the nine month period ended September 30, 1998, operating
activities used cash of $1,580,000. Investment activities during the period
utilized cash of $2,047,000 primarily due to the purchase of 19.2% of
Dexterity's outstanding stock. During the period, the Company's financing
activities provided $1,404,000 primarily from the issuance of preferred stock.
Based upon the current level of operations, the Company believes that
projected cash flow from operations plus the Company's cash from its line of
credit and from the realization of its current assets will be adequate to meet
its anticipated requirements for working capital and capital expenditures
through at least 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
The Company reported a loss from operations of $406,000 for the quarter
ended September 30, 1999 as compared with a loss from operations of $456,000 for
the quarter ended September 30, 1998. For the nine months ended September 30,
1999 and 1998 the loss from operations was $1,613,000 and $1,479,000
respectively.
For the three months ended September 30, 1999, the Company reported a
net loss applicable to common stock of $786,000 or $.08 per basic and diluted
share. This compares with a net loss of $581,000 for the three months ended
September 30, 1998 or $.08 per basic and diluted share. For the nine months
ended September 30, 1999, the Company reported a net loss of $2,408,000 versus a
net loss of $1,388,000 for the comparable period of 1998. Reported results for
1999 were adversely impacted by increased noncash amortization expense (see
below) and the transition of the Company from distributing products of Origin
Medsystems ("Origin") to distributing products of General Surgical Innovations
("GSI"). Origin products accounted for 52% of the Company's revenues during the
first quarter of 1999. However, as a result of the outcome of a patent
infringement lawsuit between Origin and GSI in April 1999, the Company made the
decision to discontinue distributing Origin products and begin distributing GSI
products. Subsequent to that decision, U. S. Surgical ("Surgical") purchased the
Origin product line and also announced their pending acquisition of GSI.
Commencing in September 1999, through an arrangement with Surgical, the Company
may now distribute both Origin and GSI products. The net losses for the three
months and nine months ended September 30, 1998 included an approximate $400,000
gain on the sale of the Osteoport(R) device.
Product sales increased 2% in the third quarter 1999 and 20% in the
first nine months of 1999 as compared with the same periods in 1998. The rate of
sales growth decreased in the third quarter of 1999 due to the aforementioned
transition in product suppliers. Product sales were $4,701,000 for the third
quarter of 1999 and $4,594,000 for the third quarter of 1998. Product sales for
the first nine months of 1999 and 1998 were $15,590,000 and $13,013,000
respectively. These increases were due to continued sales growth throughout the
Company.
The Company continues to focus on laparoscopic and lesser invasive
surgical products which generate higher gross profit margins. Accordingly,
during the quarter ended June 30, 1999, the Company closed the Surgical Systems
Division which concentrated on orthopedic products and primarily earned
commission income. Therefore, as a result, earned commissions decreased for the
three months and nine months ended September 30, 1999 as compared with the
previous year.
Gross profit from product sales in the third quarter was $2,216,000 in
1999 versus $1,722,000 in 1998. The corresponding gross profit margins increased
to 47% in 1999 from 37% in 1998. For the nine months ended September 30, gross
profit was $6,423,000 or 41% in 1999 and $5,011,000 or 39% in 1998. The
improvement in gross profit margins is
-12-
<PAGE> 13
primarily due to the increased proportion of the Company's proprietary products,
the Dexterity(R) Pneumo Sleeve(R) and the Dexterity(R) Protractor(R), within the
sales mix.
For the third quarter, selling, general and administrative expenses,
which consist primarily of sales commissions, salaries and other costs necessary
to support the Company's infrastructure, decreased 6% to $2,288,000 in 1999 from
$2,437,000 in 1998. The decline in these expenses is primarily due to the
elimination of the Surgical Systems Division, Technologies Division, and the
Med-Service Division during 1999. For the first nine months of 1999, these
expenses increased 5% from $7,146,000 to $7,469,000. These increased costs
reflect higher sales commissions due to the increased level of sales. As a
percentage of net sales, selling, general and administrative expenses have
decreased: 47% for 1999 versus 49% for 1998 for the quarter periods and 46% for
1999 versus 51% for 1998 for the nine months periods.
Depreciation and amortization expense increased 357% to $479,000 for
the third quarter of 1999 from $105,000 for the third quarter of 1998. There was
a 247% increase in the comparable nine month periods. This increase is due to
the amortization of the licensed technology rights acquired in conjunction with
Dexterity.
Interest expense was $347,000 for the quarter ended September 30, 1999
and $77,000 for the comparable 1998 quarter, an increase of 353%. For the nine
months period, interest expense was $746,000 in 1999 and $225,000 in 1998, an
increase of 232%. The increase is due to the accretion of the minimum royalty
obligation, interest on the line of credit acquired in 1999 and interest on the
note payable due to the former stockholders of Dexterity.
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.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that
the final outcome of any of the claims or proceedings to which the
Company is a party would have a material adverse effect on the
Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be
no assurance that the resolution of any particular claim or
proceeding would not have an adverse effect on the Company's results
of operations for the interim period in which such resolution
occurred.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11* Computation of Earnings (Loss) Per Share
Exhibit 27.1* Financial Data Schedule for the three months
ended September 30, 1999
Exhibit 27.2* Financial Data Schedule for the three months
ended September 30, 1998
(b) Reports on Form 8-K - Not Applicable
*Filed herewith
-14-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEXTERITY SURGICAL, INC.
(Registrant)
Dated: November 12, 1999 By /s/ RICHARD A. WOODFIELD
-------------------------------------
Richard A. Woodfield
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 12, 1999 By /s/ RANDALL K. BOATRIGHT
-------------------------------------
Randall K. Boatright
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
-15-
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11* Computation of Earnings (Loss) Per Share
27.1* Financial Data Schedule for the three months
ended September 30, 1999
27.2* Financial Data Schedule for the three months
ended September 30, 1998
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 11
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE:
Net loss $ (568,234) $ (742,359) $ (1,374,914) $ (2,276,814)
Preferred Stock Dividends (13,256) (43,900) (13,256) (131,583)
------------ ------------ ------------ ------------
Net loss available for common stock shareholders $ (581,490) $ (786,259) $ (1,388,170) $ (2,408,397)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING USED FOR COMPUTATION 7,212,742 10,212,742 6,921,910 9,357,186
============ ============ ============ ============
BASIC LOSS PER COMMON SHARE $ (.08) $ (.08) $ (.20) $ (.26)
============ ============ ============ ============
COMPUTATION OF DILUTED LOSS PER SHARE:
Net loss $ (568,234) $ (742,359) $ (1,374,914) $ (2,276,814)
Interest on Convertible Debentures 68,055 67,500 201,945 202,500
------------ ------------ ------------ ------------
Net loss used for computation $ (500,179) $ (674,859) $ (1,172,969) $ (2,074,314)
============ ============ ============ ============
Weighted average shares of common stock outstanding 7,212,742 10,212,742 6,921,910 9,357,186
Weighted average incremental shares outstanding upon assumed
conversion of options and other dilutive securities 136,583 5,281 179,870 5,282
Weighted average incremental shares outstanding upon
assumed conversion of preferred stock 324,293 1,371,875 109,286 1,370,660
Weighted average incremental shares outstanding upon assumed
conversion of Convertible Debentures 1,500,000 1,875,000 1,500,000 1,875,000
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS OUTSTANDING
USED FOR COMPUTATION 9,173,618 13,464,898 8,711,066 12,608,128
============ ============ ============ ============
DILUTED LOSS PER COMMON SHARE AND COMMON
SHARE EQUIVALENTS (a) $ (.05) $ (.05) $ (.13) $ (.16)
============ ============ ============ ============
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-B although it is not required by SFAS No. 128 because it
is antidilutive. As a result, it is not the amount reflected on the
statements of operations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999, AND THE YEAR TO DATE
CONSOLIDATED STATEMENT OF OPERATIONS FINANCIAL STATEMENTS FOR THE PERIOD THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 475,245
<SECURITIES> 0
<RECEIVABLES> 3,361,217
<ALLOWANCES> 216,743
<INVENTORY> 2,880,156
<CURRENT-ASSETS> 6,622,003
<PP&E> 1,312,046
<DEPRECIATION> 584,284
<TOTAL-ASSETS> 27,900,386
<CURRENT-LIABILITIES> 8,151,365
<BONDS> 3,000,000
0
2
<COMMON> 10,213
<OTHER-SE> 11,176,440
<TOTAL-LIABILITY-AND-EQUITY> 27,900,386
<SALES> 16,137,035
<TOTAL-REVENUES> 16,249,975
<CGS> 9,166,942
<TOTAL-COSTS> 17,696,346
<OTHER-EXPENSES> 30,000
<LOSS-PROVISION> 54,000
<INTEREST-EXPENSE> 746,443
<INCOME-PRETAX> (2,408,397)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,408,397)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,408,397)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND THE YEAR TO DATE
CONSOLIDATED STATEMENTS OF OPERATIONS FINANCIAL STATEMENTS FOR THE PERIOD THEN
ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,013,626
<SECURITIES> 1,114,757
<RECEIVABLES> 2,770,774
<ALLOWANCES> 208,883
<INVENTORY> 1,124,690
<CURRENT-ASSETS> 5,874,007
<PP&E> 1,526,542
<DEPRECIATION> 996,024
<TOTAL-ASSETS> 10,817,073
<CURRENT-LIABILITIES> 2,366,396
<BONDS> 3,000,000
0
1
<COMMON> 7,213
<OTHER-SE> 5,336,299
<TOTAL-LIABILITY-AND-EQUITY> 10,817,073
<SALES> 13,971,919
<TOTAL-REVENUES> 14,403,107
<CGS> 8,001,679
<TOTAL-COSTS> 15,400,656
<OTHER-EXPENSES> 105,000
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 225,002
<INCOME-PRETAX> (1,388,170)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,388,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,388,170)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
</TABLE>
