SPARTA SURGICAL CORPORATION
Bernal Corporate Park
7068 Koll Center Parkway, Suite 401
Pleasanton, CA 94566
PROXY STATEMENT AND
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 28, 1996
To the shareholders of Sparta Surgical Corporation:
The Annual Meeting of the shareholders of Sparta Surgical Corporation (the
"Company") will be held at the Company's executive offices, Bernal Corporate
Park, 7068 Koll Center Parkway, Suite 401, Pleasanton, California 94566, at 8:30
A.M. on August 28, 1996 or at any adjournment or postponement thereof, for the
following purposes:
1. To elect three (3) directors of the Company
2. To ratify the issuance of stock options to Thomas F. Reiner, the
Company's Chairman of the Board, President and CEO, to purchase up to
500,000 shares of Common Stock at $.40 per share until December 4,
2003. These stock options were issued to Mr. Reiner on December 12,
1995 in consideration for his locating a purchaser for and negotiating
the sale of the medical product line for a purchase price of
approximately $5,700,000.
3. To transact such other business as may properly come before the
meeting.
Details relating to the above matters are set forth in the attached Proxy
Statement. All shareholders of record of the Company as of the close of business
on July 12, 1996 are entitled to notice of and to vote at such meeting or at any
adjournment or postponed thereof.
ALL SHAREHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING. IF YOU DO NOT
PLAN TO ATTEND THE MEETING YOU ARE URGED TO SIGN, DATE AND PROMPTLY RETURN THE
ENCLOSED PROXY. A REPLY CARD IS ENCLOSED FOR YOUR CONVENIENCE. THE GIVING OF A
PROXY WILL NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
Thomas F. Reiner
Thomas F. Reiner
Chairman of the Board, President
and Chief Executive Officer
July 22, 1996
PROXY STATEMENT
SPARTA SURGICAL CORPORATION
Bernal Corporate Park
7068 Koll Center Parkway, Suite 401
Pleasanton, CA 94566
Telephone: (510) 417-8812
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 28, 1996
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Sparta Surgical Corporation (the
"Company"), a Delaware corporation, of $.002 par value Common Stock ("Common
Stock") and $4.00 par value redeemable Preferred Stock ("Preferred Stock") to be
voted at the Annual Meeting of Shareholders of the Company ("Annual Meeting") to
be held at 8:30 A.M. on August 28, 1996, or at any adjournment or postponement
thereof. The Company anticipates that this Proxy Statement and the accompanying
form of proxy will be first mailed or given to all shareholders of the Company
on or about July 22, 1996. The shares represented by all proxies that are
properly executed and submitted will be voted at the meeting in accordance with
the instructions indicated thereon. Unless otherwise directed, votes will be
cast for the election of the nominees for directors hereinafter named. The
holders of a majority of the shares represented at the meeting in person or by
proxy will be required to approve all proposed matters.
Any shareholder giving a proxy may revoke it at any time before it is
exercised by delivering written notice of such revocation to the Company, by
substituting a new proxy executed at a later date, or by requesting, in person,
at the Annual Meeting, that the proxy be returned.
All of the expenses involved in preparing, assembling and mailing this
Proxy Statement and the materials enclosed herewith and all costs of soliciting
proxies will be paid by the Company. In addition to the solicitation by mail,
proxies may be solicited by officers and regular employees of the Company by
telephone, telegraph or personal interview. Such persons will receive no
compensation for their services other than their regular salaries. Arrangements
will also be made with brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of the
share held of record by such persons, and the Company may reimburse such persons
for reasonable out of pocket expenses incurred by them in so doing.
-1-
VOTING SHARES AND PRINCIPAL SHAREHOLDERS
The close of business on July 12, 1996 has been fixed by the Board of
Directors of the Company as the record date for the determination of
shareholders entitled to notice of and to vote at the Annual Meeting. On July
12, 1996, there were outstanding 4,267,860 shares of Common Stock, each share of
which entitles the holder thereof to one vote on each matter which may come
before the meeting and 168,523 shares of Redeemable Convertible Preferred Stock
("1992 Preferred Stock"), each share of which entitles the holder to two votes
on each matter which may come before the meeting. Cumulative voting is not
permitted.
A majority of the issued and outstanding shares entitled to vote,
represented at the meeting in person or by proxy, constitutes a quorum at any
shareholders' meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning stock
ownership of the Company's $.002 par value Common Stock by all persons known to
the Company to own beneficially 5% or more of the outstanding shares of Common
Stock, by each director, by all individuals named in the "Summary Compensation
Table" of the "Management" section and by all directors and officers as a group,
as of May 16, 1996. None of the named individuals or any other executive
officers own any shares of 1992 Preferred Stock or Series A Convertible
Redeemable Preferred Stock ("1994 Preferred Stock") nor does any person own
beneficially 5% or more of the outstanding shares of 1992 or 1994 Preferred
Stock. For purposes of determining the percentage ownership of the individuals
and group listed in the table, the 1992 Preferred Stock and the Common Stock
have been treated as one class, since both classes are entitled to vote on all
matters on which the Common Stock is entitled to vote. In such instances, each
share of the 1992 Preferred Stock is entitled to two votes. The 1994 Preferred
Stock has not been included as it is non-voting.
The Company knows of no arrangements that will result in a change in
control at a date subsequent hereto. Except as otherwise noted, the persons
named in the table own the shares beneficially and of record and have sole
voting and investment power with respect to all shares shown as owned by them,
subject to community property laws, where applicable. Each stockholder's address
is in care of the Company at 7068 Koll Center Parkway, Pleasanton, California
94566. The table reflects all shares of Common Stock which each individual has
the right to acquire within 60 days from the date hereof upon exercise of
options, warrants, rights or other conversion privileges or similar obligations.
Number Percent
of Shares of of Class of
Common Common
Name Stock Owned Stock Owned
---- ----------- -----------
Thomas F. Reiner (1) 2,114,095 31.5%
Joseph Barbrie (2) 75,000 1.6%
Wm. Samuel Veazey (2) 76,875 1.6%
Michael Y. Granger (3) 20,000 .4%
Allan J. Korn (3) 15,000 .3%
Charles C. Johnston (4) 255,000 5.3%
Arbora A.G.(5) 750,000 14.3%
All officers and directors
as a group (five persons) (6) 2,300,970 32.6%
(1) Includes (i) 15,625 shares of Common Stock issuable upon exercise of options
at $8.80 per share at any time until July 1, 1997; (ii) 75,000 shares issuable
upon exercise of options at $2.25 per share at any time until February 14, 1999;
(iii) 200,000 shares issuable upon exercise of options at $2.25 per share at any
time until February 28, 2004; (iv) 400,000 shares issuable upon exercise of
options at $2.25 per share at any time until November 1, 1999; (v) 500,000
shares issuable upon exercise of options at $.40 per share at any time until
December 4, 2003; and (vi) certain shares and options to purchase shares for
which Mr. Reiner acts as trustee under a voting trust agreement. See footnote
(5), below. Does not include options to purchase 100,000 shares at $2.25 per
share at any time until February 28, 2004 contingent upon the Company achieving
certain goals. See "Summary Compensation Table."
(2) Includes 12,500 and 9,375 shares issuable upon exercise of options to
Messrs. Barbrie and Veazey, respectively, at $8.00 per share until July 1, 1997;
12,500 and 17,500 shares issuable upon exercise of options to Messrs. Barbrie
and Veazey, respectively, at $2.25 per share until February 14, 2004; and 50,000
shares issuable to each of Messrs. Barbrie and Veazey upon exercise of options
at $.40 per share until December 4, 2003.
(3) Includes 10,000 and 5,000 shares of Common Stock issuable upon exercise of
options to Messrs. Granger and Korn, respectively, at $2.25 per share at any
time until February 14, 2004 and 10,000 shares of Common Stock each issuable
upon exercise of options at $.40 per share until December 4, 2003.
(4) Includes shares and warrants owned by Mr. Johnston or by companies
controlled by Mr. Johnston which entitle them to purchase up to 40,000 shares at
$2.10 per share at any time until August 18, 1999 and 50,000 shares at $.375 per
share at any time until January 4, 1999.
(5) Includes warrants to purchase up to 500,000 shares at $.47 per share issued
to Arbora and related parties at any time until November 8, 1998 and 250,000
shares of Common Stock currently owned by Arbora. These warrants and shares are
subject to a voting trust agreement which provides the Company's Chairman,
President and Chief Executive Officer, Thomas F. Reiner with sole voting rights.
-2-
(6) Includes an aggregate of 1,877,500 shares of Common Stock issuable upon
exercise of currently exercisable options.
STOCK ESCROW
In connection with the 1992 Offering, Messrs. Reiner and Kramer, the
Company's Chairman and former Chairman, respectively, placed a total of 187,500
shares (93,750 shares each) of the Company's Common Stock owned by them in
escrow, pursuant to which the shares would be canceled on February 28, 1996
unless the closing bid price of the Company's Common Stock, as reported by
Nasdaq, averaged in excess of $38.48 per share for 30 consecutive trading days
at any time prior to February 28, 1996. The Company did not meet any of the
criteria for release of the shares from escrow and consequently the shares were
canceled effective February 28, 1996.
ELECTION OF DIRECTORS
At the Annual Meeting, the shareholders will elect three (3) directors of
the Company. Cumulative voting is not permitted in the election of directors of
the Company. All of the nominees are presently members of the Board of
Directors. Each of the nominees has consented to be named herein and to serve if
elected. It is not anticipated that any nominee will become unable or unwilling
to accept nomination or election, but if such should occur, the person named in
the proxy intends to vote for the election in his stead of such person as the
Board of Directors of the Company may recommend.
The following table sets forth certain information as to each nominee's and
officer's age, positions with the Company, and the year when the nominee or
officer first became an officer or director of the Company.
Officer or
Director
Name Age Office Since
---- --- ------ -----
Thomas F. Reiner 50 Chairman of the Board of Directors, 1987
Chief Executive Officer, President,
Treasurer, and Director
Joseph Barbrie 42 Vice President of Sales 1989
Wm. Samuel Veazey 35 Vice President of Finance 1990
and Administration, Secretary
Michael Y. Granger 40 Director 1991
Allan J. Korn 53 Director 1994
Directors hold office for a period of one year from their election at the
annual meeting of stockholders and until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. None of the above individuals has any family
relationship with any other. The Board of Directors has audit and compensation
committees composed of Messrs. Reiner, Granger and Korn. Messrs. Granger and
Korn receive $750 each, per meeting, for attending Board of Directors' meetings
and are reimbursed for out-of-pocket expenses.
Background
The following is a summary of the business experience of each officer and
director of the Company:
Thomas F. Reiner co-founded the Company and has been Chief Executive
Officer, President and a director of the Company since its organization in July
1987 and Chairman since January 1994. From 1972 to 1983, Mr. Reiner was employed
by Sparta Instrument Corporation, becoming its President in 1979. Mr. Reiner
co-founded Healthmed in 1983, serving as Vice President of Sales and Marketing
until 1985 and President until 1987. Mr. Reiner earned a B.S. degree in Business
Management and an M.B.A. degree in finance and general management from Fairleigh
Dickinson University.
Joseph Barbrie has been Vice President of Operations since March 1989 and
Vice President of Sales since March 1996. Mr. Barbrie earned a B.A. degree in
Business Management from Johnson & Wales College.
Wm. Samuel Veazey has been Vice President of Finance and Administration
since January 1990 and Secretary since January 1994. From January 1988 to
December 1989, he was Vice President of Corporate Finance for Interco Funding
Group, Inc., a Florida-based investment banking firm. Mr. Veazey earned a B.S.
degree in Biology and Chemistry, an M.S. degree in Biomedical Engineering and an
M.B.A. degree in Finance and General Management, all from the University of
Miami.
-3-
Michael Y. Granger, a director of the Company since June 1991, has been an
independent investment management consultant since April 1991. From March 1990
to April 1991, he was Vice President and Portfolio Manager for LINC Capital
Management ("LINC"), one of the Company's former lenders, where he was
responsible for negotiating and structuring financial transactions for emerging
growth companies in health care and other advanced technology fields. From July
1986 to March 1990, Mr. Granger was Investment Manager for Xerox Venture
Capital, with responsibility for structuring investments in high technology
emerging growth companies. Mr. Granger earned a B.S. degree in Electrical
Engineering from the University of Massachusetts at Amherst and an M.B.A. degree
in Finance and General Management from Dartmouth College.
Allan J. Korn, a director of the Company since February 1994, has been an
independent sales and marketing consultant to the medical and pharmaceutical
industry since October 1993. From March 1985 until September 1993, he held
various sales and marketing executive positions with DuPont Multi-Source
Products, Inc. Mr. Korn earned a B.A. degree in Economics from Queens College,
Flushing, New York and an M.B.A. degree in Marketing from Fairleigh Dickinson
University. Mr. Korn is also an Adjunct Professor in Business Administration at
Union County College.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
During the fiscal year ended February 29, 1996, all of the Company's
officers and directors timely filed reports on Forms 3 and 4.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for services rendered to
the Company in all capacities awarded to, earned by, or paid to the Chief
Executive Officer and the Company's other executive officers who received
compensation of more than $100,000 in the fiscal year ended February 29, 1996
and for each of the three fiscal years ended February 29, 1996.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Other Annual Awards All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
- --------------------------- ---- ------ ----- ------------ ------- ------------
Thomas F. Reiner ........................... 1996 $293,288(1) $ 63,000(2) $ 9,165(3) 500,000(4) $ 0
Chairman, Chief Executive ............. 1995 266,395(1) 0 85,538(3) 700,000(5) 0
Officer, Treasurer, Director .......... 1994 198,765(1) 11,785(6) 0 75,000(7) 0
Joseph Barbrie ............................. 1996 113,743 6,000(8) 0 50,000(9) 0
Vice President of Sales ............... 1995 105,355 0 23,576(10) 0 0
1994 99,413 5,600(6) 0 12,500(7) 0
Wm. Samuel Veazey .......................... 1996 98,734 11,000(8) 0 50,000(9) 0
Vice President of Finance ............. 1995 106,259 0 0 0 0
and Administration .................... 1994 84,761 5,600(6) 0 17,500(7) 0
John P. Landino (11) ....................... 1996 0 0 0 0 0
1995 100,712 0 0 0 0
1994 130,717 0 22,128(10) 0 0
Gerald S. Kramer (12) ...................... 1996 0 0 0 0 0
1995 54,615 0 0 0 0
1994 170,339 0 0 0 0
(1) Includes salaries and an automobile and insurance allowance. See
"-Employment Agreements."
(2) Includes a paid $50,000 bonus in consideration of completing the sale of the
medical product line and an unpaid bonus of $13,000 accrued in Fiscal 1996
related to the Company's management bonus plan.
(3) Represents paid vacation accruals in Fiscal 1996 and Fiscal 1995.
(4) In December 1995, in connection with the sale of the medical product line,
the Company issued to Mr. Reiner options to purchase 500,000 shares at $.40 per
share exercisable until December 4, 2003. Does not include options to purchase
725,000 shares granted to Mr. Reiner in July 1995 which were canceled by him in
May 1996.
(5) Under the terms of the April 1994 employment agreement, Mr. Reiner received
options to purchase 200,000 shares at $2.25 per share and options to purchase an
additional 100,000 shares at $2.25 per share if the Company reports income from
operations of $1,000,000 or more for any fiscal year through the fiscal year
ending February 28, 2004. See "-Employment Agreements."
In October 1994, the Company issued to Mr. Reiner stock options to purchase
up to 400,000 shares exercisable until November 1, 1999 at $2.25 per share.
(6) In July 1994, bonuses were paid under the Company's management bonus plan
which were accrued in Fiscal 1994.
-4-
(7) In February 1994, the Company granted stock options under the Company's 1987
Stock Option Plan which are exercisable at $2.25 per share until February 14,
2004 except for Mr. Reiner's which are exercisable until February 14, 1999.
(8) Represents unpaid bonuses under the Company's management bonus plan which
were accrued in Fiscal 1996.
(9) In December 1995, in connection with the sale of the medical product line,
the Company issued options to Messrs. Barbrie and Veazey to purchase 50,000
shares each at $.40 per share at any time until December 4, 2003.
(10) Represents reimbursement of relocation expenses.
(11) Mr. Landino was employed by the Company from December 1992 until his
resignation in January 1995.
(12) Mr. Kramer orally resigned as a director of the Company in January 1994 and
was terminated as an executive officer in March 1994.
OPTION GRANTS IN LAST FISCAL YEAR AND STOCK OPTION GRANT
The following table provides information on option grants during the year
ended February 29, 1996 to the named executive officers:
Individual Grants
% of Total Options
Options Granted to
Granted Employees in
Name (1) Fiscal Year Exercise Price Expiration Date
- ---- --- ----------- -------------- ---------------
Thomas F. Reiner 500,000 83.3% $ .40 December 4, 2003
Joseph Barbrie 50,000 8.3 .40 December 4, 2003
Wm. Samuel Veazey 50,000 8.3 .40 December 4, 2003
John P. Landino 0 -- -- --
Gerald S. Kramer 0 -- -- --
(1) See footnotes (4) and (9) to the Summary Compensation Table.
AGGREGATE OPTION EXERCISE IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information on the value of the named
executive officers' unexercised options at February 29, 1996. No shares of
Common Stock were acquired upon exercise of options during the fiscal year ended
February 29, 1996.
Number of Value of Unexercised
Unexercised Options In-The-Money Options
at Fiscal Year End (1) at Fiscal Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Thomas F. Reiner 1,190,625 100,000 $65,000 0
Joseph Barbrie 75,000 0 6,500 0
Wm. Samuel Veazey 76,875 0 6,500 0
John P. Landino 0 0 0 0
Gerald S. Kramer 0 0 0 0
(1) The closing price of the Common Stock on February 29, 1996 as reported
by Nasdaq was $.53.
EMPLOYMENT AGREEMENTS
On April 8, 1996, the Company entered into an employment agreement through
February 28, 2003 ("Agreement") with Mr. Reiner replacing the April 22, 1994
employment agreement (as subsequently amended) which replaced the September 29,
1993 employment agreement. The Agreement provides for a base salary of $239,500
per year, (with annual increases based upon the greater of 4% or the Producer
Price Index For Surgical and Medical Instruments and Apparatus published by the
U.S. Department of Labor), 50% of the Management Bonus, $500,000 whole life and
$1,000,000 term life insurance policies to be owned by Mr. Reiner, an automobile
allowance and significant termination payments to Mr. Reiner (aggregating over
seven times his annual salary) in the event the Agreement is canceled for any
reason other than cause, and references existing stock options to purchase up to
300,000 shares of the Company's Common Stock at $2.25 per share of which options
to purchase 200,000 shares were granted and options to purchase an additional
100,000 shares were granted but may not be exercised unless the Company reports
income from operations of at least $1,000,000 for any fiscal year through
February 28, 2004. Mr. Reiner is also to receive annual cash bonuses based upon
the Company reaching certain annual levels of income from operations during the
term of the Agreement as follows:
-5-
Income from
Operations Amount of Bonus (1)
$150,000 $15,000
210,000 30,000
300,000 50,000
450,000 65,000
600,000 75,000
750,000 85,000
900,000 95,000
On April 8, 1996, the Company amended the Management Bonus Plan providing
for pooled bonuses of 8% of the Company's pretax net income to be shared among
the Company's management for the fiscal years through February 28, 2003,
(1) Fifty percent of any bonus amount will be applied to reduce any indebtedness
of Mr. Reiner to the Company as of the date of the bonus payment. However, if
the Agreement is terminated by the Company for any reason other than "cause" as
defined in the Agreement, any indebtedness owed by Mr. Reiner to the Company is
automatically canceled.
STOCK OPTION PLAN AND STOCK OPTION GRANT
In 1987, the Company adopted its 1987 Stock Option Plan (the "Plan"), which
provides for the grant to employees, officers, directors and consultants of
options to purchase up to 62,500 shares of Common Stock, consisting of both
"incentive stock options" within the meaning of Section 422A of the United
States Internal Revenue Code of 1986 (the "Code") and "non-qualified" options.
Incentive stock options are issuable only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants and
others, as well as to employees of the Company. In January 1994, the Company's
stockholders approved an increase in the number of stock options available under
the Plan to a total of 250,000 options.
The Plan is administered by the Board of Directors, which determines those
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares of Common Stock that
may be purchased under each option, and the option price.
The per share exercise price of the Common Stock subject to an incentive
stock option or nonqualified option may not be less than the fair market value
of the Common Stock on the date the option is granted. The per share exercise
price of the Common Stock subject to a non-qualified option is established by
the Board of Directors. The aggregate fair market value (determined as of the
date the option is granted) of the Common Stock that any employee may purchase
in any calendar year pursuant to the exercise of incentive stock options may not
exceed $100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company is eligible to
receive any incentive stock options under the Plan unless the option price is at
least 110% of the fair market value of the Common Stock subject to the option,
determined on the date of grant. Non-qualified options are not subject to this
limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination during which he or she can exercise the
option. Upon termination of employment of an optionee by reason of death or
permanent total disability, his or her option remains exercisable for one year
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Options under the Plan must be granted within ten years from the effective
date of the Plan. The incentive stock options granted under the Plan cannot be
exercised more than ten years from the date of grant except that incentive stock
options issued to 10% or greater stockholders are limited to five year terms.
All options granted under the Plan provide for the payment of the exercise price
in cash or by delivery to the Company of shares of Common Stock already owned by
the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of Common Stock to purchase
additional shares of Common Stock and may theoretically exercise all of his
stock options with no additional investment other than his original shares.
Any unexercised options that expire or that terminate upon an optionee
ceasing to be an officer, director or an employee of the Company become
available once again for issuance. As of May 16, 1996, options to purchase
160,125 shares have been granted under the Plan. A total of 160,125 options are
currently exercisable, and no options have been exercised.
In April 1994, under the terms of the employment agreement, Mr. Reiner
received options to purchase 200,000 shares of Common Stock at $2.25 per share
and options to purchase an additional 100,000 shares of Common Stock at $2.25
per share if the Company reports income from operations of $1,000,000 or more
for any fiscal year through the fiscal year ending February 28, 2004. See
"-Employment Agreements."
-6-
In October 1994, the Company issued to Mr. Reiner options to purchase up to
400,000 shares of Common Stock at $2.25 per share until November 1, 1999 in
consideration for Mr. Reiner providing personal guarantees for the Congress loan
and certain other debts of the Company.
In July 1995, in consideration for Mr. Reiner's efforts in successfully
negotiating long term contracts having an aggregate value of approximately
$7,500,000, the Company issued to Mr. Reiner options to purchase 625,000 shares
at $1.00 per share and options to purchase an additional 100,000 shares at $1.00
per share if the price of the Company's common stock is in excess of $2.25 per
share for a period of ten consecutive trading days through the fiscal year
ending February 28, 2000. In May 1996, Mr. Reiner canceled these options.
In December 1995, in consideration of negotiating and completing the sale
of the medical product line for a sale price of approximately $5,700,000, the
Company issued to Messrs. Reiner, Barbrie, Veazey, Granger and Korn options to
purchase 500,000, 50,000, 50,000, 10,000, and 10,000 shares, respectively, at
$.40 per share until December 4, 2003.
CERTAIN TRANSACTIONS
Management is of the opinion that each transaction described below between
the Company and its officers, directors or stockholders was on terms at least as
fair to the Company as had the transaction been concluded with an unaffiliated
party, except for the loans advanced by the Company to certain of the officers
which do not bear interest. All material transactions between the Company and
its officers, directors or principal stockholders are subject to approval by a
majority of the Company's directors not having an interest in the transaction.
There are currently two outside directors. Mr. Reiner is the Company's Chairman,
Chief Executive Officer and President. Mr. Kramer is the Company's former
Chairman.
On September 23, 1992, the Company issued to Messrs. Kramer and Reiner
options to purchase up to 187,500 shares each at $4.24 per share at any time
until May 31, 2002 if the Company reaches certain annual gross revenue levels
prior to February 28, 1998. Mr. Kramer's option was canceled when the Company
terminated his employment for cause on March 4, 1994, and Mr. Reiner's option
was canceled by mutual agreement of Mr. Reiner and the Company in connection
with the execution of an employment agreement with Mr. Reiner on April 22, 1994.
Under the terms of the new employment agreement, Mr. Reiner received options to
purchase 200,000 shares at $2.25 per share and options to purchase an additional
100,000 shares at $2.25 per share if the Company reports income from operations
of $1,000,000 or more for any fiscal year through the fiscal year ending
February 28, 2004.
The Company holds promissory notes due it from Messrs. Kramer and Reiner in
the amounts of $389,000 and $210,000, respectively, at February 29, 1996. The
promissory notes do not bear interest (although the Internal Revenue Service may
impute interest) and are payable on February 1, 1997. The Company also has a
receivable from Mr. Reiner of $123,994 at February 29, 1996. The receivable does
not bear interest and is due on demand. The Company also has a note receivable
from Mr. Reiner of $222,419 due in July 2006 with interest at 6% per annum.
On March 4, 1994, the Company terminated for cause its December 5, 1992
employment agreement with Gerald S. Kramer, a former Chairman of the Company's
Board of Directors. The Company also offset against a promissory note in the
amount of $378,770 owed by the Company to Mr. Kramer, a receivable owed by Mr.
Kramer to the Company in the amount of $138,063, as well as $222,419
representing Mr. Kramer's share of his joint bank indebtedness which was repaid
by the Company. A payment in the amount of the net balance of $18,288 was
remitted to Mr. Kramer in December 1995.
In July 1994, the Company purchased an indebtedness owed to Bank Hapoalim
B.M. jointly and severally by Messrs. Reiner and Kramer, for the $444,838
balance, in exchange for all rights held by the Bank as against such
individuals. Accordingly, Mr. Reiner owes one half of this amount to the
Company, and Mr. Kramer's half was offset against other indebtedness owed by the
Company to Mr. Kramer, which indebtedness is currently the subject of
litigation.
In April 1993, the Company borrowed $350,000 from Asset Factoring
International, Inc. ("Asset Factoring"), a company controlled by Charles C.
Johnston, a principal stockholder of the Company, evidenced by a promissory
note. The principal due on the promissory note plus $50,000 in interest was due
in October 1995. The promissory note was subordinated to the promissory note
payable to Congress Financial Corporation ("Congress") and was guaranteed by
Messrs. Kramer and Reiner. In August 1994, the Company issued 40,000 Common
Stock purchase warrants exercisable at $2.10 per share at any time until August
18, 1999 in consideration of Asset Factoring extending the due date of the
$350,000 promissory note and $50,000 interest payment until June 1995. In
connection with the financing, the Company issued a warrant to purchase up to
62,500 shares of its Common Stock exercisable at $3.00 per share at any time
until March 31, 1998. In connection with the subordination of the loan to
Congress, Asset Factoring received an additional warrant to purchase up to
62,500 shares at $2.00 per share at any time until August 31, 1998. Both
warrants were exercised in April 1994 based upon a net issuance of 40,000 shares
of Common Stock. The Company also entered into a one year consulting agreement
with Asset Factoring in which the Company paid Asset Factoring $50,000 for one
year of consulting services. In December 1995, the Company paid Asset Factoring
$469,710 consisting of the principal due on the promissory note plus accrued
interest. In addition, in connection with extending the promissory note through
December 1995, Mr. Johnston received a warrant to purchase up to 50,000 shares
of its Common Stock exercisable at $.375 per share at any time until January 4,
1999.
-7-
In October 1994, the Company issued to Mr. Reiner options to purchase up to
400,000 shares at $2.25 per share until November 1, 1999 in consideration for
Mr. Reiner providing personal guarantees for the Congress loan and certain other
debts of the Company.
In July 1995, in consideration for Mr. Reiner's efforts in successfully
negotiating long term contracts having an aggregate value of approximately
$7,500,000, the Company issued to Mr. Reiner options to purchase 625,000 shares
at $1.00 per share and options to purchase an additional 100,000 shares at $1.00
per share if the price of the Company's Common Stock is in excess of $2.25 per
share for a period of ten consecutive trading days through the fiscal year
ending February 28, 2000. In May 1996, Mr. Reiner canceled these options.
In December 1995, in consideration of locating a purchaser for and
negotiating the sale of the medical product line for a purchase price of
approximately $5,700,000, the Company issued to Mr. Reiner options to purchase
500,000 shares at $.40 per share until December 4, 2003.
The Company repaid $1,000,000 to Arbora, A.G. ("Arbora") as of December 14,
1995, which together with the return of a $809,500 promissory note issued to the
Company by an affiliate of Arbora, served as principal consideration to redeem
and cancel 4,761,842 shares of the Company's Common Stock. The 4,761,842 shares
were issued to Arbora on December 4, 1995 in consideration of the conversion of
a $1,000,000 note into equity and the issuance to the Company of a promissory
note in the amount of $809,500 by an affiliate of Arbora pursuant to an
agreement reached between it and the Company. In connection with this
transaction, the Company also canceled a warrant to purchase 1,000,000 shares of
the Company's Common Stock at $1.40 per share held by Arbora and issued Arbora
and its affiliated parties warrants to purchase up to 750,000 shares of the
Company's common stock at $.47 per share at any time until November 8, 1998. In
addition, a voting trust was entered into which provided the Company's Chairman,
President and Chief Executive Officer, Thomas F. Reiner, with voting rights as
to such shares. On April 22, 1996, 250,000 shares of Common Stock were issued to
Arbora in connection with the exercise of 250,000 Common Stock purchase
warrants.
PROPOSAL TO RATIFY THE ISSUANCE OF STOCK OPTIONS TO MR. REINER
The Board of Directors recommends that the Company's shareholders ratify
the issuance of stock options to Thomas F. Reiner, the Company's Chairman of the
Board, President and CEO, to purchase up to 500,000 shares of Common Stock at
$.40 per share until December 4, 2003. These stock options were issued to Mr.
Reiner on December 12, 1995 in consideration for locating a purchaser for and
negotiating the sale of the medical product line for a purchase price of
approximately $5,700,000.
RELATIONSHIP WITH THE INDEPENDENT PUBLIC ACCOUNTANTS
Angell & Deering, Certified Public Accountants, conducted the audit of the
Company's financial statements for the year ended February 29, 1996. It is the
Company's understanding that this firm is obligated to maintain audit
independence as prescribed by the accounting profession and certain requirements
of the Securities and Exchange Commission. As a result, the directors of the
Company do not specifically approve, in advance, non-audit services provided by
the firm, nor do they consider the effect, if any, of such services on audit
independence.
PROPOSALS OF SHAREHOLDERS FOR PRESENTATION
AT NEXT ANNUAL MEETING OF SHAREHOLDERS
Any shareholder of the Company who desires to submit a proper proposal for
inclusion in the proxy materials relating to the next annual meeting of
shareholders must do so in writing and it must be received at the Company's
principal executive offices prior to the Company's fiscal year end. The
proponent must be a shareholder entitled to vote at the next annual meeting of
shareholders on the proposal and must continue to own the securities through the
date on which the meeting is held.
OTHER BUSINESS
The management of the Company is not aware of any other matters which are
to be presented to the Annual Meeting, nor has it been advised that other
persons will present any such matters. However, if other matters properly come
before the meeting, the individual named in the accompanying proxy shall vote on
such matters in accordance with his best judgment.
The above notice and Proxy Statement are sent by order of the Board of
Directors.
Thomas F. Reiner
Thomas F. Reiner
Chairman of the Board, President
and Chief Executive Officer
July 22, 1996
-8-