FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 29, 2001
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: 0-26538
ENCORE MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 65-0572565
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9800 Metric Boulevard
Austin, Texas 78758
(Address of principal executive offices) (Zip code)
512-832-9500
(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 Registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock 10,726,154 (23,979,454 on an as converted basis)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 2001 AND DECEMBER 31, 2000
(in thousands, except share data)
(unaudited)
JUNE 29, December 31,
2001 2000
------- -------
ASSETS
Cash and cash equivalents $13,502 $ 1
Accounts receivable, net 6,128 5,417
Inventories 18,856 20,291
Prepaid expenses and other current assets 1,540 1,532
------- -------
Total current assets 40,026 27,241
Property, plant and equipment, net 5,245 5,408
Intangible assets, net 4,389 4,698
Other non current assets 1,149 1,147
------- -------
Total assets $50,809 $38,494
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion - long-term debt $ 2,267 $ 3,232
Accounts payable and accrued liabilities 3,818 3,159
------- -------
Total current liabilities 6,085 6,391
Long-term debt, net of current portion 13,686 14,283
------- -------
Total liabilities 19,771 20,674
Redeemable convertible Series A Preferred Stock -
12,857
Common stock, $0.001 par value, 35,000,000 shares
authorized, 11,362,000 and 9,348,000 shares issued , respectively 11 9
Additional paid-in capital 21,905 19,406
Deferred compensation (137) (185)
Retained earnings (deficit) (368) 11
Notes receivable for sale of common stock (1,187) -
Less cost of repurchased stock, warrants and rights
(635,000 and 322,000 shares, respectively) (2,043) (1,421)
------- -------
Total stockholders' equity 18,181 17,820
------- -------
Total liabilities, redeemable convertible preferred stock and
stockholders' equity $50,809 $38,494
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
2
ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 29, 2001 AND JUNE 30, 2000
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
------------------------ ------------------------
June 29, June 30, June 29, June 30,
2001 2000 2001 2000
------- ------- ------- -------
Sales $ 8,411 $ 7,194 $17,130 $15,695
Cost of goods sold 2,949 2,426 6,159 5,400
------- ------- ------- -------
Gross margin 5,462 4,768 10,971 10,295
Operating expenses:
Research and development 413 460 812 920
Selling, general and administrative 4,144 3,742 8,611 7,893
Other charges 1,623 - 1,623 -
------- ------- ------- -------
Operating income (loss) (718) 566 (75) 1,482
Interest expense (301) (325) (663) (613)
Other income 81 98 146 152
------- ------- ------- -------
Income (loss) before income taxes (938) 339 (592) 1,021
Current provision (benefit) for income taxes (331) 122 (213) 347
------- ------- ------- -------
Net income (loss) (607) 217 (379) 674
Beneficial conversion feature related to Series
A preferred stock (3,706) - (3,706) -
------- ------- ------- -------
Net income (loss) attributable to common
stockholders $(4,313) $ 217 $(4,085) $ 674
======= ======= ======= =======
Basic earnings (loss) per share attributable to
common stockholders $(0.47) $0.02 $(0.45) $0.07
Shares used in computing basic earnings (loss)
per share 9,189 9,022 9,042 9,023
Diluted earnings (loss) per share attributable
to common stockholders $(0.47) $0.02 $(0.45) $0.07
Shares used in computing diluted earnings (loss)
per share 9,189 10,006 9,042 10,091
The accompanying notes are an integral part of the consolidated financial
statements.
3
ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 29, 2001 AND JUNE 30, 2000
(in thousands)
(unaudited)
SIX MONTHS ENDED
-------------------------------
JUNE 29, JUNE 30,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (379) $ 674
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,373 1,455
(Gain) loss on sale of assets 8 (3)
Other charges 581 -
Other - 2
Changes in operating assets and liabilities:
Increase in accounts receivable (711) (561)
Decrease (increase) in inventories 1,435 (3,050)
Decrease (increase) in prepaid expenses and (10) 215
other assets
Increase in accounts payable and accrued expenses 659 200
------- -------
Net cash provided by (used in) operating 2,956 (1,068)
activities ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds on sale of assets 3 0
Purchases of property and equipment (843) (882)
------- -------
Net cash used in investing activities (840) (882)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 499 13
Proceeds from issuance of Series A preferred stock 12,857 -
Payments to acquire treasury stock - (120)
Payments on long-term obligations (1,987) (409)
Proceeds from long-term obligations 16 2,466
------- -------
Net cash provided by financing activities 11,385 1,950
------- -------
Net increase in cash and cash equivalents 13,501 -
Cash and cash equivalents at beginning of period 1 1
------- -------
Cash and cash equivalents at end of period $13,502 $ 1
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cashless exercise of stock options 213 -
Notes received for sale of common stock 1,187 -
Purchase of treasury stock by issuance of a note 409 -
The accompanying notes are an integral part of the consolidated financial
statements.
4
ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Encore Medical Corporation, a Delaware corporation, and its wholly owned
subsidiaries (individually and collectively referred to as the "Company"). All
significant intercompany balances and transactions have been eliminated in
consolidation. The unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month period ended June
29, 2001, are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K dated December 31, 2000 (the "Form 10-K"). Certain amounts
in the prior period have been reclassified to conform to the current period
presentation.
2. DESCRIPTION OF BUSINESS
The Company, through its primary operating subsidiary, Encore
Orthopedics, Inc. ("Encore"), designs, manufactures, markets and sells products
for the orthopedic implant industry primarily in the United States, Europe and
Asia.
The Company's products are subject to regulation by the Food and Drug
Administration ("FDA") with respect to their sale in the United States, and the
Company must obtain FDA authorization to market each of its products before it
can be sold in the United States. Additionally, the Company is subject to
similar regulations in many of the international countries in which it sells
products.
3. OTHER CHARGES
The components of other charges included in the consolidated statements
of operations for the three and six months ended June 29, 2001 are as follows
(in thousands):
Compensation expense associated with stock option exchange program $917
Compensation expense associated with cashless exercise of options 171
Legal settlement charges 535
------
$1,623
======
In June 2001, Encore recorded compensation expense of $917 related to the
cancellation of certain outstanding options to purchase common stock in exchange
for common shares of the Company. In June 2001, a former employee exercised
options by selling some of the shares acquired by this exercise back to the
Company in sufficient quantity to cover the exercise price and related tax
liability. This cashless exercise of options generated compensation expense of
$171. Finally, in June 2001, the Company reached a settlement with Medica
Holding AG ("Medica") related to a complaint filed by Medica associated with the
sale of Series A Preferred Stock. The Company incurred two charges in
connection with the settlement. The first charge of $125 relates to court
ordered reimbursement of the plaintiff's legal expenses which resulted in the
filing of a supplement to the original proxy statement. The second charge of
$410 represents a non-cash benefit provided to the Company by the primary Series
A Preferred Stock stockholders which arose as a result of its purchase of
Medica's outstanding stock in the Company. Of the total charges of $1,623, only
$479 represented a cash outlay by the Company.
5
4. INVENTORIES
Inventories at June 29, 2001 and December 31, 2000 are as follows (in
thousands):
JUNE 29, DECEMBER 31,
2001 2000
------- -------
Components and raw materials $ 4,231 $ 4,482
Work in process 1,470 2,162
Finished goods 16,405 18,322
------- -------
22,106 24,966
Less-reserve for obsolescence (3,250) (4,675)
------- -------
$18,856 $20,291
======= =======
5. SERIES A PREFERRED STOCK
On June 12, 2001, the stockholders of the Company approved the issuance of
132,353 shares of Series A Preferred Stock at $102.00 per share for an aggregate
purchase price of $13.5 million. The 132,353 shares of Series A Preferred Stock
are immediately convertible into 13,253,300 shares of the Company's common
stock. The holders of the Series A Preferred Stock have the right to designate
up to two individuals to serve on the Company's Board of Directors. Each share
of Series A Preferred Stock is entitled, for all matters except the election of
directors, to one vote for each share of Common Stock into which such share of
Series A Preferred Stock is then convertible. Shares of Series A Preferred
Stock bear non-cumulative dividends at a rate of 8% per annum if declared by the
Company. The holders of Series A Preferred Stock are entitled to certain other
rights that are more expansive than the rights of the holders of common stock
which are detailed in the Amended and Restated Series A Preferred Stock Purchase
Agreement dated as of May 3, 2001. Issuance costs associated with the sale of
Series A Stock amounted to $643,000. Certain terms of the Series A Preferred
Stock, including redemption in the event of a change in control, result in the
Series A Preferred Stock being treated as redeemable for financial accounting
purposes.
6. EARNINGS PER SHARE
The reconciliation of the denominators used to calculate the basic and
diluted earnings per share for the periods ended June 29, 2001 and June 30,
2000, respectively, are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- -----------------------------
JUNE 29, JUNE 30, JUNE 29, JUNE 30,
2001 2000 2001 2000
-------- ------ ----- ------
Shares used in computing basic earnings (loss) per
share attributable to common stockholders 9,189 9,022 9,042 9,023
Plus: Common stock equivalents - 984 - 1,068
----- ------ ----- ------
Shares used in computing diluted earnings (loss) per
share attributable to common stockholders 9,189 10,006 9,042 10,091
===== ====== ===== ======
Options and warrants to purchase 1,552,293 and 3,536,700 shares of common
stock, respectively, were outstanding at June 29, 2001, but were not included in
the computation of diluted EPS because the exercise of such options and warrants
would be anti-dilutive.
6
7. RECENT ACCOUNTING PRONOUNCEMENT
In June 2001, The Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets," (SFAS No. 142) which changes how
goodwill and other intangible assets are accounted for subsequent to their
initial recognition. Under this standard, goodwill and other intangible assets
having identifiable useful lives are no longer amortized, but are subjected to
periodic assessments of impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. We are currently in the process of evaluating
SFAS No. 142 and the effect it may have on our financial statements. As of this
date, we have not determined whether SFAS No. 142 will have a material impact on
our financial statements or results of operations. In the event that SFAS No.
142 is determined to have a material impact on our financial statements or
results of operations, we would be required to report such changes no later than
the quarter ending March 31, 2002.
8. SUBSEQUENT EVENT
On July 2, 2001, the Company acquired Kimberly-Clark Corporation's line of
orthopedic soft goods, patient safety devices and pressure care products (the
"OSG Products") pursuant to that certain Asset Purchase Agreement dated July 2,
2001. The Company acquired fixed assets, inventory, customer lists,
transferable licenses and intellectual property related to the production of the
OSG Products for a total purchase price of $8,835,206, consisting of $5,700,000
in cash and a promissory note in the amount of $3,135,206 bearing interest at 8%
per annum and payable over 24 months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 29, 2001, AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2000.
Sales were $8,411,000 for the quarter ended June 29, 2001, representing an
increase of $1,217,000 or 17% over the quarter ended June 30, 2000. U.S. sales
achieved a record level for any one quarter at $6,432,000, increasing $1,753,000
or 37% compared to the same period in 2000. This was the result of Encore's
efforts over the past six months to strengthen and build the U.S. sales force.
On the other hand, sales outside the U.S. declined $536,000 or 21%, offsetting
some of the increase in U.S. sales. The decline in sales outside the U.S. can
be primarily attributed to Encore's previously announced strategy to focus sales
efforts in the U.S. which is a more profitable geographic area and to the
absence of any major stocking orders in the second quarter of 2001.
Gross margin increased by $694,000 from the second quarter of 2000. However,
gross margin as a percent of sales declined from 66% during the second quarter
of 2000 to 65% during the second quarter of 2001 primarily due to increases in
production variances.
Research and development expenses decreased $47,000 or 10% from the second
quarter of 2000 due primarily to the approval of products in late 2000 and early
2001, such as the Keystone(TM) Modular Hip System and the Metal/Metal Acetabular
Hip System, that were in clinical studies in 2000. Notwithstanding this
decrease in expenditures, there are several new products in the development
process. In addition, clinical studies are continuing on a mobile bearing knee
product and a ceramic femoral knee component.
Selling, general, and administrative expenses increased $402,000 or 11% compared
to the second quarter of 2000 due mainly to higher commissions and royalties as
a result of increased sales. However, as a percent of sales, selling, general
and administrative expenses decreased to 49% for the quarter from 52% in the
second quarter of 2000.
An additional charge of $1,623,000 was taken in the second quarter of 2001 which
related to specific one-time items that are not part of the normal selling,
general and administrative, or research and development expenses. The most
significant was a charge of $917,000 related to an exchange of certain
outstanding options for stock. Approximately 1.9 million options were cancelled
and approximately 600,000 shares were issued to the senior management of the
Company. The cash impact of this transaction was only $354,000. Another
component of this charge includes $535,000 in legal settlement charges. This
was related to the settlement of the lawsuit brought by one of the Company's
stockholders in an attempt to stop the issuance of the Series A Preferred Stock.
Only $125,000 of this
7
expense was a cash expense. Finally, there was a $171,000 charge for
compensation expense associated with a cashless exercise of options by a former
employee.
As a result of these other charges, an operating loss of $718,000 was incurred
in the second quarter 2001 compared to operating income of $566,000 for the
second quarter of 2000. Operating income before these non-recurring
transactions was $905,000, an increase of 60% over the same period in 2000.
Without these non-recurring charges, operating income increased to 10.7% of
sales during the second quarter of 2001, compared to 7.9% for the second quarter
of 2000.
Interest expense decreased $24,000 for the three months ended June 29, 2001, to
$301,000 as compared to $325,000 during the same period in the prior year.
Overall, net loss for the quarter ended June 29, 2001 was $607,000 as compared
to net income of $217,000 during the second quarter of 2000. However, if you
removed the effect of the other charges discussed above, the Company's results
for the second quarter of 2000 would show a net income of $432,000. This is a
99% increase over the same period in 2000.
In connection with the issuance of Series A Preferred Stock in June 2001,
because the stock is immediately convertible into common stock of Encore at the
holder's option at a conversion price of $1.02 per share, which was below the
per share closing price of our common stock on the date of the issuance of the
Series A Preferred Stock, Encore recorded a charge to net income available to
common stockholders of $3,706,000 representing the fair value of the beneficial
conversion feature of the Series A Preferred Stock.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 29, 2001, AS COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2000.
Sales increased 9% over the first six months of 2000 to $17,130,000 from
$15,695,000. U.S. sales were $12,656,000, increasing $2,879,000 or 29% compared
to the same period in 2000. This was the result of efforts to strengthen and
build the U.S. sales force. Sales outside the U.S. declined $1,444,000 or 24%
offsetting some of the increase in the U.S. The decline can be attributed to
previously announced strategies to focus sales efforts in the U.S.
Gross margin increased by $676,000 from the same six months of 2000. However,
gross margin as a percent of sales declined from 65.6% in 2000 to 64.0% during
2001 primarily due to increases in production variances.
Research and development expenses decreased by $108,000 or 11.7% from the first
six months of 2000 due primarily to the approval of products in late 2000 and
early 2001, such as the Keystone(TM) Modular Hip System and the Metal/Metal
Acetabular Hip System, that were in clinical studies in 2000. Clinical studies
are continuing on a mobile bearing knee product and a ceramic femoral knee
component.
Selling, general, and administrative expenses increased $718,000 or 9% compared
to the same period in 2000 due to increased commissions, royalties and doubtful
account reserves as a result of increased sales and relocation expenses.
However, as a percent of sales, selling, general and administrative expenses
remained at 50% of sales.
An additional charge of $1,623,000 was taken in the second quarter of 2001 which
related to specific one-time items that are not part of the normal selling,
general and administrative, or research and development expenses. The most
significant was a charge of $917,000 related to an exchange of certain
outstanding options for stock. Approximately 1.9 million options were cancelled
and approximately 600,000 shares were issued to the senior management of the
Company. The cash impact of this transaction was only $354,000. Another
component of this charge includes $535,000 in legal settlement charges. This
was related to the settlement of the lawsuit brought by one of the Company's
stockholders in an attempt to stop the issuance of the Series A Preferred Stock.
Only $125,000 of this expense was a cash expense. Finally, there was a $171,000
charge for compensation expense associated with a cashless exercise of options
by a former employee.
As a result of these charges, an operating loss of $75,000 was incurred for the
first six months of 2001, as compared to operating income of $1,482,000 in 2000
as the increase in sales was offset by the additional spending discussed above.
Operating income before the additional charge was $1,548,000, a 4% increase over
the same period in 2000.
8
Interest expense increased $50,000 for the six months of 2001 to $663,000 as
compared to the same period in the prior year.
Overall, net loss for the six months ended June 29, 2001 was $379,000 as
compared to net income of $674,000 for the same six months in 2000. Removing
the effect of the other charges discussed above results in net income of
$660,000.
In connection with the issuance of Series A Preferred Stock in June 2001,
because the stock is immediately convertible into common stock of Encore at the
holder's option at a conversion price of $1.02 per share, which was below the
per share closing price of our common stock on the date of the issuance of the
Series A Preferred Stock, Encore recorded a charge to net income available to
common stockholders of $3,706,000 representing the fair value of the beneficial
conversion feature of the Series A Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations through the sale of
equity securities, borrowings and cash flow from operations. The Company has
available to it a $12.5 million revolving credit facility (the "Credit
Facility"). This facility will decrease during the year on a quarterly basis to
$10.5 million. In addition, it has a number of financial covenants that must be
met on a quarterly basis. As of June 29, 2001, the Company had drawn
approximately $11 million. As of June 29, 2001, the Company was in compliance
with all of the financial covenants. While the Company's current forecast shows
that the Company will be able to meet the financial covenants during 2001 and
will be able to keep the need for outstanding debt under the maximum ceilings
for amounts outstanding, there is no assurance that the forecasts will prove
accurate or that the bank's requirements will be able to be met. In addition,
there is no assurance that another credit facility will be available as a
replacement to the current facility, which is scheduled to mature in October of
2002. There exists the possibility that the Company will need to obtain
additional equity financing, although there is no assurance as to the amount,
availability or cost of such financing.
During the second quarter ended June 29, 2001, operating activities provided
cash and cash equivalents of $3 million primarily due to a decrease in
inventory, an increase in accounts payable and accrued liabilities, and net
income adjusted for depreciation and amortization. This compares favorably to
the second quarter ended June 30, 2001 when operating activities used cash and
cash equivalents of $1.1 million.
During June 2001, the Company raised $12.9 million, net of issuance costs of
$643,000, in connection with the sale of Series A Preferred Stock. The purpose
of raising this money is to fund the acquisitions that the Company has
previously announced that it is pursuing. The first of these acquisitions was
completed on July 2, 2001, with the purchase of the orthopedic soft goods,
patient safety devices and pressure care product lines from Kimberly-Clark
Corporation.
The Company's continued growth has resulted in an increase in its capital
requirements. This growth is primarily funded by the Credit Facility and cash
generated from operations to meet its working capital needs. As of June 29,
2001, the Company had net working capital of approximately $34 million, an
increase from the $21 million net working capital at December 31, 2000.
9
FORWARD LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 which represent
Encore's expectations or beliefs concerning future events, including, but not
limited to, statements regarding growth in sales of Encore's products, profit
margins and the sufficiency of Encore's cash flow for its future liquidity and
capital resource needs. These forward looking statements are further qualified
by important factors that could cause actual results to differ materially from
those in the forward looking statements. These factors include, without
limitation, the effect of competitive pricing, Encore's dependence on the
ability of its third-party manufacturers to produce components on a basis which
is cost-effective to Encore, market acceptance of Encore's products, the ability
to attract and retain competent employees, technological obsolescence of one or
more products, changes in product strategies, the availability to locate
acceptable acquisition candidates and then finance and integrate those
acquisitions, and effects of government regulation. Results actually achieved
may differ materially from expected results included in these statements as a
result of these or other factors.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 1, 2001, one of the Company's stockholders, Medica Holding AG ("Medica")
filed a complaint in the Court of Chancery of the State of Delaware, against the
Company, its directors, and the principal investors in the Series A Preferred
Stock, seeking to enjoin the consummation of the sale of the Series A Preferred
Stock alleging, among other things, (a) that the individual defendants breached
their fiduciary duties by failing to consider alternative transactions or
proposals for obtaining capital for the Company and by not seeking the advice of
a financial advisor before entering in the Series A Stock Purchase Agreement,
and (b) that the principal investors aided and abetted the individual defendants
in the breach of their fiduciary duties. The lawsuit was settled prior to the
June 12, 2001 Annual Meeting. The terms of the settlement required that (a) the
Company agree to pay court-ordered attorneys fees to the plaintiff in connection
with the requirement that the original proxy be amended to provide supplemental
disclosures, and (b) that the principal investors in the Series A Preferred
Stock purchase the shares of common stock in the Company that Medica owned.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 12, 2001, the stockholders of the Company approved the issuance of
132,353 shares of Series A Preferred Stock at $102.00 per share for an aggregate
purchase price of $13.5 million. The shares were issued on June 12, 2001. The
purchase price was payable in cash. There was no underwriter involved with the
issuance. The parties who purchased the Series A Preferred Stock were primarily
comprised of partnerships controlled by Galen Partners and by Ivy Orthopedics
Partners LLC. A complete list of the purchasers can be found in the Proxy dated
May 4, 2001 that was distributed to all stockholders of the Company. The 132,353
shares of Series A Preferred Stock are immediately convertible into 13,253,300
shares of the Company's common stock. The sale of these securities was exempt
from registration under the Securities Act of 1933 pursuant to Regulation D.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of stockholders was held on June 12, 2001. All management
nominees for director, as listed in the Proxy Statement for the Annual Meeting,
were elected. The following are the matters voted on at the meeting:
A. Election of directors:
VOTES
NAME VOTED FOR VOTED AGAINST WITHHELD
- ---- --------- ------------- --------
Craig Smith 7,841,588 0 460,393
John Abeles 7,928,044 0 373,937
The following directors' terms of office as a director continued after the
meeting: Nick Cindrich, Kenneth Davidson, Dennis Enright, Jay Haft, Joel
Kanter, and Richard Martin.
10
B. Ratification of PricewaterhouseCoopers LLP as independent auditors of the
Company for the fiscal year ending December 31, 2001.
Voted For: 8,180,169
Voted Against: 112,589
Voted Abstained: 9,223
C. Approval of the Amended and Restated Series A Preferred Stock Purchase
Agreement and approval of the sales of 132,353 shares of Series A Preferred
Stock to, interalia, Galen Partners III, L.P., Galen Partners International
III, L.P. and Galen Employee Fund III, L.P.
Voted For: 4,435,201
Voted Against: 316,073
Voted Abstained: 12,423
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits. See Index to Exhibits
---------
2. Reports on Form 8-K. The Company filed a Form 8-K on June 28, 2001, relating
--------------------
to the issuance of 132,353 shares of Series A Preferred Stock which resulted in
a change in control of the registrant. The Company also filed a Form 8-K on
July 17, 2001, relating to the Company acquiring a line of orthopedic soft
goods, patient safety devices, and pressure care products from Kimberly-Clark
Corporation.
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.
Aug. 13, 2001 By: /s/ Kenneth W. Davidson
- ------------- ------------------------------
Date Kenneth W. Davidson, Chairman of the Board and
Chief Executive Officer
Aug. 13, 2001 By: /s/ August Faske
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Date August Faske, Executive Vice President -
Chief Financial Officer
INDEX TO EXHIBITS
Number Assigned in
Regulation S-K
Item 601 Description of Exhibit
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(2) No exhibit
(4) No exhibit
(10) No exhibit
(11) No exhibit
(15) No exhibit
(18) No exhibit
(19) No exhibit
(22) No exhibit
(23) No exhibit
(24) No exhibit
(99) No exhibit
11