1
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, 1997
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
LIFEQUEST MEDICAL, 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 10, 1997, there were outstanding 6,410,883 shares of Common
Stock, $.001 par value, of the registrant.
Page 1 of 14
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
FORM 10-QSB
INDEX
Page
----
PART I. FINANCIAL INFORMATION
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Item 1: Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - December 31, 1996, and September 30, 1997 3
Consolidated Statements of Operations - For the Three Months and Nine Months
Ended September 30, 1996 and 1997 4
Consolidated Statements of Cash Flows - For the Nine Months Ended
September 30, 1996 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, September 30,
ASSETS 1996 1997
------------ ------------
Current Assets:
Cash and cash equivalents $ 294,143 $ 966,119
Short-term investments 2,464,743 243,801
Accounts receivable (net of allowance for doubtful accounts of
$231,891 in 1996 and $86,891 in 1997) 1,162,880 1,789,771
Accounts receivable from related party 14,871 19,818
Interest receivable 60,381 2,824
Inventories 1,628,913 1,671,885
Prepaid and other assets 74,379 16,810
------------ ------------
Total current assets 5,700,310 4,711,028
------------ ------------
Property, Plant and Equipment 1,253,277 1,556,413
Less-Accumulated depreciation (785,897) (879,855)
------------ ------------
467,380 676,558
------------ ------------
Intangible Assets:
Licensed technology rights 441,358 441,358
Goodwill, net 2,677,142 2,545,957
------------ ------------
Total assets $ 9,286,190 $ 8,374,901
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,689,686 $ 2,118,881
Accrued expenses 999,375 295,388
Current portion of long-term debt and
capital lease obligations 11,577 777,143
------------ ------------
Total current liabilities 2,700,638 3,191,412
Long-term debt and capital lease obligations 790,991 13,895
------------ ------------
Total liabilities 3,491,629 3,205,307
------------ ------------
Minority Interest 120,380 116,165
------------ ------------
Stockholders' Equity:
Common Stock, $.001 par value; 10,000,000 shares authorized;
shares issued and outstanding: 6,191,071 (1996)
and 6,410,883 (1997) 6,191 6,411
Additional paid-in capital 19,989,467 20,121,673
Accumulated deficit (14,321,477) (15,074,655)
------------ ------------
Total stockholders' equity 5,674,181 5,053,429
------------ ------------
Total liabilities and stockholders' equity $ 9,286,190 $ 8,374,901
============ ============
The accompanying notes are an integral
part of these consolidated financial statements.
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Nine Months
Ended September 30 Ended September 30
------------------------------- -------------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
Retail Value of Product and Commission Sales $ 1,784,899 $ 4,771,710 $ 5,365,969 $ 13,290,397
============ ============ ============ ============
Net Sales
Product Sales $ 1,413,903 $ 3,718,765 $ 4,368,933 $ 10,079,602
Commissions Earned 69,698 200,099 164,987 559,226
------------ ------------ ------------ ------------
1,483,601 3,918,864 4,533,920 10,638,828
------------ ------------ ------------ ------------
Cost And Expenses:
Cost of sales 899,394 2,301,661 2,723,450 6,188,081
Research and development 100,821 23,567 278,752 32,424
Selling, general and administrative 782,692 2,089,490 2,561,611 4,868,678
Depreciation and amortization 25,280 96,822 85,302 297,341
------------ ------------ ------------ ------------
1,808,187 4,511,540 5,649,115 11,386,524
------------ ------------ ------------ ------------
Income (loss) from operations (324,586) (592,676) (1,115,195) (747,696)
------------ ------------ ------------ ------------
Other income (expense):
Investment income 48,572 17,687 170,159 85,012
Interest expense (14,511) (30,194) (48,762) (59,365)
Merger and acquisition costs (6,238) (29,425) (112,975) (500)
------------ ------------ ------------ ------------
Net Income (Loss) Before Minority Interest (296,763) (634,608) (1,106,773) (722,549)
Minority interest in net loss of
consolidated subsidiary 631 1,674 15,917 4,215
------------ ------------ ------------ ------------
Net Income (Loss $ (296,132) $ (632,934) $ (1,090,856) $ (718,334)
============ ============ ============ ============
Net Income (Loss) Per Share of Common Stock $ (.07) $ (.10) $ (.25) $ (.11)
============ ============ ============ ============
Weighted Average Shares Used In Computing
Net Income (Loss) Per Share of Common Stock 4,316,821 6,410,883 4,309,756 6,325,793
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
-----------------------------
1996 1997
----------- -----------
Cash Flow From Operating Activities:
Net Income (Loss) $(1,090,856) $ (718,334)
Adjustments to reconcile net income (net loss) to net cash
provided by (used in) operating activities -
Depreciation and amortization 85,302 297,341
Issuance of stock, marketing agreement expense 17,500 --
Minority interest in net (loss) income of consolidated subsidiary (15,917) (4,215)
Changes in operating assets and liabilities-
(Increase) in accounts receivable, net (321,960) (626,891)
Decrease in interest receivable 1,855 57,557
(Increase) in inventories (227,096) (42,972)
Decrease in prepaid and other assets 59,726 57,569
(Increase) in accounts receivable from related party (49,689) (4,947)
(Decrease) increase in accounts payable (9,580) 429,195
Increase (decrease) in accrued expenses 36,004 (703,987)
----------- -----------
Net cash used in operating activities (1,514,711) (1,259,684)
----------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment (276,021) (304,872)
Purchases of investments (1,976,458) (2,248,153)
Investment maturities 3,386,946 4,469,095
Acquisitions, net of cash acquired -- (70,462)
----------- -----------
Net cash provided by investing activities 1,134,467 1,845,608
----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of notes payable 1,016,000 263,076
Proceeds from exercise of stock options 13,440 132,426
Payments on long-term debt and capital lease obligations (681,660) (274,606)
Payments to Stockholder (28,767) (34,844)
----------- -----------
Net cash provided by financing activities 319,013 86,052
----------- -----------
Net (decrease) increase in cash and cash equivalents (61,231) 671,976
Cash and cash equivalents, beginning of period 309,952 294,143
----------- -----------
Cash and cash equivalents, end of period $ 248,721 $ 966,119
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months
Ended September 30,
--------------------
1996 1997
------- -------
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for -
Interest $48,762 $59,365
Income taxes -- 70,462
Noncash Investing And Financing Activities:
The Company issued 950,000 shares of common stock in 1996 in connection
with the mergers of G. M. Engineering, Inc. and Klein Medical, Inc. For a
discussion of these mergers, see the Company's annual report on Form 10-KSB.
The Company also issued 57,143 shares of common stock in 1997 in connection
with the merger of Trimedica, Inc. See Note 5 in the financial statements.
The Company also issued 466,473 and 98,246 shares of common stock in 1997
in connection with the mergers of W. H. Bookwalter and Associates, Inc. and
Mishbucha, Inc., respectively. See Notes 7 and 8 in the financial statements.
The accompanying notes are an integral part of these
consolidated financial statements
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LIFEQUEST MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of LifeQuest Medical,
Inc. (the "Company"), LifeQuest Endoscopic Technologies, Inc. ("LQET"), Klein
Medical, Inc. ("KMI"), Val-U-Med, Inc. ("VMI"), wholly-owned subsidiaries of 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, 1996, 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.
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. Retail Value of Product and Commission Sales as presented on the
consolidated statement of income includes product sales, plus the gross sales of
products for which the Company receives commissions and is presented for
informational purposes.
NOTE 3 - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of Common Stock and common stock equivalents
outstanding during the period. Common stock equivalents are not considered in
the computation of net loss per share when their effect is antidilutive.
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
December 31, September 30,
1996 1997
---------- ----------
Raw materials $ 66,979 $ 47,977
Work-in-process 128,774 116,276
Finished Goods 1,433,160 1,507,632
---------- ----------
$1,628,913 $1,671,885
========== ==========
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NOTE 5 - TRIMEDICA, INC. MERGER
Effective June 1997, Trimedica, Inc., a Colorado corporation
("Trimedica"), was acquired by the Company and merged into KMI, a wholly-owned
subsidiary of the Company. Trimedica was purchased for an aggregate of 57,143
shares of Common Stock. The transaction was accounted for using the
pooling-of-interests accounting method, therefore, the assets, liabilities, and
operations of Trimedica are included in the consolidated financial statements
for all periods reported herein. Trimedica business activity will constitute the
new orthopedic sales force of KMI.
The following table shows the net sales and net income (loss) related
to Trimedica that have been included in the consolidated statements of
operations:
Three Months Nine Months
Ended September 30 Ended September 30
1996 1997 1996 1997
-------- -------- -------- --------
Net Sales $ 33,822 $ -- $138,699 $148,464
Net Income (Loss) $ 2,678 $ -- $ 52,239 $ 49,230
NOTE 6 - STOCK OPTION PLAN
At the Annual Meeting of Stockholders held June 17, 1997, the proposal
to amend the Company's 1989 Stock Option Plan to increase the number of shares
authorized for issuance under the Option Plan to 1,500,000 was approved as
2,383,894 shares of Common Stock were voted "For", 666,753 shares were voted
"Against", 206,707 shares abstained from voting and 1,971,460 were unvoted.
NOTE 7 - W. H. BOOKWALTER AND ASSOCIATES, INC. MERGER
Effective September 1997, W. H. Bookwalter and Associates, Inc., a
Vermont corporation ("WHB") was acquired by the Company and merged into VMI, a
wholly-owned subsidiary of the Company. WHB was purchased for an aggregate of
466,473 shares of Common Stock. The transaction was accounted for using the
pooling-of-interests accounting method, therefore, the assets, liabilities, and
operations of WHB are included in the consolidated financial statements for all
periods reported herein. WHB business activity will provide the Company with
distribution coverage in the northeastern region of the United States.
The following table shows the net sales and net income (loss) related
to WHB that have been included in the consolidated statements of operations:
Three Months Nine Months
Ended September 30 Ended September 30
1996 1997 1996 1997
----------- ----------- ----------- -----------
Net Sales $ 501,260 $ 554,001 $ 1,503,780 $ 1,790,572
Net Income (Loss) $ (10,357) $ 501 $ (31,071) $ (89,839)
NOTE 8 - MEDEX SURGICAL MERGER
Effective September 1997, Mishbucha, Inc., a Texas corporation d/b/a
Medex Surgical ("Medex"), was acquired by the Company and merged into KMI, a
wholly-owned subsidiary of the company. Medex was purchased for an aggregate of
98,246 shares of Common Stock. Medex was formed during 1997 and the transaction
was accounted for using the pooling-of-interests accounting method, therefore,
the assets, liabilities, and operations of Medex are included in the
consolidated financial statements for all 1997 periods reported herein. Medex
business activity will allow the Company to further expand its geographical
area.
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The following table shows the net sales and net income (loss) related
to Medex that have been included in the consolidated statements of operations:
Three Months Nine Months
Ended September 30 Ended September 30
1996 1997 1996 1997
------ -------- ------ --------
Net Sales $ -- $ 58,579 $ -- $ 58,579
Net Income (Loss) $ -- $ (5,757) $ -- $ (5,757)
NOTE 9 - DEBT
On February 26, 1996, the Company borrowed $750,000 from a commercial
bank pledging a like amount of short-term investments as collateral. The loan
proceeds were used to replace more expensive debt, mainly capital equipment
leases, acquired with the acquisition of G. M. Engineering, Inc. On September 3,
1997, the loan was converted to a line of credit maturing September 1998 whereby
all inventories, accounts receivable and intangibles are pledged as collateral.
The line of credit is further secured by a Treasury Bill with a maturity value
of $250,000. The balance of this debt at September 30, 1997, is $600,000.
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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 and Section 21E of the Exchange Act. Specifically, all statements other than
statements of historical facts included in this Item 2 regarding the Company's
financial position, business strategy and plans and objectives of management of
the Company for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of the Company's management,
as well as assumptions made by and information currently available to the
Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect" and "intend" and words or phrases of similar
import, as they relate to the Company or Company management are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions related to certain factors including, without
limitation, competitive factors, general economic conditions, customer
relations, relationships, relationships with vendors, the interest rate
environment, governmental regulation and supervision, product introductions and
acceptance, technological change, changes in industry practices, one-time events
and other factors described herein, in the Company's Registration Statement on
Form S-3 filed on February 7, 1997, and in the Company's annual, quarterly and
other reports filed with the Securities and Exchange Commission (collectively,
"cautionary statements"). Although the Company believes that its expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements.
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 received minimal operating revenues and, thus,
was unprofitable. As of September 30, 1997, the Company had an accumulated
deficit of approximately $15,075,000. There can be no assurance that the Company
will be able to attain profitability.
The Company's future operating results will depend on many factors,
including the Company's ability to manufacture and market its products on a
cost-effective basis, demand for the Company's products and the level of
competition in the market place.
Effective September 1997, W. H. Bookwalter and Associates, Inc., a
Vermont corporation ("WHB"), was acquired by the Company and merged into
Val-U-Med, Inc. ("VMI"), a Nevada corporation and a wholly-owned subsidiary of
the Company, in consideration for an aggregate of 466,473 shares of Common
Stock. The transaction was accounted for using the pooling-of-interests
accounting method, therefore, the assets, liabilities, and operations of WHB are
included in the consolidated financial statements for all periods reported
herein. WHB business activity will provide the Company with distribution
coverage in the northeastern region of the United States.
Effective September 1997, Mishbucha, Inc., a Texas corporation d/b/a
Medex Surgical ("Medex"), was acquired by the Company and merged into Klein
Medical, Inc. ("KMI"), a Nevada corporation and a wholly-owned subsidiary of
the Company, in consideration for an aggregate of 98,246 shares of Common
Stock. Medex was formed during 1997 and the transaction was accounted for using
the pooling-of-interests accounting method, therefore, the assets, liabilities,
and operations of Medex are included in the consolidated financial statements
for all 1997 periods reported herein. Medex business activity will allow the
Company to further expand its geographical area.
Effective June 1997, Trimedica, Inc., a Colorado corporation
("Trimedica"), was acquired by the Company and merged into KMI, a wholly-owned
subsidiary of the Company, in consideration for an aggregate of 57,143 shares of
Common Stock. The transaction was accounted for using the pooling-of-interests
accounting method, therefore, the assets, liabilities, and operations of
Trimedica are included in the consolidated financial statements for all periods
reported herein. Trimedica business activity will be managed by the new
orthopedic sales force of KMI.
In December 1996, Val-U-Med, Inc., a Georgia corporation
("Val-U-Med"), was acquired by the Company and merged into VMI, a wholly-owned
subsidiary of the Company, in consideration for an aggregate of 1,200,000 shares
of Common Stock and an aggregate of $400,000. The transaction was accounted for
using the purchase method of accounting. VMI is involved in the distribution and
marketing of minimally invasive surgical products.
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In November, 1996, Klein Medical, Inc., a Texas corporation ("Klein"),
was acquired by the Company and merged into KMI, a Nevada corporation and
newly-formed, wholly-owned subsidiary of the Company, in consideration for an
aggregate of 600,000 shares of Common Stock. The transaction was accounted for
using the pooling-of-interests accounting method, therefore, the assets,
liabilities, and operations of KMI and Klein are included in the consolidated
financial statements for all periods reported herein. KMI is involved in the
distribution and marketing of minimally invasive surgical products.
In February 1996, the Company completed the merger of GM Engineering,
Inc., a California corporation ("GME"), with and into LifeQuest Endoscopic
Technologies, Inc., ("LQET") a Nevada corporation and newly formed wholly-owned
subsidiary of the Company, in consideration for 350,000 shares of Common Stock.
The transaction was recorded using the pooling-of-interests method of
accounting, therefore, the assets, liabilities, and operations of GME are
included in the consolidated financial statements for all periods reported
herein. LQET develops, manufactures, and markets surgical and related
instruments used in minimally invasive surgery.
In May, 1994, the Company and Valdor Fiber Optics ("Valdor") of San
Jose, California, formed a corporate joint venture called ValQuest Medical, Inc.
("ValQuest"). In accordance with the terms of the joint venture agreement,
Valdor transferred to ValQuest the exclusive worldwide rights to develop,
manufacture, and market all present and future medical applications of Valdor's
patented fiber optic connector technology. The Company paid $100,000 to Valdor
in consideration for the transfer of these rights to ValQuest. Valdor
contributed such rights, which had an initial value of $327,273 in the
consolidated financial statements, to ValQuest in exchange for a 45 percent
interest in ValQuest. The Company contributed $400,000 to be used as working
capital in exchange for a 55 percent interest in ValQuest. Currently, subsequent
purchases of stock have increased the Company's ownership interest in ValQuest
to 82 percent.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had current assets of $4,711,000 and
current liabilities of $3,191,000 resulting in working capital of $1,520,000.
This compares to a working capital position of $3,000,000 at December 31, 1996.
The decline in working capital is primarily due to costs related to establishing
the larger infrastructure necessary to support the geographical expansion of the
Company's business activity and sales force.
Capital expenditures, including purchase business combinations, were
$375,000 during the first nine months of 1997. The Company anticipates further
capital expenditures as the Company's geographical expansion continues.
On February 26, 1996, the Company borrowed $750,000 from a commercial
bank pledging a like amount of short-term investments as collateral. The loan
proceeds were used to replace more expensive debt, mainly capital equipment
leases, acquired with the acquisition of GME. On September 3, 1997, the loan was
converted to a line of credit maturing September 1998 whereby all inventories,
accounts receivable and intangibles of the Company are pledged as collateral.
The line of credit is further secured by a Treasury Bill with a maturity value
of $250,000. The balance of this debt at September 30, 1997 is $600,000.
Based upon the current level of operations, the Company believes that
cash flow from operations plus the Company's cash from the realization of its
current assets will be adequate to meet its anticipated requirements for working
capital and capital expenditures. However, additional capital may be required in
order for the Company to take advantage of any additional attractive acquisition
opportunities or to participate in future alliances or joint ventures.
RESULTS OF OPERATIONS
For the three months ended September 30, 1997, the Company reported a
net loss of $633,000 or $.10 per share. This compares with a net loss of
$296,000 for the three months ended September 30, 1996. For the nine months
ended September 30, 1997, the Company reported a net loss of $718,000 versus a
net loss of $1,091,000 for the comparable period of 1996. The increase in the
net loss for the quarter was primarily caused by the Company's acceleration of
the geographic expansion of its business activity and sales force as well as its
distribution and sales support infrastructure. Also, the increase in loss was
due to development expense associated with the Company's new customized line of
trocars and cannulas. The decrease in net loss for the nine months ended
September 30, 1997 as compared to the same period in 1996 was due to the
business activity from the acquisition of VMI. Due to management's business
strategy to aggressively invest in growth opportunities which are expected to
lead to long-term profitability, the Company anticipates operating losses for
the remainder of 1997.
Product sales increased 163% in the third quarter 1997 and 131% in the
first nine months of 1997 as compared with the same periods in 1996. Product
sales were $3,719,000 for the third quarter of 1997 and $1,414,000 for the third
quarter of
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1996. Product sales for the first nine months of 1997 and 1996 were
$10,080,000 and $4,369,000 respectively. These increases were due to continued
sales growth throughout the Company and the acquisition of Val-U-Med.
Gross profit from product sales in the third quarter was $1,417,000 in
1997 versus $515,000 in 1996. The corresponding gross profit margins were 38% in
1997 and 36% in 1996. For the nine months ending September 30, gross profit was
$3,892,000 or 39% in 1997 and $1,645,000 or 38% in 1996. The increase in margins
in the third quarter 1997 is a result of the realization of the efficiencies
incurred through expanding volumes and economies of scale. On July 18, 1997, the
Company completed its previously announced relocation which combines its
corporate offices, San Antonio warehouse and distribution center, repair and
service center, and manufacturing facility in one new San Antonio location. The
Company believes this move and the related February 1997 move of VMI and the
Atlanta distribution center into a new larger facility prepares the Company for
continual growth and positions the Company to capture further operating
efficiencies.
Research and development expenses continued at de minimus levels
through September 30, 1997. This decline is due to the Company's decision to
severely curtail research activity and to concentrate its resources on sales
growth through geographical and product line expansion.
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, increased to $2,089,000 in 1997 from
$783,000 in 1996. For the nine months ending September 30, these expenses
increased 90% in 1997. These costs reflect higher sales commissions due to the
Companywide sales growth, overall increased activity due to the inclusion of VMI
and costs associated with development of a new customized line of trocars and
cannulas.
The minority interest in net loss of consolidated subsidiary reflects
the minority ownership share of ValQuest's operations.
Investment income represents interest earned on the Company's
short-term investments. Therefore, investment income declined as the level of
short-term investments declined from year to year.
As of September 30, 1997, the Company had net operating loss
carryforwards of approximately $13.3 million for federal income tax purposes
which are available to reduce future taxable income and will expire in 2006
through 2012 if not utilized. For federal income tax purposes the Company
deferred for future amortization certain acquisition and research and
development costs in the amount of approximately $2.5 million. Such costs, which
have been expensed for financial reporting purposes, will be amortized for tax
purposes over future years when commercial operations commence. The Company
received IRS approval of its request for a change of tax accounting method to
expense research and development costs for expenditures incurred in 1992 and
future years. The Company also has Research and development credit carryforwards
available to offset future income taxes and expire in 2005 through 2010.
The Company's ability to use its NOL carryforwards to offset future
taxable income is subject to restrictions enacted in the United States Internal
Revenue Code of 1986, as amended (the "Code"). These restrictions provide for
limitations on the Company's utilization of its NOL carryforwards following
certain ownership changes described in the Code. As a result of ownership
changes, the Company's existing NOL carryforwards are subject to the limitation.
Of the $13.3 million of NOL carryforwards, approximately $550,000 is subject to
limitation. Approximately $40,000 of the $550,000 can be utilized annually.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not applicable
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
(c) Pursuant to a Plan of Acquisition and Merger Agreement
(the "Agreement") among the Company, Val-U-Med, Inc., a
Nevada corporation and wholly-owned subsidiary of the
Company, W. H. Bookwalter and Associates, Inc., a Vermont
corporation ("WHB"), William H. Bookwalter, John R.
Bookwalter, M.D., and Frederick F. Judd, III (the "WHB
Shareholders") dated effective September 30, 1997, whereby
the Company acquired substantially all of the assets of WHB,
the Company issued 466,473 shares of common stock, $.001 par
value ("Common Stock"), to the WHB Shareholders. Such Common
Stock was not registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to the exemptions of
such registration provided under Regulation D ("Regulation
D") of the rules and regulations promulgated under the
Securities Act by the Securities and Exchange Commission. The
Company relied upon certain representations and warranties of
the WHB Shareholders, including, among other things, as to
their ability, along with that of their Purchaser
Representatives (as that term is defined in Rule 501(h) of
Regulation D), to evaluate the merits and risks of the
transactions contemplated in the Agreement and that the
Common Stock was acquired solely for their own accounts for
investment and not with a view to distribution.
Pursuant to a Plan of Acquisition and Merger Agreement (the
"Agreement") among the Company, Klein Medical, Inc., a Nevada
corporation and wholly-owned subsidiary of the Company,
Mishbucha, Inc., a Texas corporation ("Medex"), Robert Kraus
and Edward Kraus (the "Medex Shareholders") dated effective
September 30, 1997, whereby the Company acquired
substantially all of the assets of Medex, the Company issued
98,246 shares of common stock, $.001 par value ("Common
Stock"), to the Medex Shareholders. Such Common Stock was not
registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to the exemptions of such
registration provided under Regulation D. The Company relied
upon certain representations and warranties of the Medex
Shareholders, including, among other things, as to their
ability, along with that of their Purchaser Representatives
(as that term is defined in Rule 501(h) of Regulation D), to
evaluate the merits and risks of the transactions
contemplated in the Agreement and that the Common Stock was
acquired solely for their own accounts for investment and not
with a view to distribution.
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 Number 2.1*: Plan of Merger and Acquisition
Agreement Among the Company, Val-U-Med,
Inc., W. H. Bookwalter and Associates,
Inc., William H. Bookwalter, John R.
Bookwalter, M.D., and Frederick F.
Judd, III
Exhibit Number 2.2*: Plan of Merger and Acquisition
Agreement Among the Company, Klein
Medical, Inc., Mishbucha, Inc., Robert
Kraus, and Edward Kraus, effective
September 30, 1997.
Exhibit Number 10.1*: Employment Agreement dated
September 30, 1997 between William H.
Bookwalter and LifeQuest Medical, Inc.
Exhibit Number 27*: Financial Data Schedule
(b) Reports on Form 8-K: Not applicable
* Filed herewith
-13-
14
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.
LIFEQUEST MEDICAL, INC.
(Registrant)
Dated: November 13, 1997 By /s/ HERBERT H. SPOON
--------------------------------------
Herbert H. Spoon
President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 13, 1997 By /s/ RANDALL K. BOATRIGHT
---------------------------------
Randall K. Boatright
Vice President and Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
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15
INDEX TO EXHIBITS
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number 2.1*: Plan of Merger and Acquisition
Agreement Among the Company, Val-U-Med,
Inc., W. H. Bookwalter and Associates,
Inc., William H. Bookwalter, John R.
Bookwalter, M.D., and Frederick F.
Judd, III
Exhibit Number 2.2*: Plan of Merger and Acquisition
Agreement Among the Company, Klein
Medical, Inc., Mishbucha, Inc., Robert
Kraus, and Edward Kraus, effective
September 30, 1997.
Exhibit Number 10.1*: Employment Agreement dated
September 30, 1997 between William H.
Bookwalter and LifeQuest Medical, Inc.
Exhibit Number 27*: Financial Data Schedule
(b) Reports on Form 8-K: Not applicable
* Filed herewith