1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 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 0-20532
DEXTERITY SURGICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2559866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12961 Park Central, Suite 1300
San Antonio, Texas 78216
(Address of principal executive offices)
(Zip Code)
(210) 495-8787
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
----------
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
On August 9, 2001, there were outstanding 11,521,492 shares of Common
Stock, $.001 par value, of the registrant.
2
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
FORM 10-QSB
INDEX
<Table>
<Caption>
Page
----
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements - (Unaudited)
Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations - For the Three Months and Six Months
Ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows - For the Three Months and Six Months
Ended June 30, 2001 and 2000 5
Condensed Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</Table>
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
June 30, December 31,
ASSETS 2001 2000
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 34,195 $ 42,085
Accounts receivable (net of allowance for doubtful accounts of
$46,043 in 2001 and $46,418 in 2000) 580,048 730,306
Accounts receivable from related party -- 15,000
Inventories, net 911,092 1,050,927
Prepaid and other assets 52,714 238,923
------------ ------------
Total current assets 1,578,049 2,077,241
Property, Plant and Equipment, net 443,532 533,736
Investments, at cost 1,202,500 1,202,500
Deferred finance charges 178,079 215,494
Intangible Assets:
Licensed technology rights & other, net 14,390,837 15,160,883
Goodwill, net 1,188,376 1,293,082
------------ ------------
Total assets $ 18,981,373 $ 20,482,936
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,635,777 $ 2,732,846
Accrued liabilities 678,941 539,379
Convertible debentures in default 2,796,196 2,970,000
Current portion of long-term obligations 3,812,479 3,149,039
------------ ------------
Total current liabilities 9,923,393 9,391,264
Royalty Obligation 4,589,521 4,992,864
Minority Interest 47,248 47,248
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized;
2,445 shares issued and outstanding 2 2
Common stock, $.001 par value; 50,000,000 shares authorized;
11,521,492 shares issued and outstanding 11,522 11,522
Additional paid-in capital 32,333,504 32,333,504
Warrants 2,370,900 2,370,900
Accumulated deficit (30,294,717) (28,664,368)
------------ ------------
Total stockholders' equity 4,421,211 6,051,560
------------ ------------
Total liabilities and stockholders' equity $ 18,981,373 $ 20,482,936
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements
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DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<Table>
<Caption>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net Sales $ 1,199,068 $ 1,733,680 $ 2,426,823 $ 4,313,540
------------ ------------ ------------ ------------
Cost And Expenses:
Cost of sales 625,040 730,050 1,135,361 1,729,737
Research and development -- -- -- 4,765
Selling, general and administrative 393,849 1,560,976 1,056,061 3,191,203
Depreciation and amortization 504,513 490,316 999,561 981,355
------------ ------------ ------------ ------------
1,523,402 2,781,342 3,190,983 5,907,060
------------ ------------ ------------ ------------
Loss From Operations (324,334) (1,047,662) (764,160) (1,593,520)
Other Income (Expense):
Investment income -- 3,313 -- 12,132
Interest expense (373,896) (345,997) (768,389) (706,283)
------------ ------------ ------------ ------------
Net Loss (698,230) (1,390,346) (1,532,549) (2,287,671)
Less dividend requirement on
cumulative convertible preferred stock 48,900 40,900 97,800 81,800
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (747,130) $ (1,431,246) $ (1,630,349) $ (2,369,471)
============ ============ ============ ============
Basic and Diluted Loss Per Share of
Common Stock $ (.06) $ (.13) $ (.14) $ (.22)
============ ============ ============ ============
Weighted Average Shares Used In
Computing Basic and Diluted Loss
Per Share of Common Stock 11,521,492 11,237,151 11,521,492 10,750,331
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements
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DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
Six Months
Ended June 30,
---------------------------
2001 2000
----------- -----------
Cash Flows From Operating Activities:
Net Loss $(1,532,549) $(2,287,671)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Depreciation and amortization 999,561 981,355
Accretion of royalty obligation 368,335 371,514
Amortization of deferred finance charges 37,416 37,416
Noncash interest expense 22,500 172,500
Noncash consulting expense -- 21,750
Changes in operating assets and liabilities-
Decrease in accounts receivable, net 150,258 1,933,088
Decrease in accounts receivable from related party 15,000 4,750
Decrease in inventories, net 139,835 493,780
Decrease in prepaid and other assets 163,709 5,769
Decrease in accounts payable (97,069) (203,644)
Increase (decrease) in accrued expenses 139,562 (487,381)
----------- -----------
Net cash provided by operating activities 406,558 1,043,226
----------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment (34,606) (22,818)
Proceeds from sale of assets -- 7,000
----------- -----------
Net cash used in investing activities (34,606) (15,818)
----------- -----------
Cash Flows From Financing Activities:
Dividends paid to preferred stockholders (97,800) (81,800)
Payments on debt -- net (282,042) (780,701)
Payments on royalty obligations -- (147,509)
----------- -----------
Net cash used in financing activities (379,842) (1,010,010)
----------- -----------
Net increase (decrease) in cash and cash equivalents (7,890) 17,398
Cash and cash equivalents, beginning of period 42,085 113,384
----------- -----------
Cash and cash equivalents, end of period $ 34,195 $ 130,782
=========== ===========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements
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DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2001
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dexterity
Surgical, Inc. (the "Company") and the Company's 82% ownership interest in
ValQuest Medical, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation. The consolidated financial statements
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. However,
all adjustments have been made which are, in the opinion of the Company,
necessary for a fair presentation of the results of operations for the periods
covered. In addition, all such adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto for the fiscal year ended December 31, 2000, included in the Company's
Form 10-KSB.
In February 2000, the United States Surgical Corporation (U.S. Surgical), a
division of Tyco Healthcare Group LP, terminated its General Surgical
Innovations, Inc. (GSI) distribution agreement with the Company related to
balloon dissector, blunt tip trocar, and tacker products associated with
minimally invasive hernia surgery. These products accounted for approximately
50% of sales and 44% of gross profit of Dexterity from the effective date of the
distribution agreement, which was May 1, 1999, through February 2000, the
termination month. The Company does not believe that U.S. Surgical has any right
to cancel the agreement and is currently vigorously pursuing legal negotiations
and remedies.
At June 30, 2001, the Company had an accumulated deficit of approximately $30.3
million. During the six month periods ended June 30, 2001 and 2000, the Company
incurred net losses of approximately $1,533,000 and $2,288,000 respectively. It
is likely that the Company will continue to incur losses. There can be no
assurance that the Company will be able to raise cash as necessary to fund
operations or that the Company will ever achieve profitability. The Company's
cumulative losses have been funded primarily through the Company's initial
public offering of common stock, private sales of common stock and preferred
stock, debt financing, and the sale of convertible debentures. As discussed in
Note 7, the Company is in violation of certain affirmative financial covenant
requirements associated with its convertible debentures. Also, certain
redemption rights of the holder associated with its convertible debentures were
triggered by the delisting of the Company's common stock from the NASDAQ
SmallCap Market. Therefore, the Company is in technical default under the
convertible debentures, and the holder has the right to demand immediate
repayment of the entire amount outstanding, which is $2,796,196 at June 30,
2001. The Company currently does not have sufficient resources to fund such
amounts in the event of acceleration of the entire amount outstanding. Further,
the Company did not have the available resources to pay the guaranteed minimum
royalty amount of $414,321 due April 30, 2001 for the Royalty Year ended March
31, 2001. Additionally, the current portion of other long-term obligations due
in 2001 totals approximately $3,812,000 at June 30, 2001. The Company currently
does not have sufficient resources to fund such amounts in the event of demands
for payment. The Company is presently in negotiations to make arrangements to
restructure its cash obligations, including its Debentures, line of credit and
royalty obligations. However, there can be no assurance that the Company will be
able to restructure these obligations. There can be no assurance that such
additional funding will be available on terms attractive to the Company or at
all. The Company does not believe it will be able to obtain financing from
traditional commercial lenders. Rather, the Company likely will have to conduct
additional sale of its equity and/or debt securities through public or private
financings, collaborative relationships or other arrangements. Substantial and
immediate dilution to existing stockholders likely would result from any sales
of equity securities or other securities convertible into equity securities.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO RAISE ANY ADDITIONAL CAPITAL. IF
ADDITIONAL AMOUNTS CANNOT BE RAISED AND WE ARE UNABLE TO SUBSTANTIALLY REDUCE
OUR EXPENSES AND RESTRUCTURE OUR CASH OBLIGATIONS, WE WOULD SUFFER MATERIAL
ADVERSE CONSEQUENCES TO OUR BUSINESS,
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND WOULD LIKELY BE REQUIRED TO
SEEK OTHER ALTERNATIVES UP TO AND INCLUDING PROTECTION UNDER THE UNITED STATES
BANKRUPTCY LAWS.
The Company has taken steps to improve its 2001 operating results and
anticipated cash flows. Steps to improve operating results include reductions in
selling, general, and administrative costs and increased sales of Dexterity
products. During 2000 the Company executed agreements with the debt and
obligation holders allowing the Company to fund interest on the convertible
debentures and Dexterity note and a portion of the royalty obligation with
stock, in lieu of cash. The Company is attempting to negotiate similar
agreements to satisfy certain 2001 obligations with equity instruments. Based on
current projections for 2001, management believes that the Company's operating
results for 2001 will generate sufficient working capital, along with available
cash and available borrowings under a revolving line of credit, to sustain its
operations throughout the year, assuming the Company is successful in its
negotiations with the holders of its debt and other obligations. However, there
can be no assurances that these events will occur, that the Company can achieve
all of the planned operating improvements, or that ultimately the projections of
operating results will be achieved.
The medical devices industry in which the Company competes is highly competitive
and dominated by a relatively small number of competitors with financial and
other resources much greater than those possessed by the Company. The Company's
ability to achieve increases in sales or to sustain current sales levels depends
in part on the ability of the Company's suppliers to provide products in the
quantities the Company requires. While the Company has written distribution
agreements with certain of it suppliers, these agreements in certain instances
provide for nonexclusive distribution rights and often include territorial
restrictions that limit the geographical area in which the Company is permitted
to distribute the products. The agreements are also generally short-term, are
subject to periodic renewal, and often contain provisions permitting termination
by either party without cause upon relatively short notice.
These, and other factors which are beyond the control of the Company, provide no
assurances that the Company will be able to successfully raise additional funds
as needed or compete in the medical devices market. Failure to do so would have
a material adverse effect on the Company's business, financial condition,
results of operations, and ability to continue operations.
The Common Stock was delisted from the NASDAQ SmallCap Market on October 24,
2000. Trading in the Common Stock is now conducted on the National Association
of Securities Dealer's "Electronic Bulletin Board." Consequently, the liquidity
of the Company's Common Stock is impaired, not only in the number of shares
bought and sold, but also through delays in the timing of the transactions,
reduction in security analysts' and the news media's coverage, if any, of the
Company and lower prices for the Company's securities than might otherwise
prevail.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue when each of the following four criteria are met:
1) a contract or sales arrangement exists; 2) products have been shipped or
services have been rendered; 3) the price of the products or services is fixed
or determinable; and 4) collectibility is reasonably assured.
Product sales are recognized upon the shipment of products to the customer.
Commissions earned are recognized when customer orders are placed with product
suppliers. Customers may return products in the event of product defect or
inaccurate order fulfillment. The Company maintains an allowance for sales
returns based upon a historical analysis of returns. Substantially all returns
relate to inaccurate order fulfillment.
Licensed Technology Rights
Licensed technology rights are amortized upon the commencement of commercial
sales of the underlying products. The carrying value of the licensed technology
is periodically reviewed by the Company with impairments being recognized when
the expected future operating cash flows derived from such licensed technology
rights is less than their carrying value. Except for the royalty obligation
component, licensed technology rights acquired in conjunction with the merger
with Dexterity Incorporated (see "Note 5 - Merger) are amortized over a 17 year
period. The royalty obligation component of licensed technology rights is
amortized over the royalty agreement period of 7 years.
-7-
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Pending Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets will
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. The Company is in the
process of determining the effects of applying the nonamortization provisions of
the Statement on net income and earnings per share. During 2002, the Company
will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company.
NOTE 3 - BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is computed by dividing net income
(loss) by the weighted average number of shares of common stock outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. As the Company had a net loss for
the three months and six months ended June 30, 2001, Diluted EPS equals Basic
EPS as potentially dilutive common stock equivalents are antidilutive in loss
periods.
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
<Table>
<Caption>
June 30, December 31,
2001 2000
------------ ------------
Raw materials $ 5,458 $ 5,458
Work-in-process 339,481 341,964
Finished Goods 1,336,153 1,423,505
Allowances (770,000) (720,000)
------------ ------------
$ 911,092 $ 1,050,927
============ ============
</Table>
NOTE 5 - MERGER
On March 18, 1999, the Company's stockholders approved the Merger between the
Company and Dexterity Incorporated ("DI"). Contemporaneously with the Merger,
the Company changed its name to Dexterity Surgical, Inc. The Company accounted
for this business combination as a purchase. The consideration given to the
selling stockholders by the Company for the DI stock it did not previously own
consisted of an aggregate of:
(a) $1.5 million cash.
(b) Three million shares of the Company's common stock valued at
approximately $5.6 million.
(c) Warrants to purchase 1.5 million shares of the Company's
common stock valued at approximately $2.3 million.
(d) A one year, $1 million promissory note bearing interest at 12
percent.
(e) A royalty to be paid to the selling stockholders in an amount
equal to 15 percent of all sales of DI products for a period
of seven years. The royalty is subject to minimum payments
which aggregate approximately $9.7 million over the seven-year
royalty period, with a net present value, discounted at 12
percent, of approximately $5.95 million.
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NOTE 6 - COMMITMENTS AND CONTINGENCIES
On February 19, 2001, in Andrieni v. Lifequest Medical, Inc., et al., Civil
Action File No. E-71617 in Fulton County (Georgia) Superior Court, the jury
rendered a verdict in favor of plaintiffs in the amount of $297,000, plus
statutory interest. The Company has filed a motion for new trial in the matter
and, in the event such motion is denied, intends to appeal the judgment.
Further, the Company is currently attempting to negotiate a settlement with the
plaintiffs. In the event of an unfavorable outcome, the Company believes that it
is entitled to indemnification from the former stockholders of Val-U-Med for 42%
to 100% of any ultimate judgment. The Company recorded an expense and accrued
liability of approximately $360,000 as of December 31, 2000.
Included in accounts payable at June 30, 2001 and December 31, 2000 is
approximately $2.0 million owed to a former supplier, which is unpaid pending
the outcome of certain legal proceedings.
The Company is also a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party
would have a material adverse effect on the Company's financial statements;
however, due to the inherent uncertainty of litigation, the range of possible
loss, if any, cannot be estimated with a reasonable degree of precision and
there can be no assurance that the resolution of any particular claim or
proceeding would not have an adverse effect on the Company's results of
operations for the interim period in which such resolution occurred.
NOTE 7 - DEBT AND OTHER LONG-TERM OBLIGATIONS
Debt and other long-term obligations are outstanding as follows:
<Table>
<Caption>
June 30, December 31,
2001 2000
----------- -----------
Dexterity notes (1) 1,000,000 1,000,000
Line of credit (2) 645,995 754,233
Royalty obligation (3) 6,756,005 6,387,670
Convertible Debentures (in default at June 30, 2001 and December 31,
2000) (4) 2,796,196 2,970,000
----------- -----------
11,198,196 11,111,903
Less current portion 6,608,675 6,119,039
----------- -----------
Total long-term obligations $ 4,589,521 $ 4,992,864
=========== ===========
</Table>
(1) Unsecured notes payable related to Dexterity acquisition,
bearing interest at 12% interest due quarterly, maturing in
October 2001. In February 2000, the Company and the lender
amended the notes to allow interest for the period January 1,
2000 through December 31, 2000 to be paid in shares of common
stock at a per share price of $1.00. Interest subsequent to
December 31, 2000 is payable in cash.
(2) Revolving line of credit secured by account receivable,
inventories and intangible assets. In May 2001, Teleflex,
Inc., a major shareholder in the Company, purchased this
instrument from the previous lendor. Teleflex, Inc. and the
Company are currently negotiating new terms and conditions for
the line of credit. The outstanding balance continues to be
classified as a current liability and interest at prime rate
plus 1.5% continues to accrue until negotiations are
completed.
(3) Royalty obligation related to Dexterity acquisition, subject
to annual minimum payments over a period of seven years,
discounted at 12%. The minimum payments aggregate
approximately $9.7 million over the seven-year royalty period.
Subsequent to December 31, 1999, the Company and holders of
the royalty obligation agreed to an amendment to the royalty
agreement whereby a portion of the royalties due for the
period January 1, 2000 through December 31,
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2000 would be paid in shares of common stock at a per share
price of $1.00. The amount paid in stock approximates
$400,000. Royalties payable at and subsequent to December 31,
2000 are payable in cash.
(4) In December 1997, the Company sold 250,000 shares of common
stock to affiliates of Renaissance Capital Group, Inc.
(Renaissance), in a private placement for aggregate proceeds
of $1,000,000, and placed $3,000,000 in 9% Convertible
Debentures (Debentures) with Renaissance. The Debentures are
secured by substantially all of the assets of the Company and
require monthly payments of interest beginning in February
1998 and, unless sooner paid, redeemed, or converted, monthly
principal payments commencing in December 2000 of $10 per
$1,000 of the then-remaining principal amount. The remaining
principal balance will mature in December 2004.
The Debentures are convertible into shares of the Company's
common stock, in whole or in part, at any time at the option
of the holder. The Debentures are currently convertible at a
price of $1.00 per share of common stock, or 2,796,196 shares.
The conversion price is subject to downward revision if the
company sells shares of its common stock, or securities
convertible into shares of its common stock, at a price less
than $1.00 per share of common stock, subject to certain
allowed exceptions, during the term of the Debentures.
Additionally, an amendment allowed for interest on the
Debenture to be paid in shares of common stock at a per share
price of $1.00 for the period February 1, 2000 through January
31, 2001. Interest subsequent to January 31, 2001 is payable
in cash.
The Debentures currently require the Company to comply with
the following financial covenants: (i) a Debt-to-Net Worth
Ratio of no greater than 99:1; (ii) an Interest Coverage Ratio
of at least .60:1; (iii) a Debt Coverage Ratio of at least
.10:1; and (iv) a Current Ratio of at least .68:1. The Company
is currently not in compliance and, therefore, is in technical
default under the Debentures. As discussed in Note 1, the
delisting of the Company's common stock in October 2000 also
creates an event of default. Under these events of default,
the holders have the right to demand the immediate repayment
of the entire amount outstanding. Accordingly, the entire
balance due of $2,796,196 has been classified as a current
liability as of June 30, 2001. The Company currently does not
have, nor does it believe it could obtain, sufficient
resources to fund such amounts in the event of such
acceleration.
NOTE 8 - PREFERRED STOCK PLACEMENTS
Pursuant to a private placement which occurred in July and August 2000, the
Company issued to TFX Equities, Inc., a business development subsidiary of
Teleflex, Inc., and Cuda Products Company, whose chief executive officer is a
director of the Company, an aggregate of 400 shares of Series C Cumulative
Convertible Preferred Stock, $.001 par value ("Series C Preferred Stock") for
aggregate proceeds of $400,000. The Company used such proceeds for working
capital. The annual dividends on the Series C Preferred Stock are cumulative at
a rate of $80 per share. The Series C Preferred Stock is currently convertible
into shares of Common Stock at a conversion price of $1.00 per share, for an
aggregate of 400,000 shares of Common Stock. The conversion price for the Series
C Preferred Stock is subject to downward adjustment in the event the Company
sells shares of Common Stock, or securities convertible into shares of Common
Stock, at a per share price less than $1.00. The holders of Series C Preferred
Stock are entitled to one vote per share on all matters submitted to a vote of
the stockholders of the Company, and the affirmative vote of the holders of
66 2/3% of the votes entitled to be cast by the holders of the Series C
Preferred Stock is required in order to amend the Company's Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of Series
C Preferred Stock, including authorizing and creating a class of stock having
rights prior to or senior to the Series C Preferred Stock. In the event two
quarterly dividends payable on the Series C Preferred Stock are in arrears, the
holders of the Series C Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.
Pursuant to a private placement which occurred in November 1998, the Company
issued to two affiliates of Renaissance Capital Group, Inc. (collectively,
"Renaissance") and one individual, who is an officer and director of the
Company, an aggregate of 1,025 shares of Series B Cumulative Convertible
Preferred Stock, $.001 par value ("Series B Preferred Stock") for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital. The
annual dividends on the Series B Preferred Stock are cumulative at a rate of $80
per share. The Series B Preferred Stock is currently convertible into shares of
Common Stock at a conversion price of $1.54 per share, for an aggregate of
665,584 shares of Common Stock. The conversion price for the Series B Preferred
Stock is subject to downward adjustment in the event the Company sells
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shares of Common Stock, or securities convertible into shares of Common Stock,
at a per share price less than $1.54. The holders of Series B Preferred Stock,
are entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company, and the affirmative vote of the holders of 66 2/3%
of the votes entitled to be cast by the holders of the Series B Preferred Stock
is required in order to amend the Company's Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series B Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series B Preferred Stock. In the event two quarterly
dividends payable on the series B Preferred Stock are in arrears, the holders of
Series B Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.
In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of series A Cumulative Convertible
Preferred Stock, $.001 par value ("Series A Preferred Stock"), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
During March 2000, 150 shares of Series A Preferred stock were converted to
93,750 shares of Common Stock. Annual dividends on the Series A Preferred Stock
are cumulative at a rate of $80 per share. The Series A Preferred Stock is
currently convertible into share of Common Stock at a conversion price of $1.54
per share, for an aggregate of 662,338 shares of Common Stock. The conversion
price for the Series A Preferred Stock is subject to downward adjustment in the
event the Company sells shares of Common Stock, or securities convertible into
shares of common Stock, at a per share price less than $1.54. The holders of
Series A Preferred Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company, and the affirmative vote
of the holders of 66 2/3% of the votes entitled to be cast by the holders of the
Series A Preferred Stock is required in order to amend the Company's Certificate
of Incorporation or Bylaws to materially affect the rights of the holders of
Series A Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series A Preferred Stock. In the event
two quarterly dividends payable on the Series A Preferred Stock are in arrears,
the holders of Series A Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.
NOTE 9 - WECK AGREEMENT
On June 29, 2000, the Company announced it had signed an exclusive agreement
under which Weck Closure Systems (WCS) will distribute the Dexterity(R) Pneumo
Sleeve(R) and the Dexterity(R) Protractor(R) in the United States. The agreement
also covers international distribution except in those areas for which Dexterity
has signed previous exclusive sales and distribution agreements still in effect.
Under the terms of the agreement, WCS (a unit of Teleflex Incorporated) is
required to purchase certain minimum quantities. Also, per the agreement, WCS
and the Company will combine elements of both sales forces under the WCS
umbrella. The Company and WCS will continue as separate business entities. The
Company believes this agreement will allow it to benefit from a large,
established worldwide sales force and to continue to reduce overhead expenses.
Sales to WCS represented 70% of the Company's net sales for the three months
ended June 30, 2001 and 69% of net sales for the six months ended June 30, 2001.
In June 2001, the Company and WCS amended the agreement which adjusted various
aspects of the contract to more accurately reflect current existing market
conditions. Effective July 1, 2001, WCS continues its exclusive right to
distribute the Dexterity Protractor, however, WCS will distribute the Dexterity
Pneumo Sleeve on a non-exclusive basis. Also, certain guaranteed minimum
purchase requirements by WCS, which originally were scheduled to expire December
31, 2001, are extended until December 31, 2003.
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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 of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Specifically, all statements other than statements of historical
fact included in this Item 2 regarding Dexterity Surgical, Inc. and its
subsidiary's and affiliates' (collectively, the "Company") financial position,
business strategy and plans and objectives of management of the Company for
future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of the Company's management, as well as
assumptions made by and information currently available to the Company's
management. When used in this report, the words "anticipate," "believe,"
"estimate," "expect" and "intend" and words or phrases of similar import, as
they relate to the Company or Company's management are intended to identify
forward-looking statements. Such statements reflect the current view of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions related to certain factors including, without
limitation, dependence on third parties for manufacturing, marketing and
distribution, future capital requirements, the Company's ability to obtain
additional funding, the Company's ability to restructure its cash obligation,
demand for and acceptance of the Company's products, the level of competition in
the marketplace, the ability of the Company's customers to be reimbursed by
third-party payors, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, product introductions and acceptance,
technological change, changes in industry practices, one-time events and other
factors described herein, and in the Company's annual, quarterly and other
reports filed with the SEC (collectively, "cautionary statements"). Although the
Company believes that its expectations are reasonable, it can give no assurance
that such expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements. The Company
does not intend to update these forward-looking statements.
CURRENT FINANCIAL CONDITION
The Company is in violation of certain affirmative financial covenant
requirements associated with its convertible debentures. Also, certain
redemption rights of the holder of its convertible debentures were triggered by
the delisting of the Company's Common Stock from the NASDAQ SmallCap Market.
Therefore, the Company is in technical default under the Debentures and the
holder has the right to demand immediate repayment of the entire amount
outstanding. This default, in turn, invoked the cross-default clause in the
Company's line of credit agreement. Further, the Company did not have the
available resources to pay the guaranteed minimum royalty amount of $414,321 due
April 30, 2001 for the Royalty Year ended March 31, 2001. The Company currently
does not have sufficient resources to fund such amounts in the event of demands
for payment. The Company is presently in negotiations to make arrangements to
restructure its cash obligations, including its Debentures, line of credit and
royalty obligations. However, there can be no assurance that the Company will be
able to restructure these obligations. There can be no assurance that such
additional funding will be available on terms attractive to the Company or at
all. The Company does not believe it will be able to obtain financing from
traditional commercial lenders. Rather, the Company likely will have to conduct
additional sales of its equity and/or debt securities through public or private
financings, collaborative relationships or other arrangements. Substantial and
immediate dilution to existing stockholders likely would result from any sales
of equity securities or other securities convertible into equity securities.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO RAISE ANY ADDITIONAL CAPITAL. IF
ADDITIONAL AMOUNTS CANNOT BE RAISED AND WE ARE UNABLE TO SUBSTANTIALLY REDUCE
OUR EXPENSES AND RESTRUCTURE OUR CASH OBLIGATIONS, WE WOULD SUFFER MATERIAL
ADVERSE CONSEQUENCES TO OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK OTHER ALTERNATIVES UP TO AND
INCLUDING PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS.
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OVERVIEW
In February 2000, the Company's principal supplier, General Surgical
Innovations, Inc. ("GSI"), terminated its distribution agreement with the
Company. As background, Origin Medsystems ("Origin) products accounted for 52%
of the Company's revenues during the first quarter of 1999. However, as a result
of the outcome of a patent infringement lawsuit between Origin and GSI in April
1999, the Company made the decision to discontinue distributing Origin products
and begin distributing GSI products. Subsequent to that decision, U. S. Surgical
Corporation ("Surgical") purchased the Origin product line and also announced
their acquisition of GSI. Then, in February 2000, GSI terminated its
distribution agreement with the Company. GSI supplied products which accounted
for 38% of the Company's revenue in 1999 and 50% of the Company's revenue from
May 1, 1999 (the effective date of the distribution agreement) through February
2000, the termination month. In response to this unilateral action by GSI, the
Company filed a lawsuit in September 2000 against Surgical and GSI. It is
management's belief the fee arrangement with its legal counsel will not
adversely affect the Company's cash flow as the case progresses toward
resolution, as legal fees will be based on results, if any, obtained. The
Company took several additional steps in response to this action. The Company
restructured its debt obligations, modified its royalty agreement to provide for
partial non-cash royalty payments, reduced its general and administrative costs
by converting its entire sales force from employees to independent sales
representatives and eliminated additional administrative staff. In aggregate,
the Company reduced its number of employees from 66 at January 1, 2000 to 6 at
June 30, 2001.
From inception through December 31, 1995, the Company was a development
stage enterprise whose efforts and resources were devoted primarily to research
and development activities related to its initial products. During this
development stage, the Company generated minimal operating revenues and, thus,
was unprofitable. In 1996, the Company reduced investment in research and
development related to such technologies and focused its efforts on acquiring
and distributing minimally invasive surgical devices. Accordingly, during the
last five fiscal years, the Company has continued to decrease its engagement in
Company sponsored research and development. As of June 30, 2001, the Company had
an accumulated deficit of approximately $30,295,000. The Company will likely
continue to incur losses. There can be no assurance that the Company will be
able to raise cash as necessary to fund operations or that the Company will ever
achieve profitability.
The Company's future operating results will depend on many factors,
including dependence on third parties for manufacturing, marketing and
distribution, future capital requirements, the Company's ability to obtain
additional funding, the Company's ability to restructure its cash obligation,
demand for and acceptance of the Company's products, the level of competition in
the marketplace, the ability of the Company's customers to be reimbursed by
third-party payors, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, product introductions and acceptance,
technological change, changes in industry practices, one-time events and other
factors described in Form 10-KSB for the year ended December 31, 2000.
Effective October 24, 2000, following the delisting of the Company's
Common Stock from trading on the NASDAQ SmallCap Market, the Company's Common
Stock began trading on the National Association of Securities Dealer's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's Common
Stock is impaired, not only in the number of shares which can be bought and
sold, but also through delays in the timing of the transactions, reduction in
security analysts' and the news media's coverage, if any, of the Company and
lower prices for the Company's securities than might otherwise prevail.
As the Company's Common Stock was delisted from trading on the Nasdaq
SmallCap Market and the trading price of the Common Stock is below $5.00 per
share, trading in the Common Stock is subject to the requirements of certain
rules promulgated under the Exchange Act, which require additional disclosures
by broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules require
the delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (which are
generally institutions). For these types of transactions, the broker-dealer must
make a special suitability determination for the purchase and have received the
purchaser's written consent to the transaction prior to the sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock which could
severely limit the market liquidity of Common Stock and the ability of
stockholders to sell their shares of Common Stock in the secondary market.
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In January 1998, the Company acquired approximately 20% of the common
stock of Dexterity Incorporated ("Dexterity"), a business development subsidiary
of Teleflex, Inc. In March 1999, the Company acquired the remaining common stock
of Dexterity by merging Dexterity into the Company (the "Dexterity Merger")
pursuant to a Plan of Merger and Acquisition agreement between the Company and
Dexterity (the "Dexterity Agreement"). Simultaneous with the effectiveness of
the Dexterity Merger, the Company changed its name to Dexterity Surgical, Inc.
Under the terms of the Dexterity Agreement, which was approved by the
stockholders of the Company at a special meeting held March 18, 1999, the
Dexterity stockholders, other than the Company, received an aggregate of:
o $1,500,000 cash;
o 3,000,000 shares of Common Stock;
o warrants to purchase an aggregate of 1,500,000 shares of Common
Stock, at an exercise price per share of $2.00 (the "Warrants");
o promissory notes in the aggregate amount of $1,000,000 (the
"Notes"); and
o a royalty for seven years in an amount equal to 15% of all sales of
Dexterity products (the "Royalty") pursuant to a royalty agreement
(the "Royalty Agreement") among the Company and the Dexterity
stockholders, other than the Company. The Royalty is subject to
minimum annual payments which aggregate, over the seven years of the
Royalty Agreement, approximately $9,695,095.
The Company determined the fair market value of the above consideration
to be approximately $16,000,000. The Company launched distribution of
Dexterity's primary products, the Dexterity(R) Pneumo Sleeve and Dexterity(R)
Protractor, in March 1998. The Dexterity Merger was accounted for using the
purchase method of accounting.
On June 29, 2000, the Company announced it had signed an exclusive
agreement under which Weck Closure Systems (WCS) will distribute the
Dexterity(R) Pneumo Sleeve(R) and the Dexterity(R) Protractor(R) in the United
States. The agreement also covers international distribution except in those
areas for which Dexterity has signed previous exclusive sales and distribution
agreements still in effect. Under the terms of the agreement, WCS (a unit of
Teleflex Incorporated) is required to purchase certain minimum quantities. Also,
per the agreement, WCS and the Company will combine elements of both sales
forces under the WCS umbrella. The Company and WCS will continue as separate
business entities. The Company believes this agreement will allow it to benefit
from a large, established worldwide sales force and to continue to reduce
overhead expenses. Sales to WCS represented 70% of the Company's net sales for
the three months ended June 30, 2001 and 69% of net sales for the six months
ended June 30, 2001.
In June 2001, the Company and WCS amended the agreement which adjusted
various aspects of the contract to more accurately reflect current existing
market conditions. Effective July 1, 2001, WCS continues its exclusive right to
distribute the Dexterity Protractor, however, WCS will distribute the Dexterity
Pneumo Sleeve on a non-exclusive basis. Also, certain guaranteed minimum
purchase requirements by WCS, which originally were scheduled to expire December
31, 2001, are extended until December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
On February 19, 2001, in Andrieni v. Lifequest Medical, Inc., et al.,
Civil Action File No. E-71617 in Fulton County (Georgia) Superior Court, the
jury rendered a verdict in favor of plaintiffs in the amount of $297,000, plus
statutory interest. The Company has filed a motion for new trial in the matter
and, in the event such motion is denied, intends to appeal the judgment.
Further, the Company is currently attempting to negotiate a settlement with the
plaintiffs. In the event of an unfavorable outcome, the Company believes that it
is entitled to indemnification from the former stockholders of Val-U-Med for 42%
to 100% of any ultimate judgment. The Company recorded an expense and accrued
liability of approximately $360,000 as of December 31, 2000.
Pursuant to a private placement which occurred in July and August 2000,
the Company issued to TFX Equities, Inc., a business development subsidiary of
Teleflex, Inc., and Cuda Products Company, whose chief executive officer is a
director of the Company, an aggregate of 400 shares of Series C Cumulative
Convertible Preferred Stock, $.001 par value ("Series C Preferred Stock") for
aggregate proceeds of $400,000. The Company used such proceeds for working
capital. The annual dividends on the Series C Preferred Stock are cumulative at
a rate of $80 per share. The Series C Preferred Stock is currently convertible
into shares of Common Stock at a conversion price of $1.00 per share, for an
aggregate of 400,000 shares of
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Common Stock. The conversion price for the Series C Preferred Stock is subject
to downward adjustment in the event the Company sells shares of Common Stock, or
securities convertible into shares of Common Stock, at a per share price less
than $1.00. The holders of Series C Preferred Stock, are entitled to one vote
per share on all matters submitted to a vote of the stockholders of the Company,
and the affirmative vote of the holders of 66 2/3% of the votes entitled to be
cast by the holders of the Series C Preferred Stock is required in order to
amend the Company's Certificate of Incorporation or Bylaws to materially affect
the rights of the holders of Series C Preferred Stock, including authorizing and
creating a class of stock having rights prior to or senior to the Series C
Preferred Stock. In the event two quarterly dividends payable on the Series C
Preferred Stock are in arrears, the holders of the Series C Preferred Stock, by
a majority vote, shall be entitled to designate two additional directors to
serve on the Company's Board of Directors.
In March 2000, the Warrants, Notes and Royalty Agreement were
restructured. The maturity date of the Notes was extended by 19 months to
October 18, 2001. The interest expense on the Notes for the year 2000 was paid
in shares of Common Stock at a per share price of $1.00. The Warrants were
amended to reflect an exercise price per share of Common Stock of $1.00. In
addition, the Royalty Agreement was restructured to allow the Company to pay the
first $400,000 in Royalty due for 2000 in shares of Common Stock, valued at
$1.00 per share. The Company does not have the available resources to pay the
remaining minimum royalty of $414,321 for the Royalty Year ended March 31, 2001,
which became due on April 30, 2001.
At June 30, 2001, the Company had current assets of $1,578,000 and
current liabilities of $9,923,000 resulting in a working capital deficit of
$8,345,000. This compares to a working capital deficit of $7,314,000 at December
31, 2000. The increase in working capital deficit is primarily due to continued
operating losses incurred during 2001.
The Company maintains a maximum $5,000,000 revolving line of credit
whereby all inventories, accounts receivable and intangibles of the Company are
pledged as collateral. At June 30, 2001, the outstanding balance due on such
line of credit was $646,000. The technical default under the Debentures
(discussed below) triggered the cross-default clause in the line of credit
agreement. Therefore, the lendor has the right to demand immediate repayment of
the entire amount outstanding. In May 2001, Teleflex, Inc., a major shareholder
in the Company, purchased this instrument from the previous lendor. Teleflex,
Inc. and the Company are currently negotiating new terms and conditions for the
line of credit. The outstanding balance continues to be classified as a current
liability and interest at prime rate plus 1.5% continues to accrue until
negotiations are completed.
Pursuant to a private placement which occurred in November 1998, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, "Renaissance") and one individual, who is an officer and director
of the Company, an aggregate of 1,025 shares of Series B Cumulative Convertible
Preferred Stock, $.001 par value ("Series B Preferred Stock") for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital. The
annual dividends on the Series B Preferred Stock are cumulative at a rate of $80
per share. The Series B Preferred Stock is currently convertible into shares of
Common Stock at a conversion price of $1.54 per share, for an aggregate of
665,584 shares of Common Stock. The conversion price for the Series B Preferred
Stock is subject to downward adjustment in the event the Company sells shares of
Common Stock, or securities convertible into shares of Common Stock, at a per
share price less than $1.54. The holders of Series B Preferred Stock, are
entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company, and the affirmative vote of the holders of 66 2/3%
of the votes entitled to be cast by the holders of the Series B Preferred Stock
is required in order to amend the Company's Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series B Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series B Preferred Stock. In the event two quarterly
dividends payable on the series B Preferred Stock are in arrears, the holders of
Series B Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.
In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of series A Cumulative Convertible
Preferred Stock, $.001 par value ("Series A Preferred Stock"), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
During March 2000, 150 shares of Series A Preferred stock were converted to
93,750 shares of Common Stock. Annual dividends on the Series A Preferred Stock
are cumulative at a rate of $80 per share. The Series A Preferred Stock is
currently convertible into share of Common Stock at a conversion price of $1.54
per share, for an aggregate of 662,338 shares of Common Stock. The conversion
price for the Series A Preferred Stock is subject to downward adjustment in the
event the Company sells shares of Common Stock, or securities convertible into
shares of
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common Stock, at a per share price less than $1.54. The holders of Series A
Preferred Stock are entitled to one vote per share on all matters submitted to a
vote of the stockholders of the Company, and the affirmative vote of the holders
of 66 2/3% of the votes entitled to be cast by the holders of the Series A
Preferred Stock is required in order to amend the Company's Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of Series
A Preferred Stock, including authorizing and creating a class of stock having
rights prior to or senior to the Series A Preferred Stock. In the event two
quarterly dividends payable on the Series A Preferred Stock are in arrears, the
holders of Series A Preferred Stock, by a majority vote, shall be entitled to
designate two additional directors to serve on the Company's Board of Directors.
In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make the January
1998 equity investment in Dexterity, and for working capital purposes. The
Debentures are secured by substantially all of the assets of the Company and
require monthly payments of interest and also require monthly principal
payments, which commenced in December 2000 of $10 per $1000 of the then
remaining principal amount. The remaining principal balance will mature in
December 2004. In March 2000, the Debentures were modified to provide that the
interest payable between February 1, 2000 through January 31, 2001 shall be paid
in shares of Common Stock, valued at $1.00 per share. Upon modification, 270,000
shares of Common Stock valued at $270,000 were issued in advance of interest due
through January 31, 2001.
The Debentures currently require the Company to comply with the
following financial covenants: (i) a Debt-to-Net Worth Ratio of no greater than
99:1; (ii) an Interest Coverage Ratio of at least .60:1; (iii) a Debt Coverage
Ratio of at least .10:1; and (iv) a Current Ratio of at least .68:1. The Company
is currently not in compliance and, therefore, is in technical default under the
Debentures. As discussed in Note 1, the delisting of the Company's common stock
in October 2000 also creates an event of default. Under these events of default,
the holders have the right to demand the immediate repayment of the entire
amount outstanding. Accordingly, the entire balance due of $2,796,196 has been
classified as a current liability as of June 30, 2001. The Company currently
does not have, nor does it believe it could obtain, sufficient resources to fund
such amounts in the event of such acceleration.
The holders of the Debentures have the option to convert at any time
all or a portion of the Debentures into shares of Common Stock at an initial
price of $1.00 per share of Common Stock. The conversion price is subject to
downward revision if the Company sells shares of its Common Stock, or securities
convertible into Common Stock, at a price less than $1.00 per share of Common
Stock, subject to certain allowed exceptions, during the term of the Debentures.
The Debentures are currently convertible for an aggregate of 2,796,196 shares of
Common Stock; however, since the conversion price is subject to downward
adjustment as described above, and there is no minimum conversion price, the
maximum number of shares of Common Stock which may be issued pursuant to the
Debentures is undeterminable. The provisions of the Debentures provide that the
holders of the Debentures have an option to redeem the Debentures, in an amount
equal to an 18 percent annual yield on the principal balance, upon the
occurrence of certain events, including the delisting of Common Stock from the
NASDAQ SmallCap Market and certain "change of control" provisions, as defined in
the Debentures, as they relate to the Company. As the Common Stock was delisted
from the NASDAQ SmallCap Market on October 24, 2000, the holder now has the
option to exercise these redemption rights. The Company may redeem the
Debentures at its option subject to certain share price and market activity
levels being obtained. The Company's right of redemption is subject to the
holder's prior right of conversion of the Debenture.
For the six month period ended June 30, 2001, operating activities
provided cash of $407,000. Investment activities during the period utilized cash
of $35,000. During the period, the Company's financing activities used cash of
$380,000 primarily from the net decrease in the outstanding balance of the line
of credit and scheduled principal payments on the Debentures.
For the six month period ended June 30, 2000, operating activities
provided cash of $1,043,000. Investment activities during the period utilized
cash of $16,000. During the period, the Company's financing activities used cash
of $1,010,000 primarily from the net decrease in the outstanding balance of the
line of credit.
The Company does not believe its revenues and other sources of
liquidity will provide adequate funding for its current capital requirements.
The Company is presently in negotiations to make arrangements to restructure
certain obligations including the Debentures, line of credit and Royalty
obligation. However, there can be no assurance that the
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Company will be able to restructure these obligations. There can be no assurance
that such additional funding will be available on terms attractive to the
Company or at all. In the event the Company is required to raise additional
funds, it does not believe it will be able to obtain such financing from
traditional commercial lenders. Rather, the Company likely will have to conduct
additional sales of its equity and/or debt securities through public or private
financings, collaborative relationships or other arrangements. Substantial and
immediate dilution to existing stockholders likely would result from any sales
of equity securities or other securities convertible into equity securities.
THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO RAISE ANY ADDITIONAL CAPITAL. IF
ADDITIONAL AMOUNTS CANNOT BE RAISED AND WE ARE UNABLE TO SUBSTANTIALLY REDUCE
OUR EXPENSES AND RESTRUCTURE OUR CASH OBLIGATIONS, WE WOULD SUFFER MATERIAL
ADVERSE CONSEQUENCES TO OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK OTHER ALTERNATIVES UP TO AND
INCLUDING PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS.
RESULTS OF OPERATIONS
In February 2000, the Company's principal supplier, General Surgical
Innovations, Inc. ("GSI"), terminated its distribution agreement with the
Company. As background, Origin Medsystems ("Origin) products accounted for 52%
of the Company's revenues during the first quarter of 1999. However, as a result
of the outcome of a patent infringement lawsuit between Origin and GSI in April
1999, the Company made the decision to discontinue distributing Origin products
and begin distributing GSI products. Subsequent to that decision, U. S. Surgical
Corporation ("Surgical") purchased the Origin product line and also announced
their acquisition of GSI. Then, in February 2000, GSI terminated its
distribution agreement with the Company. GSI supplied products which accounted
for 38% of the Company's revenue in 1999 and 50% of the Company's revenue from
May 1, 1999 (the effective date of the distribution agreement) through February
2000, the termination month. In response to this unilateral action by GSI, the
Company filed a lawsuit in September 2000 against Surgical and GSI. It is
management's belief the fee arrangement with its legal counsel will not
adversely affect the Company's cash flow as the case progresses toward
resolution, as legal fees will be based on results, if any, obtained. The
Company took several additional steps in response to this action. The Company
restructured its debt obligations, modified its royalty agreement to provide for
partial non-cash royalty payments, reduced its general and administrative costs
by converting its entire sales force from employees to independent sales
representatives and eliminated additional administrative staff. In aggregate,
the Company reduced its number of employees from 66 at January 1, 2000 to 6 at
June 30, 2001.
For the three months ended June 30, 2001, the Company reported a loss
from operations of $324,000 as compared with a loss from operations of
$1,048,000 for the three months ended June 30, 2000. For the six months ended
June 30, 2001, the Company reported a loss from operations of $764,000 versus a
loss from operations of $1,594,000 for the comparable period of 2000. The
decreased loss was primarily due to the sharp decline in overhead expenses
discussed below.
Net sales decreased 31% in the second quarter 2001 and 44% in the first
six months of 2001 as compared with the same periods in 2000. Net sales were
$1,199,000 for the second quarter of 2001 and $1,734,000 for the second quarter
of 2000. Net sales for the first six months of 2001 and 2000 were $2,427,000 and
$4,314,000 respectively. These declines were due primarily to the cancelled GSI
agreement.
Gross profit from net sales in the second quarter was $574,000 in 2001
versus $1,004,000 in 2000. The corresponding gross profit margins decreased to
48% in 2001 from 58% in 2000. For the six months ended June 30, gross profit was
$1,291,000 or 53% in 2001 and $2,584,000 or 60% in 2000. The decline in gross
profit margins was primarily due to the exclusive distribution agreement with
WCS wherein the Company grants WCS a standard distribution discount from list
price.
For the second quarter, selling, general and administrative expenses,
which consist primarily of sales commissions, salaries and other costs necessary
to support the Company's infrastructure, decreased 81% to $394,000 in 2001 from
$1,561,000 in 2000. For the first six months of 2001, these expenses decreased
67% to $1,056,000 from $3,191,000. The decline in these expenses was primarily
due to the previously discussed cost cutting actions taken by the Company in
response to the cancellation of the GSI agreement. As a percentage of net sales,
selling, general and administrative expenses have also decreased: 33% for 2001
versus 90% for 2000 for the quarter periods and 44% for 2001 versus 74% for 2000
for the six months periods. The Company continues to strive to reduce fixed
costs whenever possible. In May 2000, the
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Company subleased approximately 65% of the San Antonio facility at a savings of
$8,000 per month. Also, in March 2001, the Company closed the Atlanta facility
at a cost savings of approximately $15,000 per month.
Depreciation and amortization expense increased 3% to $505,000 for the
second quarter of 2001 from $490,000 for the second quarter of 2000. There was a
2% increase in the comparable six month periods.
Interest expense was $374,000 for the quarter ended June 30, 2001 and
$346,000 for the comparable 2000 quarter, an increase of 8%. For the six months
period, interest expense was $768,000 in 2001 and $706,000 in 2000, an increase
of 9%. Interest expense includes the non-cash accretion of the minimum royalty
obligation, interest on the line of credit and interest on the note payable due
to the former stockholders of Dexterity.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 19, 2001, in Andrieni v. Lifequest Medical, Inc., et al.,
Civil Action File No. E-71617 in Fulton County (Georgia) Superior
Court, the jury rendered a verdict in favor of plaintiffs in the
amount of $297,000, plus statutory interest. The Company has filed a
motion for new trial in the matter and, in the event such motion is
denied, intends to appeal the judgment. Further, the Company is
currently attempting to negotiate a settlement with the plaintiffs.
In the event of an unfavorable outcome, the Company believes that it
is entitled to indemnification from the former stockholders of
Val-U-Med for 42% to 100% of any ultimate judgment. The Company
recorded an expense and accrued liability of approximately $360,000
as of December 31, 2000.
The Company is a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that
the final outcome of any of the claims or proceedings to which the
Company is party would have a material adverse effect on the
Company's financial statements; however, due to the inherent
uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be
no assurance that the resolution of any particular claim or
proceeding would not have an adverse effect on the Company's results
of operations for the interim period in which such resolution
occurred.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on June 4, 2001
(b) The following directors were elected to serve until the next
Annual Meeting of Stockholders or until their successors have
been elected and qualified:
<Table>
Jeffrey H. Berg Christopher K. Black Randall K. Boatright
Robert L. Evans Richard A. Woodfield
</Table>
(c) (1) The directors named in (b) above were elected by the
following votes:
<Table>
<Caption>
NAME NO. OF VOTES FOR SHARES AGAINST
Robert L. Evans 9,076,212 84,512
Randall K. Boatright 9,076,212 84,512
Richard A. Woodfield 9,076,212 84,512
Jeffrey H. Berg 9,076,212 84,512
Christopher K. Black 9,076,212 84,512
</Table>
(2) Regarding the appointment of the independent public
accountants, 9,124,004 shares voted for the
ratification of the appointment of the accounting firm
of Ernst & Young LLP as the Company's
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independent accountants for 2001. The number of shares
that voted against the ratification was 33,270 and the
holders of 3,450 shares abstained from voting.
(d) Not applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1* Distribution agreement
Exhibit 11* Computation of Earnings (Loss) Per Share
(b) Reports on Form 8-K - Not Applicable
*Filed herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEXTERITY SURGICAL, INC.
------------------------
(Registrant)
Dated: August 10, 2001 By /s/ RICHARD A. WOODFIELD
--------------------------------------
Richard A. Woodfield
President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 10, 2001 By /s/ RANDALL K. BOATRIGHT
--------------------------------------
Randall K. Boatright
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT INDEX
<Table>
<Caption>
Exhibit No. Description of Exhibit
----------- ----------------------
Exhibit 10.1* Distribution agreement
Exhibit 11* Computation of Earnings (Loss) Per Share
</Table>
(b) Reports on Form 8-K - Not Applicable
*Filed herewith