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 MARCH 31, 2002
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 May 8, 2002, there were outstanding 12,121,492 shares of Common Stock,
$.001 par value, of the registrant.
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 - March 31, 2002 and December 31, 2001 3
Consolidated Statements of Operations - For the Three Months
Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 2002 and 2001 5
Condensed Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</Table>
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
March 31, December 31,
ASSETS 2002 2001
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 46,298 $ 59,008
Accounts receivable ,net of allowance of $28,119 44,181 217,629
Accounts receivable from related party 9,673 14,308
Inventories, net 117,741 127,904
Prepaid and other assets 77,569 98,048
------------ ------------
Total current assets 295,462 516,897
------------ ------------
Property, Plant and Equipment, net 267,118 324,538
Investments 450,934 450,934
Deferred finance charges 121,955 140,662
Intangible Assets:
Licensed technology rights & other, net 3,035,232 3,239,720
------------ ------------
Total assets $ 4,170,701 $ 4,672,751
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 2,562,586 $ 2,563,549
Accrued liabilities 732,259 613,047
Convertible debentures in default 2,632,563 2,632,563
Royalty obligation, in default, current portion 5,147,030 4,702,180
------------ ------------
Total current liabilities 11,074,438 10,511,339
Royalty Obligation, in default, net of current portion 3,795,573 4,060,221
Minority Interest 47,248 47,248
Commitments and Contingencies (Note 5)
Stockholders' Deficit:
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;
12,121,492 shares issued and outstanding 12,122 12,122
Additional paid-in capital 32,362,904 32,362,904
Warrants 2,370,900 2,370,900
Accumulated deficit (45,492,486) (44,691,985)
------------ ------------
Total stockholders' deficit (10,746,558) (9,946,057)
------------ ------------
Total liabilities and stockholders' deficit $ 4,170,701 $ 4,672,751
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements
-3-
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
Three Months
Ended March 31,
------------------------------
2002 2001
------------ ------------
Net Sales $ 175,489 $ 1,227,755
------------ ------------
Cost And Expenses:
Cost of sales 93,391 510,321
Selling, general and administrative 244,176 662,212
Depreciation and amortization 261,908 491,048
------------ ------------
599,475 1,667,581
------------ ------------
Loss From Operations (423,986) (439,826)
Other Income (Expense):
Interest expense (376,515) (394,493)
------------ ------------
Net Loss (800,501) (834,319)
Less dividend requirement on cumulative convertible
preferred stock (48,900) (48,900)
------------ ------------
Net loss applicable to common stock $ (849,401) $ (883,219)
============ ============
Basic and Diluted Loss Per Share of Common Stock $ (.07) $ (.08)
============ ============
Weighted Average Shares Used In Computing Basic and
Diluted Loss Per Share of Common Stock 12,121,492 11,521,492
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements
-4-
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
Three Months
Ended March 31,
------------------------------
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Net Loss $ (800,501) $ (834,319)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Depreciation and amortization 261,908 495,048
Amortization of deferred finance charges 18,708 18,707
Accretion of royalty obligation 180,201 188,136
Noncash interest expense -- 22,500
Changes in operating assets and liabilities -
Accounts receivable, net 173,448 158,030
Accounts receivable from related party 4,635 15,000
Inventories, net 10,163 18,362
Prepaid and other assets 20,479 153,510
Accounts payable (963) (136,597)
Accrued expenses 119,212 51,655
------------ ------------
Net cash (used) provided by operating activities (12,710) 150,032
------------ ------------
Cash Flows From Investing Activities:
Additions to property and equipment -- (30,534)
------------ ------------
Net cash (used) by investing activities -- (30,534)
Cash Flows From Financing Activities:
Dividends paid to preferred stockholders -- (48,900)
Payments on debt -- (102,404)
------------ ------------
Net cash (used) by financing activities -- (151,304)
------------ ------------
Change in cash and cash equivalents (12,710) (31,806)
Cash and cash equivalents, beginning of period 59,008 42,085
------------ ------------
Cash and cash equivalents, end of period $ 46,298 $ 10,279
============ ============
</Table>
The accompanying notes are an integral part of these
consolidated financial statements
-5-
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2002
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 U. S. 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, 2001,
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 March 31, 2002, the Company had an accumulated deficit of approximately $45.5
million. During the periods ended March 31, 2002 and 2001, the Company incurred
net losses of approximately $801,000 and $834,000 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 6, 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 default under the convertible debentures, and the holder has
demanded immediate repayment of the entire amount outstanding, which is
$2,632,563 at March 31, 2002 plus 18% interest per annum. The Company currently
does not have sufficient resources to fund payment of the entire amount
outstanding. Additionally, the current portion of other long-term obligations
due in 2002 totals approximately $5,147,000 at March 31, 2002. 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, 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.
-6-
The Company continues to take steps to improve its 2002 operating results and
anticipated cash flows by reducing selling, general, and administrative costs.
The Company is also attempting to negotiate new agreements to satisfy certain
2002 obligations with equity instruments. Based on current projections for 2002,
management believes that the Company's operating results for 2002 will not
generate sufficient working capital to sustain its operations throughout the
year.
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. Licensed technology rights acquired in
conjunction with the merger with Dexterity Incorporated (see "Note 5 - Merger)
are amortized over a 4 year period.
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 ended March 31, 2002, Diluted EPS equals Basic EPS as
potentially dilutive common stock equivalents are antidilutive in loss periods.
-7-
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
<Table>
<Caption>
March 31, December 31,
2002 2001
------------ ------------
Raw materials $ 5,458 $ 5,458
Work-in-process 339,476 339,476
Finished Goods 902,858 1,282,642
Allowances (1,130,051) (1,499,672)
------------ ------------
$ 117,741 $ 127,904
============ ============
</Table>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Included in accounts payable at March 31, 2002 and December 31, 2001 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 6 - DEBT AND OTHER LONG-TERM OBLIGATIONS
Debt and other long-term obligations are outstanding as follows:
<Table>
<Caption>
March 31, December 31,
2002 2001
------------ ------------
Dexterity notes (in default) (1) $ 1,000,000 $ 1,000,000
Line of credit (2) 645,995 645,995
Royalty obligations (in default) (3) 7,296,608 7,116,406
Convertible debentures (in default) (4) 2,632,563 2,632,563
------------ ------------
11,575,166 11,394,964
Less current portion 7,779,593 7,334,743
------------ ------------
Total long-term obligations $ 3,795,573 $ 4,060,221
============ ============
</Table>
(1) Unsecured notes payable related to Dexterity acquisition,
bearing interest at 12% interest due quarterly, maturing in
October 2001. The Company is presently in negotiations to
renew this obligations, and does not have sufficient resources
to satisfy this obligation in the event of demand for payment.
(2) Revolving line of credit secured by accounts receivable,
inventories and intangible assets. In May 2001, Teleflex,
Inc., a major shareholder in the Company, purchased this
instrument from the previous lender. Teleflex, Inc. and the
Company are currently negotiating new terms and condition 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 in default related to Dexterity
acquisition, subject to annual minimum payments over a period
of seven years ending 2006, discounted at 12%. The minimum
payments aggregate approximately $9.7 million over the
seven-year royalty period.
-8-
(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 Company is
not current with monthly payment schedule which is an event of
default.
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 2,632,563 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. The
holders of the Debentures claim that the conversion price of
the Debentures requires a downward adjustment to $.02 as a
result of the shares of Common Stock issued by the Company in
settlement of the Andrieni lawsuit. The Company disputes the
claim of the Debenture holders and believes the conversion
price should remain at $1.00. However, there can be no
assurance that the Debenture holders will not prevail in their
claim for a downward adjustment to the conversion price, in
which case the Company would be required, upon conversion of
the Debentures, to issue approximately fifty times the number
of shares that would be issuable at a $1.00 conversion price.
Any issuance of shares of Common Stock upon the conversion of
the Preferred Stock or the Debentures will substantially
dilute the voting rights and other interests of stockholders
of the Company. As the number of shares of Common Stock
issuable upon the conversion of the Preferred Stock and the
Debentures is indeterminate, the Company is unable to predict
to what extent the Company's stockholders' rights will be
diluted
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 with these covenants and is not
current on its interest and principal repayment obligations
under the Debentures and, therefore, is in 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
demanded the immediate repayment of the entire amount
outstanding. Accordingly, the entire balance due of $2,632,563
has been classified as a current liability as of March 31,
2002. The Company is not current on its interest and principal
repayment obligations and currently does not have, nor does it
believe it could obtain, sufficient resources to fund these
amounts.
NOTE 7 - PREFERRED STOCK PLACEMENTS AND PREFERRED DIVIDENDS IN ARREARS
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. As of March 31, 2002, the accumulated and unpaid
quarterly dividends on the Series C Preferred Stock were $8,000. The Company
does not currently believe it will have the funds to pay future dividends. 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
-9-
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. As of March 31, 2002, the accumulated and unpaid quarterly dividends
on the Series B Preferred Stock were $20,500. Furthermore, the Company does not
currently believe it will have the funds to pay future dividends. 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. As of March 31, 2002, the accumulated
and unpaid dividends on the Series A Preferred Stock were $20,400. Furthermore,
the Company does not currently believe it will have the funds to pay future
dividends. 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 8 - WECK SALES DISTRIBUTION 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.
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.
-10-
Sales to WCS and affiliates represented 0% of the Company's net sales for the
quarter ended March 31, 2002.
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 and has not made
required monthly principal and interest payments during 2002 because it lacked
the funds to do so. 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 default
under the Debentures and the holder has demanded 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 is in
default on the $1,000,000 Notes due on October 18, 2001 and does not have the
available resources to pay the guaranteed minimum royalty. The Company currently
does not have sufficient resources to fund these amounts. 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.
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
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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 4 at March 31, 2002.
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 March 31, 2002, the Company
had an accumulated deficit of approximately $45,500,000. 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, 2001.
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.
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
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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.
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.
Sales to WCS and affiliates represented 0% of the Company's net sales for the
quarter ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
By letter dated February 7, 2002, Robert Rambo, President of MCT,
claimed that the Company had underpaid royalties owed him on the Company's
products sold by Weck Closure Systems and requested the Company to recompute
such royalties and tender payment for any short-fall. There can be no assurance
that the Company will not be required to make such additional royalty payments.
Any such payments would have a material adverse effect on the Company's results
of operations. The Company is currently negotiating a new manufacturing and
royalty agreement with MCT and Robert Rambo respectively.
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 recorded an expense and accrued liability of
approximately $360,000 as of December 31, 2000. Subsequently, the Company
settled the Andrieni complaint for consideration primarily consisting of cash,
future installment payments, and common stock. The settlement's estimated cost
is $168,000. The resulting reduction in estimated expense and accrued liability
of $192,000 was recorded in December 2001.
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. As of March 31, 2002, the accumulated and unpaid
quarterly dividends on the Series C Preferred Stock were $8,000. Furthermore,
the company does not currently believe it will have the funds to pay future
dividends. 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
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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. The
Company does not have sufficient resources to continue paying dividends on the
Series C Preferred Stock.
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
guaranteed minimum royalty due quarterly or the $1 million Notes that were due
October 18, 2001. The Company is presently in negotiations to renew these
obligations. However, there can be no assurance these negotiations will be
successful.
At March 31, 2002, the Company had current assets of $295,000 and
current liabilities of $11,074,000 resulting in a working capital deficit of
$10,779,000. This compares to a working capital deficit of $9,994,000 at
December 31, 2001. The increase in working capital deficit is primarily due to
the operating losses incurred during the first quarter of 2002.
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 March 31, 2002, the outstanding balance due on such
line of credit was $646,000 and there are no additional funds available under
the current borrowing base. The 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. As of March 31, 2002, accumulated and unpaid quarterly dividends on
the Series B Preferred Stock were $20,500. Furthermore, the Company does not
currently believe it will have the funds to pay future dividends. 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. The Company does not have sufficient
resources to continue paying dividends on the Series B Preferred Stock.
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. As of March 31, 2002, accumulated and
unpaid quarterly dividends on the Series A Preferred Stock were $20,400.
Furthermore, the
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Company does not currently believe it will have the funds to pay future
dividends. 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. The Company
does not have sufficient resources to continue paying dividends on the Series A
Preferred Stock.
In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make 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 with these covenants and is not current on its
interest and principal repayment obligations under the Debentures and,
therefore, is in 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 demanded the immediate
repayment of the entire amount outstanding. Accordingly, the entire balance due
of $2,632,563 is classified as a current liability as of March 31, 2002. The
Company is not current on its interest and principal repayment obligations and
currently does not have, nor does it believe it could obtain, sufficient
resources to fund these amounts.
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 2,632,563 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 holders of the Debentures claim that the
conversion price of the Debentures requires a downward adjustment to $.02 as a
result of the shares of Common Stock issued by the Company in settlement of the
Andrieni lawsuit (See Item 1 "Legal Proceedings" for a description of the
Andrieni lawsuit). The Company disputes the claim of the Debenture holders and
believes the conversion price should remain at $1.00. However, there can be no
assurance that the Debenture holders will not prevail in their claim for a
downward adjustment to the conversion price, in which case the Company would be
required, upon conversion of the Debentures, to issue approximately fifty times
the number of shares that would be issuable at a $1.00 conversion price. Any
issuance of shares of Common Stock upon the conversion of the Preferred Stock or
the Debentures will substantially dilute the voting rights and other interests
of stockholders of the Company. As the number of shares of Common Stock issuable
upon the conversion of Preferred Stock and the Debentures is indeterminate, the
Company is unable to predict to what extent the Company's stockholders rights
will be diluted. Such uncertainty creates downward pressure on the public market
price of the Company's Common Stock. In the event such holders convert their
Debentures or shares of Preferred Stock, as applicable, and sell a large number
of shares of Common Stock into the public market over a short time, the market
price for the Common Stock could decline. Such a decline may make future equity
financing more difficult for the Company to obtain on an acceptable basis, if at
all. 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
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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 three month period ended March 31, 2002, operating activities
consumed net cash of $13,000. There were no cash flows related to investment and
financing activities.
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 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, GSI terminated its
distribution agreement with the Company. As background, 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, 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 form employees to independent sales
representatives and eliminated additional administrative staff. In addition,
certain officers of the Company agreed to restructure their compensation
packages to increase short term cash flow.
For the quarter ended March 31, 2002, the Company reported a loss from
operations of $424,000 as compared with a loss from operations of $440,000 for
the quarter ended March 31, 2001. For the quarter ended March 31, 2002, the
Company reported a net loss applicable to common stock of $849,401 or $.07 per
basic and diluted share. This compares with a net loss applicable to common
stock of $883,000 or $.08 per basic and diluted share for the quarter ended
March 31, 2001. The decreased loss is primarily due to the continued decline in
overhead expenses discussed below.
Net sales decreased 86% in first quarter 2002 as compared with the same
period in 2001. Net sales were $175,000 for the first quarter of 2002 and
$1,228,000 for the first quarter of 2001. These declines were primarily due to
Weck not complying with their contractual minimum purchases obligation. The
Company and Weck are currently discussing catch-up solutions.
Gross profit from net sales in the first quarter was $82,000 in 2002
versus $717,000 in 2001. The corresponding gross profit margins were 47% in 2002
and 58% in 2001. The decline in margins is primarily due to a large percentage
of older, smaller margin, products included in the mix of products sold.
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For the first quarter, selling, general and administrative expenses,
which consist primarily of sales commissions, salaries and other costs necessary
to support the Company's infrastructure, decreased 63% in 2002 to $244,000 from
$662,000 in 2001. 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. The Company continues to strive to reduce
fixed costs whenever possible.
Depreciation and amortization expense declined 47% from $495,000 in
2001 to $262,000 in 2002 due to a much smaller licensed technology asset base.
Interest expense was $377,000 in 2002 and $394,000 in 2001, a decrease of .5%.
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
The Company filed a lawsuit for breach of contract on September 11,
2000 in the Superior Court of the State of California, City and County of San
Francisco, against General Surgical Innovations, Inc. and United States Surgical
Corporation. The lawsuit relates to the unilateral termination of the Company's
distribution agreement with General Surgical Innovations, Inc. On October 15,
2001, General Surgical Innovations, Inc. and Tyco Healthcare Group, L.P. filed a
cross complaint against the Company for breach of contract related to the same
distribution agreement in the Superior Court of the State of California, City
and County of San Francisco. The cross-complainants seek damages in excess of
$2,500,000.
By letter dated January 7, 2002, Surgical Visions I, Inc. and various
individuals, including K.C. Fadem, a former director of the Company, threatened
to file a lawsuit against the Company and certain of its officers and directors
alleging, among other things, conspiracy to defraud minority shareholders,
breach of fiduciary duty, falsification of corporate minutes, issuance of false
and misleading public filings and press releases and bribery. The Company
believes these claims and the threatened lawsuit are without merit and intends
to vigorously defend itself in the event such lawsuit is filed.
By letter dated February 7, 2002, Robert Rambo, President of MCT,
claimed that the Company had underpaid royalties owed him on the Company's
products sold by Weck Closure Systems and requested the Company to recompute
such royalties and tender payment for any short-fall. There can be no assurance
that the Company will not be required to make such additional royalty payments.
Any such payments would have a material adverse effect on the Company's results
of operations.
The Company is a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party,
including the case described above, 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
The Company's convertible 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 with these covenants and is
not current on its interest and principal repayment obligations under the
Debentures and, therefore, is in default under the Debentures. As discussed in
Note 1 of the consolidated financial statements, 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 demanded the immediate repayment of the
entire amount outstanding. Accordingly, the entire balance due of $2,632,563 is
classified as a current liability as of March 31, 2002. The Company is not
current on its interest and principal repayment obligations and currently does
not have, nor does it believe it could obtain, sufficient resources to fund
these amounts.
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 March 31, 2002, the outstanding balance due on such line of
credit
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was $646,000 and there are no additional funds available under the current
borrowing base. The default under the Debentures (discussed above) 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.
The Company is currently in default in the payment of principal and interest in
the aggregate amount of $1,060,000 under the Notes due October 18, 2001 issued
in the Dexterity Merger and does not have the available resources to pay the
guaranteed minimum royalty related to the Dexterity Merger. As of March 31,
2002, such minimum royalty in arrears was $2,616,000. The Company currently does
not have sufficient resources to fund these amounts.
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: Not Applicable
(b) Reports on Form 8-K:
On April 29, 2002, the Company filed Form 8-K reporting a
change in its certifying accountant.
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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: May 13, 2002 By /s/ RICHARD A. WOODFIELD
-----------------------------------------
Richard A. Woodfield
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 13, 2002 By /s/ RANDALL K. BOATRIGHT
-----------------------------------------
Randall K. Boatright
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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