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 March 31, 1999
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
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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, 1999, there were outstanding 10,212,742 shares of Common Stock,
$.001 par value, of the registrant.
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DEXTERITY SURGICAL, INC. AND SUBSIDIARY
FORM 10-QSB
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements - (Unaudited)
Consolidated Balance Sheets - December 31, 1998, and March 31, 1999 3
Consolidated Statements of Operations - For the Three Months
Ended March 31, 1998 and 1999 4
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1998 and 1999 5
Condensed Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
ASSETS 1998 1999
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 1,644,535 $ 1,645,784
Short-term investments 983,714 --
Accounts receivable (net of allowance for doubtful accounts of
$219,829 in 1998 and $189,178 in 1999) 2,786,909 4,313,771
Accounts receivable from related party 56,619 56,488
Inventories, net 1,482,899 3,131,651
Prepaid and other assets 49,715 89,613
------------ ------------
Total current assets 7,004,391 9,237,307
------------ ------------
Property, Plant and Equipment 1,604,043 1,224,009
Less-accumulated depreciation (1,051,117) (498,442)
------------ ------------
Net property, plant and equipment 552,926 725,567
Investments, at cost 2,062,500 1,202,500
Intangible Assets:
Deferred finance charges 155,139 177,675
Licensed technology rights 680,912 17,479,762
Goodwill, net 1,673,818 1,621,465
------------ ------------
Total assets $ 12,129,686 $ 30,444,276
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,633,032 $ 6,041,046
Accrued expenses 645,605 994,200
Current portion of long-term obligations 116,310 1,471,287
------------ ------------
Total current liabilities 3,394,947 8,506,533
------------ ------------
Convertible Debentures 3,000,000 3,000,000
------------ ------------
Royalty Obligation -- 5,534,322
------------ ------------
Minority Interest 106,544 106,544
------------ ------------
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized;
shares issued and outstanding: 2,170 (1998) and 2,195 (1999) 2 2
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued and outstanding: 7,212,742 (1998) and
10,212,742 (1999) 7,213 10,213
Additional paid-in capital 25,095,313 33,052,313
Deferred compensation (6,857) (1,963)
Accumulated deficit (19,467,476) (19,763,688)
------------ ------------
Total stockholders' equity 5,628,195 13,296,877
------------ ------------
Total liabilities and stockholders' equity $ 12,129,686 $ 30,444,276
============ ============
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)
Three Months
Ended March 31,
-------------------------------
1998 1999
----------- -----------
Net Sales
Product sales $ 4,082,858 $ 5,685,027
Commissions earned 286,583 241,166
----------- -----------
4,369,441 5,926,193
----------- -----------
Cost And Expenses:
Cost of sales 2,476,749 3,453,521
Research and development -- 30,868
Selling, general and administrative 2,361,201 2,561,904
Depreciation and amortization 97,995 102,153
----------- -----------
4,935,945 6,148,446
----------- -----------
Loss From Operations (566,504) (222,253)
Other Income (Expense):
Gain (loss) on sale of assets (400) 44,068
Investment income 13,639 19,234
Interest expense (73,097) (63,478)
Loss on investment in affiliate (35,000) (30,000)
----------- -----------
Net Loss Before Minority Interest (661,362) (252,429)
Minority Interest in Net Loss of
Consolidated Subsidiary 1,545 --
----------- -----------
Net Loss (659,817) (252,429)
Less dividend requirement on cumulative preferred stock -- (43,783)
----------- -----------
Net loss applicable to common stock $ (659,817) $ (296,212)
=========== ===========
Basic and Diluted Loss Per Share of Common Stock $ (.10) $ (.04)
=========== ===========
Weighted Average Shares Used In Computing Basic and
Diluted Loss Per Share of Common Stock 6,706,136 7,646,075
=========== ===========
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)
Three Months
Ended March 31,
--------------------------------
1998 1999
----------- -----------
Cash Flows From Operating Activities:
Net Loss $ (659,817) $ (252,429)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities -
Depreciation and amortization 97,995 102,153
Amortization of deferred finance charges 6,464 6,464
Deferred compensation 7,416 4,894
(Gain) loss on disposal of fixed assets 400 (44,068)
Loss on investment in affiliate 35,000 30,000
Minority interest in net loss of consolidated subsidiary (1,545) --
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable, net 102,796 (1,106,474)
(Increase) decrease in accounts receivable from related party (5,014) 131
Decrease in interest receivable 5,318 --
Increase in inventories, net (218,749) (1,098,788)
Increase in prepaid and other assets (43,000) (39,898)
Increase (decrease) in accounts payable (289,566) 3,377,646
Decrease in accrued expenses (271,415) (52,706)
----------- -----------
Net cash provided by (used in) operating activities (1,233,717) 926,925
----------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment (33,341) (53,435)
Investment in affiliate (1,000,000) --
Purchases of investments (146,403) --
Investment redemptions 144,682 983,714
Acquisitions, net of cash received -- (1,751,862)
----------- -----------
Net cash used in investing activities (1,035,062) (821,583)
----------- -----------
Cash Flows From Financing Activities:
Dividends paid to preferred stockholders -- (43,783)
Payments on debt -- (56,310)
Proceeds from exercise of stock options 253,800 --
Payments on long-term debt (1,260) --
Payments of deferred finance charges -- (29,000)
Issuance of preferred stock -- 25,000
----------- -----------
Net cash provided by (used in) financing activities 252,540 (104,093)
----------- -----------
Net increase (decrease) in cash and cash equivalents (2,016,239) 1,249
Cash and cash equivalents, beginning of period 3,236,307 1,644,535
----------- -----------
Cash and cash equivalents, end of period $ 1,220,068 $ 1,645,784
=========== ===========
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)
March 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dexterity
Surgical, Inc. (the "Company"), its four operating divisions, 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, 1998,
included in the Company's Form 10-KSB. Certain reclassifications have been made
in the prior period financial statements to conform with the current period
presentation.
The accounts and operations of Dexterity Incorporated have been included in the
consolidated financial statements from March 18, 1999. Prior to the March 18,
1999 merger with Dexterity Incorporated, the Company's 19.2% investment in
Dexterity Incorporated had been accounted for using the cost method. The
resulting change in ownership qualifies as a change in reporting entity. See
"Note 5 - Merger" for a discussion of the effect on the consolidated financial
statements.
The Company has obtained a waiver for certain affirmative financial covenant
requirements associated with its convertible debentures through June 30, 1999,
at which point the Company believes it will be in compliance with the covenants.
However, if the Company is unable to comply with such requirements in the
future, the Company could be found to be in technical default under the
Debentures and the holder would have the right to demand immediate repayment of
the entire amount outstanding. The Company believes that sufficient resources
would be available to fund such amounts in the event of such acceleration. The
Company has also taken steps to improve its 1999 operating results, which
include the acquisition of Dexterity Incorporated (see "Note 5 - Merger") and
the closing of two unprofitable divisions.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Product sales are recognized upon the shipment of products to customers.
Commissions earned are recognized when customer orders are placed with product
suppliers. Customers may return products in the event of product defect or
inaccurate order fulfillment. The Company maintains an allowance for sales
returns based upon an historical analysis of returns.
Licensed Technology Rights
Licensed technology rights are amortized upon the commencement of commercial
sales of the underlying products. The varying 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.
NOTE 3 - BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
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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, 1998 and 1999, Diluted EPS equals Basic EPS as
potentially dilutive common stock equivalents are antidilutive in loss periods.
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
December 31, March 31,
1998 1999
----------- -----------
Raw materials $ 29,250 $ 34,322
Work-in-process 431,986 499,706
Finished Goods 1,186,279 2,772,854
Allowances (164,616) (175,231)
----------- -----------
$ 1,482,899 $ 3,131,651
=========== ===========
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.
The financial statements have been retroactively restated to account for the
Company's original investment in Dexterity Incorporated under the equity method
as appropriate for a step-acquisition. This investment was previously accounted
for using the cost method. The result of this restatement was a decrease in the
"Investments, at cost" and an increase in "Accumulated deficit" at December 31,
1998 of approximately $140,000, as well as an increase in net loss for the three
months ended March 31, 1998 and 1999 of $35,000 and $30,000 respectively. The
effect of the restatement on earnings per share for the three months ended March
31, 1998 was a decrease in basic and diluted earnings per share of $.01; there
was no effect on earnings per share for the three months ended March 31, 1999.
The results of operation for the three months ended March 31, 1999, include the
operations of Dexterity Incorporated from March 18, 1999. Unaudited pro forma
consolidated results of operations, assuming the Dexterity Incorporated merger
had occurred at January 1, 1998, would have been as follows:
Pro Forma (Unaudited)
Three months ended March 31,
1998 1999
----------- -----------
Net sales $ 4,391,085 $ 5,946,276
Net loss $(1,357,532) (948,860)
Basic and diluted loss per share of common stock $ (.14) $ (.10)
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The foregoing pro forma information is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the Dexterity
Incorporated merger occurred at the beginning of 1998, nor is it indicative of
future results of operations.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
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 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 - OBLIGATIONS
The Company had the following current and long-term obligations:
December 31, March 31,
1998 1999
---- ----
Unsecured note payable for a distributorship agreement, bearing interest
at 6 percent, principal and interest due monthly, maturing in 1999 $ 100,000 $ 60,000
Secured note payable for a vehicle loan, bearing interest at 9 percent,
principal and interest due monthly, maturing in 1999 16,310 --
Unsecured note payable related to Dexterity acquisition, bearing interest
at 12 percent, interest due quarterly, maturing in 2000 -- 1,000,000
Royalty obligation related to Dexterity acquisition, subject to annual minimum
payments over a period of seven years. The minimum payments 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 -- 5,945,609
Convertible Debentures, see Note 8 3,000,000 3,000,000
--------- -----------
Total obligations 3,116,310 10,005,609
Less - Current portion 116,310 1,471,287
---------- -----------
Long-term obligations $3,000,000 $ 8,534,322
========== ===========
The carrying amount of the Company's debt approximates the fair value of the
debt. This determination is based on management's estimate of the fair value at
which such instruments could be sold or obtained in a third-party transaction.
NOTE 8 - CONVERTIBLE DEBENTURES
In December 1997, the Company sold 250,000 shares of Common Stock to two
affiliates of Renaissance Capital Group, Inc. (collectively, such affiliates
referred to herein as "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 an equity investment in Dexterity, and for working capital purposes. The
Debentures are secured by substantially all of the assets of
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the Company and require monthly payments of interest beginning in February 1998
and, unless sooner paid, redeemed or converted, require monthly principal
payments commencing in December 2000 of $10 per $1000 of the then remaining
principal amount. The remaining principal balance will mature in December 2004.
The Debentures require the Company to comply with the following financial
covenants (all as defined in the Debentures): (i) a Debt to Net Worth Ratio of
no greater than .85:1; (ii) an Interest Coverage Ratio of at least 5:1; (iii) a
Debt Coverage Ratio of at least .10:1; and (iv) a Current Ratio of at least
1.8:1. The Company is currently not in compliance with and has obtained a waiver
from Renaissance to suspend the Interest Coverage Ratio, Debt Coverage Ratio,
and Current Ratio covenants through June 30, 1999 at which time the Company
believes it will be in compliance with such covenants. However, if the Company
is unable to comply with such covenants in the future, the Company could be
found to be in technical default under the Debentures and holders thereof would
have the right to demand the immediate repayment of the entire amount
outstanding. The Company believes that sufficient resources would be available
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 a price of $1.60 per share of Common
Stock for a maximum of 1,875,000 shares of Common Stock.
NOTE 9 - PREFERRED STOCK PLACEMENTS
In January 1999, pursuant to the terms of a private placement, the Company
issued to an officer and director of the Company 25 shares of 8% Series B
Cumulative Preferred Stock, $.001 par value ("Series B Preferred"), for proceeds
of $25,000.
In November 1998, pursuant to the terms of a private placement, the Company
issued to Renaissance 1,000 shares of Series B Preferred for aggregate proceeds
of $1,000,000. The Company used such proceeds for working capital. Annual
dividends on the Series B Preferred are cumulative at a rate of $80 per share.
The Series B Preferred is convertible into shares of Common Stock at a
conversion price of $1.60 per share, for an aggregate of 640,625 shares of
Common Stock.
In August 1998, pursuant to the terms of 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 8% Series A Cumulative Preferred
Stock, $.001 par value ("Series A Preferred"), for aggregate proceeds of
$1,170,000. The Company used such proceeds for working capital. Annual dividends
on the Series A Preferred are cumulative at a rate of $80 per share. The Series
A Preferred is convertible into shares of Common Stock at a conversion price of
$1.60 per share, for an aggregate of 731,250 shares of Common Stock.
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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
subsidiaries' 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, the Company's ability to manufacture, market and distribute safe and
effective products on a cost-effective basis, 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, in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998 filed with the
Securities and Exchange Commission ("SEC") on March 31, 1999, 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.
OVERVIEW
From inception through December 31, 1995, the Company was a development
stage enterprise whose efforts and resources were devoted primarily to research
and development activities related to its initial products. During this
development stage, the Company generated minimal operating revenues and, thus,
was unprofitable. In 1996, the Company decided to reduce continuing investment
in research and development related to such technologies and to focus its
efforts on acquiring and distributing minimally invasive surgical devices.
Accordingly, during the last three fiscal years, the Company has continued to
decrease its engagement in Company sponsored research and development, and in
fiscal 1998, eliminated virtually all expenditures in this area. However, due to
the Dexterity Merger (defined below) the Company intends to invest moderate
amounts in research and development in 1999. As of March 31, 1999, the Company
had an accumulated deficit of approximately $19,764,000. There can be no
assurance that the Company will not continue to incur losses, 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 the Company's ability to manufacture, market and distribute safe and
effective products on a cost-effective basis, demand for and acceptance of the
Company's products, the level of competition in the marketplace, the ability of
the Company to create, obtain and maintain scientifically advanced technology,
the ability of the Company's customers to be reimbursed by third-party payors
and other factors described in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1998.
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 "Merger") pursuant to a
Plan of Merger and Acquisition agreement between the Company and Dexterity (the
"Dexterity Agreement"). Simultaneous with the effectiveness of the 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:
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o $1,500,000;
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;
o promissory notes in the aggregate amount of $1,000,000; 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 transaction was accounted for using the purchase method of
accounting.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had current assets of $9,237,000 and
current liabilities of $8,507,000 resulting in working capital of $730,000. This
compares to a working capital position of $3,609,000 at December 31, 1998. The
decline in working capital is primarily due to the costs related to the
Company's merger with Dexterity.
In April 1999, the Company acquired a new maximum $5,000,000 revolving
line of credit from a financial institution whereby all inventories, accounts
receivable and intangibles of the Company are pledged as collateral. At April
30, 1999, the outstanding balance due on such line of credit was $1,372,000 and
an additional $2,140,000 was available under the current borrowing base.
In January 1999, pursuant to the terms of a private placement, the
Company issued to an officer and director of the Company 25 shares of 8% Series
B Cumulative Preferred Stock $.001 par value ("Series B Preferred"), for
proceeds of $25,000. Such shares of Series B Preferred are convertible into
15,625 shares of Common Stock.
In November 1998, pursuant to the terms of a private placement, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, such affiliates referred to herein as "Renaissance") 1,000 shares
of Series B Preferred for aggregate proceeds of $1,000,000. The Company used
such proceeds for working capital. Annual dividends on the Series B Preferred
are cumulative at a rate of $80 per share. Such shares of Series B Preferred are
convertible into shares of Common Stock at a conversion price of $1.60 per
share, for an aggregate of 625,000 shares of Common Stock.
In August 1998, pursuant to the terms of 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 8% Series A
Cumulative Preferred Stock, $.001 par value ("Series A Preferred"), for
aggregate proceeds of $1,170,000. The Company used such proceeds for working
capital. Annual dividends on the Series A Preferred are cumulative at a rate of
$80 per share. The Series A Preferred is convertible into shares of Common Stock
at a conversion price of $1.60 per share, for an aggregate of 731,250 shares of
Common 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 an 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 beginning in February 1998 and, unless sooner paid,
redeemed or converted, require monthly principal payments commencing in December
2000 of $10 per $1000 of the then remaining principal amount. The remaining
principal balance will mature in December 2004. The Debentures require the
Company to comply with the following financial covenants (all as defined in the
Debentures): (i) a Debt to Net Worth Ratio of no greater than .85:1; (ii) an
Interest Coverage Ratio of at least 5:1; (iii) a Debt Coverage Ratio of at least
.10:1; and (iv) a Current Ratio of at least 1.8:1. At March 31, 1999, the
Company was not in compliance with the Interest Coverage Ratio, Debt Coverage
Ratio, and Current Ratio covenants, and has obtained a waiver from Renaissance
to suspend the Interest Coverage Ratio, Debt Coverage Ratio and Current Ratio
covenants through June 30, 1999, at which time the Company believes it will be
in compliance with such covenants. However, if the Company is unable to comply
with such covenants in the future, the Company could be found to be in technical
default under the Debentures and the holders thereof would have the right to
demand the immediate repayment of the entire amount outstanding. The Company
believes that sufficient resources would be available to fund such amounts in
the event of such
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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 a price
of $1.60 per share of Common Stock for a maximum of 1,875,000 shares of Common
Stock.
Pursuant to a Subscription Agreement dated June 9, 1998, the Company
issued 370,000 shares of the Company's Common Stock, at a per share price of
$3.25, with an aggregate value of $1,202,500 in exchange for approximately four
percent (4%) of the ownership interests of Ana-Tech, L.L.C. At the same time,
Ana-Tech, L.L.C. sold ownership interests for cash to third parties at the same
unit price. The Company also has entered into an Assignment Agreement dated June
30, 1998 with Ana-Tech, L.L.C., pursuant to which the Company assigned all of
its rights, duties and obligations under its Osteoport(R) device patent license
agreement. As consideration for such assignment, the Company received $600,000
cash and will receive a five percent (5%) royalty on future gross sales of the
Osteoport(R) device. The assignment resulted in a gain of $411,000.
For the quarter ended March 31, 1999, operating activities provided
cash of $927,000. Investment activities during the quarter utilized cash of
$822,000, primarily due to the acquisition of Dexterity. During the quarter, the
Company's financing activities utilized $104,000 primarily for repayment of
debt.
Based upon the current level of operations, the Company believes that
projected cash flow from operations plus the Company's cash from its line of
credit and from the realization of its current assets will be adequate to meet
its anticipated requirements for working capital and capital expenditures
through at least 1999. However, additional capital may be required in order for
the Company to take advantage of any potential acquisition opportunities or to
participate in future alliances or joint ventures. There can be no assurance
that the Company will not require additional funding or that such additional
funding, if needed, will be available on terms beneficial to the Company or at
all.
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, the Company reported a net
loss applicable to common stock of $296,000 or $.04 per basic and diluted share.
This compares with a net loss applicable to common stock of $660,000 or $.10 per
basic and diluted share for the three months ended March 31, 1998. The
improvement in reported results for 1999 was primarily due to an increase in net
sales and cost cutting initiatives. The Company is continually monitoring
non-profitable divisions and non-performing assets. Accordingly, during 1999,
the Company closed the Technologies division and the Surgical Systems division.
As a result, excess equipment was sold at a gain of approximately $44,000.
Product sales increased 39% in the first quarter 1999 as compared with
the same period in 1998. Product sales were $5,685,000 for the first quarter
1999 and $4,083,000 for the first quarter of 1998. These increases were due to
continued sales growth throughout the Company.
Commissions earned declined 16% in the first quarter 1999 as compared
with the first quarter 1998. Commissions earned were $241,000 in 1999 and
$287,000 in 1998. The decrease in commissions earned reflects the decreasing
emphasis on orthopedic products, which are typically agency commission sales,
and are accounted for as a separate line item on the Statement of Operations.
The Company has continued to focus on laparoscopic surgery products which
generate a higher gross profit margin and are accounted for as product sales on
the Statement of Operations.
Gross profit from product sales was $2,232,000 in the first quarter
1999 versus $1,606,000 in the first quarter 1998. The corresponding gross profit
margins were approximately 39% in both 1999 and 1998.
In the three months ended March 31, 1999, selling, general and
administrative expenses, which consist primarily of sales commissions, salaries
and other costs necessary to support the Company's infrastructure, increased 8%
to $2,562,000 from $2,362,000 in the three months ended March 31, 1998. These
increased costs primarily reflect higher sales commissions due to the increased
level of sales. However, as a percentage of net sales, selling, general and
administrative expenses have decreased: 43% for 1999 versus 54% for 1998.
YEAR 2000 ISSUE
The efficient operation of the Company's business is dependent on its computer
software programs and operating systems (collectively, "Programs and Systems").
These Programs and Systems are used in several key areas of the Company's
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business, including information management services and financial reporting, as
well as in various administrative functions. The Company has evaluated its
Programs and Systems to identify potential year 2000 compliance problems, as
well as manual processes, external interfaces with customers, and services
supplied by vendors to coordinate year 2000 compliance and conversion. The year
2000 problem refers to the limitations of the programming code in certain
existing software programs to recognize date sensitive information for the year
2000 and beyond. Unless modified prior to December 31, 1999, such systems may
not properly recognize date-sensitive information and could generate erroneous
data or cause a system to fail to operate properly. Based on current
information, the Company believes its Programs and Systems are year 2000
compliant. However, because most computer systems are, by their very nature,
interdependent, it is possible that non-compliant third party computers may not
interface properly with the Company's computer systems. The Company could be
adversely affected by the year 2000 problem if it or unrelated parties fail to
successfully address this issue. Problems encountered by the Company's vendors,
customers and other third parties also may have a material adverse effect on the
Company's financial condition and results of operations.
In the event the Company determines, following the year 2000 date change, that
its Programs and Systems are not year 2000 compliant, the Company will likely
experience considerable delays in processing customer orders and invoices,
compiling information required for financial reporting and performing various
administrative functions. In the event of such occurrence, the Company's
contingency plans call for it to switch vendors to obtain hardware and/or
software that is year 2000 compliant, and until such hardware and/or software
can be obtained, the Company will plan to use non-computer systems for its
business, including information management services and financial reporting, as
well as its various administrative functions.
The above Year 2000 disclosure constitutes a "Year 2000 Readiness Disclosure" as
defined in The Year 2000 Information and Readiness Disclosure Act (the "Act"),
which was signed into law on October 19, 1998. The Act provides added protection
from liability for certain public and private statements concerning a company's
Year 2000 readiness.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 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 and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Sales of Unregistered Securities. Pursuant to a Plan of
Merger and Acquisition Agreement (the "Dexterity Agreement")
between the Company and Dexterity Incorporated, a Delaware
corporation ("Dexterity"), dated effective March 18, 1999,
whereby the Company acquired substantially all of the assets
of Dexterity, the Company issued 3,000,000 shares of common
stock, $.001 par value ("Common Stock"), and warrants to
purchase an aggregate of 1,500,000 shares of Common Stock, at
an exercise price per share of $2.00 (the "Warrants"), to the
stockholders of Dexterity, other than the Company. Such Common
Stock and Warrants were not registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to
the exemptions of such registration provided under Regulation
D ("Regulation D") of the rules and regulations promulgated
under the Securities Act by the Securities and Exchange
Commission and Section 4(2) of the Securities Act. The Company
relied on certain representations and warranties of the
stockholders of Dexterity, including, among other things,
their ability to evaluate the merits and risks of the
transactions contemplated in the Dexterity Agreement, the
status of certain of such Dexterity stockholders as
"accredited investors" (as that term is defined in Rule 501(a)
of Regulation D) and that the Common Stock and the Warrants
were acquired solely for their own accounts for investment and
not with a view to distribution.
On January 21, 1999, pursuant to the terms of a private
placement, the Company issued to Richard A. Woodfield,
President, Chief Executive Officer and Director of the
Company, an aggregate of 25 shares of 8% Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred") at a
per share purchase price of $1,000. Such shares of the Series
B Preferred are convertible into an aggregate of 15,625 shares
of Common Stock (subject to adjustment) at a conversion price
$1.60 per share. Dividends cumulatively accrue on the Series B
Preferred at a rate of $80 per annum per share. So long as any
accrued dividends on Series B Preferred are unpaid, no
dividends may be declared on Common Stock. The holders of
Series B Preferred shall be entitled, upon a liquidation of
the Company, to receive $1,000 per share of Series B
Preferred, plus all accrued and unpaid dividends. The holders
of the Series B Preferred have the right to one vote per share
of Series B Preferred on all matters submitted to a vote of
the stockholders of the Company. The affirmative vote of
66-2/3% of the shares of Series B Preferred then outstanding
is required to materially amend the Certificate of
Incorporation or Bylaws of the Company. In the event two
quarterly dividends on the Series B Preferred shall be in
arrears, the holders of the Series B Preferred have the right
to elect or designate two directors of the Company. Such
Series B Preferred was not registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to the
exemptions of such registration provided under Regulation D
("Regulation D") of the rules and regulations promulgated
under the Securities Act by the Securities and Exchange
Commission and Section 4(2) of the Securities Act. The Company
relied on certain representations and warranties of Mr.
Woodfield, including, among other things, his ability to
evaluate the merits and risks of his investment in the Series
B Preferred, his status as an "accredited investor" (as that
term is defined in Rule 501(a) of Regulation D) and that the
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Series B Preferred was acquired solely for his own account for
investment and not with a view to distribution.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) A Special Meeting of Stockholders was held on March 18, 1999
(b) Not applicable
(c) The Stockholders approved and adopted the Plan of Merger and
Acquisition Agreement which merged Dexterity Incorporated with
and into the Company (the "Merger"). Simultaneous with the
effectiveness of the Merger, the Company changed its name to
Dexterity Surgical, Inc. Regarding the vote tally, 4,119,534
shares of Common Stock were voted "For" the Merger, 25,361
shares were voted "Against" the Merger and 7,550 shares
abstained.
(d) Not applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 2.1* Plan of Merger and Acquisition Agreement
between the Company and Dexterity
Incorporated dated December 18, 1998
Exhibit 3.1* Restated Certificate of Incorporation, as
amended
Exhibit 10.1* Series B Convertible Preferred Stock
Purchase agreement dated January 21, 1999
between the Company and Richard A. Woodfield
Exhibit 10.2* Consulting Agreement between the Company
and Christopher Black dated March 18, 1999
Exhibit 10.3* Royalty Agreement among the Company and TFX
Equities Incorporated dated March 18, 1999
Exhibit 10.4* Registration Rights Agreement among the
Company and Dexterity Stockholders dated
March 18, 1999
Exhibit 11* Computation of Earnings (Loss) Per Share
Exhibit 27.1* Financial Data Schedule for the three
months ended March 31, 1999
Exhibit 27.2* Financial Data Schedule for the three
months ended March 31, 1998
(b) Reports on Form 8-K
(1) Form 8-K dated March 18, 1999 contained the required
Financial Statements and Pro Forma Financial Information
relative to the acquisition of Dexterity Incorporated.
(2) Form 8-K dated April 15, 1999 described the change in
Registrant's Certifying Accountant.
*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: May 13, 1999 By /s/ RICHARD A. WOODFIELD
------------------------------------
Richard A. Woodfield
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 13, 1999 By /s/ RANDALL K. BOATRIGHT
------------------------------------
Randall K. Boatright
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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Exhibit Index
Exhibit
Number Description
------ -----------
Exhibit 2.1* Plan of Merger and Acquisition Agreement between the
Company and Dexterity Incorporated dated December 18, 1998
Exhibit 3.1* Restated Certificate of Incorporation, as amended
Exhibit 10.1* Series B Convertible Preferred Stock Purchase agreement
dated January 21, 1999 between the company and Richard A.
Woodfield
Exhibit 10.2* Consulting Agreement between the Company and Christopher
Black dated March 18, 1999
Exhibit 10.3* Royalty Agreement among the company and TFX Equities
Incorporated dated March 18, 1999
Exhibit 10.4* Registration Rights Agreement among the company and
Dexterity Stockholders dated March 18, 1999
Exhibit 11* Computation of Earnings (Loss) Per Share
Exhibit 27.1* Financial Data Schedule for the three months ended March
31, 1999
Exhibit 27.2* Financial Data Schedule for the three months ended March 31,
1998
* Filed herewith