As filed with the Securities and Exchange Commission on April 11, 2000.
Registration No. 333-___________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SPARTA SURGICAL CORPORATION
-----------------------------------
(Name of small issuer in its charter)
Delaware 3842 22-2870438
-------- ---------- ----------
(State or jurisdiction Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Identification
or organization) Code Number) Number)
2100 Meridian Park Blvd.
Concord, CA 94520
(925) 825-8151
-----------------------------------------------------------
(Address and telephone number of principal executive offices)
2100 Meridian Park Blvd.
Concord, CA 94520
(925) 825-8151
-----------------------------------------
(Address of principal place of business or
intended principal place of business)
Thomas F. Reiner
Chief Executive Officer
2100 Meridian Park Blvd.
Concord, CA 94520
(925) 825-8151
-------------------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
Gary A. Agron, Esq.
5445 DTC Parkway, Suite 520
Englewood, CO 80111
(303) 770-7254
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
- ------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum Amount of
Title of Each Class of Securities Amount to Offering Price Aggregate Registration
to be Registered Be Registere Per Share Offering Price Fee
- ------------------------------------------------------------------------------------------------------
Common Stock, $.002 par value 3,974,665 $1.25 $4,968,331 $1,466
- ------------------------------------------------------------------------------------------------------
This registration statement registers the resale of 3,934,665 shares of
common stock offered by the selling stockholders.
In addition to the number of shares set forth above, the amount to be
registered includes any shares of our common stock issued as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The Proposed Maximum Offering Price Per Share and the Proposed Maximum
Aggregate Offering Price in the table above are estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457(c) promulgated under
the Securities Act of 1933. These estimates were calculated based on the average
of the bid and ask prices for our common stock on the NASDAQ Over-the-Counter
Bulletin Board Trading System on April 3, 2000.
We hereby amend this registration statement on such date or dates as may be
necessary to delay its effective date until we shall file a further amendment
which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the registration statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
ii
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Dated April 3, 2000
3,974,665 SHARES OF COMMON STOCK
SPARTA SURGICAL CORPORATION
The following stockholders are offering and selling up to 3,974,665 shares
of our common stock:
Coridal, N.V.
Flyn Von Schubert and Associates, s.a.
John Weller
Arne Jensen
Andreas T. Glapiak
Elizabeth Frazier
J. Victor Samuels
Spags Investment Group, N.V.
Royce Walker LLC
Sheldon S. Kabaker
D. Brewer
P.J. Cook
Howard Bronson
William S. Gilmore
Kenneth Robbins
Bruce Havenberg
Frank Coluccino
Stephen Axelrod
IGC of New York
Pepper Frazier
The selling stockholders may offer common stock through public or private
transactions, on the NASDAQ Over-the-Counter Bulletin Board Trading System, at
prevailing market prices or at privately negotiated prices. We will not receive
any proceeds from this offering.
Our common stock is listed on the NASDAQ Over-the-Counter Bulletin Board
Trading System under the symbol "SPSG." On April 3, 2000, the closing sale price
for our common stock, as quoted on the Bulletin Board was $1.25 per share.
Investing in our common stock involves risks. See "Risk Factors" beginning
on page 4.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is April 3, 2000.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS......................................................1
SUMMARY....................................................................1
RISK FACTORS ..............................................................4
USE OF PROCEEDS............................................................7
MARKET PRICE AND DIVIDEND INFORMATION......................................7
CAPITALIZATION.............................................................8
SELECTED CONSOLIDATED FINANCIAL DATA.......................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................10
BUSINESS..................................................................14
MANAGEMENT................................................................19
EXECUTIVE COMPENSATION....................................................21
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS
AND BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK...........24
SELLING STOCKHOLDERS......................................................25
PLAN OF DISTRIBUTION......................................................26
RELATED PARTY AND OTHER MATERIAL TRANSACTIONS.............................27
DESCRIPTION OF CAPITAL STOCK..............................................29
SHARES ELIGIBLE FOR FUTURE SALE...........................................32
EXPERTS...................................................................33
LEGAL MATTERS.............................................................33
WHERE YOU CAN FIND MORE INFORMATION ......................................33
FINANCIAL STATEMENTS.....................................................F-1
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
We furnish our stockholders with annual reports containing consolidated
financial statements audited by an independent accounting firm.
SUMMARY
This summary highlights material information regarding our company and the
offering contained in this prospectus. However, this summary is not complete and
may not contain all of the information that may be important to you. You should
read the entire prospectus carefully, including the financial data and related
notes, before making an investment decision. Unless otherwise specifically
stated, the information in this prospectus assumes that holders of our
securities have not exercised any options or warrants which are currently
outstanding.
Introduction and History
Since 1990, we have developed, manufactured, and marketed surgical and
electrotherapy products for the healthcare industry. Our surgical products
include:
o microsurgical hand-held instruments and accessories;
o electro-surgical products;
o critical care hospital disposable products; and
o oral maxillofacial implant plating systems to repair bone fractures in
the face.
We market over 3,000 medical products. Our surgical products are used in
ophthalmic, ear, nose, throat, plastic, reconstructive, general and oral
maxillofacial surgical procedures. Our electrotherapy products, which are used
for pain management, consist of transcutaneous electrical nerve stimulators, or
TENS, and their related disposable and reusable electrodes and accessories.
We were incorporated in Delaware in 1987 and have continuously been engaged
in the medical products business since that date. Our offices are located at
2100 Meridian Park Blvd. Concord, California 94520 and our telephone number is
(925) 825-8151.
Strategy
We continue to seek growth through internal expansion and acquisition of
companies or products that complement or expand our existing medical product
lines. We prefer to develop or acquire medical products in specialty markets
that are served by relatively few competitors. In order to increase revenue from
existing and new products, we will continue to rely upon our medical products
dealers and independent manufacturing representatives to market our products to
hospitals, physicians and clinics.
1
Sales and Marketing
We offer our medical products through independent manufacturing
representatives and through medical/surgical and durable medical equipment
distributors located throughout the United States and abroad. The products are
marketed under our name as well as on a private label basis under which the
products are labeled with the name of our customer.
Description of Selling Stockholders
Through this prospectus, we are registering the resale of up to 3,974,665
shares of our common stock by our 20 selling stockholders, all of whom acquired
the shares in a private placement of our securities between March 1999 and March
2000. We currently have 8,217,514 shares of common stock outstanding.
Forward-Looking Statements
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us which are discussed in the Risk Factors
section below as well as throughout this prospectus. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus might not occur.
2
Summary of Consolidated Financial Data
The following summary of historical and pro forma consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited Consolidated
Financial Statements and related Notes thereto included elsewhere in this
prospectus.
The summary pro forma statement of operations data for the year ended
February 28, 1999 and the nine months ended November 30, 1999, and summary pro
forma balance sheet data as of November 30, 1999 give effect to the acquisition
of Olsen Electrosurgical as if it had occurred on March 1, 1998. The summary pro
forma data does not purport to represent what our results would have been if the
acquisition had occurred at March 1, 1998.
Nine Months Ended
Year ended February 28 November 30, 1999
---------------------- -----------------
1999 Pro Forma
1997 1998 1999 Pro Forma Historical as Adjusted
---- ---- ---- --------- ---------- -----------
Statement of Earnings Data
Net sales 2,243,000 2,272,000 1,984,000 4,330,000 2,294,000 2,870,000
Operating profit (2,176,000) (705,000) (169,000) (516,000) (101,000) (117,000)
Earnings (loss) before
income taxes (1,905,000) (1,858,000) (344,000) (717,000) (430,000) (451,000)
Net earnings (loss) (1,905,000) (1,858,000) (344,000) (717,000) (430,000) (451,000)
Preferred Stock Dividends (114,000) (42,000) (42,000) (42,000) (21,000) (21,000)
Net Income (loss) applicable
to common stockholders (2,019,000) (1,900,000) (386,000) (759,000) (451,000) (472,000)
Earnings (loss) per share (2.73) (2.27) (0.28) (0.42) (0.20) (0.18)
Weighted average shares outstanding 740,702 836,189 1,395,276 1,795,276 2,258,768 2,658,768
November 30, 1999
-----------------
Pro Forma Pro Forma
Historical Adjustments As Adjusted
---------- --------- -----------
Balance Sheet Data
Working capital 395,000 395,000
Total assets 4,897,000 (21,000) 4,876,000
Total liabilities 4,241,000 4,241,000
Stockholders' equity 656,000 (21,000) 635,000
3
RISK FACTORS
The shares of common stock offered by this prospectus involve a high degree
of risk and represent a highly speculative investment. You should not purchase
these shares if you cannot afford the loss of your entire investment. In
addition to the other information contained in this prospectus, you should
carefully consider the following risk factors in evaluating our company, our
business prospects and an investment in our shares of common stock.
Risks Particular to our Company
We have incurred significant operating losses and may not be profitable in
the future. We have reported net losses of $1,858,000 and $344,000 for the years
ended February 28, 1998 and 1999 and a net loss of $430,000 for the nine months
ended November 30, 1999. We cannot assure that we will report profits in the
future.
Our operations continue to be cash flow negative, reducing our working
capital resources. Our future capital requirements will depend on numerous
factors, including the acquisition of new product lines and/or other business
operations and the continued development of existing products, as well as our
distribution and marketing efforts. In order to continue our current level of
operations, it will be necessary for us to obtain additional working capital,
from either debt or equity sources. Our principal working capital needs are to
fund inventory purchases and accounts receivable. There can be no assurance we
will be able to obtain this financing on terms satisfactory to us.
We face intense competition, which could reduce our product prices. The
medical products industry is intensely competitive. We compete in all aspect of
our business with numerous medical products manufacturers and distributors, many
of whom have substantially greater market share and financial and other
resources than we do. Competition with these companies could cause us to reduce
our product prices or the amount of products we sell.
It is costly for us to comply with government regulations. Our operations
are regulated by the Federal Food and Drug Administration and other agencies in
California. Compliance with medical product regulations are costly and time
consuming, and if we do not remain in compliance we may be unable to sell some
or all of our products.
We depend upon others to manufacture many of our products or product
components on a timely and cost-effective basis. From time to time, we have
experienced difficulties in obtaining some products or components, and there can
be no assurance that our suppliers will be able to meet our product needs on a
timely basis. A lack of availability of components or products could cause
production delays, increase our product costs, affect our quality control
efforts and interfere with our ability to maintain production and delivery
schedules.
We depend upon our personnel. Our ability to manufacture and market our
medical products depends upon our ability to attract, hire and retain qualified
personnel. Competition for this personnel is intense, and there can be no
assurance that we will be able to attract and retain such personnel. We are also
dependent upon the services of Thomas F. Reiner, our Chairman, Chief Executive
Officer and President. The loss of Mr. Reiner's services would have a material
adverse effect on our business.
4
We face risks of reduced revenue and increased administrative expenses
which might result from health care reform. Legislative proposals continue to be
introduced or proposed in Congress and in state legislatures that would effect
major changes in the health care system nationally and on the state level. Among
the proposals are cost controls on hospitals, change in health insurance
coverages, reductions in reimbursement for medical treatments and the creation
of government health insurance plans. It is not clear what effect such proposals
would have on our business. Certain proposals, such as cutbacks in Medicare and
Medicaid programs, containment of health care costs and permitting states
greater flexibility in the administration of Medicaid, could reduce our revenue
or increase our costs. In addition, concern about proposed reform measures and
their potential effects has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of our common stock.
Risks Related to the Offering
Shares of our common stock which are eligible for future sale by our
stockholders may decrease the price of our common stock. As of April 3, 2000 we
had 8,217,514 shares of our common stock outstanding, of which approximately
800,000 shares are free trading, 1,524,348 shares are "restricted" but may be
sold at anytime under Rule 144, 1,902,986 are held in escrow subject to the
escrow agreement, and 3,974,665 shares are restricted but are being registered
by this prospectus. If holders of our securities sell substantial amounts of our
common stock, then the market price of our common stock could decrease.
We have a significant number of stock options, warrants and convertible
securities outstanding, which could significantly depress our common stock
market price if exercised and sold. We currently have outstanding options and
warrants to purchase approximately 4,729,728 shares of our common stock and
other securities convertible into 235,107 shares of common stock. The holders of
these securities may exercise or convert them at any time at exercise or
conversion prices ranging from $.59 per share to $13.50 per share. Although
restrictions under federal securities laws limit the ability of the shares of
our common stock issuable upon exercise or conversion of these securities to be
resold in the public market upon issuance, these restrictions may not apply or
may only apply for a period of one year from the date on which these securities
are exercised or converted. The sale of shares underlying these stock options,
warrants and convertible securities could significantly depress the common stock
market price.
There is no significant trading market for our common stock. Our common
stock is not eligible for trading on any national or regional exchange. Our
common stock is traded on a limited basis on the NASDAQ Over-the-Counter
Bulletin Board Trading System pursuant to Rule 15c2-11 of the Securities
Exchange Act of 1934. This market tends to be highly illiquid, in part because
there is no national quotation system by which potential investors can trace the
market price of shares except through information received or generated by a
limited number of broker-dealers that make a market in that particular stock.
There is a greater chance of market volatility for securities that trade on the
Bulletin Board as opposed to a national exchange or quotation system. This
volatility may be caused by a variety of factors, including:
o the lack of readily available price quotations;
o the absence of consistent administrative supervision of "bid" and
"ask" quotations;
o lower trading volume;
o and market conditions.
5
In a volatile market, we may experience wide fluctuations in the market
price of our securities. These fluctuations may have an extremely negative
effect on the market price of our securities and may prevent you from obtaining
a market price equal to your purchase price when you attempt to sell our
securities in the open market. In these situations, you may be required to
either sell our securities at a market price which is lower than your purchase
price, or to hold our securities for a longer period of time than you planned.
Because our common stock is classified as "penny stock", trading is
limited, and the common stock price could decline. Because our common stock
falls under the definition of "penny stock," the trading in our common stock is
limited because broker-dealers are required to provide their customers with
disclosure documents prior to allowing them to participate in transactions
involving our common stock. These disclosure requirements are burdensome to
broker-dealers and may discourage them from allowing their customers to
participate in transactions involving our common stock.
"Penny stocks" are equity securities with a market price below $5.00 per
share other than a security that is registered on a national exchange; included
for quotation in the NASDAQ system; or whose issuer has net tangible assets of
more than $2,000,000 and has been in continuous operation for greater than three
years. Issuers who have been in operation less than three years must have net
tangible assets of at least $5,000,000.
Rules promulgated by the Securities and Exchange Commission under Section
15(g) of the Exchange Act require broker-dealers engaging in transactions in
"penny stocks," to first provide to their customers a series of disclosures and
documents, including:
o a standardized risk disclosure document identifying the risks inherent
in investment in "penny stocks;"
o all compensation received by the broker-dealer in connection with the
transaction;
o current quotation prices and other relevant market data; and,
o monthly account statements reflecting the fair market value of the
securities.
In addition, these rules require that a broker-dealer obtain financial and
other information from a customer, determine that transactions in "penny stocks"
are suitable for such customer and deliver a written statement to such customer
setting forth the basis for this determination.
In addition, under the Exchange Act, and the regulations thereunder, any
person engaged in a distribution of shares of our common stock offered by this
prospectus may not simultaneously engage in market making activities with
respect to the common stock during the applicable "cooling off" periods prior to
the commencement of this distribution.
Our preferred stock and status as a Delaware corporation may make a third
party acquisition of our company more difficult. Our certificate of
incorporation authorizes our Board of Directors to issue up to 2,000,000 shares
of preferred stock having such rights as may be designated by our Board of
Directors, without stockholder approval. This issuance of preferred stock could
inhibit a change in control by making it more difficult to acquire the majority
of our voting stock. In addition, the Delaware General Corporation law restricts
certain business combinations with interested stockholders. This statute may
have the effect of inhibiting a non-negotiated merger or other business
combination.
6
We do not anticipate paying dividends. We have not paid any cash dividends
on our common stock since our inception and we do not anticipate paying cash
dividends in the foreseeable future. Any dividends which we may pay in the
future will be at the discretion of our Board of Directors and will depend on
our future earnings, any applicable regulatory considerations, our financial
requirements and other similarly unpredictable factors. For the foreseeable
future, we anticipate that we will retain any earnings which we may generate
from our operations to finance and develop our growth.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our common
stock being offered by this prospectus.
MARKET PRICE AND DIVIDEND INFORMATION
Our common stock has traded on the Nasdaq Over-the-Counter Bulletin Board
Trading System under the symbol "SPSG " since May 1, 1998. From January 31, 1991
to April 30, 1998 our common stock traded on the Nasdaq SmallCap Market. The
market for our common stock on the Bulletin Board is limited and sporadic with
daily volume averaging 4,000 shares during the quarter ended November 30, 1999.
The following table presents the range of the high and low closing prices,
provided by Nasdaq Trading and Market Services for our common stock for the
periods indicated. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Price
-----
By Quarter Ended: High Low
- ----------------- ---- ---
Fiscal 2001
May 31, 2000 (through April 3, 2000) $3.40 $0.91
Fiscal 2000
May 31, 1999 $2.50 $1.75
August 31, 1999 $2.36 $2.22
November 30, 1999 $1.75 $0.94
February 29, 2000 $1.81 $0.91
Fiscal 1999
May 31, 1998 $1.69 $0.75
August 31, 1998 $1.75 $0.75
November 30, 1998 $1.75 $0.87
February 28, 1999 $1.00 $0.43
Fiscal 1998
May 31, 1997 $4.00 $1.25
August 31, 1997 $2.00 $1.00
November 30, 1997 $2.25 $1.87
February 28, 1998 $1.62 $0.75
As of April 3, 2000, we had approximately 475 stockholders of record.
7
CAPITALIZATION
The following table sets forth our capitalization as of November 30, 1999:
November 30, 1999
-----------------
Long term debt (1) $ 1,687,000
Stockholders' equity
Preferred stock $4.00 par value,
2,000,000 shares authorized;
1992 non-cumulative convertible redeemable
preferred stock: 165,000 shares authorized,
82,783 shares outstanding 331,000
Series A cumulative preferred stock:
30,000 shares authorized, 28,068 shares
issued and outstanding 112,000
Series AA cumulative preferred stock:
875,000 shares authorized, 39,938 shares
issued and outstanding 160,000
Common Stock, $.002 par value, 8,000,000 shares
authorized 5,740,281 shares issued and outstanding 5,000
Additional paid-in capital 10,291,000
Accumulated Deficit (10,243,000)
Total stockholders' equity 656,000
Total Capitalization 2,343,000
(1) Long term debt consists primarily of a revolving credit facility with a
financial institution. See note 4 to the accompanying financial statements.
8
SELECTED CONSOLIDATED FINANCIAL DATA
Nine Months Ended
Year ended February 28, November 30
----------------------- -----------
1997 1998 1999 1998 1999
---- ---- ---- ---- ----
Summary of Operation Data
in thousands except per share data
Sales 2,243 2,272 1,984 1,673 2,294
Cost of goods sold 1,229 1,066 1,028 878 944
Gross profit (loss) 1,014 1,206 956 795 1,350
Operating Expenses
Selling, general and administrative 2,052 1,679 927 572 1,218
Depreciation and amortization 240 217 198 200 217
Research and development 42 15 -- -- 16
Write-off inventory
Total operating expenses 2,334 1,911 1,125 772 1,451
Income (loss) from operations (1,320) (705) (169) 23 (101)
Interest Expense (388) (629) (623) (258) (341)
Other Income (expense) (197) (524) 448 304 12
Net income (loss) (1,905) (1,858) (344) 69 (430)
Preferred stock dividends (114) (42) (42) (25) (21)
Net income (loss) applicable
to common stockholders (2,019) (1,900) (386) 44 (451)
Historical basic and diluted
income (loss) per share (2.73) (2.27) (0.28) 0.03 (0.20)
Shares used to compute historical
basic and diluted income (loss)
per share 740,702 836,189 1,395,276 1,413,438 2,258,768
As of November 30
-----------------
1998 1999
---- ----
Balance sheet data:
Cash and cash equivalents 1 5
Working capital 1,360 395
Total assets 3,155 4,897
Long term debt 1,837 1,687
Total stockholders' equity 289 656
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following section contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this prospectus.
This discussion should be read in conjunction with our audited financial
statements and footnotes included elsewhere in this prospectus.
Results of Operations
Nine months ended November 30, 1999 as compared to nine months ended November
30, 1998
Net sales for the nine months ended November 30, 1999 were $2,294,000, a
37% increase from net sales of $1,673,000 for the nine months ended November 30,
1998. The increase in net sales in 1999 was the result of an increase in
surgical device sales and decrease in durable medical equipment sales which have
lower margins. The increase in sales for the surgical devices primarily resulted
from our acquisition of Olsen's electrosurgical business and receipt of various
national group purchasing contracts.
Gross profit was $1,350,000 or 58.8% of net sales for the nine months ended
November 30, 1999 as compared to $795,000 or 47.5% of net sales for the nine
months ended November 30, 1998. The increase in gross profit percentage is
primarily due to the higher margins generated from increased sales volume among
our surgical product lines.
Selling, general and administrative expenses for 1999 were $1,218,000, a
113% increase from expenses of $572,000 for 1998. The increase in these expenses
primarily resulted from nonrecurring legal and accounting fees related to
proposed acquisitions not consummated, lease termination expenses and expenses
incurred in consolidation of Olsen's operations. We also incurred other
nonrecurring expenses including regulatory approvals for our ISO 9001
manufacturing certification, due diligence fees related to the termination of
our acquisition of Western Medical Services, Inc. and ICS of North America, Inc.
Interest expense for the nine months ended November 30, 1999, increased to
$341,000 from $258,000 in the nine months ended November 30, 1998, principally
as a result of bridge financing loans obtained to provide working capital and
funds for expenses related to planned acquisitions.
Other income decreased to $12,000 for the nine months ended November 30,
1999, from $304,000 for the nine months ended November 30, 1998. The decrease
resulted primarily from a reversal of accrued rent in 1998, from successful
settlement of litigation related to a terminated lease agreement, amounting to
approximately $199,000 (net of legal fees).
As a result of the above, our net loss for the nine months ended November
30, 1999 was $430,000, a decrease of $499,000 from our net income of $69,000 for
1998.
Year ended February 28, 1999 as Compared to Year ended February 28, 1998
Net sales for the fiscal year ended February 28, 1999, were $1,984,000, a
decrease of 12.7% from net sales of $2,272,000 for fiscal 1998. The decrease in
net sales during fiscal 1999 was the result of a $215,000 or 17.3% decrease in
electrotherapy product sales from $1,245,000 to $1,030,000; and a decrease of
$72,000 or 7.1% in surgical product sales from $1,026,000 to $954,000. The
decrease in sales of the electrotherapy product line primarily resulted from the
completion of standing purchase orders in the approximate amount of $650,000
from one of our electrotherapy accounts. The decrease in sales of the surgical
product line primarily resulted from a reduction in the number of our
independent manufacturing sales representatives, and our decision not to attend
certain trade shows.
10
Gross profit was $956,000 or 48% of net sales for fiscal 1999 as compared
to $1,206,000 or 53% of net sales for fiscal 1998. The decrease in gross profit
percentage resulted from a decrease in sales of surgical and electrotherapy
products. In general, the electrotherapy product line generates lower gross
profits than the surgical line. Also, in connection with some sales promotions,
we allowed certain price concessions in our surgical product line.
Selling, general and administrative expenses for fiscal 1999 were $927,000,
a $752,000 or 44.8% decrease from expenses of $1,679,000 for fiscal 1998. The
decrease in these expenses primarily resulted from the implementation of our
plan to reduce operating and personnel costs. Depreciation and amortization
expenses for fiscal 1999 were $198,000, a $19,000 or 8.8% decrease from $217,000
for fiscal 1998. The decrease in these expenses was primarily due to a decrease
in the net book value of property and equipment which became fully depreciated.
The decrease in other expenses is primarily the result of a $548,000
provision for an uncollectible note receivable in 1998 that was not repeated in
1999. The decrease is also the result of a favorable settlement of litigation
related to a terminated lease obligation, resulting in the reversal of accrued
rent of approximately $300,000.
As a result of the above, our net loss for fiscal 1999 was $344,000, a
decrease of $1,514,000, or 81% from our net loss of $1,858,000 for fiscal 1998.
Basic and diluted loss per share was $0.28 for fiscal 1999 as compared to
$2.27 for fiscal 1998. The basic and diluted loss per share computation reflects
paid and accrued dividends on our Series A Convertible Preferred Stock paid on
March 31, 1998 and 1999.
Year ended February 28, 1998 as Compared to Year ended February 29, 1997
Net sales for the fiscal year ended February 28, 1998 were $2,272,000, an
increase of 1.3% from net sales of $2,243,000 for fiscal 1997. The increase in
net sales during fiscal 1998 is the result of a $221,000 or 21.6% increase in
electrotherapy product sales from $1,025,000 to $1,246,000; and a decrease of
$192,000 or 15.8% in surgical product sales from $1,218,000 to $1,026,000. The
increase in sales for the electrotherapy product line can be primarily
attributed to the receipt of non-cancelable purchase orders in the approximate
amount of $650,000 from various customers. The decrease in surgical product
sales is primarily due to a reduction in the number of our independent
manufacturing sales representatives, and reduced attendance at trade shows.
Gross profit was $1,206,000 or 53.1% of net sales for fiscal 1998 as
compared to $1,014,000 or 45.2% of net sales for fiscal 1997. The increase in
gross profit percentage is primarily due to the recording of a $275,000 reserve
for slow moving inventory during fiscal 1997 which lowered the gross profit
percentage and was not repeated during fiscal 1998. Gross profit percentage net
of the reserve for slow moving inventory during fiscal 1997 was 57.4%. The
decrease in gross profit percentage during fiscal 1998 is primarily due to the
increase in electrotherapy product sales. In general, the electrotherapy product
line generates lower gross profits than the surgical product line.
11
Selling, general and administrative expenses for fiscal 1998 were
$1,679,000, a 18.1% decrease from expenses of $2,052,000 for fiscal 1997. The
decrease in these expenses for fiscal 1998 is primarily due to legal expenses
incurred during fiscal 1997 which were not repeated during fiscal 1998. In
addition, lower expenses were experienced for fiscal 1998 due to our
implementation in June 1997 of a plan to reduce operating and personnel costs.
Total other expense for fiscal 1998 was $1,153,000, a decrease of
$1,424,000 from total other income of $271,000 for fiscal 1997. The increase in
total other expense is primarily due to the recording of a provision for an
uncollectible note receivable in the amount of $548,000, an increase of $16,000
in interest expense due primarily to higher loan balances and banking expenses
coupled with a one-time gain of $607,000 on the sale of our wound care product
line, which was recognized during fiscal 1997.
As a result of the above, our net loss for fiscal 1998 was $1,858,000, a
decrease of $47,000 from our net loss of $1,905,000 for fiscal 1997.
Basic and diluted loss per share was $2.27 for fiscal 1998 as compared to
$2.73 for fiscal 1997. The basic and diluted loss per share computation reflects
paid and accrued dividends on our Series A Convertible Preferred Stock, paid on
March 31, 1997 and 1998.
Liquidity and Capital Resources
In recent years, we have experienced losses from operations and have
suffered from a deficiency in available working capital. For the fiscal year
ended February 28, 1999, we improved our operating performance, principally as a
result of reductions in operating expenses. However, revenue from existing
product lines have not been sufficient to generate adequate working capital. We
intend to continue to try to improve operations and to pursue capital through
debt and equity securities offerings.
In June 1999 we purchased all of the outstanding capital stock of Olsen
Electrosurgical, Inc. for 400,000 shares of our common stock and payments to the
two Olsen principals aggregating $1,350,000 over five years. We may make
additional acquisitions of companies, divisions of companies or products in the
future. Acquisitions entail numerous risks, including difficulties in
assimilating acquired operations and products, diversion of management's
attention and loss of key employees of acquired businesses, all of which we have
encountered with previous acquisitions. Future acquisitions may require dilutive
issuances of equity securities and the incurrence of additional debt, and the
creation of goodwill or other intangible assets that could result in
amortization expense. In addition, the failure to finalize and close an
acquisition often results in additional expenses.
At February 28, 1999, we had approximately $7,530,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards will expire from 2007 to 2019.
Additionally, we have approximately $1,680,000 of California state net operating
loss carryforwards for tax reporting purposes which will expire through 2004.
12
Our working capital at November 30, 1999 was $395,000 as compared to
$1,313,000 at February 28, 1999. Our working capital position decreased by
$918,000 due to short-term debt we obtained in order to complete our acquisition
of Olsen and to provide Olsen with working capital.
We have a 48-month $2.5 million revolving line of credit provided by Bank
of America comprised of a $1.5 million line of credit for Sparta and a $1
million line of credit for Olsen. We pay the bank interest on the average
outstanding principal amount of the line at a per annum rate of prime plus 3%.
The line is based on a percentage of eligible assets and is secured by a first
position security interest on all of our assets. In addition, $250,000 of the
line is personally guaranteed by Thomas F. Reiner, our Chief Executive Officer.
At February 29, 2000, the outstanding balance on the line was $1,216,000 and
approximately $100,000 in credit was available. The line is being used to
provide working capital for current operations.
We also have a $750,000 unsecured line of credit provided by Mr. Reiner, of
which $430,000 was outstanding at February 29, 2000. We pay interest on the line
of credit of 12% per annum and the line is available to us until September 2000.
Between March 1999 and March 2000, we sold an aggregate of 1,177,000 shares
of our common stock to a group of 20 investors for a total of $1,263,125 in cash
and $1,285,000 of debt conversion, or an average of $1.07 per share. All of
these shares are being registered for sale under this prospectus.
Between March 1999 and January 2000, we borrowed a total of $1,510,000 from
five persons. The loans bore interest ranging from 7% to 12% per annum. A total
of $1,285,000 of these loans were converted to common stock at an average price
of $1.08 per share in February 2000 and $225,000 of the loans was repaid.
Our operations continue to be cash flow negative, reducing our working
capital resources. Our future capital requirements will depend on numerous
factors, including the acquisition of new product lines and/or other business
operations and the continued development of existing products, as well as our
distribution and marketing efforts. In order to continue our current level of
operations, it will be necessary for us to obtain additional working capital,
from either debt or equity sources. Our principal working capital needs are to
fund inventory purchases and accounts receivable.
13
BUSINESS
Products
We have developed, manufactured and marketed specialty surgical,
electrosurgical and electrotherapy products since 1990. We offer more than 3,000
medical products comprised of:
o Microsurgical hand held instruments and accessories. We market a line
of microsurgical hand held stainless steel instruments and related
hospital equipment and accessories for use by:
o ophthalmologists in eye surgery procedures such as cataract,
retina and radial keratotomy procedures;
o surgeons in ear, nose, throat, plastic, reconstructive, and oral
maxillofacial procedures; and
o general surgeons in other general surgical applications, such as
ob/gyn and cardiovascular procedures.
o Electrosurgical products. We market a line of electrosurgical products
including disposable and reusable electrosurgical pencils,
electrosurgical instruments, cables, scalpels and laparoscopy
instruments. We also apply non-conductive materials to surgical
instruments as well as repair them. Electrosurgical instruments use
low levels of electricity to assist in cutting and cauterizing the
tissue during surgery. The tissue is actually divided by controlled
electrical sparks from the electrosurgical instrument. At the same
time, the intense heat caused by the electric sparks vaporizes the
tissue and cauterizes it to reduce bleeding.
o Critical care hospital disposable products. We market a line of
proprietary critical care general hospital disposable products such
as:
o surgical and sponge clamps and external tubing;
o surgical and preoperative products;
o anesthesia extension tubes, anesthesia and intravenous tube sets;
and
o sterile, nasal latex balloons used to control nose bleeding.
o Oral Maxillofacial implant plating systems. We market an oral
maxillofacial implant titanium plating system which consists of
plates, screws and instruments to repair bone fractures in the face
and head by holding fracture ends in alignment during bone healing.
o Transcutaneous electrical nerve stimulators, electrodes and related
accessories. We market patented and proprietary nerve stimulators,
known as "TENS" units which deliver low voltage electrical current to
the nerves in the spine in order to temporarily reduce or control
certain types of acute or chronic pain. Our TENS units include the
patented Spectrum Max-SD, our most advanced unit for acute and chronic
14
pain management; Spectrum Plus, which allows therapists to treat less
complicated pain syndromes than the Spectrum Max-SD; and Spectrum II,
our least expensive TENS unit. We also market both disposable and
reusable TENS electrodes and related accessories. The electrotherapy
pain management devices and related accessories are prescribed by a
wide range of professionals including physicians, and physical and
occupational therapists for use in clinics, rehabilitation facilities
and patients' homes.
Strategy
We continue to seek growth through internal expansion and acquisitions of
companies or products that complement or expand our existing medical product
lines. We will continue to enter small specialty markets that are served by
relatively few competitors. We will also continue efforts to develop products in
collaboration with established medical device companies on a private label basis
while researching and developing our own products.
We intend to expand our distribution networks by continuing to appoint
additional specialty surgical dealers and selected independent manufacturing
representatives to promote and market our products to hospitals, physicians and
clinics. The expansion of our product lines also promotes crossover sales by
dealers in each product group.
We will also continue to sell our electrotherapy products to durable
medical equipment dealers, rather than physicians, hospitals, patients and other
end users.
Sales and Marketing
We offer our products through an in-house sales force consisting of two
individuals and through independent manufacturing representatives and
medical/surgical and durable medical equipment distributors located throughout
the United States and abroad. Our customers include hospitals, physicians,
clinics, physical and occupational therapists and rehabilitation facilities.
Support for our internal and external sales forces is provided by advertisements
in medical journals, attendance at trade shows and educational seminars,
distribution of sales brochures and through sales training and telemarketing.
Sales leads developed through advertising, direct mail, trade shows and customer
inquiries are pursued through direct sales contacts. In addition, we market our
products under various private label manufacturing arrangements.
Our sales network reaches most of the major markets in the United States
along with a modest but expanding international market. In the United States and
overseas we use a number of independent health care distributors including
Baxter Healthcare Corp., McKesson General Medical Corp., Alliance Healthcare
Inc., Owens and Minor, Inc., DeRoyal Industries, Inc., Alabama Microsurgical
Instruments, Salvin Dental Co., Enable Instruments, Inc., Goodman Medical
Company, Therapeutic Trends, Inc., and Dong-Jin International Co. Our products
are also marketed to private and public hospitals, rehabilitation facilities,
clinics, physicians, and occupational and physical therapists.
15
Manufacturing and Distribution
Our surgical products, oral maxillofacial implant plating systems, critical
care hospital disposables and electrotherapy products are received, inspected,
and packaged at our warehouse facility in Concord, California. Microsurgical
hand-held instruments and oral maxillofacial implant plating systems are
manufactured in Germany, Switzerland and the United States to our
specifications. Critical care hospital disposables and TENS units are
manufactured domestically to our specifications under various manufacturing
arrangements. Parts for electrosurgical products are manufactured for us and
assembled at our Concord facility.
We have experienced difficulty from time to time in obtaining some raw
materials or products, and there can be no assurance that our suppliers will be
able to meet our needs on a timely basis. Although some products are currently
available from multiple sources, at present we obtain approximately 50% of our
products from single sources. A lack of availability from current suppliers
could cause distribution delays, increased costs and decreases in sales levels.
We are required to carry significant amounts of inventory to meet rapid
delivery requirements. These inventory requirements in turn require us to
maintain working capital and credit financing sufficient to fund the purchase of
inventory. No assurance can be given that we will be able to generate sufficient
working capital or credit facilities to fund inventory purchases.
Product Liability
We carry product liability insurance of $1 million per occurrence. Like
most producers of surgical and electrotherapy products, we face the risk of
product liability claims and unfavorable publicity if our products cause injury.
Although we believe our insurance coverage to be adequate, there can be no
assurance that this insurance will be sufficient to cover all risks to which we
may be exposed.
Competition
The health care products industry is intensely competitive, and many of our
competitors have financial, marketing and other resources substantially greater
than ours. Some of our larger competitors enjoy an additional competitive
advantage due to their ability to offer product discounts for volume purchases
across product lines. Other competitors have significantly greater resources,
established sales organizations and greater experience in the marketing and
sales of products through direct distribution. Our industry is dominated by
multinational companies such as Johnson and Johnson and Baxter Healthcare
Corporation.
In the surgical specialty market for microsurgical hand held instruments,
we compete with Storz Instrument Company, TFX Pilling Surgical, Katena Products,
Inc. and Stille AB. In the critical care hospital disposable products market, we
compete with Baxter Healthcare Corporation, Johnson & Johnson Patient Care,
Inc., Abbott Laboratories, Inc., and Patterson Dental Co. as well as other
smaller competitors. In the electrosurgical products market, we compete with
Valley Lab, Inc., ConMed Corp. and Weck Electrosurgical, Inc.. In the oral
maxillofacial implant plating market, we compete with Howmedica, Inc., Synthes
U.S.A. and Walter Lorenz Surgical Instruments as well as other smaller
competitors. In the TENS market, we compete with many companies including Empi,
Inc. and RehabiLicare, Inc., the market leaders in the electrotherapy industry.
16
The pain management market is a relatively mature and competitive market,
subject to significant fluctuations in profitability caused by foreign
competition, questions of therapeutic efficacy, governmental regulations and
private rates of reimbursement. The rehabilitation portion of the market is
evolving and fragmented with a number of different companies offering competing
treatments without any clear indication of preference among treating clinicians.
Competitive factors for microsurgical hand held instruments,
electrosurgical products, critical care hospital disposables and maxillofacial
products include the depth, quality and price of the product line. We believe
price is the only significant competitive factor with respect to the
electrotherapy product line. Our market share in each of our product lines is
negligible.
Patents and Trademarks
We sell our products under a variety of trademarks, some of which we have
registered in the United States and various foreign countries. We currently hold
two patents granted by the United States Patent Office relating to our TENS
units, which expire in 2002. Notwithstanding the trademarks and patents held by
us, there can be no assurance that competitors will not develop similar
trademarks outside our trademark protection or functionally similar products
outside our patent protection.
There also can be no assurance that any patents issued to or licensed by us
will not be infringed upon or designed around by others, that others will not
obtain patents that we will need to license or design around, that our patents
will not inadvertently infringe upon the patents of others, or that others will
not use our patents upon their expiration. There can be no assurance that our
patents will not be invalidated or that we will have adequate funds to finance
the high cost of prosecuting or defending patent validity or infringement
issues.
Government Regulation
We are registered with the FDA as a medical device establishment. All of
our products must be approved, registered and/or licensed by the FDA and other
domestic and foreign regulatory authorities. These authorities also regulate
labeling, advertising and other forms of product claims.
Under the federal Food, Drug and Cosmetics Act, we are required to file
with the FDA a new device description and obtain FDA approval for any new
medical device which we propose to manufacture and market. The procedure for
obtaining such approval differs depending upon the uniqueness of the device,
with devices similar to those marketed prior to 1976 being eligible for
expedited approval and those devices which represent significant departures from
devices on the market in 1976 requiring pre-marketing approval. The devices are
also subject to inspection by the FDA after approval, with devices that are
potentially life-threatening being subject to more stringent standards. The FDA
has established manufacturing and sterilization standards for medical devices
known as "Good Manufacturing Practices" which require our warehouse and
distribution facility and our suppliers to be registered annually and subject to
regular inspections by the FDA.
17
Although applicable government regulations vary in their provisions, they
are stringent and continuing. The cost of compliance with these regulations may
be a significant expense for us in the future. We believe that we have obtained
all applicable government and regulatory approvals for our existing products,
facilities and processes. There can be no assurance that we will continue to be
in compliance with all current regulations or that we will be able to comply
with all future regulations.
Our office, assembly, warehouse and manufacturing facilities in Concord,
California are subject to various state and local regulations such as zoning
requirements, health and fire codes and the like.
Employees
As of February 29, 2000, we had 30 full-time employees. None of our
employees are currently covered by collective bargaining agreements and we
consider our relations with our employees to be satisfactory.
Facilities
We currently lease 22,200 square feet of office, assembly, warehouse and
manufacturing space at 2100 Meridian Park Boulevard, Concord, California 94520
for $25,400 per month under a lease which expires August 2004.
18
MANAGEMENT
Directors and Executive Officers
The following table sets forth information regarding our executive officers
and directors:
Name Age Office
---- --- ------
Thomas F. Reiner 53 Chairman of the Board of Directors,
Chief Executive Officer, President,
Treasurer, and Director
Joseph Barbrie 45 Vice President of Sales
John F. O'Hanlon 43 Chief Financial Officer
Michael Y. Granger 43 Director
Allan J. Korn 56 Director
Joel Flig 46 Director
Directors hold office for a period of one year from their election at the
annual meeting of stockholders and until their successors are duly elected and
qualified. Officers are elected by, and serve at the discretion of, the Board of
Directors. None of the above individuals has any family relationship with any
other. Our audit committee is composed of Messrs. Granger, Korn and Flig.
Messrs. Granger, Korn and Flig receive $750 for each meeting they attend and are
reimbursed for out-of-pocket expenses.
The following is a summary of the business experience of each of our
executive officers and directors:
Thomas F. Reiner is our co-founder and has been our Chief Executive
Officer, President and a director since we were organized in July 1987 and our
Chairman since January 1994. From 1972 to 1983, Mr. Reiner was employed by
Sparta Instrument Corporation, becoming its President in 1979. Mr. Reiner
co-founded Healthmed in 1983, serving as Vice President of Sales and Marketing
until 1985 and President until 1987. Mr. Reiner earned a B.S. degree in Business
Management and an M.B.A. degree in Finance and General Management from Fairleigh
Dickinson University.
Joseph Barbrie has been our Vice President of Operations since March 1989
and our Vice President of Sales since March 1996. From 1979 to 1989 he was
employed by Superior Healthcare Group, becoming its director of
purchasing/operations in 1984. Mr. Barbrie earned an A.S. degree in Business
Management from Johnson & Wales College.
19
John F. O'Hanlon was the Chief Financial Officer of Genmark Automation from
1996 to November 1999 and was an independent financial consultant from 1990 to
May 1996. He was Director of Finance for J.J. Morris from 1984 to 1990. Mr.
O'Hanlon earned a Masters of Business Administration degree from the University
of Texas in San Antonio, and a B.S. degree in Accounting from California State
University in Hayward.
Michael Y. Granger, has been one of our directors since June 1991. He has
been President of Ark Capital Management, Inc., an independent management
consulting firm since April 1991. From March 1990 to April 1991, he was Vice
President and Portfolio Manager for LINC Capital Management, a large independent
health-care financial services company, where his responsibilities included
providing financing for private health-care companies. Prior to joining LINC,
Mr. Granger was an Investment Manager with Xerox Venture Capital, an early-stage
venture capital fund, where he was responsible for identifying, selecting and
managing investments in high technology companies. Earlier, he was a principal
at CIGNA Venture Capital, Inc., an investment subsidiary of CIGNA Investments,
where he was responsible for managing a private equity investment program. Mr.
Granger earned his Bachelor of Science degree in Electrical Engineering from the
University of Massachusetts at Amherst and M.B.A. degree in Finance and General
Management from Dartmouth College's Amos Tuck School of Business.
Allan J. Korn has been one of our directors since February 1994. He has
been Vice President of Sales and Marketing for A and Z Pharmaceutical, Inc.
since 1994. From 1993 to 1994 he was Vice President of Marketing for Ohm Labs,
Inc. From March 1985 until 1993 he held various sales and marketing executive
positions with DuPont Multi-Source Products, Inc. Mr. Korn earned a B.A. degree
in Economics from Queens College, Flushing, New York and an M.B.A. degree in
Marketing from Fairleigh Dickinson University. Mr. Korn is also an Adjunct
Professor of Business Administration at Union County College.
Joel Flig, has been one of our directors since March 1998. He has been
President of Financial Solutions Group, Inc., an investment banking company,
specializing in the placement of senior debt to middle market companies since
1987. From 1981 to 1987 he was employed by Union Chelsea National Bank. Mr. Flig
earned a Bachelors of Business Administration from Bernard Baruch College in the
City of New York and an M.B.A. degree in Finance from St. John's University.
20
EXECUTIVE COMPENSATION
The following table sets forth compensation for services rendered to us by
our Chief Executive Officer and any other executive officers who received
compensation of more than $100,000 in the fiscal years ended February 28, 1999
and 1998.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
Name and Principal ------------------- Other Annual Awards
Position Year Salary Bonus Compensation Options
- ------------------ ---- ------ ------ ------------ -------
Thomas F. Reiner 1999 $166,254(1) $0 $ 0 $312,500
Chairman, Chief Executive 1998 275,581(1) $0 $7,543(2) 447,000
Officer, Treasurer, Director
Joseph Barbrie 1999 78,790 $0 $ 0 40,000
Vice President of Sales 1998 104,050 $0 $ 0 40,000
Wm. Samuel Veazey 1999 20,971 $0 $ 0 40,000
Vice President of Finance 1998 102,711 $0 $ 0 40,000
(1) Includes salaries and an automobile and insurance allowance.
(2) Represents an unpaid vacation accrual.
Option Grants in Last Fiscal Year
The following table provides information on option grants during the year
ended February 28, 1999 to Mr. Reiner:
Individual Grants
% of Total Options
Granted to
Options Employees in
Name Granted Fiscal Year Exercise Price Epiration Date
- ---- ------- ----------- -------------- -------------
Thomas F. Reiner 100,000 29.9% $1.47 July 26, 2005
Aggregate Option Exercise in Last Fiscal Year and Fiscal Year-End Option Values
The following table provides information on the value of the named
executive officers' unexercised options at February 28, 1999. No shares of our
common stock were acquired upon exercise of options during the fiscal year ended
February 28, 1999.
Number of Value of Unexercised
Unexercised Options In-The-Money
at Fiscal Year End Options at Fiscal Year End (1)
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Thomas F. Reiner 797,000 133,335 $1,344,425 $ 0
Joseph Barbrie 30,418 20,000 2,500 2,500
(1) The closing price of our common stock on February 28, 1999 as reported by
the Bulletin Board was $1.62 per share.
21
Employment Agreement with Mr. Reiner
In September 1999 we entered into a seven-year employment agreement with
Mr. Reiner, which will automatically be extended for three additional years if
we report net sales in any fiscal year during the term of the employment
agreement of $7 million or more. Under the terms of the employment agreement,
Mr. Reiner is to receive:
o an annual salary of $195,000 in the first year, increasing 15% each
year thereafter;
o cash bonuses ranging from $10,000 to $60,000 annually if our net sales
or common stock price increase from 25% to 300% during any fiscal year
and separate cash bonuses ranging from $10,000 to $60,000 annually if
we report net income ranging from $100,000 to $400,000 during any
fiscal year;
o an increase in Mr. Reiner's annual salary to between $225,000 to
$385,000 for any fiscal year in which we report net sales ranging from
$5 million to $25 million;
o a $1.25 million term and whole life insurance policy and a $12,500 per
month disability insurance policy, both to be owned by Mr. Reiner;
o a $50,000 per year contribution to Mr. Reiner's retirement plan;
o reimbursement for any federal, state or local taxes payable by Mr.
Reiner for any compensation he receives under the employment
agreement, other than his annual base salary;
o 3 1/2% of our annual pre-tax earnings;
o an automobile allowance of $1,395 per month;
o five weeks of paid vacation time.
Stock Option Plan and Stock Option Grants
In 1987, we adopted our 1987 Stock Option Plan, which provides for the
grant to employees, officers, directors and consultants of options to purchase
shares of common stock, consisting of both "incentive stock options" within the
meaning of Section 422A of the United States Internal Revenue Code of 1986 (the
"Code") and "non-qualified" options. Incentive stock options are issuable only
to employees, while non-qualified options may be issued to non-employee
directors, consultants and others, as well as to employees. In January 1994, our
stockholders approved an increase in the number of stock options available under
the Plan to a total of 250,000 options.
The Plan is administered by the Board of Directors, which determines those
individuals who are to receive options, the time period during which the options
may be partially or fully exercised, the number of shares of common stock that
may be purchased under each option, and the option price.
22
The per share exercise price of the common stock subject to an incentive
stock option or nonqualified option may not be less than the fair market value
of the common stock on the date the option is granted. The per share exercise
price of the common stock subject to a non- qualified option is established by
the Board of Directors. The aggregate fair market value, determined as of the
date the option is granted, of the common stock that any employee may purchase
in any calendar year pursuant to the exercise of incentive stock options may not
exceed $100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of our stock is eligible to receive any
incentive stock options under the Plan unless the option price is at least 110%
of the fair market value of the common stock subject to the option, determined
on the date of grant. Non-qualified options are not subject to this limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by him or her. In the event of
termination of employment other than by death or disability, the optionee has
three months after such termination during which he or she can exercise the
option. Upon termination of employment of an optionee by reason of death or
permanent total disability, his or her option remains exercisable for one year
thereafter to the extent it was exercisable on the date of such termination. No
similar limitation applies to non-qualified options.
Options under the Plan must be granted within ten years from the effective
date as amended of the Plan. The incentive stock options granted under the Plan
cannot be exercised more than ten years from the date of grant except that
incentive stock options issued to 10% or greater stockholders are limited to
five year terms. All options granted under the Plan provide for the payment of
the exercise price in cash or by delivery to us of shares of common stock
already owned by the optionee having a fair market value equal to the exercise
price of the options being exercised, or by a combination of such methods of
payment. Therefore, an optionee may be able to tender shares of common stock to
purchase additional shares of common stock and may theoretically exercise all of
his stock options with no additional investment other than his original shares.
Any unexercised options that expire or that terminate upon an optionee
ceasing to be an officer, director or an employee become available once again
for issuance. As of February 29, 2000, options to purchase 134,754 shares have
been granted under the Plan including 114,587 options granted to executive
officers and directors at exercise prices ranging from $.59 to $13.50.
Liability and Indemnification of Officers and Directors
Our Amended Certificate of Incorporation provides that our directors will
not be liable for monetary damages for breach of their fiduciary duty as
directors, other than the liability of a director for:
o a breach of the director's duty of loyalty to our company or our
stockholders;
o acts or omissions by the director not in good faith or which involve
intentional misconduct or a knowing violation of law;
o willful or negligent declaration of an unlawful dividend, stock
purchase or redemption; or
o transactions from which the director derived an improper personal
benefit.
These provisions are consistent with the applicable provisions of Delaware law.
Our Amended and Restated Certificate of Incorporation require us to
indemnify all persons whom we may indemnify pursuant to the Delaware General
Corporation Law to the full extent permitted by Delaware Law.
23
In addition, our bylaws require us to indemnify our officers and directors
and other persons against expenses, judgments, fines and amounts incurred or
paid in settlement in connection with civil or criminal claims, actions, suits
or proceedings against such persons by reason of serving or having served as
officers, directors, or in other capacities, if such person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to our
best interests and, in a criminal action or proceeding, if he had no reasonable
cause to believe that his/her conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of no contest or its equivalent shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he or she
reasonably believed to be in or not opposed to our best interests or that he or
she had reasonable cause to believe his or her conduct was unlawful.
Indemnification as provided in our bylaws shall be made only as authorized in a
specific case and upon a determination that the person met the applicable
standards of conduct. Insofar as the limitation of, or indemnification for,
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers, or persons controlling us pursuant to the foregoing, or
otherwise, we have been advised that, in the opinion of the Securities and
Exchange Commission, such limitation or indemnification is against public policy
as expressed in the Securities Act of 1933 and is therefore, unenforceable.
SECURITY OWNERSHIP OF EXECUTIVE OFFICERS, DIRECTORS
AND BENEFICIAL OWNERS OF GREATER THAN 5% OF OUR COMMON STOCK
The following table sets forth information with respect to the beneficial
ownership of our common stock owned, as of February 29, 2000, by:
o the holders of more than 5% of our common stock;
o each of our directors;
o our executive officers; and
o all directors and executive officers of our company as a group.
For purposes of computing the percentages under the table below, it is
assumed that all options and warrants to acquire our common stock which have
been issued to the directors, executive officers and the holders of more than 5%
of our common stock and are fully vested or will become fully vested within 60
days of the date of this prospectus have been exercised by these individuals and
the appropriate number of shares of our common stock have been issued to these
individuals.
In addition, for purposes of determining the percentages under the table,
the 1992 Preferred Stock and the common stock have been treated as one class,
since both classes are entitled to vote on all matters on which the common stock
is entitled to vote. None of our officers or directors own any shares of our
preferred stock. Our Series A and Series AA Preferred Stock have not been
included as they are non-voting. Except as otherwise noted, the persons named in
the table own the shares beneficially and of record and have sole voting and
investment power with respect to all shares shown as owned by them. Each
stockholder's address is in care of our company at 2100 Meridian Park Blvd.
Concord, California 94520.
24
Number Percent
of Shares of of Class of
Common Common
Name of Beneficial Owner Stock Owned Stock Owned
- ------------------------ ------------ -----------
Thomas F. Reiner (1) 8,253,367 62.04 %
Joseph Barbrie 100,418 .75 %
Joel Flig 10,000 .08 %
Michael Y. Granger 13,334 .10 %
Allan J. Korn 10,834 .08 %
Charles C. Johnston and affiliates 1,791,731 13.47 %
Coridal, N.V. 932,000 7.01 %
Spags Investment Group, N.V. 1,135,000 8.53 %
All officers and directors as a group
(five persons) 8,387,953 63.05 %
(1) Includes:
o 1,780,335 shares issuable under options at prices ranging from $.59 to
$13.50 per share exercisable through various dates until January 15,
2005;
o 4,477,987 shares for which Mr. Reiner acts as voting trustee under
voting trust agreements; and
o 1,902,986 shares contingently issuable to Mr. Reiner pursuant to a
stock escrow agreements which provides Mr. Reiner with voting rights
until their release.
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders, the
number of shares of our common stock beneficially owned by the selling
stockholders as of February 29, 2000 and the number of shares of our common
stock which may be offered for sale pursuant to this prospectus by the selling
stockholders.
The following shares may be offered from time to time by the selling
stockholders named below. However, the selling stockholders are under no
obligation to sell all or any portion of these shares of our common stock. In
addition, the selling stockholders are not obligated to sell such shares of our
common stock immediately under this prospectus. Since the selling stockholders
may sell all or part of the shares of common stock offered in this prospectus,
we cannot estimate the number of shares of our common stock that will be held by
the selling stockholders upon termination of this offering.
None of the selling stockholders is an officer or director of our company.
The address of each selling stockholder is in care of our company at 2100
Meridian Park Blvd. Concord, California 94520.
25
Number of Shares
Of Common Stock Percentage
Name Before Offering Before Offering
- ---- --------------- ---------------
Coridal, N.V 932,000 11.34 %
Flyn Von Schubert and Associates, s.a 290,000 3.53 %
John Weller 200,000 2.43 %
Arne Jensen 236,666 2.88 %
Andreas T. Glapiak 50,000 .61 %
Elizabeth Frazier 25,000 .31 %
J. Victor Samuels 205,333 .31 %
Spags Investment Group, N.V 1,135,000 13.81 %
Royce Walker LLC 212,000 2.58 %
Sheldon S. Kabaker 300,000 3.65 %
D. Brewer 100,000 1.22 %
P.J. Cook 10,000 .12 %
Howard Bronson 15,000 .18 %
William S. Gilmore 37,000 .45 %
Kenneth Robbins 10,000 .12 %
Bruce Havenberg 60,000 .73 %
Frank Coluccino 50,000 .61 %
Stephen Axelrod 30,000 .37 %
IGC of New York 40,000 .49 %
Pepper Frazier 36,666 .45 %
--------- -------
Total shares 3,974,665 48.37 %
========= =======
PLAN OF DISTRIBUTION
The shares of our common stock which the selling stockholders or their
pledgees, donees, transferees or other successors in interest are offering for
resale will be sold from time to time in one or more of the following
transactions:
o block transactions;
o transactions on the Bulletin Board or on such other market on which
our common stock may from time to time be trading;
o privately negotiated transactions;
o through the writing of options on the shares;
o short sales; or,
o any combination of these transactions
The sale price to the public in these transactions may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o negotiated prices; or,
o such other price as the selling stockholders determine from time to
time.
In the event that we permit or cause this prospectus to lapse, the selling
stockholders may sell shares of our common stock pursuant to Rule 144 under the
Securities Act of 1933. The selling stockholders will have the sole and absolute
discretion not to accept any purchase offer or make any sale of these shares of
our common stock if they deem the purchase price to be unsatisfactory at any
particular time.
The selling stockholders or their pledges, donees, transferees or other
successors in interest, may also sell these shares of our common stock directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. These broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of these shares of our common stock for whom such
broker-dealers may act as agents or to whom they sell as principal, or both. As
to a particular broker-dealer, this compensation might be in excess of customary
commissions. Market makers and block purchasers purchasing these shares of our
common stock will do so for their own account and at their own risk. It is
26
possible that a selling stockholder will attempt to sell shares of our common
stock in block transactions to market makers or other purchasers at a price per
share which may be below the prevailing market price of our common stock. There
can be no assurance that all or any of these shares of our common stock offered
hereby will be issued to, or sold by, the selling stockholders. Upon effecting
the sale of any of these shares of our common stock offered under this
prospectus, the selling stockholders and any brokers, dealers or agents, hereby,
may be deemed "underwriters" as that term is defined under the Securities Act of
1933 or the Securities Exchange Act of 1934, or the rules and regulations
thereunder.
Alternatively, the selling stockholders may sell all or any part of the
shares of our common stock offered hereby through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into. If a selling
stockholder enters into an agreement or agreements with an underwriter, then the
relevant details will be set forth in a supplement or revision to this
prospectus.
The selling stockholders and any other persons participating in the sale or
distribution of these shares of our common stock will be subject to applicable
provisions of the Securities Exchange Act of 1934 and the rules and regulations
thereunder including, without limitation, Regulation M. These provisions may
restrict activities of, and limit the timing of purchases and sales of any of
these shares of our common stock by, the selling stockholders. Furthermore,
pursuant to Regulation M, persons engaged in a distribution of securities are
prohibited from simultaneously engaging in market making and other activities
with respect to the securities for a specified period of time prior to the
commencement of the distributions, subject to specified exceptions or
exemptions. These regulations may affect the marketability of these shares of
our common stock.
We will pay substantially all of the expenses incident to the registration
and offering of our common stock, other than commissions or discounts of
underwriters, broker-dealers or agents.
RELATED PARTY AND OTHER MATERIAL TRANSACTIONS
In July 1998 J&C Resources, Inc., a company owned and controlled by Charles
Johnson, one of our principal stockholders, agreed to convert $751,300 of
indebtedness due to J&C for 1,001,733 shares of our common stock, or $.75 per
share. Subsequently, in February 1999 the CCJ Trust, a trust controlled by Mr.
Johnson, converted $159,750 of indebtedness due to CCJ for 39,938 shares of our
Series AA preferred stock, or $4.00 per share.
Between September and November 1999, we issued a total of 950,000 shares of
our common stock to Thomas F. Reiner, our Chief Executive Officer, in
consideration of Mr. Reiner guaranteeing loans incurred by us in the total
amount of $426,000 and providing us a line of credit under which we can borrow
up to $750,000 from Mr. Reiner on an unsecured basis. We further agreed with Mr.
Reiner that the 950,000 shares would be placed in escrow and not released to Mr.
Reiner unless:
o we fail to repay loans and other indebtedness which Mr. Reiner
guaranteed on our behalf within 12 months from the date of Mr.
Reiner's guarantee; or,
o there is a change in control of our company defined as meaning that
any person who is not currently an owner of 20% of our securities
becomes the owner of 20% of our securities or our current directors
become less than a majority of our board of directors in the future;
or,
o Mr. Reiner's employment with us is terminated for any reason; or,
o we become insolvent or voluntarily file for bankruptcy.
27
In September 1999 we entered into a seven-year employment agreement with
Mr. Reiner, which will automatically be extended for three additional years if
we report net sales in any fiscal year during the term of the employment
agreement of $7 million or more. Under the terms of the employment agreement,
Mr. Reiner is to receive:
o an annual salary of $195,000 in the first year, increasing 15% each
year thereafter;
o cash bonuses ranging from $10,000 to $60,000 annually if our net sales
or common stock price increase from 25% to 300% during any fiscal year
and separate cash bonuses ranging from $10,000 to $60,000 annually if
we report net income ranging from $100,000 to $400,000 during any
fiscal year;
o an increase in Mr. Reiner's annual salary to a range of $225,000 to
$385,000 for any fiscal year in which we report net sales ranging from
$5 million to $25 million;
o a $1.25 million term and whole life insurance policy and a $12,500 per
month disability insurance policy, both to be owned by Mr. Reiner;
o reimbursement for any federal, state or local taxes payable by Mr.
Reiner for any compensation he receives under the employment
agreement, other than his annual base salary;
o a $50,000 per year contribution to Mr. Reiner's retirement plan;
o 3 1/2% of our annual pre-tax earnings;
o an automobile allowance of $1,395 per month;
o five weeks of paid vacation time.
Between March 1999 and March 2000, we sold an aggregate of 1,177,000 shares
of our common stock to a group of investors for a total of $1,263,125, or an
average of $1.07 per share. Our subscription agreement with one of these
investors provided that we would increase the number of shares issued to him
from 250,000 shares to 290,000 shares if we failed to complete the registration
by January 2000. Accordingly, the additional shares have been included in this
prospectus for registration.
Between March 1999 and January 2000, we borrowed a total of $835,000 from
Spags Investment Group, N.V. We paid Coridal, N.V., an affiliate of Spags, a
total of 932,000 shares of our common stock as consideration for assisting us in
obtaining the debt financing from Spags. We are registering the 932,000 shares
by this prospectus. In March 2000 Spags converted the $835,000 loan to 835,000
shares of our common stock.
We also granted to Coridal an option to purchase 500,000 shares of our
common stock at $1.00 per share and 500,000 shares at $5.00 per share. Coridal
may exercise the $1.00 option during any ten-day period following its receipt of
due diligence materials in connection with any acquisition we are investigating.
The purpose of limiting Coridal's exercise period to the ten-day period is to
provide us with additional working capital that may be needed should we agree to
complete such an acquisition. The Coridal option expires in September 2000.
In March 1999 we entered into a consulting agreement with IGC of New York
Corporation under which IGC agreed to provide financial consulting services to
us, including assisting us in seeking, negotiating and closing acquisition
targets and obtaining debt and equity financing for us. Under the terms of the
consulting agreement, we issued to IGC warrants to purchase 421,000 shares of
our common stock at $.95 per share and 100,000 shares at $1.70 per share until
March 2002. We also agreed to pay IGC a fee of $8,000 per month through November
2001 and to pay a finder's fee of $154,305 for assisting us in completing the
above-mentioned debt and equity financings.
28
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 8,000,000 shares of common stock, par value
$.002 per share, and 2,000,000 shares of preferred stock, par value $4.00 per
share, although our Board of Directors approved an increase in our authorized
shares of common stock to 25,000,000 shares which, we expect, will be approved
by our stockholders in April 2000. Shares of preferred stock may be issued from
time to time in one or more series with such designations, voting powers, if
any, preferences and relative, participating, optional or other special rights,
and such qualifications, limitations and restrictions, as are determined by
resolution of our Board of Directors, except that so long as any 1992 Preferred
Stock, Series A Preferred Stock or Series AA Preferred Stock are outstanding, we
may not issue any series of stock having rights senior to these classes of
preferred stock without the approval of holders of at least 50% of the
outstanding shares of such classes. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control of our company
without further action by stockholders and could adversely affect the rights and
powers, including voting rights, of the holders of common stock. In certain
circumstances, the issuance of preferred stock could depress the market price of
the common stock.
Common Stock
At April 3, 2000 there were 8,217,514 shares of common stock outstanding.
The holders of common stock are entitled to one vote per share on all matters
submitted to a vote of stockholders, including the election of directors. There
is no right to cumulate votes in the election of directors. The holders of
common stock are entitled to any dividends that may be declared by the Board of
Directors out of funds legally available therefore subject to the prior rights
of holders of preferred stock and any contractual restrictions we have against
the payment of dividends on common stock. In the event of our liquidation or
dissolution, holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preferences of any
outstanding shares of preferred stock.
Holders of common stock have no preemptive rights and have no right to
convert their common stock into any other securities. All of the outstanding
shares of common stock are fully paid and nonassessable.
Series A Convertible Preferred Stock
We issued 165,000 shares of $4.00 par value Series A Convertible Preferred
Stock convertible into 137,500 shares of common stock in connection with a 1994
securities offering. At January 31, 2000 there were 28,068 shares of Series A
Preferred Stock outstanding convertible into 23,380 shares of common stock. A
summary of the Series A Preferred Stock follows.
Dividend Rights. Holders of shares of Series A Preferred Stock on the last
day of each fiscal quarter February 28, May 31, August 31 and November 30 are
entitled to receive dividends at the quarterly rate of $.375 per share,
consisting of $.25 payable in our common stock semiannually and $.125 payable in
cash. Dividends accrue and are cumulative from the date of first issuance of the
Series A Preferred Stock and are payable to holders of record as they appear on
our stock books on the record dates fixed by the Board of Directors. If we do
not have at least $500,000 of cash or cash equivalents indicated on our balance
sheet on the last day of any fiscal quarter, we may pay the entire dividend in
common stock on the quarterly payment date in lieu of the cash dividend for such
quarter. The value of the common stock to be issued as a dividend will be based
upon the last reported sales price of the common stock on the Bulletin Board on
the last day of the fiscal quarter. Common stock issuable as a common stock
dividend on the Series A Preferred Stock was registered in the 1994 securities
offering.
29
Redemption. The Series A Preferred Stock is redeemable for cash, in
whole or in part, at any time, at our option, at $10.00 per share plus any
accrued and unpaid dividends, whether or not declared. Notice of redemption must
be mailed at least 30 days but not more than 60 days before the redemption date
to each holder of record of Series A Preferred Stock to be redeemed at the
holder's address shown on our stock transfer books. After the redemption date
unless there has been a default in payment of the redemption price, dividends
will cease to accrue on the shares of the Series A Preferred Stock called for
redemption, and all rights of the holders of such Series A Preferred Stock will
terminate except the right to receive the redemption price without interest.
The holders of Series A Preferred Stock have the right to convert any or
all such shares into common stock at the rate of .833 shares of common stock for
each share of the Series A Preferred Stock. The conversion price is subject to
adjustment for stock splits, reverse stock splits and other similar
capitalizations, although the Series A Preferred Stock does not contain
provisions protecting against dilution resulting from the sale of common stock
at a price below the conversion price or the current market price of our
securities. If at any time the closing price of our common stock, as quoted on
the Bulletin Board or any other securities exchange, exceeds $14.00 per share
for ten consecutive trading days, then the Series A Preferred Stock will be
automatically converted into common stock at the conversion rate.
Liquidation Preference. In the event of our liquidation, dissolution or
winding up, holders of shares of Series A Preferred Stock are entitled to
receive, out of legally available assets, a liquidation preference of $10.00 per
share, plus an amount equal to any accrued and unpaid dividends to the payment
date, before any payment or distribution is made to the holders of common stock
or any series or class of our stock hereafter issued that ranks junior as to
liquidation rights to the Series A Preferred Stock, but the holders of the
shares of the Series A Preferred Stock will not be entitled to receive the
liquidation preference on such shares until the liquidation preference of any
other series or class of our stock previously or hereafter issued that ranks
senior as to liquidation rights to the Series A Preferred Stock has been paid in
full.
Voting Rights. The holders of the Series A Preferred Stock have no voting
rights except as to matters affecting the rights of Series A Preferred
Stockholders or as required by law. In connection with any such vote, each
outstanding share of Series A Preferred Stock is entitled to one vote, excluding
shares held by us or any entity controlled by us, which shares have no voting
rights.
1992 Redeemable Convertible Preferred Stock
At January 31, 2000 there were 82,783 shares of $4.00 par value 1992
Redeemable Convertible Preferred Stock outstanding convertible into 27,594
shares of common stock which were issued in connection with a 1992 securities
offering. A summary of the 1992 Preferred Stock follows.
Dividend Rights. Holders of the 1992 Preferred Stock are entitled to
receive, in each fiscal year in which we attain net income after taxes, as
defined below, from funds legally available therefor, non-cumulative dividends
at the annual rate of $.40 per share, payable within 120 days of the end of our
fiscal year. The dividends are payable in cash for each fiscal year in which we
have net income (excluding any items of non-cash extraordinary income) after
taxes of at least $650,000, and, if net income is less than that amount, in
cash, common stock or a combination of cash and common stock, to be determined
at our election. The common stock, if any, payable as the 1992 Preferred Stock
dividend will be valued at the average closing bid price for the common stock
during the 30 business days prior to the dividend payment date as reported by
the Bulletin Board, and will be registered and free trading securities.
Dividends are non-cumulative and will be payable to holders of record on such
record dates as shall be fixed by our Board of Directors. Dividends payable for
any period less than a full year will be computed on the basis of a 360-day year
with equal months of 30 days.
30
Redemption. We may, at any time, redeem the shares of 1992 Preferred Stock
for $4.00 per share, in whole or in part, upon written notice mailed to each
holder of record of shares to be redeemed. Such notice must be given not more
than 60 days and not less than 30 days prior to the redemption date.
Conversion Rights. Each share of 1992 Preferred Stock is convertible at the
option of the holder into .333 shares of common stock. The shares of common
stock issued upon conversion of the 1992 Preferred Stock will be free trading
securities and will be fully paid and non-assessable if we have a current
registration statement on file with the Commission covering the underlying
shares at the time of conversion. We do not have a current registration
statement on file with the Commission covering these shares.
Liquidation Preference. Upon our liquidation, dissolution or winding-up,
the 1992 Preferred Stock has preference and priority over the common stock and
any other class or series of stock ranking junior to the 1992 Preferred Stock
for payment out of our assets or proceeds available for distribution to
stockholders of $4.00 per share plus all unpaid dividends to the date of such
distribution.
Voting Rights. Each share of 1992 Preferred Stock votes the equivalent of
.333 shares of common stock as a single class on all matters except that the
written consent or affirmative vote of the holders of a majority of the
outstanding shares of 1992 Preferred Stock is required to approve any proposed
amendment to our certificate of incorporation or certificate of designation of
the 1992 Preferred Stock that would increase or decrease the aggregate number of
authorized shares of the 1992 Preferred Stock, increase or decrease the par
value of the 1992 Preferred Stock, or alter or change the powers, preferences,
or special rights of the shares of 1992 Preferred Stock so as to affect them
adversely.
Series AA Convertible Redeemable Preferred Stock
At January 31, 2000 there were 39,938 shares of Series AA Preferred Stock
$4.00 par value outstanding, convertible into 179,721 shares of common stock
which were issued in lieu of $159,750 of indebtedness. A summary of the Series
AA Preferred Stock follows:
Dividend Rights. The holders of Series AA Preferred Stock are entitled to
receive out of our assets which are by law available for the payment of
dividends, when and as declared by the Board of Directors, cumulative dividends
at the per annum rate of $0.28 per share, payable either in cash, our common
stock or some combination, in our sole discretion. The Series AA Preferred Stock
is junior to our 1992 Preferred Stock and our Series A Preferred Stock.
Conversion Rights. Each two shares of Series AA Preferred Stock is
convertible into nine fully paid and non-assessable shares of common stock, at
the option of the holder at any time or from time to time on or before February
10, 2001 and automatically converts into nine shares of common stock in the
event that the daily bid and ask price of our common stock averages $3.00 per
share or more for thirty consecutive days.
Redemption. The shares of Series AA Preferred Stock are redeemable, in
whole or in part at our option at any time, at a price of $10.00 per share, in
the event the bid and ask price of the common stock averages $2.00 per share or
more for thirty consecutive days or at a price of $8.00 per share, in the event
the bid and ask price of the common stock averages $3.00 per share or more for
thirty consecutive days.
31
Liquidation or Dissolution. In the event of our liquidation, dissolution or
winding-up, whether voluntary or involuntary, holders of each outstanding share
of Series AA Preferred Stock are entitled to be paid first out of our assets
available for distribution to stockholders, whether such assets are capital,
surplus, or earnings, an amount equal to $4.00 per share of Series AA Preferred
Stock held, plus an amount equal to all accrued and unpaid dividends, before any
payment shall be made to the holders of the common stock, or any other of our
stock ranking as to dividends or assets junior to the Series AA Preferred Stock.
Voting Rights. The holders of Series AA Preferred Stock have no voting
rights.
Stock Transfer
American Stock Transfer and Trust Company, 40 Wall Street, New York, New
York, is our transfer agent.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 3, 2000 we had 8,217,514 shares of our common stock
outstanding, of which approximately 800,000 shares were free trading, 1,524,348
shares could be sold at any time under Rule 144, 1,902,986 are held in escrow
subject to the escrow agreement, and 3,974,665 shares are restricted shares but
are being registered by this prospectus.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who owns shares that were purchased from us, or any
affiliate, at least one year previously, including a person who may be deemed
our affiliate, is entitled to sell within any three-month period, a number of
shares that does not exceed the greater of:
o 1% of the then outstanding shares of our common stock; or,
o the average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person who is not deemed to have been our affiliate at any time during the 90
days preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us,
or any affiliate, at least two years previously, is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
In addition to the outstanding shares of our common stock described above,
as of the date of this prospectus, we have 3,838,825 shares of common stock
reserved for issuance upon the exercise of outstanding options and warrants and
235,107 shares reserved for issuance upon the conversion of outstanding
preferred stock and promissory notes. All of these securities and the shares of
our common stock underlying these securities are restricted securities. The
transfer of these restricted securities is subject to the requirements of Rule
144, as discussed above.
Future sales of restricted common stock under Rule 144 or otherwise or of
the shares which we are registering under this prospectus could negatively
impact the market price of our common stock. We are unable to estimate the
number of shares that may be sold in the future by our existing stockholders or
the effect, if any, that sales of shares by such stockholders will have on the
market price of our common stock prevailing from time to time. Sales of
substantial amounts of our common stock by existing stockholders could adversely
affect prevailing market prices.
32
EXPERTS
Our consolidated financial statements as of February 28, 1999 and for each
of the two years ended February 28, 1999, and the financial statements of Olsen
Electrosurgical, Inc. as of and for the years ended December 31, 1998 and 1997,
included in the registration statement and this prospectus have been included in
reliance on the report of Grant Thornton LLP, independent certified public
accountants, given on the authority of Grant Thornton LLP as experts in
accounting and auditing.
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for us
by the Law Office of Gary A. Agron, Englewood, Colorado.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form SB-2 under the Securities Act of 1933
with respect to our common stock offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement
and the exhibits to the registration statement. For further information with
respect to Sparta Surgical Corporation and our common stock offered hereby,
reference is made to the registration statement and the exhibits filed as part
of the registration statement. We also file periodic reports with the Securities
and Exchange Commission, including quarterly reports, annual reports which
include our audited financial statements and proxy statements. The registration
statement, including exhibits thereto, and all of our periodic reports may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C. and copies of all or any part thereof may be obtained
from the Public Reference Section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Securities and Exchange Commission. You may obtain additional information
regarding the operation of the Public Reference Section by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site which provides online
access to reports, proxy and information statements and other information
regarding registrants that file electronically with the Securities and Exchange
Commission at the address http://www.sec.gov.
33
SPARTA SURGICAL CORPORATION
---------------------------
Pro forma Statements of Operations
(Unaudited)
For Year Ended February 28, 1999 and
the Nine Months ended November 30, 1999
The following unaudited pro forma combined condensed statements of
operations assume that the acquisition of all of the outstanding common stock of
Olsen Electrosurgical, Inc., a California corporation, ("Olsen") took place as
of the beginning of the year ended February 28, 1999, and the nine months ended
November 30, 1999, and combines the statements of operations of Sparta Surgical
Corporation, a Delaware corporation, ("Sparta") for the year ended February 28,
1999, and the nine months ended November 30, 1999, with Olsen's statements of
operations for the year ended December 31, 1998, and the three months ended
March 31, 1999, respectively.
The pro forma combined condensed statements of operations are not
necessarily indicative of the operating results which would have been achieved
had the acquisition been consummated as of the beginning of the year ended
February 28, 1999, or the nine months ended November 30, 1999, and should not be
construed as representative of future operations.
F-1
Sparta Surgical Corporation
PROFORMA STATEMENT OF OPERATIONS
(Unaudited)
Sparta Olsen
For the Year For the Year Total
Ended Ended Pro Forma Pro Forma
February 28, 1999 December 31, 1998 Adjustments Amounts
----------------- ----------------- ----------- -------
Net sales $ 1,984,000 $ 2,385,000 $ (39,000)(1) $ 4,330,000
Cost of sales 1,028,000 1,092,000 (39,000)(1) 2,081,000
----------- ----------- ----------- -----------
Gross profit 956,000 1,293,000 -- 2,249,000
Selling, general and administrative expenses 927,000 1,508,000 -- 2,435,000
Depreciation and amortization expenses 198,000 49,000 83,000(2) 330,000
----------- ----------- ----------- -----------
Loss from operations (169,000) (264,000) (83,000) (516,000)
Other income (expense):
Interest expense (623,000) (26,000) -- (649,000)
Other 448,000 -- -- 448,000
----------- ----------- ----------- -----------
(175,000) (26,000) -- (201,000)
----------- ----------- ----------- -----------
Net loss (344,000) (290,000) (83,000) (717,000)
Preferred stock dividend (42,000) -- -- (42,000)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (386,000) $ (290,000) $ (83,000) $ (759,000)
=========== =========== =========== ===========
Net loss per common share - basic and diluted $ (0.28) $ (0.42)
=========== ===========
Shares used in computing per share information 1,395,276 400,000(3) 1,795,276
=========== =========== ===========
F-2
Sparta Surgical Corporation
PROFORMA STATEMENT OF OPERATIONS
(Unaudited)
Sparta Olsen
For the Nine For the Three Total
Months Ended Months Ended Pro Forma Pro Forma
November 30, 1999 March 31, 1999 Adjustments Amounts
----------------- -------------- ----------- -----------
Net sales $ 2,294,000 $ 586,000 $ (10,000)(1) $ 2,870,000
Cost of sales 944,000 323,000 (10,000)(1) 1,257,000
----------- ----------- ----------- -----------
Gross profit 1,350,000 263,000 -- 1,613,000
Selling, general and administrative expenses 1,218,000 246,000 -- 1,464,000
Research and development expenses 16,000 -- -- 16,000
Depreciation and amortization expenses 217,000 12,000 21,000(2) 250,000
----------- ----------- ----------- -----------
Income (loss) from operations (101,000) 5,000 (21,000) (117,000)
Other income (expense):
Interest expense (329,000) (5,000) -- (334,000)
----------- ----------- ----------- -----------
(329,000) (5,000) -- (334,000)
----------- ----------- ----------- -----------
Net loss (430,000) -- (21,000) (451,000)
Preferred stock dividend (21,000) -- -- (21,000)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders $ (451,000) $ -- $ (21,000) $ (472,000)
=========== =========== =========== ===========
Net loss per common share - basic and diluted $ (0.20) $ (0.18)
=========== ===========
Shares used in computing per share information 2,258,768 400,000(3) 2,658,768
=========== =========== ===========
See accompanying notes to financial statements.
F-3
Sparta Surgical Corporation
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
Year ended February 28, 1999 and
Nine months ended November 30, 1999
(Unaudited)
On June 8, 1999, Sparta acquired all of the outstanding common stock of
Olsen (collectively the "Company"). Olsen develops, manufactures, distributes
and markets, reusable and disposable electrosurgical devices and accessories for
the healthcare industry. The purchase price was paid in 400,000 shares of
Sparta's common stock with a fair value of $ 850,000. Goodwill and other
intangible assets will be amortized over their estimated useful lives of 15
years.
The accompanying pro forma statements of operations are presented in
accordance with Regulation S-B Item 310(b) Paragraph (d). No pro forma balance
sheet is presented as the assets and liabilities of Olsen and the goodwill
recognized in the acquisition are contained in the August 31, 1999, and the
November 30, 1999, balance sheets of the Company filed on Forms 10-QSB.
The Company's results of operations will include Olsen from June 8, 1999.
The pro forma statements of operations for the year ended February 28, 1999, and
the nine months ended November 30, 1999, include the following adjustments to
reflect consummation of the transaction as if it had occurred at the beginning
of each period presented.
1. To eliminate revenues and cost of revenues between Sparta and Olsen.
2. To record amortization of intangibles.
3. To increase the number of common shares used in the per share
calculation for the common stock issued in the acquisition.
The adjustments do not give effect to any potential benefits that might
have been realized through the combination of operations and are not necessarily
indicative of the results that would have been reported if the acquisition of
Olsen had actually occurred at the beginning of the year ended February 28, 1999
or the nine months ended November 30, 1999.
F-4
SPARTA SURGICAL CORPORATION
---------------------------
Consolidated Financial Statements and
Report of Independent Certified Public Accountants
February 28, 1998 and 1999
and November 30, 1999 (unaudited)
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Sparta Surgical Corporation
We have audited the accompanying consolidated balance sheet of Sparta Surgical
Corporation (the "Company") as of February 28, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as of
February 28, 1999, and the consolidated results of its operations and its cash
flows for each of the two years in the period then ended, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
San Jose, California
June 10, 1999
F-5
Sparta Surgical Corporation
CONSOLIDATED BALANCE SHEET
February 28, 1999 and November 30, 1999 (unaudited)
February 28, November 30,
1999 1999
------------ ------------
ASSETS (unaudited)
Current assets:
Cash $ 1,000 $ 5,000
Accounts receivable, net of allowance for doubtful accounts of $34,000
and $42,000 at February 28, 1999 and November 30, 1999, respectively 162,000 430,000
Inventories 2,026,000 2,414,000
Other 66,000 100,000
------------ ------------
Total current assets 2,255,000 2,949,000
Property and equipment, net 137,000 877,000
Other assets
Intangible assets 461,000 948,000
Other 144,000 123,000
------------ ------------
Total other assets 605,000 1,071,000
------------ ------------
Total assets $ 2,997,000 $ 4,897,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term obligations $ 219,000 $ 1,516,000
Account payable - trade 422,000 621,000
Accrued expenses 301,000 417,000
------------ ------------
Total current liabilites 942,000 2,554,000
Revolving credit facility and long-term obligations 1,833,000 1,687,000
Stockholders' equity:
Preferred stock: $4.00 par value, 2,000,000 shares authorized;
1992 non-cumulative convertible redeemable preferred stock:
165,000 shares authorized, 116,583 and 82,783 shares issued and
outstanding at February 28, 1999 and November 30, 1999, respectively 466,000 331,000
Series A cumulative convertible redeemable preferred stock:
30,000 shares authorized, 28,068 shares issued and outstanding 112,000 112,000
Series AA cumulative convertible redeemable preferred stock:
875,000 shares authorized, 39,938 shares issued and outstanding 160,000 160,000
Common stock: $0.002 par value, 8,000,000 shares authorized, 2,879,607
and 5,740,281 shares issued and outstanding at February 28, 1999 and
November 30, 1999, respectively 4,000 5,000
Additional paid in capital 9,272,000 10,291,000
Accumulated deficit (9,792,000) (10,243,000)
------------ ------------
Total stockholders' equity 222,000 656,000
------------ ------------
Total liabilities and stockholders' equity $ 2,997,000 $ 4,897,000
============ ============
See accompaning notes to consolidated financial statements.
F-6
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended February 28,
1998 and 1999 and for the nine months
ended November 30, 1999 (unaudited)
February 28, February 28, November 30,
1998 1999 1999
------------ ----------- -----------
(unaudited)
Net sales $ 2,272,000 $ 1,984,000 $ 2,294,000
Cost of sales 1,066,000 1,028,000 944,000
----------- ----------- -----------
Gross profit 1,206,000 956,000 1,350,000
Selling, general and administrative expenses 1,679,000 927,000 1,218,000
Depreciation and amortization 217,000 198,000 217,000
Research and development expenses 15,000 0 16,000
----------- ----------- -----------
Loss from operations (705,000) (169,000) (101,000)
Other income (expense):
Interest expense (629,000) (623,000) (341,000)
Litigation settlements 0 214,000 0
Provision for uncollectible note receivable (548,000) 0 0
Gain on settlement of long-term liabilities 0 199,000 0
Other 24,000 35,000 12,000
----------- ----------- -----------
Total other income (expense) (1,153,000) (175,000) (329,000)
----------- ----------- -----------
Net loss (1,858,000) (344,000) (430,000)
Preferred stock dividends (42,000) (42,000) (21,000)
----------- ----------- -----------
Net loss applicable to common stockholders $(1,900,000) $ (386,000) $ (451,000)
=========== =========== ===========
Basic and diluted net loss per common share ($ 2.27) ($ 0.28) ($ 0.20)
=========== =========== ===========
Shares used to calculate basic and diluted net loss per common share 836,189 1,395,276 2,258,768
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
Sparta Surgical Corporation
CONSOLIDATED Statement of Stockholders' Equity
Two years ended February 28, 1999 and nine months ended November 30, 1999 (unaudited)
1992 Series A Cumulative Series AA
Redeemable Redeemable Redeemable
Preferred Stock Preferred Stock Preferred Stock
---------------------- -------------------- -------------------
Shares Amount Shares Amount Shares Amount
--------- --------- --------- -------- -------- --------
Balance at March 1, 1997 160,678 $ 643,000 28,068 112,000 -- $ --
Preferred stock dividends paid in common stock -- -- -- -- -- --
Conversion of preferred stock into common stock (38,095) (153,000) -- -- -- --
Issuance of common stock under escrow agreement -- -- -- -- -- --
Issuance of stock and warrants with debt -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- -------- --------- ---------
Balance at February 28, 1998 122,583 490,000 28,068 112,000 -- --
Preferred stock dividends paid in common stock -- -- -- -- -- --
Issuance of common stock -- -- -- -- -- --
Conversion of preferred stock into common stock (6,000) (24,000) -- -- -- --
Conversion of debt into common and preferred stock -- -- -- -- 39,938 160,000
Issuance of common stock under escrow agreement -- -- -- -- -- --
Issuance of warrants with debt -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- -------- --------- ---------
Balance at February 28, 1999 116,583 466,000 28,068 112,000 39,938 160,000
Unaudited:
Preferred stock dividends paid in common stock -- -- -- -- -- --
Issuance of common stock -- -- -- -- -- --
Conversion of preferred stock into common stock (33,800) (135,000) -- -- -- --
Issuance of common stock for the purchase of a -- -- -- -- -- --
subsidiary
Issuance of common stock under escrow agreement -- -- -- -- -- --
Issuance of common stock under escrow in connection
with debt financing -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- -------- --------- ---------
Balance at November 30, 1999 82,783 $ 331,000 28,068 $112,000 39,938 $ 39,958
========= ========= ========= ======== ========= =========
Common Stock Additional
--------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
Balance at March 1, 1997 764,249 $ 1,000 $7,926,000 $(7,506,000) $1,176,000
Preferred stock dividends paid in common stock 23,274 -- 42,000 (42,000) --
Conversion of preferred stock into common stock 12,698 1,000 152,000 -- --
Issuance of common stock under escrow agreement 727,986 -- -- -- --
Issuance of stock and warrants with debt 50,000 -- 137,000 -- 137,000
Net loss -- -- -- (1,858,000) (1,858,000)
--------- --------- ----------- ------------- ----------
Balance at February 28, 1998 1,578,207 2,000 8,257,000 (9,406,000) (545,000)
Preferred stock dividends paid in common stock 32,487 -- 42,000 (42,000) --
Issuance of common stock 40,180 -- -- -- --
Conversion of preferred stock into common stock 2,000 -- 24,000 -- --
Conversion of debt into common and preferred stock 1,001,733 2,000 749,000 -- 911,000
Issuance of common stock under escrow agreement 225,000 -- -- -- --
Issuance of warrants with debt -- -- 200,000 -- 200,000
Net loss -- -- -- (344,000) (344,000)
--------- --------- ----------- ------------ ---------
Balance at February 28, 1999 2,879,607 4,000 9,272,000 (9792,000) 222,000
Unaudited:
Preferred stock dividends paid in common stock 28,908 -- 21,000 (21,000) --
Issuance of common stock 116,500 -- 14,000 -- 14,000
Conversion of preferred stock into common stock 11,266 -- 135,000 -- --
Issuance of common stock for the purchase of a subsidiary 400,000 1,000 849,000 -- 850,000
Issuance of common stock under escrow agreement 980,000 -- -- -- --
Issuance of common stock under escrow in connection
with debt financing 1,324,000 -- -- -- --
Net loss -- -- -- (430,000) (430,000)
--------- --------- ----------- ------------ ---------
Balance at November 30, 1999 5,740,281 $ 5,000 $10,291,000 $(10,243,000) $ 656,000
========= ========= =========== ============ =========
See accompanying notes to consolidated financial statements.
F-8
Sparta Surgical Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended February 28,
1998 and 1999 and for the nine months
ended November 30, 1999 (unaudited)
February 28, February 28, November 30,
1998 1999 1999
----------- ----------- ------------
(Unaudited)
Cash flows from operating activities
Net loss $(1,858,000) $ (344,000) $ (430,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 217,000 198,000 180,000
Amortization of debt issuance costs, including warrants 225,000 265,000 37,000
Provision for uncollectible note receivable 548,000 0 0
Gain on disposition of long-term liabilities 0 (199,000) 0
Gain on lease settlement 0 0 (12,000)
Litigation settlements 0 (214,000) 0
Changes in operating assets and liabilities:
Accounts receivable 107,000 53,000 (121,000)
Inventories 95,000 139,000 (99,000)
Other assets 66,000 (97,000) 8,000
Accounts payable and accrued expenses (171,000) 16,000 (370,000)
----------- ----------- -----------
Net cash used in operating activities (771,000) (183,000) (807,000)
Cash flows from investing activities:
Capital expenditures 0 (10,000) (102,000)
Repayment of notes receivable 599,000 0 0
Cash acquired in acquisition of subsidiary 0 0 14,000
----------- ----------- -----------
Net cash provided by (used in) investing activities 599,000 (10,000) (88,000)
Cash flows from financing activities:
Proceeds from borrowings 2,129,000 2,867,000 3,038,000
Principal payments on long-term obligations (1,787,000) (2,657,000) (2,101,000)
Proceeds from issuance of common stock 0 0 14,000
Debt issuance costs incurred (169,000) (17,000) (52,000)
----------- ----------- -----------
Net cash provided by financing activities 173,000 193,000 899,000
----------- ----------- -----------
Net change in cash and cash equivalents 1,000 0 4,000
Cash and cash equivalents at beginning of period 0 1,000 1,000
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,000 $ 1,000 $ 5,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 483,000 $ 308,000 $ 341,000
Income taxes 0 0 0
Supplemental disclosure of non-cash financing activities:
- ---------------------------------------------------------
Conversion of trade payables and accrued interest into long-term debt $ 216,000 $ -- $ --
Conversion of long-term debt and accrued interest into common stock 0 911,000 0
Warrants and common stock issued in connection with long-term debt borrowings 137,000 200,000 0
Assets and liabilities acquired in purchase of subsidiary:
Cash 14,000
Accounts receivable 147,000
Inventories 289,000
Prepaid expenses 21,000
Property and equipment 740,000
Accounts payable (295,000)
Accrued and other liabilities (390,000)
Notes payable (171,000)
Common Stock issued (850,000)
-----------
Goodwill $ (495,000)
===========
See accompanying notes to consolidated financial statements.
F-9
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sparta Surgical Corporation (the "Company") was incorporated in Delaware on
July 15, 1987. The Company develops, manufactures, distributes and markets,
surgical and electrotherapy products for the worldwide healthcare industry.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Revenue Recognition
-------------------
The Company recognizes revenue when goods are shipped.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted average method.
Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Basic and Diluted Net Loss Per Share
------------------------------------
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share
is computed using the weighted average number of common and potentially
dilutive shares outstanding during the period. Potentially dilutive
shares consist of the incremental common shares issuable upon conversion
of convertible securities (using the if-converted method) and shares
issuable upon the exercise of stock options and warrants (using the
treasury stock method). Potentially dilutive shares are excluded from the
computation if their effect is anti-dilutive. Contingently issuable
shares are included in diluted earnings per share when the related
conditions are satisfied.
F-10
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Nine months
Year ended February 28, ended
--------------------------- November 30,
1998 1999 1999
--------- --------- ------------
(unaudited)
Numerator
Net loss applicable to commons
stockholders (1,900,000) (386,000) (451,000)
Denominator
Average outstanding during
the period 1,789,175 2,348,262 3,705,319
Less: Shares subject to
escrow agreement (Note 9) 952,986 952,986 1,446,551
--------- --------- ---------
Number of shars on which EPS
is calculated 836,189 1,395,276 2,258,768
========= ========= =========
Basic and diluted loss per
common share $ (2.27) $ (0.28) $ (0.20)
========= ========= =========
Property and Equipment
----------------------
Property and equipment consists primarily of warehouse and office
equipment and automobiles. Depreciation is calculated based on the
following estimated useful lives using the straight-line method.
Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the improvement.
Equipment 3 - 10 years
Automobiles 7 years
Intangible Assets
-----------------
The Company evaluates the realizability of intangibles to determine
potential impairment by comparing the undiscounted cash flows of the
related assets to the carrying value. The Company provides for losses if
an impairment is indicated. Intangible assets are being amortized using
the straight-line method based on the following estimated useful lives.
Debt issuance costs are amortized over the term of the related debt
agreement.
Non-compete agreements 5 years
Goodwill 5 - 10 years
Patents and licensing agreements 10 years
F-11
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation
------------------------
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees," and complies
with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB 25, compensation cost is recognized
over the vesting period based on the excess of the fair value of the
Company's stock on the measurement date over the amount an employee must
pay to acquire the stock.
Income Taxes
------------
Income taxes are computed using an asset and liability method. Under an
asset and liability method, deferred income tax assets and liabilities
are determined based on the differences between the financial reporting
and tax bases of assets and liabilities and are measured using currently
enacted tax rates and laws.
Fair Value of Financial Instruments
-----------------------------------
The fair value of cash, accounts receivable and trade payables
approximates carrying value due to the short term nature of such
instruments. The fair value of long term obligations from financial
institutions approximates carrying value based on terms available for
similar instruments. The fair value of long term obligations with related
parties and individuals is not determinable.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentrations
--------------
The Company provides credit, in the normal course of business, to a large
number of distributors and wholesalers, concentrated in the medical
supply industry. Accounts receivable are due from customers located
throughout the United States and various foreign countries. The Company
performs periodic credit evaluations of its customers' financial
condition and generally requires no collateral. The Company maintains
reserves for potential credit losses and such losses have not exceeded
management's expectations. One electrotherapy products customer accounted
for 20% and 22% of net sales for the years ended February 28, 1999 and
1998, respectively. In 1999 and 1998, the Company purchased the products
sold to this customer from a single source vendor. Purchases from this
vendor were 43% and 33% of total cost of sales for the years ended
February 28, 1999 and 1998, respectively. The Company has identified an
alternate supplier for this product; however, no purchases have been made
from this vendor.
F-12
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Reclassifications
-----------------
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
February 28, November 30,
1999 1999
------------- -------------
(unaudited)
Equipment $ 323,000 $ 1,148,000
Automobiles 94,000 0
Leasehold improvements 20,000 38,000
------------- -------------
437,000 1,186,000
Less accumulated depreciation
and amortization (300,000) (309,000)
------------- --------------
$ 137,000 $ 877,000
============= =============
NOTE 3 - INTANGIBLE ASSETS
Intangible assets consist of the following:
February 28, November 30,
1999 1999
------------- -------------
(unaudited)
Goodwill, net of accumulated
amortization of $618,000
and $675,000, respectively $ 277,000 $ 715,000
Patents, net of accumulated
amortization of $200,000 and
$227,000, respectively 152,000 125,000
Other 32,000 108,000
------------- -------------
Total $ 461,000 $ 948,000
============= =============
F-13
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 4 - REVOLVING CREDIT FACILITIES AND LONG-TERM OBLIGATIONS
Revolving credit facilities and long-term obligations consist of the
following:
February 28, November 30,
1999 1999
------------- ------------
(unaudited)
The Company has a revolving credit facility
with a financial institution (the "Bank
Line") that bears interest at prime (7.75%
at February 28, 1999) plus 3% and expires
in July 2001. Borrowings under this line of
credit are limited to the lesser of 85% of
eligible accounts receivable and 55% of
eligible inventory or $2,500,000. The line
of credit facility is collateralized by
substantially all assets of the Company and
is guaranteed by Mr. Thomas F. Reiner, the
Company's President, Chief Executive
Officer and Chairman, up to $250,000. At
February 28, 1999, as a result of the
borrowing limits, the Company had no
amounts available under this line. $ 1,340,000 $ 1,170,000
Mr. Reiner has provided the Company with a
$500,000 line of credit (the "Reiner Line")
that bears interest at 12%. Borrowings
under this line of credit are due in June
2000. Mr. Reiner may convert any
outstanding balance into common stock at
100% of the average trading price of the
Company's common stock. 455,000 410,000
Bridge financing loans (see Note 12) - 1,285,000
4.5% installment note due in 2000, variable
principal and interest payments from $4,000
to $10,000 per month. 156,000 126,000
7% unsecured installment note due in 2000,
monthly principal and interest payments of
$3,000. 50,000 21,000
Revolving credit facility for $75,000 with
a financial institution that bears interest
at prime plus 5.5%. The line of credit is
collateralized by various assets of the
Company and expires in July 2004. - 71,000
F-14
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 4 - REVOLVING CREDIT FACILITIES AND LONG-TERM OBLIGATIONS (continued)
Installment loan with a bank, payable in
thirty-five consecutive monthly principal
payments of $3,422 plus interest through
August 15, 2000, with balance due September
15, 2000. The loan accrues interest at a
variable rate which is determined monthly
and is equal to the lender's prime rate
plus 5%. The loan is collateralized by a
security interest in certain assets of the
Company. - 26,000
Unsecured short-term note payable in
monthly installments of $5,000 bearing
annual interest of 8.25%. The loan is past
due. - 27,000
Obligations under capital leases 51,000 67,000
------------ ------------
2,052,000 3,203,000
Less current portion (219,000) (1,516,000)
------------ ------------
Long-term debt $ 1,833,000 $ 1,687,000
============ ============
Installments due on debt principal, including the capital leases, are as
follows:
February 28, November 30,
1999 1999
------------- -------------
(unaudited)
Year ending February 28,
2000 $ 219,000 $ 1,436,000
2001 491,000 480,000
2002 1,342,000 1,183,000
2003 - 14,000
2004 - 14,000
Thereafter - 76,000
------------- -------------
$ 2,052,000 $ 3,203,000
============= =============
In 1999, the Company issued warrants to purchase 300,000 shares of common
stock in connection with the issuance of long-term debt. The Company
determined the aggregate fair value of these warrants and shares to be
$200,000 and is amortizing this amount as interest expense over the life
of the related debt. As of February 28, 1999, the Company had 376,634
warrants outstanding which had been issued in connection with long-term
debt.
F-15
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 5 - INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through February 28, 1999. The
following table sets forth the primary components of deferred tax assets
at February 28, 1999:
Net operating loss and credit carryforwards $ 2,700,000
Non-deductible reserves and expenses 520,000
------------
Gross deferred tax assets 3,220,000
Valuation allowance (3,220,000)
------------
$ -
============
The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation
allowance is required. During fiscal 1999 the valuation allowance
increased $220,000. At February 28, 1999, the Company had approximately
$7,530,000 of federal net operating loss carryforwards for tax reporting
purposes available to offset future taxable income; such carryforwards
will expire from 2007 to 2009. Additionally, the Company has
approximately $1,680,000 of state net operating loss carryforwards for
tax reporting purposes which will expire from 1999 to 2004.
NOTE 6 - STOCKHOLDERS' EQUITY
Amendment to Authorized Common and Preferred Stock
--------------------------------------------------
In February 1999, the Company's Board of Directors authorized an
amendment and restatement of the Company's Articles of Incorporation to
increase the number of authorized shares of preferred stock from 750,000
to 2,000,000 shares.
Preferred Stock
---------------
The Preferred Stock may be issued in series from time to time with such
designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The rights,
preferences and limitations of separate series of Preferred Stock may
differ with respect to such matters as may be determined by the Board of
Directors, including, without limitation, the rate of dividends, method
and nature of payment of dividends, terms of redemption, amounts payable
on liquidation, sinking fund provisions, conversion rights and voting
rights.
F-16
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
1992 Preferred Stock. The Company has authorized 165,000 shares of
Non-Cumulative Convertible Redeemable Preferred Stock (the "1992
Preferred Stock"). The holders of the 1992 Preferred Stock shall be
entitled to receive non-cumulative dividends, at the rate of 10% per
annum or $.40 per share, for each year that the Company has net income
after taxes. The holders of the 1992 Preferred Stock are entitled to vote
on all matters upon which holders of the common stock have the right to
vote, and shall be entitled to the number of votes equal to the number of
full shares of common stock into which the shares of 1992 Preferred Stock
could be converted. Each share of 1992 Preferred Stock is convertible at
the option of the holder into one third of one share of common stock.
Each preferred share is subject to redemption at the option of the
Company at $4.00 per share under certain conditions. The liquidation
preference for the 1992 Preferred Stock is $4.00 per share. Warrants
issued with the 1992 Preferred Stock expired in the year ended February
28, 1998.
Series A Preferred Stock. The Company has authorized 30,000 shares of
Series A Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock"). The holders of the Series A Preferred Stock receive cumulative
dividends at the quarterly rate of $0.375 per share. The holders of the
Series A Preferred Stock have no voting rights except as to matters
affecting the rights of preferred stockholders or as required by law. In
connection with any such vote, each outstanding share of Series A
Preferred Stock has one vote. The Series A Preferred Stock is redeemable
at the option of the Company for cash at $10.00 per share plus any
accrued and unpaid dividends. The Series A Preferred Stock is convertible
into shares of common stock at the rate of 0.833 shares of common stock
for each share of Series A Preferred Stock. The liquidation preference
for the Series A Preferred Stock is $10.00 per share. The 1992 Preferred
Stock carries liquidation rights senior to the Series A Preferred Stock.
Series AA Preferred Stock. The Company has authorized 875,000 shares of
Series AA Convertible Redeemable Preferred Stock (the "Series AA
Preferred Stock"). The holders of the Series AA Preferred Stock receive
cumulative dividends at the annual rate of $0.28 per share, payable
semi-annually. The holders of the Series AA Preferred Stock have no
voting rights except as to matters affecting the rights of preferred
stockholders or as required by law. In connection with any such vote,
each outstanding share of Series AA Preferred Stock has one vote. The
Series AA Preferred Stock is convertible at any time through February 10,
2001 into shares of common stock at the rate of 9 shares of common stock
for each two shares of Series AA Preferred Stock. The Series AA Preferred
Stock will automatically be converted into common stock at this rate in
the event that the daily average bid and ask price of the common stock
averages $3.00 per share or more over a thirty consecutive day period
through February 10, 2001. At any time subsequent to February 10, 2001,
each two shares of Series AA Preferred Stock are redeemable at the option
of the Company for cash at $10.00 or $8.00, plus any accrued and unpaid
dividends, in the event that the daily average bid and ask price of the
common stock averages at least $2.00 per share or $3.00 per share,
respectively, over a thirty consecutive day period. The liquidation
preference for the Series AA Preferred Stock is $4.00 per share. The 1992
Preferred Stock and Series A Preferred Stock carry liquidation rights
senior to the Series AA Preferred Stock.
F-17
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
Series A Warrants
-----------------
The securities sold in the Company's 1994 public offering (the "Units")
consisted of one share of Series A Preferred Stock and four common stock
purchase warrants (the "Series A Warrants"). As a result of stock splits
since the offering, six Series A Warrants and $18.00 are convertible into
one share of common stock. In connection with the offering, the Company
issued to the underwriter, warrants to purchase 16,500 Units at an
exercise price of $12.00 per Unit (the "Underwriters' Warrants"). The
Series A Warrants and the Underwriters' Warrants expired in July 1999.
Stock Options and Warrants
--------------------------
The 1987 Stock Option Plan (the "Plan") provided for the grant of both
incentive stock options and non-qualified stock options. The Plan expired
in 1997. Options granted under the Plan generally vested within one year
and terminate between five and ten years from the date of grant.
The Company has also granted options and warrants to purchase common
stock outside of the Plan to officers, vendors, directors and
consultants. These instruments generally vest within one year.
Stock option and warrant activity, excluding the Series A Warrants, the
Underwriters' Warrants and warrants issued in connection with long-term
debt, is summarized as follows:
Weighted
Average
Exercise
Shares Price
---------- -------------
Balance at March 1, 1997 256,031 $ 9.88
Granted 647,000 1.26
Exercised - -
Cancelled (44,858) 10.47
---------- -----------
Balance at February 28, 1998 858,173 3.35
Granted 335,000 0.97
Exercised - -
Cancelled (73,751) 3.94
---------- -----------
Balance at February 28, 1999 1,119,422 $ 2.60
========== ===========
F-18
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 6 - STOCKHOLDERS' EQUITY (continued)
The following table summarizes information about stock options and
warrants outstanding as of February 28, 1999:
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Price Outstanding Price Term Exercisable Price
- ----------------- --------------- ------------ -------------- ------------- ------------
$0.59 - $1.47 812,000 $1.06 6 years 712,000 $1.10
$1.98 - $3.18 186,002 2.20 5 years 186,002 2.20
$13.50 121,420 13.50 3 years 121,420 13.50
--------- ---------
1,119,422 1,019,422
========= =========
The following table depicts the Company's pro forma results for the years
ending February 28 1999 and 1998, had compensation expense for employee
stock options been determined based on the fair value at the grant dates
as prescribed in SFAS 123:
1998 1999
------------- -------------
Net loss applicable to common stockholders
As reported $ (1,900,000) $ (386,000)
Pro forma (2,618,000) (760,000)
Basic and diluted net loss per share
As reported $(2.27) $(0.28)
Pro forma (3.13) (0.54)
The fair value of each option grant was determined using the
Black-Scholes model. The weighted average fair value of options and
warrants granted during 1998 and 1999 was $1.10 and $1.12, respectively.
The following weighted average assumptions were used to perform the
calculations: expected life of 7 years; interest rate of 6%; volatility
of 125%; and no dividend yield. The pro forma disclosures above may not
be representative of pro forma effects on reported financial results for
future years.
NOTE 7 - BUSINESS SEGMENTS
The Company's products are divided into two product groups: Surgical
Specialty Products and Electrotherapy DME Products. The Company's
reportable product group segments are strategic business units that offer
different ranges of products. Surgical Specialty Products consist of
microsurgical hand held instruments and accessories, critical care
hospital disposable products and oral maxillofacial implant plating
systems. Electrotherapy DME Products consist of transcutaneous electrical
nerve stimulators, electrodes and related accessories.
F-19
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 7 - BUSINESS SEGMENTS (continued)
Information by product group segment is set forth below for the years
ended February 28, 1998 and 1999 and for the nine months ended November
30, 1999:
February 28, February 28, November 30,
1998 1999 1999
------------- ------------- -------------
(unaudited)
Net sales:
Surgical Specialty Products $ 1,027,000 $ 954,000 $ 675,000
Electrotherapy DME Products 1,245,000 1,030,000 1,619,000
------------- ------------- -------------
$ 2,272,000 $ 1,984,000 $ 2,294,000
============= ============= =============
Gross profit:
Surgical Specialty Products $ 671,000 $ 545,000 $ 451,000
Electrotherapy DME Products 535,000 411,000 899,000
------------- ------------- -------------
$ 1,206,000 $ 956,000 $ 1,350,000
============= ============= =============
Due to the shared and integrated resources in personnel and facilities
for the two product group segments, information on assets, operating
expenses and income from operations is not identifiable for each of the
two business segments.
NOTE 8 - COMMITMENTS
The Company leases equipment and facilities under operating lease
agreements. Rental expense was $160,000 and $145,000 for the years ended
February 28, 1998 and 1999, respectively. The following is a schedule of
future minimum lease payments under the Company's operating leases that
have initial or remaining noncancellable lease terms in excess of one
year:
Year ending February 28,
------------------------
2000 $ 119,000
2001 118,000
2002 73,000
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company has entered into several transactions with Mr. Reiner for the
issuance of shares of common stock or the granting of options to purchase
shares of common stock. As of February 28, 1999, Mr. Reiner has been
granted options to purchase 747,002 shares of common stock. These options
have been granted both from the Plan and from outside the Plan.
F-20
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 9 - RELATED PARTY TRANSACTIONS (continued)
As of February 28, 1999, Mr. Reiner has also been granted 952,986 shares
of common stock for providing the Reiner Line and for guaranteeing
certain debt obligations of the Company (See Note 4). The Company and Mr.
Reiner entered into an escrow agreement whereby the issuance of the
952,986 shares is contingent upon the Company meeting certain performance
goals prior to May 2004. The Company has not satisfied these conditions.
Mr. Reiner has voting authority over these shares and these shares are
considered outstanding as of February 28, 1999, although for purposes of
calculating the net loss per share, these shares are excluded.
Prior to 1998, Mr. Reiner had entered into several note agreements with
the Company. Under the terms of these agreements, Mr. Reiner was
obligated to pay the Company $569,000. During 1998, Mr. Reiner made
repayments in the amount of $21,000. The Company agreed to forgive the
amounts owed under the notes if the performance criteria contained in the
escrow agreement are achieved prior to May 2004. The Company does not
consider collection of the notes to be probable and recorded a charge to
operations of $548,000 during the year ended February 28, 1998.
In total, at February 28, 1999, Mr. Reiner directly holds 52,059 shares
of common stock, has options or warrants to purchase 747,002 shares of
common stock at prices ranging from $0.59 to $13.50 per share and has
voting authority over 1,015,462 shares of common stock. Mr. Reiner also
is the trustee over voting trusts for 692,500 shares of common stock
issuable upon the exercise of outstanding warrants.
Under the terms of an employment agreement, Mr. Reiner's daughter, an
employee of the Company, was granted options to purchase 150,000 shares
of common stock in March 1998. These options vest over three years and
are exercisable at $0.75 per share.
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan for employees who are not
covered by any collective bargaining agreement, have attained age 21 and
have completed one year of service. Employee and Company matching
contributions are discretionary. The Company made no matching
contributions for the years ended February 28, 1998 and 1999.
NOTE 11 - LITIGATION
In May 1998, the Company settled an action stemming from a 1992
acquisition. As settlement, the Company issued warrants to purchase
75,000 shares of Common Stock at $0.75 per share and 35,000 shares of
Common Stock.
In June 1998, a judicial ruling released the Company from any financial
obligations in connection with the termination of a lease of the
Company's former facilities in New Jersey. As a result of this judicial
ruling, the Company eliminated its accrual for the lease termination,
which was approximately $304,000.
F-21
Sparta Surgical Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
February 28, 1999 and 1998
and November 30, 1999 (unaudited)
NOTE 11 - LITIGATION (continued)
In January 1999, the Company settled a dispute with a former employee. As
settlement, the Company agreed to pay $90,000 to the former employee,
$40,000 of which was paid as of February 28, 1999, and the remainder of
which is included in accounts payable.
NOTE 12 - SUBSEQUENT EVENTS
In March 1999, the Company signed a consulting agreement with a financial
advisor, which provides for the advisor to receive warrants to purchase
300,000 shares of common stock at $0.95 per share.
During the period from March 1999 through November 1999, the Company
raised $1,510,000 of financing from various individual investors. These
individual loans (the "Bridge Financing Loans") range from $25,000 to
$350,000, with interest rates ranging from 7% to 12%. The proceeds from
the Bridge Financing Loans are designated to be used primarily for
working capital and legal and accounting expenses related to the various
acquisitions that the Company has targeted. In accordance with the terms
of the Bridge Financing Loans, the principal is to be repaid by the
Company at the earlier of six months from the date of issuance of the
loans or the closing of a $25 million second public offering.
In June 1999, the Company completed an agreement to purchase all of the
outstanding common stock of Olsen Electrosurgical, Inc. ("Olsen"), a
privately held company that manufactures and markets electrosurgical
devices and accessories. For the fiscal year ending December 31, 1998,
Olsen recorded approximately $2.4 million in net sales. Under the
purchase agreement, the Company issued 400,000 shares of the Company's
Common Stock, in exchange for all of the outstanding shares of Olsen's
common stock. In addition, the shareholders of Olsen entered into a
five-year non-compete and consulting agreement valued at approximately
$1.3 million.
UNAUDITED
In February and March 2000, the Company converted $1,285,000
of debt into 1,188,332 shares of common stock at an average
of $1.08 per share. In addition, the Company issued
1,342,333 shares in consideration of loans made during 1999.
The Company also completed a private placement selling a
total of 1,177,000 shares of common stock at an average
price of $1.07, a total of $1,263,125 from March 1999 to
March 2000.
The following unaudited pro forma consolidated results of operations
assume that the purchse occurred as of the beginning of each period:
Year Ended Nine Months Ended
February 28, 1999 November 30, 1999
----------------- -----------------
Revenues $4,330,000 $2,870,000
Net loss applicable to shareholders ($ 759,000) ($ 472,000)
Loss per share - bsic and diluted ($0.42) ($0.18)
F-22
OLSEN ELECTROSURGICAL, INC.
---------------------------
Financial Statements and
Report of Independent Certified Public Accountants
December 31, 1998 and 1997
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors and Stockholders
Olsen Electrosurgical, Inc.
We have audited the accompanying balance sheets of Olsen Electrosurgical, Inc.
(the "Company") as of December 31, 1998 and 1997, and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States.
San Jose, California
February 18, 2000
F-23
Olsen Electrosurgical, Inc
BALANCE SHEETS
December 31 March 31
-------------------------- --------------------------
1998 1997 1999 1998
---------- ---------- ---------- ----------
Unaudited
ASSETS
Current assets
Cash $ 394 $ 218 $ 319 $ 133
Accounts receivable 156,380 324,251 177,111 250,547
Accounts and advances receivable - related parties 4,400 132,774 6,971 115,547
Inventories 388,673 424,286 304,742 492,932
Other 27,084 33,853 48,166 21,624
---------- ---------- ---------- ----------
Total current assets 576,931 915,382 537,309 880,783
Property and equipment, net 76,641 99,941 69,884 87,625
---------- ---------- ---------- ----------
Total assets $ 653,572 $1,015,323 $ 607,193 $ 968,408
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ -- $ 68,469 $ 4,480 $ 39,342
Current portion of long-term debt 169,223 77,597 67,055 108,925
Line of credit 75,000 72,000 75,000 75,000
Accounts payable 238,992 285,969 277,413 269,190
Accrued expenses 10,745 19,633 1,185 1,620
---------- ---------- ---------- ----------
Total current liabilities 493,960 523,668 425,133 494,077
Long-term debt, less current portion 31,249 72,916 54,134 12,467
Stockholders' equity
Common stock, $1 par value, 100,000 shares authorized, 5,000 5,000 5,000 5,000
5,000 issued and outstanding
Retained earnings 123,363 413,739 122,926 456,864
---------- ---------- ---------- ----------
Total stockholders' equity 128,363 418,739 127,926 461,864
---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 653,572 $1,015,323 $ 607,193 $ 968,408
========== ========== ========== ==========
See accompanying notes to financial statements.
F-24
Olsen Electrosurgical, Inc.
STATEMENTS OF OPERATIONS
Year ended December 31, Three months ended March 31,
------------------------------ ------------------------------
1998 1997 1999 1998
----------- ----------- ----------- -----------
Unaudited
Net sales $ 2,384,535 $ 3,091,174 $ 585,968 $ 678,873
Cost of sales 1,092,008 1,557,812 322,759 265,557
----------- ----------- ----------- -----------
Gross profit 1,292,527 1,533,362 263,209 413,316
Selling, general and administrative expenses 1,507,631 1,544,514 246,228 350,222
Depreciation and amortization expenses 49,258 51,668 12,250 12,315
----------- ----------- ----------- -----------
Income (loss) from operations (264,362) (62,820) 4,731 50,779
Other income (expense):
Interest expense (26,014) (20,969) (5,168) (7,654)
Other -- 5,399 -- --
----------- ----------- ----------- -----------
Total other income (expense) (26,014) (15,570) (5,168) (7,654)
----------- ----------- ----------- -----------
Net income (loss) $ (290,376) $ (78,390) $ (437) $ 43,125
=========== =========== =========== ===========
See accompanying notes to financial statements.
F-25
Olsen Electrosurgical, Inc
STATEMENT OF STOCKHOLDERS' EQUITY
For the two years ended December 31, 1998
Common Stock
----------------------------- Retained
Shares Amount Earnings Total
--------- --------- --------- ---------
Balance at January 1, 1997 5,000 $ 5,000 $ 492,129 $ 497,129
Net loss -- -- (78,390) (78,390)
--------- --------- --------- ---------
Balance at December 31, 1997 5,000 5,000 413,739 418,739
Net loss -- -- (290,376) (290,376)
--------- --------- --------- ---------
Balance at December 31, 1998 5,000 $ 5,000 $ 123,363 $ 128,363
========= ========= ========= =========
See accompanying notes to financial statements.
F-26
Olsen Electrosurgical, Inc
STATEMENTS OF CASH FLOWS
Year ended December 31, Three months ended March 31,
----------------------- ----------------------------
1998 1997 1999 1998
--------- --------- --------- ---------
Unaudited
Cash flows from operating activities:
Net income (loss) $(290,376) $ (78,390) $ (437) $ 43,125
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 49,258 51,668 12,250 12,315
Changes in operating assets and liabilities:
Accounts receivable and employee advances 296,244 (15,073) (23,301) 90,931
Inventories 35,613 (113,385) 83,931 (68,646)
Other assets 6,769 28,737 (21,082) 12,229
Accounts payable and accrued expenses (55,865) 130,597 28,861 (34,792)
--------- --------- --------- ---------
Net cash used in operating activities 41,644 4,154 80,222 55,162
Cash flows from investing activities:
Capital expenditures (25,958) (24,201) (5,493) --
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (25,958) (24,201) (5,493) --
Cash flows from financing activities:
Change in bank overdraft (68,469) (13,984) 4,480 (29,127)
Proceeds from long term debt 131,084 125,000 -- --
Principal payments on long term debt (81,125) (118,023) (79,283) (29,120)
Net borrowings on revolving line of credit 3,000 27,272 -- 3,000
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (15,510) 20,265 (74,803) (55,247)
--------- --------- --------- ---------
Net change in cash and cash equivalents 176 218 (74) (85)
Cash at beginning of year 218 -- 393 218
--------- --------- --------- ---------
Cash at end of year $ 394 $ 218 $ 319 $ 133
========= ========= ========= =========
Supplemental disclosure of cash flow information:
- -------------
Cash paid during the year for:
Interest $ 26,014 $ 20,969 $ -- $ --
Income taxes 800 800 -- --
See accompanying notes to financial statements.
F-27
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Olsen Electrosurgical, Inc. (the "Company") was incorporated in California on
March 12, 1973. The Company develops, manufactures, distributes and markets,
reusable and disposable electrosurgical devices and accessories for the
worldwide healthcare industry.
The accompanying financial statements of the company as of March 31, 1999 and
1998 and for the three months then ended have been prepared on the same basis
as the audited financial statements. In the opinion of management such
unaudited information includes all adjustments (consisting only of normal
recurring accruals) necessary for the fair presentation of this interim
information. Operating results and cash flows for interim periods are not
necessarily indicative of results to be expected for the entire year.
Revenue Recognition
-------------------
The Company recognizes revenue when goods are shipped.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first in, first out method. Inventories consisted of the following
at December 31, :
1998 1997
----------- -----------
Raw materials $ 305,216 $ 366,962
Finished goods 83,457 57,324
----------- -----------
$ 388,673 $ 424,286
=========== ===========
Property and Equipment
----------------------
Property and equipment consists primarily of warehouse and office equipment
and automobiles. Depreciation is calculated based on the following estimated
useful lives using the straight-line method or double declining balance.
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life of the improvement.
Equipment 3 - 10 years
Automobiles 7 years
Deferred Income Taxes
---------------------
Deferred income taxes are provided under the asset and liability method for
temporary differences between the bases of assets and liabilities for income
tax and financial reporting purposes. A valuation allowance is established
for any portion of the deferred tax asset for which realization is not
expected to occur.
F-28
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 1 - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments
-----------------------------------
The fair value of notes receivable, accounts receivable, trade payables and
the line of credit approximates carrying value due to the short term nature
of such instruments. The fair value of long term obligations from financial
institutions approximates carrying value based on terms available for similar
instruments. The fair value of long term obligations with related parties and
individuals is not readily determinable.
Use of Estimates
----------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Segments/Reporting
------------------
Statement of Financial Accounting Standards 131, "Disclosures about Segments
of an Enterprise and Related Information", established standards for
reporting information about operating segments. The Company operates in one
segment.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following
at December 31,: 1998 1997
----------- -----------
Warehouse equipment $ 383,036 $ 366,078
Automobiles 9,000 -
Office equipment 393,928 393,928
Leasehold improvements 245,358 245,358
----------- -----------
1,031,322 1,005,364
Less accumulated depreciation and amortization 954,681 905,423
----------- -----------
$ 76,641 $ 99,941
=========== ===========
F-29
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 3 - LINE OF CREDIT
At December 31, 1998 and 1997, borrowings of $75,000 and $72,000,
respectively, were outstanding under the Company's revolving credit
agreement against a maximum of $75,000. The line of credit is
collateralized by various assets of the Company. Interest is payable
monthly based on the prime rate (7.75% at December 31, 1998) plus 5.5%. The
maturity date of the current agreement is July 2004.
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following at December 31,:
1998 1997
----------- -----------
Installment loan with a bank, payable in thirty-five consecutive monthly
principal payments of $3,422 plus interest through August 15, 2000, with
balance due September 15, 2000. The loan accrues interest at a variable rate
which is determined monthly and is equal to the lender's prime rate (7.75% at
December 31, 1998) plus 5%. The loan is collateralized by a security interest
in certain assets of the Company. $ 64,551 $ 114,583
Unsecured short-term note payable bearing an annual interest rate of 13% with
no stated maturity date. 21,656 12,635
Unsecured short-term note payable in monthly installments of $5,000 bearing
annual interest of 8.25%. The loan is past due. 10,181 23,295
Unsecured, non-interest bearing notes, issued to members of management for cash
received, with no stated maturity date. 104,084 -
----------- -----------
200,472 150,513
Less current maturities: 169,223 77,597
----------- -----------
$ 31,249 $ 72,916
=========== ===========
Future maturities of long-term debt at December 31, 1998 are as follows:
1999 $ 169,223
2000 31,249
--------------
$ 200,472
==============
F-30
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 5 - INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses during December 31, 1997 and 1998.
The following table sets forth the primary components of deferred tax assets
at December 31,:
1998 1997
------------- -------------
Net operating loss carryforwards $ 66,100 $ 11,600
Other (4,100) 2,700
-------------- -------------
Gross deferred tax assets 62,000 14,300
Valuation allowance 62,000 14,300
------------- -------------
$ - $ -
============= =============
The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance
is required. During fiscal 1998, the valuation allowance increased $47,700.
At December 31, 1998, the Company had approximately $340,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income; such carryforwards will expire from 2010 to 2018.
Additionally, the Company has approximately $170,000 of state net operating
loss carryforwards for tax reporting purposes which will expire from 2007 to
2008.
NOTE 6 - COMMITMENTS
The Company leases its manufacturing and administrative facility under an
operating lease agreement. Rental expense was $350,400 and $346,875 for the
years ended December 31, 1998 and 1997, respectively. The Company is
committed to paying $72,000 under a non-cancelable lease agreement expiring
in 1999.
F-31
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 7 - RELATED PARTY TRANSACTIONS
Accounts receivable represent borrowings by an officer/stockholder of the
Company. These borrowings bear no interest and have no stated maturity or
payment schedule. Reductions on the receivable occurred periodically
throughout the year through direct payments to the Company and the offset of
business-related expenses incurred on the Company's behalf and borne by the
officer/stockholder. The balance outstanding on the receivable was $4,400 and
$98,294 at December 31, 1998 and 1997, respectively. Subsequent to year end,
as a provision of the sale agreement referred to in Note 10, the outstanding
balance on this accounts receivable was forgiven.
During 1997 and part of 1998, the Company leased its facility through an
agreement with the owners. Total rent paid to the owners for 1998 and 1997
was $336,000 and $346,875, respectively. The owners sold the facility during
1998.
The Company had cash advances receivable from an officer/stockholder at
December 31, 1997, in the amount of $34,480. There was no balance outstanding
at December 31, 1998.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) savings plan for eligible employees. The
Company currently matches 25% of the participants' 401(k) contributions up to
3% of employee compensation. The Company may also elect to make additional,
discretionary matching contributions to the plan. Employees vest in the
Company's matching contributions over a six year period. Matching
contributions for the years ended December 31, 1998 and 1997, were $8,268 and
$6,118, respectively.
NOTE 9 - CONCENTRATIONS
The Company provides credit, in the normal course of business, to a large
number of distributors and wholesalers, concentrated in the medical supply
industry. Accounts receivable are due from customers located throughout the
United States and various foreign countries. The Company performs periodic
credit evaluations of its customers' financial condition and generally
requires no collateral.
The Company had 2 suppliers that accounted for 54% and 47%, respectively, of
purchases during December 31, 1998 and 1997. Although management believes
that other suppliers could provide functionally similar products, it believes
a change in suppliers could adversely affect operating results by causing a
delay in manufacturing resulting in possible loss of sales.
F-32
Olsen Electrosurgical, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1998 and 1997
NOTE 10 - SUBSEQUENT EVENTS
On June 8, 1999, Sparta Surgical Corporation ("Sparta") purchased 100% of the
outstanding common stock of the company for 400,000 shares of Sparta common
stock.
F-33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Incorporated by reference to the Registrant's Registration Statement on
Form SB-2, file number 33-71888 (April 7, 1994).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
SEC Registration Fees............................................ $ 1,466
Blue Sky Filing Fees............................................. $ 5,000
Blue Sky Legal Fees.............................................. $ 10,000
Printing Expenses................................................ $ 5,000
Legal Fees and Expenses.......................................... $ 50,000
Accounting Fees.................................................. $ 10,000
Transfer Agent Fees.............................................. $ 1,000
Miscellaneous Expenses........................................... $ 17,543
--------
Total....................................................... $100,000
========
(1) All expenses, except the SEC registration fee are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant sold the following securities
which were not registered under the Securities Act, as amended.
(i) In March 1997 the Registrant issued 10,417 shares of Arbora, N.V.,
for $.50 per share.
(ii) In August 1998 the Registrant issued 1,001,733 shares to J&C
Resources for the conversion of a $751,300 loan advanced to the Registrant. In
February 1999, the CCJ Trust, affiliated with J&C, converted a $159,750 loan
advanced to the Registrant for 39,938 shares of Series AA preferred stock.
(iii) Between March 1999 and January2000, the Registrant borrowed the
following amounts from the persons indicated, issuing promissory notes to such
persons:
II-1
Name Amount Borrowed
---- ---------------
Sheldon S. Kabaker, Trustee $475,000
J. Victor Samuels $100,000
Arne Jensen $ 75,000
Pepper Frazier $ 25,000
Spags Investment Group, N.V. $835,000
(iv) In March 1999 the Registrant issued options to purchase up to
421,000 shares at $.95 per share and 100,000 shares at $1.70 per share to IGC of
New York Corporation.
(v) Between March 1999 and March 2000 the Registrant sold the
following shares at approximately $1.10 per share to the following individuals:
Name Number of Shares
---- ----------------
John Weller 200,000
Flyn, von Schubert and Associates, s.a. 250,000
J. Victor Samuels 25,000
Andreas T. Glapiak 50,000
Arne Jensen 100,000
Elizabeth Frazier 25,000
Bruce Havenberg 60,000
Kenneth Robbins 10,000
Frank Colaccino 50,000
William Gilmore 37,000
Stephen Axelrod 30,000
Spags Investment Group, N.V. 300,000
II-2
(vi) In September and November 1999, the Registrant issued 950,000
shares to its Chief Executive Officer, Thomas F. Reiner, in exchange for loan
guarantees and providing the Registrant with a $750,000 unsecured line of
credit.
(vii) In June 1999, the Registrant issued to Maria Mursell and Eugene
W. Olsen, the principals of Olsen Electrosurgical, Inc., 400,000 shares valued
at $2.00 per share in connection with the Registrant's acquisition of Olsen.
(viii) In July and November 1999, the Registrant issued 98,000 shares
to Royce Walker & Co., for consulting services valued at $ 1.69 per share.
(ix) In July and November 1999, the Registrant issued 932,000 shares
to Coridal, N.V, for consulting services, valued at $ 1.69 per share.
(x) In October 1999 the Registrant issued 200,000 shares to Sheldon
Kabaker as consideration for loans advanced by Mr. Kabaker to the Registrant
aggregating $475,000.
(xi) In December 1999 the Registrant issued 15,000 shares to Howard
Bronson for consulting services.
(xii) In February 2000 the Registrant issued 835,000 shares to Spags
Investment Group, N.V. at $1.00 per share in exchange for the conversion of an
$835,000 loan advanced to the Registrant.
With respect to the above securities issuances, the Registrant relied on
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act")
and Rule 506 promulgated thereunder. No advertising or general solicitation was
employed in offering the securities. The securities were offered to a limited
number of persons all of whom were business associates of the Registrant or its
executive officers and directors, and the transfer accredited investors as that
term is defined in Rule 501 of Regulation D under the Securities Act and were
capable of analyzing the merits and risks of their investment and who
acknowledged in writing that they were acquiring the securities for investment
and not with a view toward distribution or resale and understood the speculative
nature of their investment.
EXHIBIT INDEX
Exhibit No. Title
- ----------- -----
5.01 Opinion of Gary A. Agron regarding legality
10.01 Stock Escrow Agreement (Reiner)
10.02 Stock Escrow Agreement (Reiner)
10.03 Stock Escrow Agreement (Coridal)
10.04 Promissory Note (Spags Investment Group, N.V.)
10.05 Agreement with Coridal
10.06 Consulting Agreement with IGC of New York Corporation
10.07 Registration Rights Agreement
10.08 Certificate of Designations-Series AA Preferred Stock
10.09 Agreement with Royce Walker & Co.
10.10 Employment Agreement with Mr. Reiner
23.01 Consent of Gary A. Agron (see 5.01, above)
23.02 Consent of Grant Thornton LLP
27.01 Financial Data Statement
II-3
ITEM 28 UNDERTAKINGS
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registration of expenses incurred or paid by a director, officer
or controlling person to the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and Exchange
Commission such supplementary and periodic information, documents and reports as
may be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in that section.
(c) That any post-effective amendment filed will comply with the
applicable forms, rules and regulations of the Commission in effect at the time
such post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(1) To include any prospectus required by section 10(a)(3) of
the Securities Act;
(2) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof), which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(3) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(e) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(f) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the Offering.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Concord, California, on April 7, 2000.
SPARTA SURGICAL CORPORATION
By: /s/ Thomas F. Reiner
--------------------------------------
Thomas F. Reiner, President
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons on the
dates indicated.
Signature Title Date
/s/ Thomas F. Reiner Chairman of the Board of Directors, April 10, 2000
- ------------------------ Chief Executive Officer, and
Thomas F. Reiner President
/s/ John F. O'Hanlon Chief Financial Officer April 10, 2000
- ------------------------ (Principal Accounting Officer)
John F. O'Hanlon
/s/ Joseph Barbrie Vice President of Sales April 10, 2000
- ------------------------
Joseph Barbrie
/s/ Michael Y. Granger Director April 10, 2000
- ------------------------
Michael Y. Granger
Director
- ------------------------
Allan J. Korn
/s/ Joel Flig Director April 10, 2000
- ------------------------
Joel Flig
EXHIBIT INDEX
Exhibit No. Title
- ----------- -----
5.01 Opinion of Gary A. Agron regarding legality
10.01 Stock Escrow Agreement (Reiner)
10.02 Stock Escrow Agreement (Reiner)
10.03 Stock Escrow Agreement (Coridal)
10.04 Promissory Note Spags Investment Group, N.V.
10.05 Agreement with Coridal
10.06 Consulting Agreement with IGC of New York corporation
10.07 Registration Rights Agreement
10.08 Certificate of Designations-Series AA Preferred Stock
10.09 Agreement with Royce Walker & Co.
10.10 Employment Agreement with Mr. Reiner
23.01 Consent of Gary A. Agron (see 5.01, above)
23.02 Consent of Grant Thornton LLP
27.01 Financial Data Statement