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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB  (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from. . . . . .to. . . . . .
 Commission file number 0-20532 DEXTERITY SURGICAL, INC. (Exact name of small business issuer in its charter)
 Delaware(State or other jurisdiction of
incorporation or organization)
    
    74-2559866(I.R.S. Employer
Identification No.)5444 Westheimer Road, Suite 1970
Houston, Texas
(Address of principal executive offices)
    
    77056
(Zip Code)
 Issuers telephone number, including area code: (713) 622-0516    Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant toSection 12(g)of the Act: Common Stock, $.001 par value
(Title of class) Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or15(d)of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. YesþNoo. Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of thisForm 10-KSBor any amendment to
thisForm 10-KSB o Issuers revenues for fiscal year ended December 31, 2003: $1,785,000. At March 12, 2004 (based upon the last reported sales price of $.045 per
share), the aggregate market value of the Common Stock, $.001 par value, of the
issuer held by non-affiliates was approximately $409,785. At March 12, 2004, there were outstanding 12,121,492 shares of Common
Stock, $.001 par value, of the issuer.




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TABLE OF CONTENTS  PART IITEM 1. DESCRIPTION OF BUSINESSITEM 2. DESCRIPTION OF PROPERTYITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 7. FINANCIAL STATEMENTSITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 8A. CONTROLS AND PROCEDURESPART IIIITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACTITEM 10. EXECUTIVE COMPENSATIONITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 13. EXHIBITS AND REPORTS ON FORM 8-KExhibit IndexITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESOffice Lease AgreementFirst Amendment to Distribution AgreementCode of Ethics for Senior Financial OfficersConsent of Akin, Doherty, Klein & FeugeCertification by the Chief Executive OfficerCertification by the Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer    Table of Contents  
 PART I 
 ITEM 1. DESCRIPTION OF BUSINESS Certain statements contained in thisForm 10-KSB, including but not
limited to statements made in this Item 1, Description of Business, and those
made in Item 6, Managements Discussion and Analysis or Plan of Operation,
are forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Specifically, all
statements other than statements of historical fact included in this Item 1
regarding Dexterity Surgical, Inc. and its affiliates (collectively, the
Company) financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Companys
management, as well as assumptions made by and information currently available
to the Companys management. When used in this report, the words anticipate,
believe, estimate, expect and intend and words or phrases of similar
import, as they relate to the Company or the Companys management, are intended
to identify forward-looking statements. Such statements reflect the current
view of the Company with respect to future events and are subject to certain
risks, uncertainties and assumptions related to certain factors including,
without limitation, the Companys ability to raise capital, the Companys
dependence on its sole manufacturer and sole distributor, the Companys ability
to distribute safe and effective products on a cost-effective basis, demand for
and acceptance of the Companys products, the level of competition in the
marketplace, the ability of the Companys customers to be reimbursed by
third-party payors, competitive factors, general economic conditions, customer
relations, relationships with vendors, the interest rate environment,
governmental regulation and supervision, technological change, changes in
industry practices, one-time events and other factors described herein, and in
the Companys annual, quarterly and other reports filed with the SEC
(collectively, cautionary statements). Although the Company believes that
its expectations are reasonable, it can give no assurance that such
expectations will prove to be correct. Based upon changing conditions, should
any one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements. The
Company does not intend to update these forward-looking statements. In this Annual Report onForm 10-KSB, the Company, we, our, or us
refers to Dexterity Surgical, Inc. Current Financial Condition On July 17, 2003, Medical Creative Technologies, Inc. and Robert D. Rambo
filed a lawsuit in the United States District Court for the Eastern District of
Pennsylvania against the Company alleging breach of contract with regard to
several of the Companys operative agreements. The plaintiffs are seeking
approximately $267,562 cash and return of all rights to the Dexterity® Pneumo
Sleeve® and the Dexterity® Protractor®. The Company believes this lawsuit is
without merit and intends to vigorously defend its position. On June 3, 2003, the Company announced that Davol, Inc. and the Company
had broken off negotiations related to the previously announced sale of
substantially all assets of the Company relating to the Dexterity Protractor
line in consideration for cash of $7 million. On September 11, 2002, the Company had entered into an agreement with
United States Surgical Corporation (U.S. Surgical), a division of Tyco
Healthcare Group LP, to ultimately settle all claims and counterclaims between
the two parties. The pertinent terms of the settlement agreement were as
follows:  
    
    The Company represented and warranted it was in the
process of negotiating the sale of the Dexterity Protractor line.
    
    Within seven days of the closing of the sale, but no
later than April 21, 2003, the Company would pay U.S. Surgical
$800,000 in full settlement of the $2,500,000 trade accounts
payable to U.S. 2




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Surgical currently recorded on the Companys books and records.
Cost of litigation settlement of $287,000 was recorded in September
2002. Because the sale of the asset did not take place, U.S. Surgical may
enforce a Stipulated Judgment, filed by the Company and U.S. Surgical on
September 30, 2002, for $2,500,000 in its favor. Virtually all debts and obligations of the Company are in default. The
Company is in violation of certain affirmative financial covenant requirements
associated with its convertible debentures and has not made required monthly
principal and interest payments during 2003 because it lacked the funds to do
so. Also, certain redemption rights of the holder of its convertible
debentures were triggered by the delisting of the Companys common stock from
the NASDAQ SmallCap Market in 2000. Therefore, the Company is in default under
the debentures and the holder has demanded immediate repayment of the entire
amount outstanding, which was $2,632,563 at December 31, 2003. This default,
in turn, invoked the cross-default clause in the Companys line of credit
agreement, under which $914,995 was outstanding at December 31, 2003. Further,
the Company is in default on the $1,000,000 notes due on October 18, 2001 and
does not have the available resources to pay the guaranteed minimum royalty,
with a balance of $8,279,673 at December 31, 2003, due to the former
stockholders of Dexterity Incorporated. The Company does not have sufficient
resources to fund such amounts. The Company has attempted to make arrangements
to restructure its cash obligations, including its debentures, line of credit
and royalty obligations. However, these negotiations have not been successful.
IF A RESTRUCTURING IS NOT SUCCESSFUL, THE COMPANY WOULD LIKELY BE REQUIRED TO
SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS. General We are engaged in the distribution of instruments, equipment and surgical
supplies used in hand-assisted laparoscopic surgery (HALS) through an
exclusive distribution agreement with Weck Closure Systems, LLC (WCS). HALS is a hybrid between open and laparoscopic surgery during which the
surgeon inserts one hand into the abdominal cavity during laparoscopic surgery.
By having his or her hand in the abdomen when performing laparoscopic surgery,
the surgeon has tactile feedback, rapid finger dissection, enhanced retraction
capabilities and simplified homeostasis. The Dexterity Pneumo Sleeve is a device that allows the surgeon to insert
one hand into the abdominal cavity while preserving the presence of air or gas
in the preperitoneal space during laparoscopic surgery. This enabling
technology is expected to greatly increase the number of advanced minimal
access surgeries as well as the number of surgeons who perform these
procedures. In addition to being used with the Dexterity Pneumo Sleeve, the
Dexterity Protractor is used as a stand-alone product for open surgery,
providing atraumatic retraction and wound protection. We acquired Dexterity Incorporated, a Delaware corporation (Dexterity),
in March 1999. Dexterity was located in the Philadelphia, Pennsylvania
metropolitan area and had the exclusive rights of the Dexterity Pneumo Sleeve
and Dexterity Protractor proprietary instruments, equipments and supplies used
in HALS. Effective with such acquisition, we changed our name from LifeQuest
Medical, Inc. to Dexterity Surgical, Inc. We were incorporated on December 23, 1988 as a Delaware corporation and
commenced operations on January 1, 1989. In August 1992, we completed our
initial public offering of common stock, which is currently traded on the OTC
Bulletin Board. Our executive offices are located at 5444 Westheimer Road,
Suite 1970, Houston, Texas 77056, and our telephone number is (713) 622-0516. Recent Developments On July 17, 2003, Medical Creative Technologies, Inc. and Robert D. Rambo
filed a lawsuit in the United States District Court for the Eastern District of
Pennsylvania against the Company alleging breach of contract with regard to
several of the Companys operative agreements. The plaintiffs are seeking
approximately $267,562 cash 3




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and return of all rights to the Dexterity Pneumo Sleeve and the Dexterity
Protractor. The Company believes this lawsuit is without merit and intends to
vigorously defend its position. On June 3, 2003, the Company announced that Davol, Inc. and the Company
had broken off negotiations related to the previously announced sale of
substantially all assets of the Company relating to the Dexterity Protractor
line in consideration for cash of $7 million. On September 11, 2002, the Company had entered into an agreement with U.S.
Surgical, a division of Tyco Healthcare Group LP, to ultimately settle all
claims and counter claims between the two parties. The pertinent terms of the
settlement agreement were as follows:  
    
    The Company represented and warranted it was in the
process of negotiating the sale of the Dexterity Protractor line.
    
    Within seven days of the closing of the sale, but no
later than April 21, 2003, the Company would pay U.S. Surgical
$800,000 in full settlement of the $2,500,000 trade accounts
payable to U.S. Surgical currently recorded on the Companys
books and records. Cost of litigation settlement of $287,000 was
recorded in September 2002. Because the sale of the asset did not take place, U.S. Surgical may
enforce a Stipulated Judgment, filed by the Company and U.S. Surgical on
September 30, 2002, for $2,500,000 in its favor. On September 29, 2000, we signed an exclusive agreement, effective July 1,
2000, under which WCS distributes the Dexterity Pneumo Sleeve and the Dexterity
Protractor in the United States. The agreement also covers international
distribution. Under the terms of the agreement, WCS (a unit of Teleflex
Incorporated) is required to purchase certain minimum quantities. Also, per
the agreement, WCS and the Company combined elements of both sales forces under
the WCS umbrella. The Company and WCS will continue as separate business
entities. In June 2001, the Company and WCS amended the agreement, which
adjusted various aspects of the contract to more accurately reflect current
existing market conditions. Effective July 1, 2001, WCS continued its
exclusive right to distribute the Dexterity Protractor; however, WCS will
distribute the Dexterity Pneumo Sleeve on a nonexclusive basis. Also, certain
guaranteed minimum purchase requirements by WCS, which originally were
scheduled to expire December 31, 2001, were extended until December 31, 2003.
The WCS agreement may be renewed for one-year periods upon such terms as the
parties may mutually agree. The exclusive agreement to distribute the Dexterity
Protractor was extended until June 30, 2004 to allow time to negotiate a
renewal. However, WCS did not agree to any guaranteed minimum purchase
requirements during the extension period. Dexterity Acquisition In January 1998, the Company acquired approximately 20% of the common
stock of Dexterity, which was a business development subsidiary of Teleflex,
Inc. In March 1999, the Company acquired the remaining capital stock of
Dexterity by merging Dexterity into the Company (the Dexterity Merger),
pursuant to a Plan of Merger and Acquisition Agreement between the Company and
Dexterity (the Dexterity Agreement). Under the terms of the Dexterity
Agreement, which was approved by the stockholders of the Company on March 18,
1999, the Dexterity stockholders, other than the Company (the Former Dexterity
Stockholders), received an aggregate of:  
    
    $1,500,000 cash;
    
    3,000,000 shares of common stock, $.001 par value (Common Stock), of the Company;
    
    warrants to purchase an aggregate of 1,500,000 shares of
Common Stock at an exercise price per share of $2.00 (the
Warrants);
    
    promissory notes in the aggregate amount of $1,000,000 (the
Notes); and 4




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
    
    a royalty for seven years in an amount equal to 15% of all
sales of Dexterity products (the Royalty) pursuant to a royalty
agreement (the Royalty Agreement) among the Company and the Former
Dexterity Stockholders. The Royalty is subject to minimum annual
payments which aggregate, over the seven years of the Royalty
Agreement, approximately $9,695,095. We determined the fair market value of the above consideration to be
approximately $16,000,000. We launched distribution of Dexteritys primary
products, the Dexterity Pneumo Sleeve and Dexterity Protractor, in March 1998.
Simultaneous with the effectiveness of the Dexterity Merger, we changed our
name from LifeQuest Medical, Inc. to Dexterity Surgical, Inc. Proprietary Products The Companys proprietary products are the Dexterity PneumoSleeve and the
Dexterity Protractor. Medical Creative Technologies, Inc. (MCT) and the
Company each own certain patents covering our proprietary products and share
ownership of other patents covering these products. MCT has granted the
Company an exclusive license to the patents it holds covering the Companys
proprietary products. Industry Background The health care industry continues to undergo change, led primarily by
market forces demanding greater efficiencies and reduced costs. Government
proposed health care mandates in the United States have not occurred, and it is
unclear whether, and to what extent, any future government mandates will affect
the domestic health care market. Industry led changes are expected to continue
irrespective of any governmental efforts toward health care reform. The scope
and timing of any further government sponsored proposals for health care reform
are presently unclear. The primary trend in the industry is toward cost containment. Payors and
managed care organizations have been able to exercise greater influence through
managed treatment and hospitalization patterns, including a shift from
reimbursement on a retrospective basis to prospective limits for patient
treatment. Hospitals have been severely impacted by the resulting cost
restraints and are competing for business and becoming more sophisticated in
management and marketing. The increasing use of managed care, centralized
purchasing decisions, consolidations among hospitals and hospital groups, and
integration of health care providers are continuing to affect purchasing
patterns in the health care system. Purchasing decisions are often shared by a
coalition of surgeons, nursing staff, and hospital administrators, with
purchasing decisions taking into account whether a product reduces the cost of
treatment and/or attracts additional patients to a hospital. All of these
factors, along with competition, have contributed to continuing reductions in
prices for our products and, in the near term, to slower acceptance of more
advanced surgical procedures in which our products are used, given hospital and
surgeon concerns as to the costs of training and reimbursement by payors. In
addition, the primary care physician is expected to exercise significant
influence on referrals of patients for surgical procedures under managed care. We could potentially benefit from this focus on cost containment and on
managed care. Both minimally invasive surgery (MIS) and HALS decrease
operating room time, including anesthesia and patient recovery time, and are
highly cost effective. Doctors, patients, employers and payors all value
decreased patient recovery time. This could lead to potential increases in
volume as minimally invasive procedures are selected over alternative
techniques. However, an undue focus on discrete costs or similar limits which
fail to consider the overall value of these advanced procedures could adversely
impact us. Some hospitals may also lose per night revenues through reduced
postoperative care requirements as to procedures performed by MIS and HALS,
which could influence their analysis of acceptance of newer procedures. We are
adapting to this environment by promoting the cost effectiveness of our
products, by striving to efficiently produce and/or distribute the highest
quality products at the lowest cost, and by assisting hospitals and payors in
achieving meaningful cost reductions for the health care system while retaining
the quality of care permitted by our products. MIS refers to surgical procedures which can be accomplished without a
major incision or other traumatization to the patient, in some cases without
general anesthesia. Endoscopy is one of the most important minimally invasive
surgical techniques. In addition to decreasing patient trauma or frequently
avoiding general anesthesia, endoscopy can substantially reduce or eliminate
postoperative hospitalization, thereby decreasing overall 5




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costs. We believe that the current pressures for medical cost containment
could result in greater utilization of cost-effective, less invasive
procedures. There can be no assurance, however, that greater utilization of
such procedures will result, or, if greater utilization of such procedures does
result, that we will benefit. The availability of innovative medical technologies, patient demand and
the motivation of physicians and payors are among the driving forces behind the
movement toward, and the wide acceptance of, minimally invasive surgical
procedures. We believe that these minimally invasive techniques are desired
because they benefit all significant participants in the healthcare system: the
patient experiences less pain and trauma and enjoys a more rapid recovery;
surgeons and hospitals or other surgical centers that adopt these techniques
enhance their practices and reputations; and the healthcare payor incurs lower
overall costs. We believe that the growing acceptance of minimally invasive
surgical procedures is changing the standards of practice over a wide range of
surgical specialties and that this trend should create significant business
opportunities for manufacturers of minimally invasive surgical products. Distribution We market our proprietary products to hospitals, purchasing groups and
surgeons through WCS as our sole distributor. We distribute MIS products of
other companies through independent contractors. Competition The primary market in which we compete is the HALS instrument market. In
the current healthcare environment, in which cost containment has become a
significant factor in purchasing decisions by hospitals, the HALS instrument
market is extremely competitive. We compete in the HALS market with Applied
Medical, Smith & Nephew and Ethicon Endo-Surgery (Ethicon), a Johnson &
Johnson company. The HALS market also competes with the MIS market. The MIS
market is dominated by two large, well-positioned entities that are intensely
competitive and frequently offer substantial discounts as a competitive tactic.
U.S. Surgical is primarily engaged in developing, manufacturing and marketing
surgical wound management products, and has historically been the firm most
responsible for providing products that have led to the growth of the industry.
U.S. Surgical supplies a broad line of products to the MIS industry, including
products that facilitate access, assessment and treatment. Ethicon has made a
major investment in the MIS field in recent years and is one of the leading
suppliers of hospital products in the world. Furthermore, U.S. Surgical and
Ethicon each utilize purchasing contracts that link discounts on the purchase
of one product to purchases of other products in their broad product lines.
Substantially all of the hospitals in the United States have purchasing
contracts with one or both of these entities. Accordingly, customers may be
dissuaded from purchasing access products from us to the extent it would cause
them to lose discounts on products that they regularly purchase from U.S.
Surgical or Ethicon. We believe that the primary competitive factors affecting our business are
the safety and effectiveness of the products offered, ease of product use,
product reliability, price, physician familiarity with the manufacturer and its
products, distribution channels, third-party reimbursement policies and the
timing of market introduction of our competitors products. All of our competitors and potential competitors have substantially
greater resources, including easier access to capital, research and development
personnel, extensive manufacturing and marketing capabilities, broad and well
established product lines as well as ancillary services, such as training
programs. Some of our competitors have long-term or preferential supply
arrangements with certain hospitals. Such arrangements may prevent us from
obtaining access to such hospitals. In addition, it is possible that other
large healthcare companies may enter the MIS device market in the future.
Competing companies may succeed in developing products that are more
efficacious or less costly than any that may be developed or distributed by us
and such companies also may be more successful than the Company in production
and marketing. Rapid technological development by others may result in our
products becoming obsolete before we recover a significant portion of the
development and commercialization expenses incurred with respect to those
products. The impact of competition will likely have a continuing effect on sales
volumes and on the prices we charge. We face a formidable task in successfully
gaining significant revenues within the MIS market. In order to succeed,
management believes that the Company will need to objectively demonstrate
substantial product benefits, 6




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and its sales effort must be able to present effectively such benefits to
both clinicians and health care administrators as well as third-party payors. There can be no assurance that we will be able to successfully compete in
the MIS market, and failure to do so would have a material adverse effect on
our business, financial condition and results of operations. Dependence on WCS and Apogee Because we have no sales, marketing, distribution or manufacturing
capabilities, we will depend on third parties to successfully perform these
functions on our behalf. We rely completely on WCS for sales, marketing and
distribution of our products. WCS is a subsidiary of our largest shareholder.
WCS currently sells products that are similar to and competitive with our
products and may develop and commercialize, either alone or with others, other
products that are similar to or competitive with the products we sell. Our
agreement with WCS is subject to termination under various circumstances,
including, in many cases, on short notice. If WCS terminated our distribution
agreement, we would have difficulty arranging for another third-party to
distribute our products and our business and financial condition would be
materially impaired. We currently rely upon Apogee Medical, Inc. (Apogee) to manufacture our
products. If this agreement is terminated or is not renewed, we believe other
companies could manufacture our products. However, the transition from Apogee
to another manufacturer could cause delays in shipments of our products and may
reduce our revenues. If we are unable to arrange for third-party manufacturing
of our products, or to do so on commercially reasonable terms, we may not be
able to market our products. Reliance on third-party manufacturers entails
risks to which we would not be subject if we manufactured products ourselves,
including reliance on the third-party for regulatory compliance and quality
assurance, the possibility of breach of the manufacturing agreement by the
third-party because of factors beyond our control and the possibility of
termination or nonrenewal of the agreement by the third-party, based on its own
business priorities, at a time that is costly or inconvenient for us. Dependence on Key Personnel The success of the Company will be largely dependent on the efforts of
Richard A. Woodfield, President and Chief Executive Officer of the Company, and
Randall K. Boatright, Executive Vice President, Chief Financial Officer and
Secretary of the Company. The Company has entered into employment agreements
with each of Mr. Boatright and Mr. Woodfield. The Company does not maintain
key man life insurance on either Mr. Boatright or Mr. Woodfield. The loss of
the services of one or more key employees could have an adverse effect on the
Company. Government Regulation As a developer and distributor of medical devices, the Company is subject
to regulation by, among other governmental entities, the FDA and the
corresponding agencies of states and foreign countries in which the Company
sells its products. These regulations govern the introduction of new medical
devices, the observance of certain standards with respect to the manufacture
and labeling of such devices, the maintenance of certain records and the
reporting of potential product defects and other matters. Failure to comply
with such regulations may have a material adverse effect on the Company. With the enactment in May 1976 of the Medical Device Amendments to the
Federal Food, Drug and Cosmetic Act (the FDC Act), the FDA classified medical
devices in commercial distribution into three classes, Class I, II or III.
This classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of the medical device. Class I devices are those
devices whose safety and effectiveness can reasonably be ensured through
general controls such as adequate labeling, premarket notification and
adherence to Good Manufacturing Practices (GMP) regulations. Some Class I
devices are further exempted from some of the general controls. Class II
devices are those devices whose safety and effectiveness can reasonably be
ensured through the use of special controls such as performance standards,
postmarket surveillance, patient registries and FDA guidelines. Class III
devices are devices which must receive premarket approval by the FDA pursuant
to a 7




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Premarket Approval (PMA) application to ensure their safety and
effectiveness. Generally, Class III devices are limited to life-sustaining,
life-supporting or implantable devices. Most medical instruments introduced to the United States market are
required by the FDA, as a condition of marketing, to secure either clearance of
a premarket notification pursuant to Section 510(k) of the FDC Act (a 510(k)
Notification) or an approved PMA. Obtaining a PMA can take several years.
In contrast, the process of obtaining a 510(k) Notification clearance requires
the submission of substantially less data and generally involves a shorter
review period. In general, clearance of a 510(k) Notification may be obtained if a
manufacturer or distributor of medical devices can establish that a new device
is substantially equivalent to a legally marketed medical device. The 510(k)
Notification and the claim of substantial equivalence may have to be supported
by various types of information indicating that the device is as safe and
effective for its intended use as a legally marketed predicate device. In
addition to requiring clearance for new products, FDA rules typically require a
filing and a waiting period prior to marketing modified versions of existing
products. The Company anticipates that most of the products it develops will
be eligible for the 510(k) Notification procedure. At this time, the FDA
typically responds to a submission of a 510(k) Notification within 180 to 360
days. Market clearance may take three to 12 months or longer. In the event
that the shorter 510(k) Notification procedure is not available, the Company
will be required to file a PMA. Under the Safe Medical Devices Act of 1990 (SMDA), the FDA is directed
to adopt new 510(k) Notification regulations which could potentially make the
approval process for the Companys products more time-consuming, difficult and
expensive. The SMDA includes new provisions relating to postmarket
surveillance requirements for certain types of devices and authorizes the FDA
to adopt new controls to be applied to certain devices such as some currently
being developed by the Company, including the promulgation of a performance
standard, requirements for patient registries, distributor and purchaser
reporting and imposition of guidelines. The process of obtaining necessary government approvals can be
time-consuming and expensive. There can be no assurance that the necessary
approvals will be obtained by the Company or, if they are obtained, that they
will be obtained on a timely basis. Furthermore, the Company or the FDA may
suspend clinical trials at any time upon a determination that the subjects or
patients are being exposed to an unacceptable health risk. The FDA may also
require postapproval testing and surveillance programs to monitor the effects
of the Companys products and the products it distributes as a condition of
approval. Approvals that have been or may be granted are subject to continual
review and surveillance programs required by regulatory agencies, and later
discovery of previously unknown problems may result in product labeling
restrictions or withdrawal of products from marketing. Manufacturers of medical devices marketed in the United States are
required to adhere to applicable regulations setting forth detailed GMP
requirements, which include testing, control and documentation requirements.
Manufacturers also must comply with Medical Device Reporting (MDR)
requirements which require that a firm report to the FDA certain adverse events
associated with the Companys devices. The Company is subject to routine
inspection by the FDA and certain state agencies for compliance with GMP
requirements, MDR requirements and other applicable regulations. The FDA is
using its statutory authority more vigorously during inspections of companies
and in other enforcement matters. The FDA has promulgated new GMP regulations
and MDR regulations, both of which will likely increase the cost of compliance
with GMP requirements. The Company also is subject to numerous federal, state
and local laws relating to matters such as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Companys business, financial condition or results of operations.
Although the Company believes that it is in compliance with all applicable
regulations of the FDA and the various states in which it operates, current
regulations depend heavily on administrative interpretation and there can be no
assurance that the Company will not incur significant costs to comply with laws
and regulations in the future or that laws and regulations will not have a
material adverse effect upon the Companys business, financial condition or
results of operations. In addition, the potential effects on the Company of
heightened enforcement of federal and state regulations cannot be predicted. 8




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All of the products manufactured by or on behalf of the Company have
received all regulatory approvals as required, and the Company believes, to its
best knowledge, that all of the products it distributes but does not
manufacture have received all regulatory approvals as required. The Company
currently has one 510(k) application for approval pending before the FDA for
the improved Dexterity Protractor. In addition to the statutes and regulations enforced by the FDA, the
Company is also subject to regulation under the Occupational Safety and Health
Act, the Environmental Protection Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act and other present and potential future
federal, state and local statutes, regulations and ordinances, including those
promulgated by the Environmental Protection Act and the Department of Labor.
Regulations regarding the manufacture and sale of the Companys products are
subject to change. The Company cannot predict what impact, if any, such
changes might have on its business. Third-Party Reimbursement The health care industry continues to undergo change, led primarily by
market forces which are demanding greater efficiencies and reduced costs.
Government proposed health care mandates in the United States generally have
not occurred, and it is unclear whether, and to what extent, any government
mandate will affect the domestic health care market. Industry led changes are
expected to continue irrespective of any governmental efforts toward health
care reform. The scope and timing of any further government sponsored
proposals for health care reform are presently unclear. The primary trend in the industry is toward consolidation and cost
containment. Third-party payors, principally federal Medicare, state Medicaid
and private health insurance plans, have been able to exercise greater
influence through managed treatment and hospitalization patterns, including a
shift from reimbursement on a cost basis to per capita limits for patient
treatment. Hospitals have been severely impacted by the resulting cost
restraints. The increasing use of managed care, centralized purchasing
decisions through group purchasing organizations, consolidations among
hospitals and hospital groups, and integration of health care providers are
continuing to affect purchasing patterns in the health care system. Purchasing
decisions are often shared by a coalition of surgeons, nursing staff, and
hospital administrators, with purchasing decisions taking into account whether
a product reduces the cost of treatment and/or attracts additional patients to
a hospital. Managed care providers are attempting to control the cost of
health care by authorizing fewer elective surgical procedures. All of these
factors have contributed to reduction in the volume growth of hospital
purchasing and, in the near term, slower acceptance of more advanced surgical
procedures in which our products are used, given hospital and surgeon concerns
as to the costs of training and reimbursement by payors. There can be no
assurance that the Company will not continue to be adversely affected by these
matters. There can be no assurance as to the impact of cost containment on the
Companys future operations. The Companys products are purchased by hospitals, physicians, and other
health care providers, which bill various third-party payors, such as
government health programs, private health insurance plans, managed care
organizations and other similar programs, for the health care goods and
services provided to their patients. Third-party payors may deny reimbursement
if they determine that a product was not used in accordance with established
payor protocol regarding cost-effective treatment methods or was used for an
unapproved treatment. Increasingly, third-party payors are also contesting the
prices charged for medical products and services and, in some instances, have
put pressure on medical device suppliers to lower their prices. There is no
assurance that reimbursement for the Companys products will be available or,
if available, that payors reimbursement levels will not adversely affect the
Companys ability to sell its products on a profitable basis. Failure by
hospitals and other users of the Companys products to obtain reimbursement
from third-party payors, and changes in third-party payors policies towards
reimbursement for procedures using the Companys products, could have a
material adverse effect on the Companys financial position, results of
operations and cash flows. Product Liability and Insurance The sale of HALS products by the Company entails the risk of product
liability claims, involving both potential financial exposure and associated
adverse publicity. The Companys current product liability insurance coverage
limits are $1,000,000 per occurrence and $2,000,000 in the aggregate, and there
can be no assurance that such coverage limits are adequate to protect the
Company from any liabilities it might incur in connection with the 9




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development, manufacture and sale of its current and potential products.
In addition, the insurance is expensive and may not be available in the future
on acceptable terms, or at all. In addition, if such insurance is available,
there can be no assurance that the limits of coverage of such policies will be
adequate. A successful product liability claim in excess of the Companys
insurance coverage could have a material adverse effect on the Companys
business, financial condition or results of operations. The Companys products are purchased by hospitals, physicians, and other
health care providers, which in turn bill various third-party payors, such as
government health programs, private health insurance plans, managed care
organizations and other similar programs, for the health care goods and
services provided to their patients. Third-party payors may deny reimbursement
if they determine that a product was not used in accordance with established
payor protocol regarding cost-effective treatment methods or was used for an
unapproved treatment. Increasingly, third-party payors are also contesting the
prices charged for medical products and services and, in some instances, have
put pressure on medical device suppliers to lower their prices. There is no
assurance that reimbursement for procedures performed by healthcare providers
utilizing the Companys products will be available or, if available, that the
third-party payors reimbursement levels will not adversely affect the
Companys ability to sell its products on a profitable basis. Failure by
hospitals and other users of the Companys products to obtain reimbursement
from third-party payors, and changes in third-party payors policies towards
reimbursement for procedures utilizing the Companys products, could have a
material adverse effect on the Companys financial position, results of
operations and cash flows. Additional Business Risks History of Losses; Profitability Uncertain.The Company has experienced
operating losses since its inception on January 1, 1989. At December 31, 2003,
the Company had an accumulated deficit of approximately $50.5 million,
including losses applicable to common stockholders of $2.9 million in 2003 and
$3.4 million in 2002. Prior to 1996, the Company was a development stage
company focused primarily on obtaining FDA approval of two medical devices.
However, the Company determined not to initiate any further work on obtaining
FDA approval of the devices and sold its rights to such devices for a cash
payment and a royalty on all future sales of such devices in 1998. The Company
generated revenues of approximately $1.8 million during the year ended December
31, 2003. There can be no assurance that the Company will not continue to incur
losses, that the Company will be able to raise cash as necessary to fund
operations or that the Company will ever achieve profitability. Future Additional Capital Requirements.Virtually all debts and
obligations of the Company are in default. The Company is in violation of
certain affirmative financial covenant requirements associated with its
convertible debentures and has not made required monthly principal and interest
payments during 2003 because it lacked the funds to do so. Also, certain
redemption rights of the holder of its convertible debentures were triggered by
the delisting of the Companys common stock from the NASDAQ SmallCap Market in
2000. Therefore, the Company is in default under the debentures and the holder
has demanded immediate repayment of the entire amount outstanding, which was
$2,632,563 at December 31, 2003. This default, in turn, invoked the
cross-default clause in the Companys line of credit agreement, under which
$914,995 was outstanding at December 31, 2003. Further, the Company is in
default on the $1,000,000 notes due on October 18, 2001 and does not have the
available resources to pay the guaranteed minimum royalty, with a balance of
$8,279,673 at December 31, 2003, due to the former stockholders of Dexterity
Incorporated. The Company does not have sufficient resources to fund such
amounts. The Company has attempted to make arrangements to restructure its
cash obligations, including its debentures, line of credit and royalty
obligations. However, these negotiations have not been successful. IF A
RESTRUCTURING IS NOT SUCCESSFUL, THE COMPANY WOULD LIKELY BE REQUIRED TO SEEK
PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS. Because we have no sales, marketing, distribution or manufacturing
capabilities, we will depend on third parties to successfully perform these
functions on our behalf.We have no sales, marketing, distribution or
manufacturing capabilities. We rely completely on WCS Closure Systems for our
sales, marketing and distribution of our products. WCS is a subsidiary of our
largest shareholder. WCS currently sells products that are similar to and
competitive with our products and may develop and commercialize, either alone
or with others, other products that are similar to or competitive with the
products we sell. Our agreement with WCS is subject to termination under
various circumstances, including, in many cases, on short notice. If WCS
terminated our distribution agreement, we 10




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would have difficulty arranging for another third-party to distribute our
products and our business and financial condition would be materially impaired. We currently rely upon Apogee to manufacture our products. If this
agreement is terminated or is not renewed, we believe other companies could
manufacture our products. However, the transition from Apogee to another
manufacturer could cause delays in shipments of our products and may reduce our
revenues. If we are unable to arrange for third-party manufacturing of our
products, or to do so on commercially reasonable terms, we may not be able to
market our products. Reliance on third-party manufacturers entails risks to
which we would not be subject if we manufactured products ourselves, including
reliance on the third-party for regulatory compliance and quality assurance,
the possibility of breach of the manufacturing agreement by the third-party
because of factors beyond our control and the possibility of termination or
nonrenewal of the agreement by the third-party, based on its own business
priorities, at a time that is costly or inconvenient for us. Private Placements.Pursuant to a private placement which occurred in
July and August 2000, the Company issued to TFX Equities, Inc., a business
development subsidiary of Teleflex, Inc., and Cuda Products Company, whose
chief executive officer is a director of the Company, an aggregate of 400
shares of Series C cumulative convertible preferred stock, $.001 par value
(Series C Preferred Stock), for aggregate proceeds of $400,000. The Company
used such proceeds for working capital. The annual dividends on the Series C
Preferred Stock are cumulative at a rate of $80 per share. Quarterly dividends
are in arrears in the aggregate amount of $64,000. The Series C Preferred
Stock is currently convertible into shares of common stock at a conversion
price of $1.00 per share, for an aggregate of 400,000 shares of common stock.
The conversion price for the Series C Preferred Stock is subject to downward
adjustment in the event the Company sells shares of common stock, or securities
convertible into shares of common stock, at a per share price less than $1.00.
The holders of Series C Preferred Stock are entitled to one vote per share on
all matters submitted to a vote of the stockholders of the Company. The
affirmative vote of 66 2/3% of the Series C Preferred Stock is required in
order to amend the Companys Certificate of Incorporation or Bylaws to
materially affect the rights of the holders of Series C Preferred Stock,
including authorizing and creating a class of stock having rights prior to or
senior to the Series C Preferred Stock. Since two or more quarterly dividends
payable on the Series C Preferred Stock are in arrears, the holders of the
Series C Preferred Stock, by a majority vote, are entitled to designate two
additional directors to serve on the Companys Board of Directors. Pursuant to a private placement which occurred in November 1998, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively Renaissance) and one individual, who is an officer and director
of the Company, an aggregate of 1,025 shares of Series B cumulative convertible
preferred stock, $.001 par value (Series B Preferred Stock), for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital.
The annual dividends on the Series B Preferred Stock are cumulative at a rate
of $80 per share. Quarterly dividends are in arrears in the aggregate amount
of $164,000. The Series B Preferred Stock is currently convertible into shares
of common stock at a conversion price of $1.54 per share, for an aggregate of
665,584 shares of common stock. The conversion price for the Series B
Preferred Stock is subject to downward adjustment in the event the Company
sells shares of common stock, or securities convertible into shares of common
stock, at a per share price less than $1.54. Certain holders of the Series B
Preferred Stock contend that the issuance of shares by the Company in
settlement of the Andrieni lawsuit in 2001 requires a downward adjustment to
the conversion price of the Series B Preferred Stock. The Company disputes the
claim of such holders of Series B Preferred Stock and believes the conversion
price should remain at $1.54. However, there can be no assurance that such
holders of Series B Preferred Stock will not prevail in their claim for a
downward adjustment to the conversion price, in which case the Company would be
required to issue a greater number of shares of common stock upon conversion of
the Series B Preferred Stock than would be issuable at a $1.54 conversion
price. Any issuance of common stock upon the conversion of preferred stock
will substantially dilute the voting rights and other interests of stockholders
of the Company. The holders of Series B Preferred Stock are entitled to one
vote per share on all matters submitted to a vote of the stockholders of the
Company. The affirmative vote of 66 2/3% of the Series B Preferred Stock is
required in order to amend the Companys Certificate of Incorporation or Bylaws
to materially affect the rights of the holders of Series B Preferred Stock,
including authorizing and creating a class of stock having rights prior to or
senior to the Series B Preferred Stock. Since two or more quarterly dividends
payable on the Series B Preferred Stock are in arrears, the holders of Series B
Preferred Stock, by a majority vote, are entitled to designate two additional
directors to serve on the Companys Board of Directors. 11




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In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director
of the Company, an aggregate of 1,170 shares of Series A cumulative convertible
preferred stock, $.001 par value (Series A Preferred Stock), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
During March 2000, 150 shares of Series A Preferred Stock were converted to
93,750 shares of common stock. Annual dividends on the Series A Preferred
Stock are cumulative at a rate of $80 per share. Quarterly dividends are in
arrears in the amount of $163,200. The Series A Preferred Stock is currently
convertible into shares of common stock at a conversion price of $1.54 per
share, for an aggregate of 662,338 shares of common stock. The conversion
price for the Series A Preferred Stock is subject to downward adjustment in the
event the Company sells shares of common stock, or securities convertible into
shares of common stock, at a per share price less than $1.54. Certain holders
of the Series A Preferred Stock contend that the issuance of shares by the
Company in settlement of the Andrieni lawsuit in 2001 requires a downward
adjustment to the conversion price of the Series A Preferred Stock. The
Company disputes the claim of such holders of Series A Preferred Stock and
believes the conversion price should remain at $1.54. However, there can be no
assurance that such holders of Series A Preferred Stock will not prevail in
their claim for a downward adjustment to the conversion price, in which case
the Company would be required to issue a greater number of shares of common
stock upon conversion of the Series A Preferred Stock than would be issuable at
a $1.54 conversion price. Any issuance of common stock upon the conversion of
preferred stock will substantially dilute the voting rights and other interests
of stockholders of the Company. The holders of Series A Preferred Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company. The affirmative vote of 66 2/3% of the Series A
Preferred Stock is required in order to amend the Companys Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of
Series A Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series A Preferred Stock. Since two or
more quarterly dividends payable on the Series A Preferred Stock are in
arrears, the holders of Series A Preferred Stock, by a majority vote, are
entitled to designate two additional directors to serve on the Companys Board
of Directors. In December 1997, the Company sold 250,000 shares of common stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% convertible debentures (the Debentures) with
Renaissance. The Debentures are secured by substantially all of the assets of
the Company. In March 2000, the Debentures were modified to provide that the
interest payable between February 1, 2000 through January 31, 2001 shall be
paid in shares of common stock, valued at $1.00 per share. Upon modification,
270,000 shares of common stock valued at $270,000 were issued in advance of
interest due through January 31, 2001. The Debentures currently require the
Company to comply with the following financial covenants: (i) a Debt-to-Net
Worth Ratio of no greater than .99:1; (ii) an Interest Coverage Ratio of at
least .60:1; (iii) a Debt Coverage Ratio of at least .10:1; and (iv) a Current
Ratio of at least .68:1. The Company is currently not in compliance with these
covenants and is not current on its interest and principal repayment
obligations under the Debentures and, therefore, is in default under the
Debentures. The delisting of the Companys common stock in October 2000 also
created an event of default. Under these events of default, the holders have
demanded the immediate repayment of the entire amount outstanding. Accordingly,
the entire balance due of $2,632,563 has been classified as a current liability
as of December 31, 2003. The Company currently does not have, nor does it
believe it could obtain, sufficient resources to fund such amount. The holders of the Debentures have the option to convert, at any time, all
or a portion of the Debentures into shares of common stock at an initial price
of $1.00 per share of common stock. The conversion price is subject to
downward revision if the Company sells shares of its common stock, or
securities convertible into common stock, at a price less than $1.00 per share
of common stock, subject to certain allowed exceptions, during the term of the
Debentures. The Debentures are currently convertible for an aggregate of
2,632,563 shares of common stock; however, since the conversion price is
subject to downward adjustment and there is no minimum conversion price, the
maximum number of shares of common stock which may be issued pursuant to the
Debentures is undeterminable. The holders of the Debentures claim that the
conversion price of the Debentures requires a downward adjustment to $.02 as a
result of the shares of common stock issued by the Company in settlement of the
Andrieni lawsuit in 2001. The Company disputes the claim of the Debenture
holders and believes the conversion price should remain at $1.00. However,
there can be no assurance that the Debenture holders will not prevail in their
claim for a downward adjustment to the conversion price, in which case the
Company would be required, upon conversion of the Debentures, to issue
approximately 50 times the number of shares that would be issuable at a $1.00
conversion price. Any issuance of shares of common stock upon the conversion
of the preferred stock or the Debentures will substantially dilute the voting
rights and other interests of stockholders of the Company. As the 12




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number of shares of common stock issuable upon the conversion of preferred
stock and the Debentures is indeterminate, the Company is unable to predict to
what extent the Companys stockholders rights will be diluted. Such
uncertainty creates downward pressure on the public market price of the
Companys common stock. In the event such holders convert their Debentures or
shares of preferred stock, as applicable, and sell a large number of shares of
common stock into the public market over a short time, the market price for the
common stock could decline. The provisions of the Debentures provide that the
holders of the Debentures have an option to redeem the Debentures, in an amount
equal to an 18% annual yield on the principal balance, upon the occurrence of
certain events, including the delisting of common stock from the NASDAQ
SmallCap Market and certain change of control provisions, as defined in the
Debentures, as they relate to the Company. As the common stock was delisted
from the NASDAQ SmallCap Market on October 24, 2000, the holder has demanded
immediate repayment of the entire amount. The Company may redeem the
Debentures at its option, subject to certain share price and market activity
levels being obtained. The Companys right of redemption is subject to the
holders prior right of conversion of the Debenture. Potential Adverse Effects of Conversion of Debentures and Preferred Stock
and Exercise of Warrants.The Company cannot predict what effect, if any, (i)
the conversion of the Debentures or preferred stock or exercise of warrants
into Common Stock or (ii) the payment of interest and the Royalty in shares of
Common Stock and/or the sale of such Common Stock into the public market will
have on the market price of the Companys Common Stock. Offers or sales of
significant quantities of the Companys Common Stock, or the perception that
such sales may occur or have occurred, could adversely affect the market price.
The conversion features of the Debentures and preferred stock operates such
that the holders thereof receive more shares of the Common Stock upon
conversion if the conversion price is adjusted downward as described above.
The holders of the Debentures claim that the conversion price of the Debentures
requires a downward adjustment to $.02 as a result of the shares of Common
Stock issued by the Company in settlement of the Andrieni lawsuit. The Company
disputes the claim of the Debenture holders and believes the conversion price
should remain at $1.00. However, there can be no assurance that the Debenture
holders will not prevail in their claim for a downward adjustment to the
conversion price, in which case the Company would be required, upon conversion
of the Debentures, to issue approximately 50 times the number of shares that
would be issuable at a $1.00 conversion price. Any issuance of shares of
Common Stock upon the conversion of the Preferred Stock or the Debentures will
substantially dilute the voting rights and other interests of stockholders of
the Company. As the number of shares of Common Stock issuable upon the
conversion of the Preferred Stock and the Debentures is indeterminate, the
Company is unable to predict to what extent the Companys stockholders rights
will be diluted. Such uncertainty creates downward pressure on the public
market price of the Companys Common Stock. In the event such holders convert
their Debentures or shares of preferred stock, as applicable, and sell a large
number of shares of Common Stock into the public market over a short time, the
market price for the Common Stock could decline. Effects of Delisting from NASDAQ SmallCap Market; Lack of Liquidity of Low
Priced Stocks.On October 24, 2000, the Companys Common Stock was delisted
from the NASDAQ SmallCap Market. Trading in the Common Stock is now conducted
in the National Association of Securities Dealers Electronic Bulletin Board.
Consequently, the liquidity of the Companys Common Stock has been impaired,
not only in the number of shares which could be bought and sold, but also
through delays in the timing of the transactions, reduction in security
analysts and the news medias coverage of the Company and lower prices for the
Companys securities. In addition, trading in the Common Stock is also subject to the
requirements of certain rules promulgated under the Exchange Act, which require
additional disclosures by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any non-NASDAQ equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors (which are generally institutions). For these types
of transactions, the broker-dealer must make a special suitability
determination for the purchase and have received the purchasers written
consent to the transaction prior to the sale. The additional burdens imposed
upon broker-dealers by such requirements may discourage broker-dealers from
effecting transactions in the Common Stock which could severely limit the
market liquidity of Common Stock and the ability of stockholders to sell their
shares of Common Stock in the secondary market. 13




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Stock Price Volatility. The stock market in general, and stocks of
medical device companies and stocks traded on the Bulletin Board in
particular, have from time to time experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These broad market fluctuations have in the past and may continue
in the future to adversely affect the market price of the Companys Common
Stock. In addition, the market price of the Common Stock has been and is
likely to continue to be highly volatile. Factors such as fluctuations in the
Companys operating results, announcements of technological innovations or new
products by the Company or its competitors, the FDA and international
regulatory actions, actions with respect to reimbursement matters, developments
with respect to patents of proprietary rights, public concern as to the safety
of products developed or marketed by the Company or others, changes in health
care policy in the United States and internationally, changes in stock market
analyst recommendations regarding the Company, or the medical device industry
generally or general market conditions may have a significant effect on the
market price of the Companys Common Stock. Shares Eligible for Future Sale or Issuance.Sales of shares of Common
Stock by existing stockholders under Rule 144 of the Securities Act, or through
the exercise of outstanding vested options or the conversion of the Debentures
or preferred stock, could have an adverse effect on the price of the Common
Stock. At March 15, 2004, virtually all of the 12,121,492 shares of Common
Stock outstanding are eligible for sale in the public market. In addition, at
December 31, 2003, there were outstanding options to acquire up to
approximately 1,342,800 shares of Common Stock, warrants to acquire 1,547,500
shares of Common Stock, 2,632,563 shares of Common Stock issuable upon
conversion of the Debentures (subject to being increased upon any downward
adjustment to the conversion price as described above under Potential Adverse
Effects of Conversion of Debentures and Preferred Stock and Exercise of
Warrants), 662,338 shares of Common Stock issuable upon conversion of Series A
Preferred Stock, 665,584 shares of Common Stock issuable upon conversion of the
Series B Preferred Stock and 400,000 shares of Common Stock issuable upon
conversion of Series C Preferred Stock. In the event a large number of shares
are sold in the public market over a short period of time, the market price for
Common Stock could decline. Rights Agreement.On June 21, 1995, the Board of Directors of the Company
declared a dividend of one Common Stock purchase right (a Right) for each
share of Common Stock outstanding. Each Right entitles the holder to purchase
one share of the Companys Common Stock at an initial exercise price of $7.00
per share, subject to adjustment, upon the terms and subject to the conditions
set forth in a Rights Agreement dated as of June 20, 1995, between the Company
and American Stock Transfer & Trust Company, as the Rights Agent. The Rights
trade with the Common Stock and will not detach from the Common Stock or become
exercisable until the earlier of (i) ten business days after a public
announcement that a person or group of affiliated or associated persons
(Acquiring Person) has acquired beneficial ownership of 15% or more of the
Companys Common Stock (a Shares Acquisition Date) and (ii) ten business days
after the commencement of, or the first public announcement of an intention to
make, a tender offer or exchange offer for the Common Stock, the consummation
of which would result in beneficial ownership by a person or group. If any person or group acquires beneficial ownership of 15% or more of the
outstanding shares of the Companys Common Stock, each Right (other than the
Rights held by the Acquiring Person, which shall be void) will entitle its
holder to purchase at the exercise price an additional number of shares of
Common Stock equal to the amount determined by dividing the exercise price by
50% of the then current market price of the Common Stock. In addition, if following the Shares Acquisition Date the Company is
acquired in a merger or other business-combination transaction, or sells more
than 50% of its assets or earning power to any person, each Right (other than
those beneficially held by an Acquiring Person) will entitle its holder to
purchase at the existing exercise price a number of shares of common stock of
the acquiring company having twice the value of the exercise price. The Company may redeem the Rights at $.02 per Right at any time on or
prior to the tenth business day following the first public announcement of the
acquisition by a person of 15% or more of its Common Stock or the commencement
of a tender offer or exchange offer for such 15% ownership. The Rights will cause substantial dilution to a person or group who
attempts to acquire the Company without conditioning the offer on a substantial
number of Rights being acquired. The Rights may also deter a person or group
from attempting to acquire the Company and therefore may inhibit the ability of
stockholders of the Company to sell their shares of Common Stock at a premium
price in a takeover situation. The Rights should not 14




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interfere with any merger or other business combination approved by the
Board of Directors of the Company since the Board of Directors may, at its
option, at any time prior to the close of business on the tenth business day
after the Shares Acquisition Date, redeem all the then outstanding Rights at a
price of $.02 per Right. Certain Anti-takeover Effects of Provisions of the Certificate of
Incorporation and Delaware Law.Certain provisions of the Delaware General
Corporation Law (DGCL) and the Companys Certificate of Incorporation could
have the effect of making it more difficult for a third-party to acquire, or of
discouraging a third-party from acquiring, control of the Company. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of Common Stock. These provisions of the DGCL and
provisions of the Companys Certificate of Incorporation may also have the
effect of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of the Company (including unsolicited
takeover attempts), even though such a transaction may offer the Companys
stockholders the opportunity to sell their stock at a price above the
prevailing market price. The Company is subject to the provisions of Section
203 of the DGCL. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a business
combination includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an interested
stockholder is a person who, together with affiliates and associates, owns (or
within three years prior to such transaction did own) 15% or more of the
corporations voting stock. The Companys Certificate of Incorporation authorizes the issuance of
preferred stock with designations, rights and preferences determined from time
to time by its Board of Directors. The Board of Directors may issue one or
more series of preferred stock, without any action on the part of the
stockholders of the Company, the terms of which may adversely affect the rights
of holders of Common Stock. Issuance of preferred stock, which may be
accomplished through a public offering or a private placement, may dilute the
voting power of holders of Common Stock (such as by issuing preferred stock
with super voting rights) and may render more difficult the removal of current
management, even if such removal may be in the stockholders best interests. The issuance of preferred stock, for example, could decrease the amount of
earnings or assets available for distribution to the holders of Common Stock or
could adversely affect the rights and powers, including voting rights, of the
holders of Common Stock. In certain circumstances, such issuance could have
the effect of decreasing the market price of the Common Stock, as well as
having the anti-takeover effect discussed above. Further, the issuance of
preferred stock may be used as an anti-takeover device without further action
on the part of the stockholders. Although the Company issued 1,170 shares of
preferred stock in August 1998, 1,000 shares of preferred stock in November
1998 and 25 shares of preferred stock in January 1999, it has no present
intention to issue any additional shares of its preferred stock; however, there
can be no assurance that it will not do so in the future. Non-payment of Dividends. The Company has never declared or paid
dividends on Common Stock and does not anticipate paying dividends on Common
Stock at any time in the foreseeable future. The terms of the convertible
debentures and certain of the Companys loan agreements restrict the payment of
dividends on Common Stock. Employees As of March 14, 2004, the Company employed four persons, all of whom were
full-time. None of the Companys employees are represented by a union for
collective bargaining purposes. The Company considers its relations with its
employees to be satisfactory. Access to Company Information The Company electronically files annual reports on Form 10-KSB, quarterly
reports on Form 10-QSB, current reports on Form 8-K and all amendments to those
reports with the Securities and Exchange Commission (SEC). The public may read
and copy any of the reports that are filed with the SEC at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site 15




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(http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically,
including the Company. 
 ITEM 2. DESCRIPTION OF PROPERTY In November 2003, the Company moved its headquarters from San Antonio,
Texas to Houston, Texas. The Company currently leases its corporate
headquarters under a three year lease expiring November 30, 2006. During 2003,
the Company incurred aggregate rental expense of approximately $44,000. 
 ITEM 3. LEGAL PROCEEDINGS On July 17, 2003, Medical Creative Technologies, Inc. and Robert D. Rambo
filed a lawsuit in the United States District Court for the Eastern District of
Pennsylvania, against the Company alleging breach of contract with regard to
several of the Companys operative agreements. The plaintiffs are seeking
approximately $267,562 cash and return of all rights to the Dexterity Pneumo
Sleeve and the Dexterity Protractor. The Company believes this lawsuit is
without merit and intends to vigorously defend its position. On February 25, 2003, Surgical Visions I, Inc. and various individuals,
including K.C. Fadem, a former director of the Company, filed a lawsuit against
the Company, Teleflex, Incorporated and certain of the Companys officers and
directors alleging, among other things, conspiracy to defraud minority
shareholders, breach of fiduciary duty, falsification of corporate minutes,
issuance of false and misleading public filings and press releases, and
bribery. The plaintiffs are seeking unspecified compensatory damages. The
Company believes this lawsuit is without merit and intends to vigorously defend
its position. On September 11, 2002, the Company entered into an agreement with U.S.
Surgical, a division of Tyco Healthcare Group LP, which could ultimately settle
all claims and counterclaims between the two parties. Pursuant to the terms of
the settlement agreement, U.S. Surgical may enforce a Stipulated Judgment for
$2,500,000 in favor of U.S. Surgical as filed by both parties on September 30,
2002 because the Company was not successful in its attempt to negotiate the
sale of the Dexterity Protractor product line. The Company is a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party,
including the case described above, would have a material adverse effect on the
Companys financial statements; however, due to the inherent uncertainty of
litigation, the range of possible loss, if any, cannot be estimated with a
reasonable degree of precision and there can be no assurance that the
resolution of any particular claim or proceeding would not have an adverse
effect on the Companys results of operations for the interim period in which
such resolution occurred. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company
during the fourth quarter ended December 31, 2003. 16




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PART II 
 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES Our common stock trades on the OTC Bulletin Board under the symbol DEXT
and commenced trading in August 1992. The following table presents the range
of high and low sales prices for our common stock as reported by the OTC
Bulletin Board for the periods indicated. The quotations represent prices in
the over-the-counter market between dealers in securities, do not include
retail mark-up, mark-down or commissions and may not necessarily represent
actual transactions. Fiscal Year Ended
    
    High
    
    LowDecember 31, 2003:Fourth Quarter
    
    $
    .0300
    
    
    $
    .0060Third Quarter
    
    $
    .0150
    
    
    $
    .0050Second Quarter
    
    $
    .0150
    
    
    $
    .0020First Quarter
    
    $
    .0100
    
    
    $
    .0020December 31, 2002:Fourth Quarter
    
    $
    .0100
    
    
    $
    .0010Third Quarter
    
    $
    .0250
    
    
    $
    .0080Second Quarter
    
    $
    .0450
    
    
    $
    .0080First Quarter
    
    $
    .0500
    
    
    $
    .0150
 On March 12, 2004, the last reported sales price of our common stock on
the OTC Bulletin Board was $.045 per share. At March 14, 2004, there were
approximately 184 record holders of our common stock. We have never declared or paid cash dividends on our common stock and do
not anticipate paying dividends on our common stock at any time in the
foreseeable future. We have not sold any securities within the last three years without
registering the securities under the Securities Act of 1933. We have not
purchased any shares of our Common Stock in the last year and no purchases have
been made on our behalf. 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Certain statements contained in this Item 6, Managements Discussion and
Analysis or Plan of Operation, are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Specifically, all
statements other than statements of historical fact included in this Item 6
regarding Dexterity Surgical, Inc. and its affiliates (collectively, the
Company) financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Companys
management, as well as assumptions made by and information currently available
to the Companys management. When used in this report, the words anticipate,
believe, estimate, expect and intend and words or phrases of similar
import, as they relate to the Company or Companys management, are intended to
identify forward-looking statements. Such statements reflect the current view
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions related to certain factors including, without
limitation, dependence on third parties for manufacturing, marketing and
distribution, future capital requirements, the Companys ability to obtain
additional funding, the Companys ability to restructure its 17




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cash obligations, demand for and acceptance of the Companys products, the
level of competition in the marketplace, the ability of the Companys customers
to be reimbursed by third-party payors, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, product introductions and
acceptance, technological change, changes in industry practices, one-time
events and other factors described herein, and in the Companys annual,
quarterly and other reports filed with the SEC (collectively cautionary
statements). Although the Company believes that its expectations are
reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the
applicable cautionary statements. The Company does not intend to update these
forward-looking statements. Current Financial Condition On June 3, 2003, the Company announced that Davol, Inc. and the Company
had broken off negotiations related to the previously announced sale of
substantially all assets of the Company relating to the Dexterity Protractor
line in consideration for cash of $7 million. On September 11, 2002, the Company entered into an agreement with U.S.
Surgical, a division of Tyco Healthcare Group LP, to ultimately settle all
claims and counterclaims between the two parties. The pertinent terms of the
settlement agreement were as follows:  
    
    The Company represented and warranted it was in the
process of negotiating the sale of the Dexterity Protractor line.
    
    Within seven days of the closing of the sale, but no
later than April 21, 2003, the Company would pay U.S. Surgical
$800,000 in full settlement of the $2,500,000 trade accounts
payable to U.S. Surgical currently recorded on the Companys
books and records. Cost of litigation settlement of $287,000 was
recorded in September 2002. Because the sale of the asset did not take place, U.S. Surgical may
enforce a Stipulated Judgment, filed by the Company and U.S. Surgical on
September 30, 2002, for $2,500,000 in its favor. Virtually all debts and obligations of the Company are in default. The
Company is in violation of certain affirmative financial covenant requirements
associated with its convertible debentures and has not made required monthly
principal and interest payments during 2003 because it lacked the funds to do
so. Also, certain redemption rights of the holder of its convertible
debentures were triggered by the delisting of the Companys common stock from
the NASDAQ SmallCap Market in 2000. Therefore, the Company is in default under
the Debentures and the holder has demanded immediate repayment of the entire
amount outstanding, which was $2,632,563 at December 31, 2003. This default,
in turn, invoked the cross-default clause in the Companys line of credit
agreement, under which $914,995 was outstanding at December 31, 2003. Further,
the Company is in default on the $1,000,000 notes due on October 18, 2001 and
does not have the available resources to pay the guaranteed minimum royalty,
with a balance of $8,279,673 at December 31, 2003, due to the former
stockholders of Dexterity Incorporated. The Company does not have sufficient
resources to fund such amounts. The Company has attempted to make arrangements
to restructure its cash obligations, including its debentures, line of credit
and royalty obligations. However, these negotiations have not been successful.
IF A RESTRUCTURING IS NOT SUCCESSFUL, THE COMPANY WOULD LIKELY BE REQUIRED TO
SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS. Overview From inception through December 31, 1995, the Company was a development
stage enterprise whose efforts and resources were devoted primarily to research
and development activities related to its initial products. 18




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During this development stage, the Company generated minimal operating
revenues and, thus, was unprofitable. In 1996, the Company reduced investment
in research and development related to such technologies and focused its
efforts on acquiring and distributing minimally invasive surgical devices.
Accordingly, during the last seven years, the Company has continued to decrease
its engagement in Company sponsored research and development. As of December
31, 2003, the Company had an accumulated deficit of approximately $50,500,000.
The Company will likely continue to incur losses. There can be no assurance
that the Company will ever achieve profitability. The Companys future operating results will depend on many factors,
including dependence on third parties for manufacturing, marketing and
distribution, future capital requirements, the Companys ability to restructure
its cash obligations, demand for and acceptance of the Companys products, the
level of competition in the marketplace, the ability of the Companys customers
to be reimbursed by third-party payors, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, product introductions and
acceptance, technological change, changes in industry practices, one-time
events and other factors described in this Annual Report on Form 10-KSB. Effective October 24, 2000, following the delisting of the Companys
common stock from trading on the NASDAQ SmallCap Market, the Companys common
stock began trading on the National Association of Securities Dealers
Electronic Bulletin Board. Consequently, the liquidity of the Companys
common stock has been impaired, not only in the number of shares which can be
bought and sold, but also through delays in the timing of the transactions,
reduction in security analysts and the news medias coverage, if any, of the
Company and lower prices for the Companys securities than might otherwise
prevail. As the Companys common stock was delisted from trading on the NASDAQ
SmallCap Market and the trading price of the common stock is below $5.00 per
share, trading in the common stock is subject to the requirements of certain
rules promulgated under the Exchange Act, which require additional disclosures
by broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-NASDAQ equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stock to persons other than established customers and accredited investors
(which are generally institutions). For these types of transactions, the
broker-dealer must make a special suitability determination for the purchase
and have received the purchasers written consent to the transaction prior to
the sale. The additional burdens imposed upon broker-dealers by such
requirements may discourage broker-dealers from effecting transactions in the
common stock. These additional burdens could severely limit the market
liquidity of the Companys common stock and the ability of stockholders to sell
their shares of the Companys common stock in the secondary market. In January 1998, the Company acquired approximately 20% of the common
stock of Dexterity Incorporated, a business development subsidiary of Teleflex,
Inc. In March 1999, the Company acquired the remaining common stock of
Dexterity by merging Dexterity into the Company (the Dexterity Merger)
pursuant to a Plan of Merger and Acquisition between the Company and Dexterity
(the Dexterity Agreement). Simultaneous with the effectiveness of the
Dexterity Merger, the Company changed its name to Dexterity Surgical, Inc.
Under the terms of the Dexterity Agreement, which was approved by the
stockholders of the Company at a special meeting held on March 18, 1999, the
Dexterity stockholders, other than the Company, received an aggregate of:  
    
    $1,500,000 cash;
    
    3,000,000 shares of Common Stock;
    
    warrants to purchase an aggregate of 1,500,000 shares of
Common Stock at an exercise price per share of $2.00 (the
Warrants);
    
    promissory notes in the aggregate amount of $1,000,000 (the
Notes); and
    
    a royalty for seven years in an amount equal to 15% of all
sales of Dexterity products (the Royalty) pursuant to a royalty
agreement (the Royalty Agreement) among the Company and the
Dexterity stockholders, other than the Company. The Royalty is
subject to minimum annual 19




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payments which aggregate, over the seven years of the Royalty
Agreement to approximately $9,695,095. The Company determined the fair market value of the above consideration to
be approximately $16,000,000. The Company launched distribution of Dexteritys
primary products, the Dexterity Pneumo Sleeve and Dexterity Protractor, in
March 1998. The Dexterity Merger was accounted for using the purchase method
of accounting. On September 29, 2000, we signed an exclusive agreement, effective July 1,
2000, under which WCS distributes the Dexterity Pneumo Sleeve and the Dexterity
Protractor in the United States. The agreement also covers international
distribution, except in those areas for which Dexterity has signed previous
exclusive sales and distribution agreements still in effect. Under the terms
of the agreement, WCS (a unit of Teleflex Incorporated) is required to purchase
certain minimum quantities. Also, per the agreement, WCS and the Company
combined elements of both sales forces under the WCS umbrella. The Company and
WCS will continue as separate business entities. In June 2001, the Company and WCS amended the agreement, which adjusted
various aspects of the contract to more accurately reflect current existing
market conditions. Effective July 1, 2001, WCS continued its exclusive right
to distribute the Dexterity Protractor; however, WCS will distribute the
Dexterity Pneumo Sleeve on a nonexclusive basis. Also, certain guaranteed
minimum purchase requirements by WCS, which originally were scheduled to expire
December 31, 2001, were extended until December 31, 2003. The WCS agreement
may be renewed for one-year periods upon such terms as the parties may mutually
agree. The exclusive agreement to distribute the Dexterity Protractor was
extended until June 30, 2004 to allow time to negotiate a renewal. However,
WCS did not agree to any guaranteed minimum purchase requirements during the
extension period. Sales to WCS and affilitates represented 62% of the Companys net sales
for the year ended December 31, 2003 and 67% of the Companys net sales for the
year ended December 31, 2002. Results of Operations for Year Ending December 31, 2003 For the year ended December 31, 2003, the Company reported a loss from
operations of $1,022,000, as compared with a loss from operations of $1,090,000
for the year ended December 31, 2002. For the year ended December 31, 2003,
the Company reported a net loss applicable to common stock of $2,858,000, or
$.24 per basic and diluted share. This compares with a net loss applicable to
common stock of $3,369,000, or $.28 per basic and diluted share for the year
ended December 31, 2002. Net sales decreased 13% in 2003 as compared with 2002. Net sales were
$1,785,000 for 2003 and $2,020,000 for 2002. The decline in net sales was due
primarily to the suspension of Dexterity Protractor shipments for the six
months transition period to effect the transfer of product manufacturing from
MCT to Apogee. Gross profit from net sales decreased 23% to $920,000 in 2003 from
$1,194,000 in 2002. The corresponding gross profit margins decreased to 52% in
2003 from 58% in 2002. The decline in gross profit margins was primarily due
to the sales mix, which was weighted more towards nonproprietary product sales
due to the change of the Dexterity Protractor manufacturer. In 2003, selling, general and administrative expenses, which consist
primarily of sales commissions, salaries and other costs necessary to support
the Companys infrastructure, increased 1% to $1,011,000 in 2003 from $996,000
in 2002. The Company continues to reduce fixed costs whenever possible. The
increase in selling, general and administrative expenses in 2003 was primarily
due to the legal costs incurred in connection with the MCT and Surgical Visions
I, Inc. disputes. Depreciation and amortization expense decreased 7% to $931,000 for 2003
from $1,000,000 for 2002. The decline in depreciation and amortization expense
was due to the decrease in our licensed technology asset base. 20




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Interest expense was $1,640,000 for the year ended December 31, 2003 and
$1,634,000 for the year ended December 31, 2002. Interest expense includes the
non-cash accretion of the minimum royalty obligation, interest on the line of
credit, and interest on the note payable due to the former stockholders of
Dexterity. Results of Operations for Year Ending December 31, 2002 For the year ended December 31, 2002, the Company reported a loss from
operations of $1,090,000, as compared with a loss from operations of
$13,569,000 for the year ended December 31, 2001. For the year ended December
31, 2002, the Company reported a net loss applicable to common stock of
$3,369,000, or $.28 per basic and diluted share. This compares with a net loss
applicable to common stock of $16,028,000, or $1.38 per basic and diluted
share, for the year ended December 31, 2001. The 2001 loss included a charge
for impairment of intangible assets and goodwill of $11,465,000. Net sales decreased 51% in 2002 as compared with 2001. Net sales were
$2,060,000 for 2002 and $4,166,000 for 2001. The decline in net sales was due
primarily to the amended WCS agreement, which called for lower minimum purchase
requirements but extended the contract until December 31, 2003. The WCS
agreement may be renewed for one-year periods upon such terms as the parties
may mutually agree. The exclusive agreement to distribute the Dexterity
Protractor was extended until June 30, 2004 to allow time to negotiate a
renewal. However, WCS did not agree to any guaranteed minimum purchase
requirements during the extension period. Gross profit from net sales decreased 14% to $1,194,000 in 2002 from
$1,388,000 in 2001. The corresponding gross profit margins increased to 58% in
2002 from 33% in 2001. The improvement in gross profit margins was primarily
due to increases to the reserve for inventory obsolescence of $780,000 in 2001
and a greater percentage of higher margin proprietary products being sold in
2002. In 2002, selling, general and administrative expenses, which consist
primarily of sales commissions, salaries and other costs necessary to support
the Companys infrastructure, decreased 34% to $996,000 in 2002 from $1,499,000
in 2001. The decline in these expenses was primarily due to cost cutting
actions taken by the Company in response to the cancellation of the GSI
agreement. The Company continues to strive to reduce fixed costs whenever
possible. Depreciation and amortization expense decreased 50% to $1,000,000 for 2002
from $1,993,000 for 2001. The decline in depreciation and amortization expense
was due to the decrease in our licensed technology asset base. Interest expense was $1,634,000 for the year ended December 31, 2002 and
$1,517,000 for the year ended December 31, 2001. Interest expense includes the
noncash accretion of the minimum royalty obligation, interest on the line of
credit, and interest on the note payable due to the former stockholders of
Dexterity. An other than temporary impairment charge of $451,000 was taken in 2002 on
the investment in Ana-Tech as Ana-Tech filed for protection under the United
States bankruptcy laws. Liquidity and Capital Resources On June 3, 2003, the Company announced that Davol, Inc. and the Company
had broken off negotiations related to the previously announced sale of
substantially all assets of the Company relating to the Dexterity Protractor
line in consideration for cash of $7 million. On September 11, 2002, the Company entered into an agreement with U.S.
Surgical, a division of Tyco Healthcare Group LP, to ultimately settle all
claims and counterclaims between the two parties. The pertinent terms of the
settlement agreement were as follows:  
    
    The Company represented and warranted it was in the
process of negotiating the sale of the Dexterity Protractor line. 21




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##### Table of Contents




    
    Within seven days of the closing of the sale, but no
later than April 21, 2003, the Company would pay U.S. Surgical
$800,000 in full settlement of the $2,500,000 trade accounts
payable to U.S. Surgical currently recorded on the Companys
books and records. Cost of litigation settlement of $287,000 was
recorded in September 2002. Because the sale of the asset did not take place, U.S. Surgical may
enforce a Stipulated Judgment, filed by the Company and U.S. Surgical on
September 30, 2002, for $2,500,000 in its favor. On February 25, 2003, Surgical Visions I, Inc. and various individuals,
including K.C. Fadem, a former director of the Company, filed a lawsuit against
the Company, Teleflex, Incorporated and certain of the Companys officers and
directors alleging, among other things, conspiracy to defraud minority
shareholders, breach of fiduciary duty, falsification of corporate minutes,
issuance of false and misleading public filings and press releases, and
bribery. The plaintiffs are seeking unspecified compensatory damages. The
Company believes this lawsuit is without merit and intends to vigorously defend
its position. Pursuant to a private placement which occurred in July and August 2000,
the Company issued to TFX Equities, Inc., a business development subsidiary of
Teleflex, Inc., and Cuda Products Company, whose chief executive officer is a
director of the Company, an aggregate of 400 shares of Series C Preferred Stock
for aggregate proceeds of $400,000. The Company used such proceeds for working
capital. The annual dividends on the Series C Preferred Stock are cumulative
at a rate of $80 per share. Quarterly dividends are in arrears in the amount
of $64,000. Furthermore, the Company does not currently believe it will have
the funds to pay future dividends as they become due. The Series C Preferred
Stock is currently convertible into shares of common stock at a conversion
price of $1.00 per share, for an aggregate of 400,000 shares of common stock.
The conversion price for the Series C Preferred Stock is subject to downward
adjustment in the event the Company sells shares of common stock, or securities
convertible into shares of common stock, at a per share price less than $1.00.
The holders of Series C Preferred Stock are entitled to one vote per share on
all matters submitted to a vote of the stockholders of the Company, and the
affirmative vote of the holders of 66 2/3% of the votes entitled to be cast by
the holders of the Series C Preferred Stock is required in order to amend the
Companys Certificate of Incorporation or Bylaws to materially affect the
rights of the holders of Series C Preferred Stock, including authorizing and
creating a class of stock having rights prior to or senior to the Series C
Preferred Stock. Since two or more quarterly dividends payable on the Series C
Preferred Stock are in arrears, the holders of the Series C Preferred Stock, by
a majority vote, are entitled to designate two additional directors to serve on
the Companys Board of Directors. The Company does not have sufficient
resources to continue paying dividends on the Series C Preferred Stock. The Company maintains a maximum $5,000,000 revolving line of credit
whereby all inventories, accounts receivable and intangibles of the Company are
pledged as collateral. At December 31, 2003, the outstanding balance due on
such line of credit was $914,995 and there are no additional funds available
under the current borrowing base. The default under the Debentures (discussed
below) triggered the cross-default clause in the line of credit agreement.
Therefore, the lender has the right to demand immediate repayment of the entire
amount outstanding. In May 2001, Teleflex, Inc., a major shareholder in the
Company, purchased this instrument from the previous lender. Teleflex, Inc.
and the Company are currently negotiating new terms and conditions for the line
of credit. The outstanding balance continues to be classified as a current
liability and interest at prime rate plus 4.5% continues to accrue until
negotiations are completed. Pursuant to a private placement which occurred in November 1998, the
Company issued to two affiliates of Renaissance and one individual, who is an
officer and director of the Company, an aggregate of 1,025 shares of Series B
Preferred Stock for aggregate proceeds of $1,025,000. The Company used such
proceeds for working capital. The annual dividends on the Series B Preferred
Stock are cumulative at a rate of $80 per share. Quarterly dividends are in
arrears in the amount of $164,000. Furthermore, the Company does not currently
believe it will have the funds to pay future dividends as they become due. The
Series B Preferred Stock is currently convertible into shares of common stock
at a conversion price of $1.54 per share, for an aggregate of 665,584 shares of
common stock. The conversion price for the Series B Preferred Stock is subject
to downward adjustment in the event the Company sells shares of common stock,
or securities convertible into shares of common stock, at a per share price
less than $1.54. Certain holders of the Series B Preferred Stock contend that
the issuance of shares by the Company in settlement of the Andrieni lawsuit in
2001 requires a downward adjustment to the conversion price of the Series B 22




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Preferred Stock. The Company disputes the claim of such holders of Series
B Preferred Stock and believes the conversion price should remain at $1.54.
However, there can be no assurance that such holders of Series B Preferred
Stock will not prevail in their claim for a downward adjustment to the
conversion price, in which case the Company would be required to issue a
substantially greater number of shares of common stock upon conversion of the
Series B Preferred Stock than would be issuable at a $1.54 conversion price.
Any issuance of common stock upon the conversion of preferred stock will
substantially dilute the voting rights and other interests of stockholders of
the Company. The holders of Series B Preferred Stock, are entitled to one vote
per share on all matters submitted to a vote of the stockholders of the
Company, and the affirmative vote of the holders of 66 2/3% of the votes
entitled to be cast by the holders of the Series B Preferred Stock is required
in order to amend the Companys Certificate of Incorporation or Bylaws to
materially affect the rights of the holders of Series B Preferred Stock,
including authorizing and creating a class of stock having rights prior to or
senior to the Series B Preferred Stock. Since two or more quarterly dividends
payable on the Series B Preferred Stock are in arrears, the holders of Series B
Preferred Stock, by a majority vote, are entitled to designate two additional
directors to serve on the Companys Board of Directors. The Company does not
have sufficient resources to continue paying dividends on the Series B
Preferred Stock. In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director
of the Company, an aggregate of 1,170 shares of Series A Preferred Stock, for
aggregate proceeds of $1,170,000. The Company used such proceeds for working
capital. During March 2000, 150 shares of Series A Preferred Stock were
converted to 93,750 shares of common stock. Annual dividends on the Series A
Preferred Stock are cumulative at a rate of $80 per share. Quarterly dividends
are in arrears in the amount of $163,200. Furthermore, the Company does not
currently believe it will have the funds to pay future dividends as they become
due. The Series A Preferred Stock is currently convertible into shares of
common stock at a conversion price of $1.54 per share, for an aggregate of
662,338 shares of common stock. The conversion price for the Series A
Preferred Stock is subject to downward adjustment in the event the Company
sells shares of common stock, or securities convertible into shares of common
stock, at a per share price less than $1.54. Certain holders of the Series A
Preferred Stock contend that the issuance of shares by the Company in
settlement of the Andrieni lawsuit in 2001 requires a downward adjustment to
the conversion price of the Series A Preferred Stock. The Company disputes the
claim of such holders of Series A Preferred Stock and believes the conversion
price should remain at $1.54. However, there can be no assurance that such
holders of Series A Preferred Stock will not prevail in their claim for a
downward adjustment to the conversion price, in which case the Company would be
required to issue a substantially greater number of shares of common stock upon
conversion of the Series A Preferred Stock than would be issuable at a $1.54
conversion price. Any issuance of common stock upon the conversion of
preferred stock will substantially dilute the voting rights and other interests
of stockholders of the Company. The holders of Series A Preferred Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company, and the affirmative vote of the holders of 66 2/3%
of the votes entitled to be cast by the holders of the Series A Preferred Stock
is required in order to amend the Companys Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series A Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series A Preferred Stock. Since two or more quarterly
dividends payable on the Series A Preferred Stock are in arrears, the holders
of Series A Preferred Stock, by a majority vote, are entitled to designate two
additional directors to serve on the Companys Board of Directors. The Company
does not have sufficient resources to continue paying dividends on the Series A
Preferred Stock. In December 1997, the Company sold 250,000 shares of common stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% convertible debentures (the Debentures) with
Renaissance. The proceeds from the private placement were used to repay the
Companys line of credit with another financial institution, to make the
January 1998 equity investment in Dexterity, and for working capital purposes.
The Debentures are secured by substantially all of the assets of the Company
and require monthly payments of interest and also require monthly principal
payments, which commenced in December 2000 of $10 per $1000 of the then
remaining principal amount. The remaining principal balance will mature in
December 2004. In March 2000, the Debentures were modified to provide that the
interest payable between February 1, 2000 through January 31, 2001 shall be
paid in shares of common stock, valued at $1.00 per share. Upon modification,
270,000 shares of common stock valued at $270,000 were issued in advance of
interest due through January 31, 2001. 23




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##### Table of Contents



The Debentures currently require the Company to comply with the following
financial covenants: (i) a Debt-to-Net Worth Ratio of no greater than .99:1;
(ii) an Interest Coverage Ratio of at least .60:1; (iii) a Debt Coverage Ratio
of at least .10:1; and (iv) a Current Ratio of at least .68:1. The Company is
currently not in compliance with these covenants and is not current on its
interest and principal repayment obligations under the Debentures and,
therefore, is in default under the Debentures. The delisting of the Companys
common stock in October 2000 also created an event of default. Under these
events of default, the holders have demanded the immediate repayment of the
entire amount outstanding. Accordingly, the entire balance due of $2,632,563
has been classified as a current liability as of December 31, 2003. The
Company currently does not have, nor does it believe it could obtain,
sufficient resources to fund such amount. The holders of the Debentures have the option to convert, at any time, all
or a portion of the Debentures into shares of common stock at an initial price
of $1.00 per share of common stock. The conversion price is subject to
downward revision if the Company sells shares of its common stock, or
securities convertible into common stock, at a price less than $1.00 per share
of common stock, subject to certain allowed exceptions, during the term of the
Debentures. The Debentures are currently convertible for an aggregate of
2,632,563 shares of common stock; however, since the conversion price is
subject to downward adjustment and there is no minimum conversion price, the
maximum number of shares of common stock which may be issued pursuant to the
Debentures is undeterminable. The holders of the Debentures claim that the
conversion price of the Debentures requires a downward adjustment to $.02 as a
result of the shares of common stock issued by the Company in settlement of the
Andrieni lawsuit settled in 2001. The Company disputes the claim of the
Debenture holders and believes the conversion price should remain at $1.00.
However, there can be no assurance that the Debenture holders will not prevail
in their claim for a downward adjustment to the conversion price, in which case
the Company would be required, upon conversion of the Debentures, to issue
approximately 50 times the number of shares that would be issuable at a $1.00
conversion price. Any issuance of shares of common stock upon the conversion
of the preferred stock or the Debentures will substantially dilute the voting
rights and other interests of stockholders of the Company. As the number of
shares of common stock issuable upon the conversion of preferred stock and the
Debentures is indeterminate, the Company is unable to predict to what extent
the Companys stockholders rights will be diluted. Such uncertainty creates
downward pressure on the public market price of the Companys common stock. In
the event such holders convert their Debentures or shares of preferred stock,
as applicable, and sell a large number of shares of common stock into the
public market over a short time, the market price for the common stock could
decline. The provisions of the Debentures provide that the holders of the
Debentures have an option to redeem the Debentures, in an amount equal to an
18% annual yield on the principal balance, upon the occurrence of certain
events, including the delisting of common stock from the NASDAQ SmallCap Market
and certain change of control provisions, as defined in the Debentures, as
they relate to the Company. As the common stock was delisted from the NASDAQ
SmallCap Market on October 24, 2000, the holder has demanded immediate
repayment of the entire amount. The Company may redeem the Debentures at its
option, subject to certain share price and market activity levels being
obtained. The Companys right of redemption is subject to the holders prior
right of conversion of the Debenture. For the year ended December 31, 2003, operating activities used cash of
$265,000. For the year ended December 31, 2002, operating activities provided cash
of $101,000. Investment activities during the period utilized cash of
$139,000. During the period, the Companys financing activities provided cash
of $269,000 from advances on the line of credit. At December 31, 2003, the Company had current assets of $760,000 and
current liabilities of $16,634,000 resulting in a working capital deficit of
$15,874,000. This compares to a working capital deficit of $12,762,000 at
December 31, 2002. The increase in working capital deficit is primarily due to
the operating losses incurred during 2003. The Company does not believe its revenues and other sources of liquidity
will provide adequate funding for its current capital requirements. The
Company is presently in negotiations to make arrangements to restructure
certain obligations including the Debentures, line of credit and Royalty
obligation. However, there can be no assurance that the Company will be able to
restructure these obligations. IF THE RESTRUCTURING IS NOT SUCCESSFUL, WE
WOULD LIKELY BE REQUIRED TO SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY
LAWS. 24




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##### Table of Contents



Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Companys
financial condition, revenue, or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors. 
 ITEM 7. FINANCIAL STATEMENTS The financial statements and supplementary data described in Item 13(a)
herein are attached hereto beginning on page F-1. 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have had no unreported disagreements with our independent auditors
regarding accounting or financial disclosure matters. 
 ITEM 8A. CONTROLS AND PROCEDURES In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2003 to provide reasonable
assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. 25




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##### Table of Contents



PART III 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Executive Officers and Directors of the Registrant The executive officers and directors of the Company as of March 15, 2003
and their names, ages, positions/occupations and tenure as an officer with the
Company are as follows: OfficerName
    
    Age
    
    Position/Occupation
    
    SinceRichard A. Woodfield
    
    
    61
    
    
    President, Chief Executive
Officer and Director of
Dexterity Surgical, Inc.
    
    
    1998Randall K. Boatright
    
    
    55
    
    
    Executive Vice President,
Chief Financial Officer,
Secretary and Director of
Dexterity Surgical, Inc.
    
    
    1992Jeffrey H. Berg, Ph.D.
    
    
    61
    
    
    President of Health Care
Insights, Edison, NJ and
Director of Dexterity
Surgical, Inc.
    
    
    N/AChristopher K. Black
    
    
    47
    
    
    Investor and Director of
Dexterity Surgical, Inc.
    
    
    N/A
 There are no arrangements or understandings pursuant to which any of the
officers listed were elected as officers. Officers are elected annually by the
Board of Directors at its first meeting following the Annual Meeting of
Stockholders, each to hold office until the corresponding meeting of the Board
in the next year or until his successor shall have been elected or shall have
been qualified. Business Experience RICHARD A. WOODFIELD has served as President and CEO of the Company since
May 1998. Prior to joining the Company, he was managing partner and active in
several ventures: Consultative Partnership, Finishing Equipment Company of
California, and Keystone Group. Mr. Woodfield was formerly President of TFX
Medical, a division of Teleflex, Inc. He has served on a variety of for profit
and non-profit Boards of Directors: The Crouse Group; Delaware Valley
Industrial Council; Teleflex Inc.; Tabor Children Services; and Package
Machinery Company. Mr. Woodfield earned a BSME from the University of Missouri
at Rolla. RANDALL K. BOATRIGHT has served as a director of the Company since
February 1997. Mr. Boatright has also served as Vice President, Chief Financial
Officer and Secretary of the Company since 1992 and in 1998 was named an
Executive Vice President. From 1985 to 1992, Mr. Boatright served as Executive
Vice President, Chief Financial Officer and Director of Abraxas Petroleum
Corporation. Prior to that, Mr. Boatright practiced accounting with the firm of
Coopers and Lybrand LLP. Mr. Boatright is a certified public accountant in
Texas and Virginia. JEFFREY H. BERG, PH.D. has served as a director of the Company since March
1995, and has served as the President of Health Care Insights, a consulting
firm specializing in health care companies, since January 1993. During 1992,
Mr. Berg was a financial analyst covering the health care industry for The
Chicago Corp., an investment bank. During 1990 and 1991, Mr. Berg was a
financial analyst covering the health care industry for William K. Woodruff &
Co., a Dallas-based investment bank. From 1987 to January 1990, he was the Vice
President of Research specializing in the health care industry for J. C.
Bradford & Co. Mr. Berg is currently a director of
Bio-Imaging Technologies. CHRISTOPHER K. BLACK is currently Chief Executive Officer of Sovereign
Capital Group. He served as President of Dexterity Incorporated from January
1997 until its acquisition by the Company in March of 1999. Beginning in July
1996, Mr. Black served as Vice President of TFX Equities, Inc. From 1993 to
1996, Mr. Black served as a Vice President of TFX Medical, a division of
Teleflex Inc. 26




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##### Table of Contents



Identification of the Audit Committee The Company has a separately designated standing Audit Committee. Jeffrey
H. Berg, Ph.D. and Christopher K. Black are the members of the Audit Committee. Audit Committee Financial Expert The Company does not have an audit committee financial expert serving on
its Audit Committee. The Company has not had sufficient capital to secure any
qualified person to act as an audit committee financial expert. Procedures by which Stockholders May Recommend Nominees for the Companys Board
of Directors The Board of Directors does not provide a process for stockholders to send
communications to the Board of Directors, but the Companys Chief Financial
Officer, who is also one of our directors, can be contacted at the Companys
headquarters located at 5444 Westheimer Road, Suite 1970, Houston, Texas 77056
or by telephone at (713) 622-0516. We are a very small company, and we do not
believe it is necessary to have a special procedure for stockholders to contact
the Board of Directors when one of our directors is so easily accessible
already. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires that the Companys directors,
executive officers and persons who own more than 10% of a registered class of
the Companys equity securities file with the Commission initial reports of
ownership and reports of changes in ownership of Common Stock and other equity
securities of the Company. Directors, executive officers and greater than 10%
stockholders are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file. To the Companys knowledge, based solely on a review of the copies of the
Section 16(a) reports furnished to the Company and written representations that
no other reports were required, during the fiscal year ended December 31, 2003,
all Section 16(a) reports applicable to its directors, executive officers and
greater than 10% beneficial owners were filed on a timely basis. Code of Ethics The Company has adopted a code of ethics that applies to our Chief
Executive Officer and Chief Financial Officer and other employees performing
similar functions. 27




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##### Table of Contents



ITEM 10. EXECUTIVE COMPENSATION The following table summarizes all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the years
ended December 31, 2001, 2002 and 2003 by the Companys Chief Executive Officer
and the Companys other most highly compensated executive officer who received
in excess of $100,000 in salary and bonus from the Company during 2003. Summary Compensation Table Long-TermCompensationAnnual Compensation
    
    AwardsSecuritiesFiscal
    
    
    
    
    
    
    
    
    
    Underlying
    
    All OtherName and Principal Position
    
    Year
    
    Salary
    
    Bonus
    
    Options (#)
    
    Compensation(1)Richard A. Woodfield
    
    
    2003
    
    
    $
    102,500
    
    
    $
    0
    
    
    
    525,000
    (2)
    
    $
    0President and Chief
    
    
    2002
    
    
    $
    102,000
    
    
    $
    0
    
    
    
    0
    
    
    $
    230Executive Officer
    
    
    2001
    
    
    $
    175,000
    
    
    $
    0
    
    
    
    75,000
    
    
    $
    180Randall K. Boatright
    
    
    2003
    
    
    $
    167,844
    
    
    $
    0
    
    
    
    305,400
    (2)
    
    $
    0Executive Vice President, Chief
    
    
    2002
    
    
    $
    166,769
    
    
    $
    0
    
    
    
    0
    
    
    $
    132Financial Officer and Secretary
    
    
    2001
    
    
    $
    165,692
    
    
    $
    0
    
    
    
    75,000
    
    
    $
    180
   (1)
    
    Represents life insurance premiums paid by the Company.(2)
    
    Consists solely of options to purchase Common Stock previously granted
subject to repricing. No other options were issued
by the Company in the last fiscal year. Stock Option Grants in Fiscal 2003 The following table provides certain information related to options
granted by the Company to the named executive officers during fiscal 2003. Individual GrantsNumber of
    
    % of Total OptionsSecurities
    
    Granted to
    
    Exercise orUnderlying Options
    
    Employees in
    
    Base Price
    
    ExpirationName
    
    Granted (#) (1)
    
    Fiscal 2003(2)
    
    ($/Share)
    
    DateRichard A. Woodfield
    
    
    75,000
    
    
    
    9.03
    
    
    
    0.003
    
    
    
    01/03/2011Richard A. Woodfield
    
    
    350,000
    
    
    
    42.14
    
    
    
    0.003
    
    
    
    02/15/2008Richard A. Woodfield
    
    
    100,000
    
    
    
    12.04
    
    
    
    0.003
    
    
    
    11/19/2009Randall K. Boatright
    
    
    28,200
    
    
    
    3.40
    
    
    
    0.003
    
    
    
    10/18/2004Randall K. Boatright
    
    
    8,200
    
    
    
    1.00
    
    
    
    0.003
    
    
    
    02/15/2005Randall K. Boatright
    
    
    8,600
    
    
    
    1.04
    
    
    
    0.003
    
    
    
    02/13/2006Randall K. Boatright
    
    
    10,400
    
    
    
    1.25
    
    
    
    0.003
    
    
    
    01/28/2007Randall K. Boatright
    
    
    25,000
    
    
    
    3.01
    
    
    
    0.003
    
    
    
    02/09/2008Randall K. Boatright
    
    
    25,000
    
    
    
    3.01
    
    
    
    0.003
    
    
    
    03/09/2008Randall K. Boatright
    
    
    50,000
    
    
    
    6.02
    
    
    
    0.003
    
    
    
    04/01/2008Randall K. Boatright
    
    
    25,000
    
    
    
    3.01
    
    
    
    0.003
    
    
    
    02/11/2009Randall K. Boatright
    
    
    50,000
    
    
    
    6.02
    
    
    
    0.003
    
    
    
    11/19/2009Randall K. Boatright
    
    
    75,000
    
    
    
    9.03
    
    
    
    0.003
    
    
    
    01/03/2011
 28




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##### Table of Contents



(1)
    
    Consists solely of options to purchase Common Stock previously granted
subject to repricing. No other options were issued
by the Company in the last fiscal year.(2)
    
    Richard A. Woodfield was granted 63.22% of the total options granted to
employees in fiscal 2003, and Randall K. Boatright
was granted 36.78% of the total options granted to employees in fiscal
2003. Aggregated Option Exercises in Fiscal 2003 and Fiscal Year-End Option Values The following table provides information related to options exercised by
the named executive officers of the Company during fiscal 2003 and the number
and value of options held at fiscal year end. Number of Securities
    
    Value of Unexercised In-Underlying Unexercised
    
    the-Money Options atOptions at FY-End (#)
    
    FY-End($)(1)Shares AcquiredUpon OptionName
    
    Exercise (#)
    
    Value Realized($)
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableRichard A. Woodfield
    
    
    0
    
    
    $
    0
    
    
    
    525,000
    
    
    
    0
    
    
    $
    3,675
    
    
    $
    0Randall K. Boatright
    
    
    0
    
    
    $
    0
    
    
    
    305,400
    
    
    
    0
    
    
    $
    2,138
    
    
    $
    0
  (1)
    
    Closing sales price of our common stock at December 31, 2003 was $.01. Long-Term Incentive Plan Awards in Fiscal 2003 The Company did not grant any long-term incentive plan awards to executive
officers during fiscal 2003. Compensation of Directors During 2003, each non-employee member of the Board of Directors received a
stipend of $20,000. The members of the Board of Directors are also reimbursed
for their travel expenses to and from the meetings. The Board of Directors
adopted a Non-Employee Director Stock Option Plan (the NEDSOP) in 1998,
pursuant to which non-employee directors may be granted stock options to
purchase Common Stock. The amount and exercise price of options granted under
the NEDSOP are determined by a committee appointed by the Board of Directors to
administer the NEDSOP. Employment Agreements and Change-of-Control Arrangements The Company and Richard A. Woodfield are parties to an employment
agreement whereby Richard A. Woodfield receives approximately $175,000 per
annum as well as a bonus based upon the achievement of goals agreed upon by the
parties, the performance of the Companys stock price and the earnings of the
Company. Despite the terms of this agreement, Mr. Woodfield has agreed to
accept a salary of $102,500 per annum for the last two years with the
understanding that the Company does not owe him any additional compensation to
make up for him accepting a smaller salary. The agreement with Richard A.
Woodfield expires May 10, 2004, subject to automatic renewals for one-year
terms unless either party notifies the other of its intention not to renew. As
an inducement to enter into such agreement, the Company granted Mr. Woodfield
nonqualified stock options for up to 350,000 shares of Common Stock, which vest
over time. On March 27, 2003, the board of directors approved an amendment to
Mr. Woodfields employment agreement. The amendment provides, in part, that in
the event Mr. Woodfield is terminated following either (i) a change of control
of the Company or (ii) the sale of all or substantially all of the assets of
the Company, Mr. Woodfield shall receive, at his discretion, either (a) his
annual base salary for up to two years after the termination of the Agreement
or (b) a lump sum payment equal to the amount of his base salary for up to two
years after the termination of the agreement. 29




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##### Table of Contents



The Company and Randall K. Boatright are parties to an employment
agreement whereby Randall K. Boatright receives approximately $160,000 per
annum as well as an annual discretionary bonus. The agreement with Randall K.
Boatright expires May 10, 2004, subject to automatic renewals for one-year
terms unless either party notifies the other of its intention not to renew. As
an inducement to enter into such agreement, the Company granted Mr. Boatright
non-qualified stock options for up to 50,000 shares of Common Stock, which vest
over time. Mr. Boatrights employment agreement provides, in part, that if he
is terminated without cause, he is entitled to receive his base salary for up
to two years following the termination of the employment agreement. The
employment agreement also provides, in part, that in the event Mr. Boatright is
terminated following either (i) a change of control of the Company or (ii) the
sale of all or substantially all of the assets of the Company, Mr. Boatright
shall receive, at his discretion, either (a) his annual base salary for up to
two years after the termination of the Agreement or (b) a lump sum payment
equal to the amount of his base salary for up to two years after the
termination of the agreement. Report on Repricing of Options All options to purchase shares of the Companys Common Stock issued to
directors and executive officers of the Company were repriced on April 1, 2003
to $0.003 per share by resolution of the board of directors. The board of
directors deemed it to be in the best interests of the Company and its
stockholders to restore the incentive for its directors and executive officers
to remain with the Company and to exert their maximum efforts on behalf of the
Company. To incentivise the directors and executive officers to continue in
their positions with the Company, the board of directors repriced the options
described above to reflect the market price on April 1, 2003, the date of the
repricing. 
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS Security Ownership of Principal Stockholders and Management OWNERSHIP OF COMMON STOCK The following table sets forth as of March 1, 2004, certain information
with respect to the Companys Common Stock beneficially owned by each
stockholder known by the Company to be the beneficial owner of more than 5% of
the Companys Common Stock, each of its directors, each executive officer named
in the Summary Compensation Table (the named executive officers) and by all
its directors and executive officers as a group. Such persons have sole voting
power and sole dispositive power with respect to all shares set forth in the
table unless otherwise specified in the footnotes to the table. Amount and Natureof BeneficialName and Address of Beneficial
Owner(1)
    
    Ownership(1)
    
    Percent(2)TFX Equities, Inc. (3)
    
    
    3,455,281
    (4)
    
    
    25.85
    %Renaissance Capital Growth & Income Fund III, Inc.(5)
    
    
    2,222,308
    (6)
    
    
    15.76
    %Renaissance U.S. Growth & Income Trust, PLC(5)
    
    
    2,217,308
    (6)
    
    
    15.73
    %Christopher K. Black
    
    
    900,752
    (7)
    
    
    7.21
    %Richard A. Woodfield
    
    
    574,220
    (8)
    
    
    4.54
    %Randall K. Boatright
    
    
    305,550
    (9)
    
    
    2.46
    %Jeffrey H. Berg, Ph.D.
    
    
    47,500
    (10)
    
    
    *All executive officers and directors as a group
(four persons, which are the executive officers and
directors listed above)
    
    
    1,828,022
    (11)
    
    
    13.64
    %
 30




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##### Table of Contents



*
    
    Represents less than 1% of the issued and outstanding shares of Common
Stock.(1)
    
    Except as otherwise noted, the street address of the named beneficial
owner is 5444 Westheimer Road, Suite 1970, Houston, TX 77056. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock which are purchasable under
options, warrants and convertible securities that are currently
exercisable or that will be come exercisable no later than 60 days after
March 12, 2003, are deemed outstanding for the person holding such
options, warrants or convertible securities but are not deemed outstanding
for computing the percentage of any other persons.(2)
    
    Percentage is based on a total of 12,121,492 shares of Common Stock
issued and outstanding on March 12, 2004.(3)
    
    The address for such stockholder is 630 W. Germantown Pike, Suite 450,
Plymouth Meeting, Pennsylvania 19462.(4)
    
    Includes 942,820 shares of Common Stock issuable upon exercise of
warrants and 300,000 shares of Common Stock issuable upon conversion of
preferred stock.(5)
    
    The address for such stockholder is 8080 N. Central Expressway, Suite
210, Dallas, Texas 75206. Beneficial ownership is based solely on
Schedule 13G reports filed with the Securities and Exchange Commission.(6)
    
    Includes 1,316,282 shares of Common Stock issuable upon conversion of
convertible debentures, 649,350 shares of Common Stock issuable upon
conversion of preferred stock and 12,500 shares of Common Stock issuable
upon exercise of a warrant.(7)
    
    Includes 260,533 shares of Common Stock issuable upon exercise of
warrants and 18,000 shares of Common Stock issuable upon exercise of an
option. Also includes 100,000 shares of Common Stock issuable upon
conversion of preferred stock to Cuda Products Company. Mr. Black serves
as chief executive officer of Cuda Products Company.(8)
    
    Includes 525,000 shares of Common Stock issuable upon exercise of options
and 29,220 shares of Common Stock issuable upon conversion of preferred
stock.(9)
    
    Includes 305,400 shares of Common Stock issuable upon exercise of
options.(10)
    
    Represents shares, which Dr. Berg has the right to acquire upon the
exercise of stock options.(11)
    
    Includes 895,900 shares of Common Stock issuable upon the exercise of
options held by executive officers or directors, 260,533 shares of Common
Stock issuable upon the exercise of warrants beneficially owned by
executive officers or directors and 129,220 shares of Common Stock
issuable upon conversion of preferred stock held by executive officers or
directors. 31




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##### Table of Contents



OWNERSHIP OF PREFERRED STOCK The following table sets forth as of March 1, 2004, certain information
with respect to the Companys preferred stock beneficially owned by each
stockholder known by the Company to be the beneficial owner of more than 5% of
the Companys preferred stock, each of its directors, the named executive
officers and by all its directors and executive officers as a group. Such
persons have sole voting power and sole dispositive power with respect to all
shares set forth in the table unless otherwise specified in the footnotes to
the table. Amount and Natureof BeneficialName and Address of Beneficial Owner(1)
    
    Ownership
    
    Percent(2)Renaissance Capital Growth & Income
Fund III, Inc.(3)
    
    
    1,000
    
    
    
    40.90
    %Renaissance U.S. Growth & Income
Trust, PLC.(3)
    
    
    1,000
    
    
    
    40.90
    %TFX Equities, Inc. (4)
    
    
    300
    
    
    
    12.27
    %Christopher K. Black
    
    
    100
    (5)
    
    
    4.09
    %Richard A. Woodfield
    
    
    45
    
    
    
    1.84
    %Randall K. Boatright
    
    
    0
    
    
    
    0
    %Jeffrey H. Berg, Ph.D.
    
    
    0
    
    
    
    0
    %All executive officers and directors as a group
(four persons, which are the executive
officers and directors listed above)
    
    
    145
    (5)
    
    
    5.93
    %
   (1)
    
    Except as otherwise noted, the street address of the named beneficial
owner is 5444 Westheimer Road, Suite 1970, Houston, TX 77056.(2)
    
    Percentage is based on a total of 2,445 shares of preferred stock issued
and outstanding on March 12, 2004.(3)
    
    The address for such stockholder is 8080 N. Central Expressway, Suite
210, Dallas, Texas 75206.(4)
    
    The address for such stockholder is 630 W. Germantown Pike, Suite 450,
Plymouth Meeting, Pennsylvania 19462.(5)
    
    Includes shares held by Cuda Products Company. Mr. Black is the chief
executive officer of Cuda Products Company. 32




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##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plans The following table provides information as of December 31, 2003 about the
securities authorized for issuance under the Companys equity compensation
plans, consisting of the 1989 Stock Option Plan, the 1995 Non-Employee Director
Stock Option Plan and the 2000 Employee Stock Compensation Plan. Number of securitiesremaining available forNumber of securities to
    
    Weighted-average
    
    future issuance underbe issued upon exercise
    
    exercise price of
    
    equity participation plansof outstanding options,
    
    outstanding options,
    
    (excluding securitieswarrants and rights
    
    warrants and rights
    
    reflected in column (a))Plan category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    648,650
    
    
    $
    0.05
    
    
    
    3,005,800Equity
participation plans
not approved by
security holders
    
    
    696,665
    (1)
    
    $
    1.39
    
    
    
    N/ATotal
    
    
    1,345,315
    
    
    
    
    
    
    
    3,005,800
 (1) Includes options granted to Richard Woodfield on December 15, 1998 to
purchase 350,000 shares of common stock for $2.00 per share pursuant to his
employment agreement with the Company and options granted to Frederick Feiler
on January 16, 2000 to purchase 100,000 shares of common stock for $1.00 per
share pursuant to his employment agreement with the Company. The remaining
246,665 options were issued to stockholders of various entities in connection
with the Companys acquisitions of these entities. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There have been no transactions during the last two years between the
Company and any officer, director, nominee for election as director, or any
shareholder owning more than 5% of the Companys outstanding shares, or any
member of any such individuals immediate family, as to which the amount
involved in the transaction or a series of similar transactions exceeded
$60,000. 
 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) 1. Financial Statements PageReports of Independent Auditors
    
    
    F-1Balance Sheets at December 31, 2003 and 2002
    
    
    F-2Statements of Operations for the Years Ended December 31, 2003 and 2002
    
    
    F-4Statements of Stockholders Deficit for the Years Ended December 31, 2003 and 2002
    
    
    F-5Statements of Cash Flows for the Years Ended December 31, 2003 and 2002
    
    
    F-6Notes to Financial Statements
    
    
    F-7
 33




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##### Table of Contents



2. Exhibit Index ExhibitNumber
    
    Identification of Exhibit2.1
    
    Plan of Merger and Acquisition Agreement dated December 18, 1998, between
Dexterity Incorporated and the Company (incorporated by reference herein
to Exhibit 2.8 to the Companys Annual Report on Form 10-KSB for the year
ended December 31, 1998).3.1
    
    Restated Certificate of Incorporation, as amended (incorporated by
reference herein to Exhibit 3.1 to the Companys Annual Report on Form
10-KSB for the year ended December 31, 2000).3.2
    
    Bylaws of the Registrant (incorporated by reference herein to Exhibit 3.2
to the Companys Registration Statement on Form S-1 filed on August 19,
1992, Registration No. 33-49196).4.1
    
    Convertible Loan Agreement among the Company, Renaissance Capital Growth
and Income Fund III, Inc., Renaissance US Growth and Income Trust PLC and
Renaissance Capital Group, Inc. dated December 19, 1997 (incorporated herein by reference to Exhibit 4.1
to the Companys Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997).10.1
    
    1989 Stock Option Plan of LifeQuest Medical, Inc. (incorporated by
reference herein to Exhibit 4.4 to the Companys Registration Statement on
Form S-8 filed on October 12, 1993, Registration No. 33-70174).10.2
    
    Incentive Stock Option Agreement dated October 17, 1994, between
LifeQuest Medical, Inc. and Randall K. Boatright (incorporated herein by
reference to Exhibit 10.16 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 1994).10.3
    
    1994 Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 10.19 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 1994).10.4
    
    Non-Qualified Stock Option Agreement dated October 17, 1994, between
LifeQuest Medical, Inc. and Robert B. Johnson (incorporated herein by
reference to Exhibit 10.21 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 1994).10.5
    
    Non-Qualified Stock Option Agreement dated March 2, 1995, between
LifeQuest Medical, Inc. and Jeffrey H. Berg, Ph.D. (incorporated herein by
reference to Exhibit 10.22 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 1994).10.6
    
    Non-Qualified Stock Option Agreement dated December 27, 1996, between
LifeQuest Medical, Inc. and K.C. Fadem (incorporated by reference herein
to Exhibit 10.2 to the Companys Current Report on Form
8-K filed January 10, 1997).10.7
    
    Non-Qualified Stock Option Agreement dated December 27, 1996, between
LifeQuest Medical, Inc. and Robert Fadem (incorporated by reference herein
to Exhibit 10.4 to the Companys Current Report on Form 8-K filed January
10, 1997).10.8
    
    Employment Agreement dated April 1, 1998, between the Company and Randall
K. Boatright (incorporated herein by reference to Exhibit 10.1 to the
Companys Form 10-Q for the quarter ended June 30, 1998).10.9
    
    Series A cumulative convertible Stock Purchase Agreement dated August 11,
1998, among the Company, Renaissance Capital Growth & Income Fund III,
Inc. and Renaissance U.S. Growth & Income Trust, PLC (incorporated herein
by reference to Exhibit 10.5 to the Companys Form 10-Q for the quarter
ended June 30, 1998).
 34




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##### Table of Contents



ExhibitNumber
    
    Identification of Exhibit10.10
    
    Series A cumulative convertible Preferred Stock Purchase Agreement dated
August 11, 1998, among the Company, Richard A. Woodfield and R. Michael
Yates (incorporated herein by reference to Exhibit 10.6 to the Companys
Form 10-Q for the quarter ended June 30, 1998).10.11
    
    Series B convertible Stock Purchase Agreement dated November 19, 1998,
among the Company, Renaissance Capital Growth & Income Trust Fund III,
Inc. and Renaissance U.S. Growth & Income Trust, PLC (incorporated by
reference herein to Exhibit 10.18 to the Companys Annual Report on Form
10-KSB for the year ended December 31, 1998).10.12
    
    Amended Employment Agreement between the Company and Richard A.
Woodfield dated December 15, 1998. (incorporated by reference herein to
Exhibit 10.19 to the Companys Annual Report on Form
10-KSB for the year ended December 31, 1998).10.13
    
    Amended Stock Option Agreement between the Company and Richard A.
Woodfield dated December 15, 1998. (incorporated by reference herein to
Exhibit 10.20 to the Companys Annual Report on Form
10-KSB for the year ended December 31, 1998).10.14
    
    Series B Convertible Preferred Stock Purchase agreement dated January
21, 1999, between the Company and Richard A. Woodfield (incorporated by
reference herein to Exhibit 10.1 to the Companys Quarterly Report on Form
10-QSB filed May 14, 1999).10.15
    
    Consulting Agreement between the Company and Christopher Black dated
March 18, 1999 (incorporated by reference herein to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-QSB filed May 14, 1999).10.16
    
    Royalty Agreement among the Company and TFX Equities Incorporated dated
March 18, 1999 (incorporated by reference herein to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-QSB filed May 14, 1999).10.17
    
    Registration Rights Agreement among the Company and Dexterity
Stockholders dated March 18, 1999 (incorporated by reference herein to
Exhibit 10.4 to the Companys Quarterly Report on Form 10-QSB filed May
14, 1999).10.18
    
    Amended Employment Agreement between the Company and Randall K.
Boatright dated December 1, 2000 (incorporated herein by reference to
Exhibit 10.25 to the Companys Annual Report on Form 10-KSB for the year
ended December 31, 2000).10.19
    
    Series C Convertible Preferred Stock Purchase Agreement dated July 31,
2000 (incorporated herein by reference to Exhibit 10.26 to the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2000).10.20
    
    Distribution Agreement between the Company and Weck Closure Systems LLC
dated June 5, 2001 (incorporated herein by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-QSB filed August 10, 2001).10.21
    
    Second Amendment to Amended Employment Agreement between the Company and
Richard Woodfield dated effective January 30, 2003 (incorporated herein by
reference to Exhibit 10.25 to the Companys Annual Report on Form 10-KSB
filed March 28, 2003).10.22*
    
    Office Lease Agreement dated October 13, 2003, between the Company and
Franklin Post Oak, Ltd.10.23*
    
    First Amendment to Distribution Agreement between the Company and Weck
Closure Systems, LLC dated October 24, 2003.14.1*
    
    Code of Ethics for Senior Financial Officers
 35




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##### Table of Contents



ExhibitNumber
    
    Identification of Exhibit23.1*
    
    Consent of Akin, Doherty, Klein & Feuge, a professional corporation31.1*
    
    Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.31.2*
    
    Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.32.1*
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as required by Sarbanes Oxley Act of 2002.32.2*
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as required by Sarbanes Oxley Act of 2002.
  *
    
    Filed herewith (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the last quarter
of the period covered by this Form 10-KSB. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The aggregate fees billed by Akin Doherty, Klein & Feuge, P.C. to the
Company for fiscal years 2003 and 2002 for professional services described
below are as follows: 2003
    
    2002Audit Fees
    
    $
    48,000
    
    
    $
    44,000Audit Related Fees
    
    $
    0
    
    
    $
    0Tax Fees
    
    $
    0
    
    
    $
    0All Other Fees
    
    $
    0
    
    
    $
    0
 Pre-Approval of the Provision of Audit and Permitted Non-Audit Services The Audit Committee has not established policies and procedures for the
pre-approval of the performance of services by the Companys independent
auditor, Akin Doherty, Klein & Feuge, P.C. Akin Doherty, Klein & Feuge, P.C.
does not perform any non-audit services at this time. 36




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##### Table of Contents



SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. DEXTERITY SURGICAL, INC.March 29, 2004
    
    By:
    
    /s/ Richard A. WoodfieldRichard A. Woodfield
President and Chief Executive Officer
 In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated. Signature
    
    Title
    
    Date/s/ Richard A. Woodfield

Richard A. Woodfield
    
    President, Chief Executive
Officer and Director
(Principal Executive
Officer)
    
    March 29, 2004/s/ Randall K. Boatright

Randall K. Boatright
    
    Executive Vice President,
Chief Financial Officer and
Director (Principal
Financial and Accounting
Officer)
    
    March 29, 2004/s/ Jeffrey H. Berg, Ph.D.

Jeffrey H. Berg, Ph.D.
    
    Director
    
    March 29, 2004/s/ Christopher K. Black

Christopher K. Black
    
    Director
    
    March 29, 2004
 37




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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS To the Board of Directors
Dexterity Surgical, Inc.
San Antonio, Texas We have audited the accompanying balance sheets of Dexterity Surgical, Inc.
(Company) as of December 31, 2003 and 2002 and the related statements of
operations, stockholders deficit 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 U.S. 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 misstatements. An audit includes examining, on a test basis, evidence
which supports 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 Dexterity Surgical, Inc. as of
December 31, 2003 and 2002, and the results of its operations and its cash
flows for the years then ended in conformity with U.S. generally accepted
accounting principles. The accompanying financial statements have been prepared assuming that
Dexterity Surgical, Inc. will continue as a going concern. As more fully
described in Note A, the Company has incurred recurring net losses and has an
accumulated deficit. In addition, substantially all of the Companys debt is
in default. These conditions raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans in regard to these
matters are also described in Note A. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.     F-1




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##### Table of Contents



DEXTERITY SURGICAL, INC.
Balance Sheets
December 31, 2003 and 2002 2003
    
    2002ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    25,651
    
    
    $
    159,836Accounts receivable, net
    
    
    606,636
    
    
    
    310,221Accounts receivable, related parties
    
    
    
    
    
    
    4,924Inventories, net
    
    
    2,732
    
    
    
    79,015Prepaid and other assets
    
    
    125,145
    
    
    
    98,850Total current assets
    
    
    760,164
    
    
    
    652,846Property and Equipment, net
    
    
    159,314
    
    
    
    142,098Other Assets:Licensed technology rights and other intangible assets, less
accumulated amortization of $1,619,860 and $838,630
    
    
    1,598,108
    
    
    
    2,411,636Deferred finance charges
    
    
    
    
    
    
    65,832Total other assets
    
    
    1,598,108
    
    
    
    2,477,468Total Assets
    
    $
    2,517,586
    
    
    $
    3,272,412
 See notes to audited financial statements. F-2




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##### Table of Contents



DEXTERITY SURGICAL, INC.
Balance Sheets
December 31, 2003 and 2002 2003
    
    2002LIABILITIES AND STOCKHOLDERS DEFICITCurrent Liabilities:Accounts payable
    
    $
    2,960,530
    
    
    $
    2,871,271Accrued liabilities
    
    
    2,510,963
    
    
    
    1,429,428Current portion of long-term obligations, including
debt and royalty obligations in default
    
    
    11,162,545
    
    
    
    9,114,144Total current liabilities
    
    
    16,634,038
    
    
    
    13,414,843Royalty Obligation
    
    
    1,664,686
    
    
    
    2,929,418Minority Interest
    
    
    
    
    
    
    47,248Commitments and Contingencies
    
    
    
    
    
    
    Stockholders Deficit:Preferred stock, $.001 par value; 2,000,000 shares authorized;
2,445 shares issued and outstanding
    
    
    2
    
    
    
    2Common stock, $.001 par value; 50,000,000 shares authorized;
12,121,492 issued and outstanding
    
    
    12,122
    
    
    
    12,122Additional paid-in capital
    
    
    34,733,804
    
    
    
    34,733,804Accumulated deficit
    
    
    (50,527,066
    )
    
    
    (47,865,025
    )Total stockholders deficit
    
    
    (15,781,138
    )
    
    
    (13,119,097
    )Total Liabilities and Stockholders Deficit
    
    $
    2,517,586
    
    
    $
    3,272,412
 See notes to audited financial statements. F-3




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##### Table of Contents



DEXTERITY SURGICAL, INC.
Statements of Operations
Years Ended December 31, 2003 and 2002 2003
    
    2002Net Sales
    
    $
    1,784,851
    
    
    $
    2,059,861Costs and Expenses:Cost of sales
    
    
    864,567
    
    
    
    865,854Selling, general and administrative
    
    
    1,010,714
    
    
    
    996,389Depreciation and amortization
    
    
    931,250
    
    
    
    1,000,395Cost of litigation settlement
    
    
    
    
    
    
    286,9032,806,531
    
    
    
    3,149,541Loss from Operations
    
    
    (1,021,680
    )
    
    
    (1,089,680
    )Other Income (Expense):Interest expense
    
    
    (1,640,361
    )
    
    
    (1,633,774
    )Investment and other income
    
    
    
    
    
    
    1,348Loss on investment
    
    
    
    
    
    
    (450,934
    )(1,640,361
    )
    
    
    (2,083,360
    )Net Loss
    
    
    (2,662,041
    )
    
    
    (3,173,040
    )Dividend requirement on cumulative
convertible preferred stock
    
    
    (195,600
    )
    
    
    (195,600
    )Net Loss Applicable to Common Stockholders
    
    $
    (2,857,641
    )
    
    $
    (3,368,640
    )Earnings (Loss) Per Share:Basic and diluted loss per common share
    
    $
    (.24
    )
    
    $

    (.28
    )Weighted average shares outstanding used in
computing basic and diluted loss per common share
    
    
    12,121,492
    
    
    
    12,121,492
 See notes to audited financial statements. F-4




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##### Table of Contents



DEXTERITY SURGICAL, INC.
Statements of Stockholders Deficit
Years Ended December 31, 2003 and 2002 AdditionalPreferred
    
    Common
    
    Paid-In
    
    AccumulatedStock
    
    Stock
    
    Capital
    
    Deficit
    
    TotalBalance, January 1, 2002
    
    $
    2
    
    
    $
    12,122
    
    
    $
    34,733,804
    
    
    $
    (44,691,985
    )
    
    $
    (9,946,057
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,173,040
    )
    
    
    (3,173,040
    )Balance, December 31, 2002
    
    
    2
    
    
    
    12,122
    
    
    
    34,733,804
    
    
    
    (47,865,025
    )
    
    
    (13,119,097
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,662,041
    )
    
    
    (2,662,041
    )Balance, December 31, 2003
    
    $
    2
    
    
    $
    12,122
    
    
    $
    34,733,804
    
    
    $
    (50,527,066
    )
    
    $
    (15,781,138
    )
 See notes to audited financial statements. F-5




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##### Table of Contents



DEXTERITY SURGICAL, INC.
Statements of Cash Flows
Years Ended December 31, 2003 and 2002 2003
    
    2002Operating ActivitiesNet loss
    
    $
    (2,662,041
    )
    
    $
    (3,173,040
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation
    
    
    121,320
    
    
    
    182,440Amortization
    
    
    809,930
    
    
    
    817,955Accretion of royalty obligation
    
    
    514,674
    
    
    
    648,598Amortization of deferred finance charges
    
    
    65,832
    
    
    
    74,830Dissolution of subsidiary
    
    
    (47,248
    )
    
    
    Loss on investment
    
    
    
    
    
    
    450,934Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (296,415
    )
    
    
    (92,592
    )Accounts receivable, related parties
    
    
    4,924
    
    
    
    9,384Inventories
    
    
    76,283
    
    
    
    48,889Prepaid and other assets
    
    
    (22,702
    )
    
    
    (802
    )Accounts payable and accrued liabilities
    
    
    1,170,794
    
    
    
    1,134,232Net cash provided (used) by operating activities
    
    
    (264,649
    )
    
    
    100,828Investing ActivitiesPurchases of property and equipment
    
    
    (138,536
    )
    
    
    Net cash (used) by investing activities
    
    
    (138,536
    )
    
    
    Financing ActivitiesAdvances on line of credit
    
    
    269,000
    
    
    
    Net cash provided by financing activities
    
    
    269,000
    
    
    
    Net change in cash and cash equivalents
    
    
    (134,185
    )
    
    
    100,828Cash and cash equivalents, beginning of year
    
    
    159,836
    
    
    
    59,008Cash and Cash Equivalents, End of Year
    
    $
    25,651
    
    
    $
    159,836Supplemental Cash Flow Information:Interest, non-cash charge for accretion of discount
    
    $
    580,506
    
    
    $
    723,428Interest paid in cash
    
    
    
    
    
    
    Federal income taxes paid in cash
    
    
    
    
    
    
    
 See notes to audited financial statements. F-6




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE A  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Description of the Company and Risk Factors:Dexterity
Surgical, Inc., a Delaware corporation (Dexterity or the Company), was
incorporated on December 23, 1988, and commenced operations on January 1, 1989.
The Company is engaged in the development, commercialization, and distribution
of proprietary and nonproprietary medical devices. Going Concern:At December 31, 2003, the Company had an accumulated deficit of
$50,527,066. During the years ended December 31, 2003 and 2002, the Company
incurred net losses of $2,662,041 and $3,173,040, respectively. It is likely
that the Company will continue to incur losses. There can be no assurance that
the Company will be able to raise cash as necessary to fund operations or that
the Company will ever achieve profitability. The Companys cumulative losses
have been funded primarily through its initial public offering of common stock,
private sales of common stock and preferred stock, debt financing, and the sale
of convertible debentures. Virtually all debts and obligations of the Company are in default. The Company
is in violation of certain affirmative financial covenant requirements
associated with its convertible debentures and has not made required monthly
principal and interest payments during 2003 because it lacked the funds to do
so. Also, certain redemption rights of the holder of its convertible
debentures were triggered by the delisting of the Companys common stock from
the NASDAQ SmallCap Market in 2000. Therefore, the Company is in default under
the debentures and the holder has demanded immediate repayment of the entire
amount outstanding, which was $2,632,563 at December 31, 2003. This default,
in turn, invoked the cross-default clause in the Companys line of credit
agreement, under which $914,995 was outstanding at December 31, 2003. Further,
the Company is in default on the $1,000,000 notes due on October 18, 2001 and
does not have the available resources to pay the guaranteed minimum royalty,
with a balance of $8,279,673 at December 31, 2003, due to the former
stockholders of Dexterity Incorporated. The Company does not have sufficient
resources to fund such amounts. The Company has attempted to make arrangements
to restructure its cash obligations, including its debentures, line of credit
and royalty obligations. However, these negotiations have not been successful.
IF A RESTRUCTURING IS NOT SUCCESSFUL, THE COMPANY WOULD LIKELY BE REQUIRED TO
SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS. During 2003, with the exception of litigation costs, the Company continued to
reduce its selling, general and administrative expenses. However, it has not
been successful in restructuring its debt obligations. Based on current
projections for 2004, management believes the Companys operating results for
2004 will not generate sufficient working capital to fund operations. The medical devices industry in which the Company competes is highly
competitive and dominated by a relatively small number of competitors with
financial and other resources much greater than those possessed by the Company.
The Companys ability to achieve increases in sales or to sustain current
sales levels depends in part on the ability of its suppliers to provide
products in the quantities the Company requires. These, and other factors which are beyond the control of the Company, provide
no assurances that the Company will be able to successfully raise additional
funds as needed or compete in the medical devices market. Failure to do so
would have a material adverse effect on the Companys business, financial
condition, results of operations, and ability to continue operations. F-7




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
A  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
continued Revenue Recognition:The Company recognizes revenue when each of the following
four criteria are met: 1) a contract or sales arrangement exists; 2) products
have been shipped or services have been rendered; 3) the price of the products
or services is fixed or determinable; and 4) collectibility is reasonably
assured. Commissions earned are recognized when customer orders are placed with product
suppliers. Customers may return products in the event of product defect or
inaccurate order fulfillment. The Company maintains an allowance for sales
returns based upon a historical analysis of returns. Returns were not
significant in 2003 or 2002. Cash and Cash Equivalents:The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Accounts Receivable:Accounts receivable are reported at outstanding principal
net of an allowance for doubtful accounts of $22,790 at December 31, 2003 and
2002. The Company normally does not charge interest on accounts receivable.
The allowance for doubtful accounts is generally determined based on an
account-by-account review. Accounts are charged off when collection efforts
have failed and the account is deemed uncollectible. Inventories:Furnished goods inventory is stated at the lower of cost
(determined on an average-cost basis which approximates the first-in, first-out
method) or market. Property and Equipment:Property and equipment is stated at cost.
Depreciation is provided utilizing the straight-line method over the estimated
useful lives of the respective assets (generally three to ten years).
Additions and improvements that extend the useful life of an asset are
capitalized. Repairs and maintenance are charged to expense as incurred. Research and Development:Research and development costs are expensed as
incurred. No such costs were incurred in 2003 or 2002. Licensed Technology Rights:The carrying value of licensed technology rights
is periodically reviewed for impairment. Impairments are recognized when the
expected future operating cash flows derived from such licensed technology
rights are less than their carrying value, and are measured by comparing the
carrying value of the asset to discounted future cash flows. Amortization
expense of approximately $810,000 is estimated for 2004 and $788,000 for 2005. Advertising:The Company expenses advertising costs as incurred. The Company
did not incur any advertising costs in 2003 or 2002. Shipping and Handling:Amounts billed to customers for shipping and handling
costs are included in net sales. Costs incurred for shipping and handling are
included in selling, general, and administrative expenses. Shipping and
handling costs were approximately $17,000 in 2003 and $10,000 in 2002. Segment Disclosure:The Company currently manages its medical devices business
as one operating segment. F-8




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DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
A  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
continued Stock-Based Compensation:At December 31, 2003, the Company has a stock-based
employee compensation plan which is described more fully in the Stock Option
and Warranty footnote. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost related to stock options is reflected in net income
as all options granted under the plan had an exercise price equal to, or
greater than, the market value of the underlying common stock on the date of
grant. The fair value of each option is estimated on the date of grant using
the Black-Scholes pricing model for a stock that does not pay dividends with
the following weighted average assumptions used for grants in 2003 and 2002:
risk-free interest rates based on market rates at grant date, ranging from 4.9%
to 6.8%; expected life of five years; and expected volatibility of 88%. The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation, to stock-based employee

compensation for the year ended December 31: 2003
    
    2002Net income (loss) as reported
    
    $
    (2,857,641
    )
    
    $
    (3,368,640
    )Deduct: Total stock-based compensation
expense determined under the fair value based
method for all awards, net of related tax effects
    
    
    (30,844
    )
    
    
    (98,000
    )Pro forma earnings (loss)
    
    $
    (2,888,485
    )
    
    $
    (3,466,640
    )Earnings (loss) per common share:Basic, as reported
    
    $
    (.24
    )
    
    $
    (.28
    )Basic, pro forma
    
    $
    (.24
    )
    
    $
    (.29
    )Diluted, as reported
    
    $
    (.24
    )
    
    $
    (.28
    )Diluted, pro forma
    
    $
    (.24
    )
    
    $
    (.29
    )
 Earnings (Loss) Per Share:Basic earnings (loss) per share (EPS) is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company.
Since the Company had a net loss for the years ended December 31, 2003 and
2002, diluted EPS equals basic EPS, as potentially dilutive common stock
equivalents are antidilutive in loss periods. Use of Estimates:The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires 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 may differ from those estimates. F-9




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DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
A  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
continued New Accounting Pronouncements:In April 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 145 - Revision of FASB Statements No.
4, 44 and 64, and Amendment of FASB Statement No. 13 and Technical
Corrections. This Statement changes the presentation and reporting of
extinguishments of debt on the Statement of Operations. The adoption of SFAS
No. 145 by the Company could impact the presentation of any debt extinguished
by the Company (as an extraordinary item or from continuing operations).
However, it should have no impact on the calculation of any gain or loss
resulting from an extinguishment. In
December 2002, FASB issued SFAS No. 148  Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment of FASB Statement No.
123. This Statement provides guidance and transition rules for those
companies electing to change the method of accounting for stock-based
compensation. However, the statement does not require a change in accounting,
and Dexterity has elected to continue reporting stock-based compensation
following SFAS No. 123 and Accounting Principles Board Opinion No. 25. SFAS
No. 148 also requires certain enhanced disclosures regarding stock-based
compensation, and such disclosures have been included in the footnotes to the
financial statements. A number of other new Standards were issued in 2003, but their impact to the
Company should be minimal. Reclassifications:Certain 2002 balances have been reclassified to conform to
their 2003 presentation. Concentration of Risk: Credit Risk:The Companys accounts receivable are due from trade customers,
including hospitals, clinics and practicing surgeons. Ongoing credit
evaluations of customers financial conditions are performed, and generally, no
collateral is required. The Company maintains reserves for possible credit
losses, and such losses have not exceeded managements expectations. Customers:In 2000, the Company signed an exclusive agreement under which Weck
Closure Systems (WCS) agreed to distribute the Dexterity Pneumo Sleeve and the
Dexterity Protractor in the United States. The agreement also covers
international distribution except in those areas for which Dexterity has signed
previous exclusive sales and distribution agreements still in effect. Under
the terms of the agreement, WCS (a division of Teleflex, Inc.) is required to
purchase certain minimum quantities. Effective July 1, 2002, the Company and WCS amended the 2000 agreement which
adjusted various aspects of the contract to more accurately reflect current
existing market conditions. WCS continued its exclusive right to distribute
the Dexterity Protractor; however, WCS also agreed to distribute the Dexterity
Pneumo Sleeve on a nonexclusive basis and certain guaranteed minimum purchase
requirements by WCS, which originally were scheduled to expire December 31,
2001, were extended until December 31, 2003. This contract was subsequently
extended to expire June 30, 2004 to allow the Company and WCS time to negotiate
a new agreement Sales to WCS and affiliates represented 62% and 67% of the Companys net sales
for the years ended December 31, 2003 and 2002, respectively. Receivables from
WCS and affiliates represented 87% and 83% of net accounts receivable at
December 31, 2003 and 2002, respectively. Suppliers:The manufacturer and supplier of the Pneumo Sleeve and Protractor
accounts for 37% and 54% of purchases for the years ended December 31, 2003 and
2002, respectively. Products:The Pneumo Sleeve and Protractor products account for 62% and 67% of
net sales for the years ended December 31, 2003 and 2002, respectively. F-10




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
B  TERMINATION OF NEGOTIATIONS FOR SALE OF MAJOR ASSET AND LITIGATION
SETTLEMENT On June 3, 2003, the Company announced that Davol, Inc. and the Company had
broken off negotiations related to the previously announced sale of
substantially all assets of the Company relating to the Protractor line in
consideration for cash of $7 million. On September 11, 2002, the Company had entered into an agreement with United
States Surgical Corporation (U.S. Surgical), a division of Tyco Healthcare
Group LP, to ultimately settle all claims and counterclaims between the two
parties. The pertinent terms of the settlement agreement are as follows:  
    
    The Company represented and warranted it was in the process of
negotiating the sale of the Dexterity Protractor line.
    
    Within seven days of the closing of the sale, but no later than
April 21, 2003, the Company would pay U.S. Surgical $800,000 in full
settlement of the $2,500,000 trade accounts payable to U.S. Surgical
currently recorded on the Companys books and records. Cost of
litigation settlement of $287,000 was recorded in September 2002. Because the sale of the asset did not take place, U.S. Surgical may enforce a
Stipulated Judgment, filed by the Company and U.S. Surgical on September 30,
2002, for $2,500,000 in its favor. As stated above, the Company was required to pay U.S. Surgical $800,000 no
later than April 21, 2003. The Company did not make the $800,000 payment to
U.S. Surgical; accordingly, U.S. Surgical may enforce its $2,500,000 judgment
at any time. The amount is included in accounts payable at December 31, 2003
and 2002. The Company is attempting to negotiate a new settlement agreement;
however, there can be no assurance that U.S. Surgical will enter into another
settlement agreement with the Company or that U.S. Surgical will not decide to
enforce its judgment. NOTE
C  INVESTMENTS In June 1998, the Company issued 370,000 shares of common stock at a per share
price of $3.25 with an aggregate value of $1,202,500 in exchange for
approximately 4% of the ownership interests of Ana-Tech Medical Corporation
(Ana-Tech), pursuant to a subscription agreement dated June 9, 1998. At the
same time, Ana-Tech sold ownership interests for cash to third parties at the
same unit price. The Company accounted for the investment in Ana-Tech using
the cost method of accounting. An impairment charge of approximately $752,000 was taken in the fourth quarter
of 2001. This impairment was determined by the latest expected sales price of
ownership interests by Ana-Tech for cash to third parties. The balance of the
investment ($451,000) was written off as an impairment charge in the third
quarter 2002 due to Ana-Tech filing for protection under the United States
bankruptcy laws. F-11




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
D  PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31: 2003
    
    2002Machinery and equipment
    
    $
    772,132
    
    
    $
    644,596Furniture and fixtures
    
    
    11,000
    
    
    
    11,000Total property and equipment
    
    
    783,132
    
    
    
    655,596Less accumulated depreciation
    
    
    (623,818
    )
    
    
    (513,498
    )Net property and equipment
    
    $
    159,314
    
    
    $
    142,098
 NOTE
E  FEDERAL INCOME TAXES As of December 31, 2003, the Company had net operating loss (NOL) carryforwards
of approximately $25,000,000 for federal income tax purposes that are available
to reduce future taxable income and will expire from 2006 through 2023 if not
utilized. The tax effects of significant temporary differences are as follows
at December 31: 2003
    
    2002Deferred Tax Assets:Tax loss carryforwards
    
    $
    8,500,000
    
    
    $
    8,250,000Research and development credit carryforwards
    
    
    560,000
    
    
    
    560,000Impairment differences
    
    
    4,090,000
    
    
    
    3,810,000Other items
    
    
    20,000
    
    
    
    20,000Total deferred tax assets
    
    
    13,170,000
    
    
    
    12,640,000Less valuation reserve
    
    
    (13,170,000
    )
    
    
    (12,640,000
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 As there is no assurance of future income, a 100% valuation reserve in 2003 and
2002 has been established against the Companys net deferred tax assets. The
Company will continue to evaluate the necessity for such valuation reserves in
the future. The Companys ability to use its NOL carryforwards to offset future income is
subject to restrictions enacted in the U.S. Internal Revenue Code of 1986 as
amended (the Code). These restrictions provide for limitations on the
Companys utilization of its NOL carryforwards following certain ownership
changes described in the Code. As a result of ownership changes, the Companys
existing NOL carryforwards are subject to limitations and may become further
limited by future ownership changes. F-12




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
F  LEASE OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES Operating Leases:The Company leases its administrative office space under a
lease agreement which expires November 30, 2006. Rent expense totaled
approximately $44,000 in 2003 and $52,000 in 2002, which is net of sublease
income of approximately $0 in 2003 and $70,000 in 2002. Employment Agreements:The Company has several employment agreements that
provide for compensation for future service of $260,000 in 2004. Certain of
the Companys employees have an opportunity to earn bonuses based upon the
achievement of specified performance criteria, sale of a major product line, or
change in control of the Company. Disputes, Lawsuits and Contingencies:  a)
    
    On July 17, 2003, Medical Creative Technologies, Inc. and Robert D.
Rambo filed a lawsuit in the United States District Court for the
Eastern District of Pennsylvania against the Company alleging breach of
contract with regard to several of the Companys operative agreements.
The plaintiffs are seeking approximately $270,000 cash and return of
all rights to the Dexterity® Pneumo Sleeve® and the Dexterity®
Protractor®. The Company believes this lawsuit is without merit and
intends to vigorously defend its position.b)
    
    The holders of the Companys convertible debentures and certain
holders of the Companys Series A Cumulative Convertible Preferred
Stock, $.001 par value (Series A Preferred Stock), and Series B
Cumulative Convertible Preferred Stock, $.001 par value (Series B
Preferred Stock), have disputed the price for conversion to
common shares. See Note H.c)
    
    On February 25, 2003, Surgical Visions I, Inc. and various
individuals, including two former directors of the Company, filed a
lawsuit in the 166th Judicial District Court in Bexar County, Texas,
against the Company, Teleflex, Inc., and certain of the Companys
officers and directors alleging, among other things, conspiracy to
defraud minority shareholders, breach of fiduciary duty, falsification
of corporate minutes, issuance of false and misleading public filings
and press releases, and bribery. The plaintiffs are seeking
unspecified compensatory damages. The Company believes this lawsuit is
without merit and intends to vigorously defend its position.d)
    
    The Company is also a party to claims and legal proceedings arising
in the ordinary course of business. The Company believes it is
unlikely the outcome of any of these other claims or proceedings will
have a material adverse effect on its financial statements. However,
there can be no assurance that the resolution of any particular claim
or proceeding would not have an adverse effect on the Companys
financial position or results of operations. F-13




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
G  DEBT AND OTHER LONG-TERM OBLIGATIONS All of the Companys debt and other long-term obligations are in default.
Amounts outstanding are as follows at December 31: 2003
    
    2002(1) Dexterity notes
    
    $
    1,000,000
    
    
    $
    1,000,000(2) Line of credit
    
    
    914,995
    
    
    
    645,995(3) Royalty obligation
    
    
    8,279,673
    
    
    
    7,765,004(4) Convertible debentures
    
    
    2,632,563
    
    
    
    2,632,563Total long-term debt and other obligations
    
    
    12,827,231
    
    
    
    12,043,562Less current portion
    
    
    (11,162,545
    )
    
    
    (9,114,144
    )Long-term portion of debt and other obligations
    
    $
    1,664,686
    
    
    $
    2,929,418
 (1) Unsecured notes payable related to Dexterity acquisition, bearing interest
at 12%, interest due quarterly, matured in October 2001. The Company is in
default with respect to this obligation and does not have sufficient resources
to satisfy this obligation in the event of demand for payment. (2) Revolving line of credit secured by accounts receivable, inventories, and
intangible assets. In May 2001, Teleflex, Inc., a major stockholder in the
Company, purchased this instrument from the previous lender. The outstanding
balance accrues interest at prime plus 1.5%, plus an additional 3% due to the
Companys default on the line of credit. There are no additional funds
available under the current borrowing base. The Company is in default with
respect to this obligation and does not have sufficient resources to satisfy
this obligation in the event of demand for payment. (3) Royalty obligation related to Dexterity acquisition, subject to annual
minimum payments over a period of seven years commencing in 1999 and discounted
at 12%. The minimum payments aggregate approximately $9.7 million over the
seven-year royalty period. The Company is in default with respect to this
obligation and does not have sufficient resources to satisfy this obligation in
the event of demand for payment. The agreement between the Company and the holders of the royalty obligation
specifies that a penalty of 12% shall be applied to any royalty amounts not
paid when due. Penalties of $397,608 and $284,242 are included in interest
expense and accrued liabilities at December 31, 2003 and December 31, 2002,
respectively. (4) In December 1997, the Company sold 250,000 shares of common stock to
affiliates of Renaissance Capital Group, Inc. (Renaissance), in a private
placement for aggregate proceeds of $1,000,000, and placed $3,000,000 in 9%
convertible debentures (debentures) with Renaissance. The Company is in
default with respect to this obligation and demand has been made for payment.
As such, the entire balance due of $2,632,563 has been classified as a current
liability at December 31, 2003. The debentures are secured by substantially
all of the assets of the Company and require monthly payments of interest. The debentures are convertible into shares of the Companys common stock, in
whole or in part, at any time at the option of the holder at a price of $1.00
per share of common stock. The conversion price is subject to downward
revision if the Company sells shares of its common stock, or securities
convertible into shares of its common stock, at a price less than $1.00 per
share of common stock, subject to certain allowed exceptions, during the term
of the debentures. F-14




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
G  DEBT AND OTHER LONG-TERM OBLIGATIONS - continued Maturities:Maturities of debt and other long-term obligations will result in
the following principal payments: Other DebtandRoyalty
    
    Long-TermYear Ending December 31
    
    Obligation
    
    Obligations
    
    TotalDelinquent
    
    $
    4,835,586
    
    
    $
    4,547,558
    
    
    $
    9,383,1442004
    
    
    1,779,401
    
    
    
    
    
    
    
    1,779,4012005
    
    
    1,779,401
    
    
    
    
    
    
    
    1,779,4012006
    
    
    444,850
    
    
    
    
    
    
    
    444,8502007
    
    
    
    
    
    
    
    
    
    
    Gross obligations
    
    
    8,839,238
    
    
    
    4,547,558
    
    
    
    13,386,796Less amount representing interest
    
    
    (559,565
    )
    
    
    
    
    
    
    (559,565
    )Net obligations
    
    $
    8,279,673
    
    
    $
    4,547,558
    
    
    $
    12,827,231
 Interest expense was incurred as follows during the years ended December 31: 2003
    
    2002Dexterity notes
    
    $
    120,000
    
    
    $
    120,000Line of credit
    
    
    60,000
    
    
    
    60,000Royalty obligation
    
    
    911,734
    
    
    
    895,550Convertible debentures
    
    
    481,130
    
    
    
    480,193Deferred finance and other charges
    
    
    67,497
    
    
    
    78,031Total
    
    $
    1,640,361
    
    
    $
    1,633,774
 NOTE
H  PREFERRED STOCK Pursuant to a private placement which occurred in July and August 2000, the
Company issued to TFX Equities, Inc., a business development subsidiary of
Teleflex, Inc., and Cuda Products Company, whose chief executive officer is a
director of the Company, an aggregate of 400 shares of Series C Cumulative
Convertible Preferred Stock, $.001 par value (Series C Preferred Stock), for
aggregate proceeds of $400,000. The Company used such proceeds for working
capital. The annual dividends on the Series C Preferred Stock are cumulative
at a rate of $80 per share. Quarterly dividends are in arrears in the
aggregate amount of $64,000. The Series C Preferred Stock is currently
convertible into shares of common stock at a conversion price of $1.00 per
share, for an aggregate of 400,000 shares of common stock. The conversion
price for the Series C Preferred Stock is subject to downward adjustment in the
event the Company sells shares of common stock, or securities convertible into
shares of common stock, at a per share price less than $1.00. The holders of
Series C Preferred Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company. The affirmative vote
of 66 2/3% of the Series C Preferred Stock is required in order to amend the
Companys Certificate of Incorporation or Bylaws to materially affect the
rights of the holders of Series C Preferred Stock, including authorizing and
creating a class of stock having rights prior to or senior to the Series C
Preferred Stock. Since two or more quarterly dividends payable on the Series C
Preferred Stock are in arrears, the holders of the Series C Preferred Stock, by
a majority vote, are entitled to designate two additional directors to serve on
the Companys Board of Directors. F-15




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
H  PREFERRED STOCK - continued Pursuant to a private placement which occurred in November 1998, the Company
issued to two affiliates of Renaissance Capital Group, Inc. (collectively
Renaissance) and one individual, who is an officer and director of the
Company, an aggregate of 1,025 shares of Series B Preferred Stock for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital.
The annual dividends on the Series B Preferred Stock are cumulative at a rate
of $80 per share. Quarterly dividends are in arrears in the aggregate amount
of $164,000. The Series B Preferred Stock is currently convertible into shares
of common stock at a conversion price of $1.54 per share, for an aggregate of
665,584 shares of common stock. The conversion price for the Series B
Preferred Stock is subject to downward adjustment in the event the Company
sells shares of common stock, or securities convertible into shares of common
stock, at a per share price less than $1.54. Certain holders of the Series B
Preferred Stock contend that the issuance of shares by the Company in
settlement of the Andrieni lawsuit in 2001 requires a downward adjustment to
the conversion price of the Series B Preferred Stock. The Company disputes the
claim of such holders of Series B Preferred Stock and believes the conversion
price should remain at $1.54. However, there can be no assurance that such
holders of Series B Preferred Stock will not prevail in their claim for a
downward adjustment to the conversion price, in which case the Company would be
required to issue a greater number of shares of common stock upon conversion of
the Series B Preferred Stock than would be issuable at a $1.54 conversion
price. Any issuance of common stock upon the conversion of preferred stock
will substantially dilute the voting rights and other interests of stockholders
of the Company. The holders of Series B Preferred Stock are entitled to one
vote per share on all matters submitted to a vote of the stockholders of the
Company. The affirmative vote of 66 2/3% of the Series B Preferred Stock is
required in order to amend the Companys Certificate of Incorporation or Bylaws
to materially affect the rights of the holders of Series B Preferred Stock,
including authorizing and creating a class of stock having rights prior to or
senior to the Series B Preferred Stock. Since two or more quarterly dividends
payable on the Series B Preferred Stock are in arrears, the holders of Series B
Preferred Stock, by a majority vote, are entitled to designate two additional
directors to serve on the Companys Board of Directors. In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director
of the Company, an aggregate of 1,170 shares of Series A Preferred Stock for
aggregate proceeds of $1,170,000. The Company used such proceeds for working
capital. During March 2000, 150 shares of Series A Preferred Stock were
converted to 93,750 shares of common stock. Annual dividends on the Series A
Preferred Stock are cumulative at a rate of $80 per share. Quarterly dividends
are in arrears in the amount of $163,200. The Series A Preferred Stock is
currently convertible into shares of common stock at a conversion price of
$1.54 per share, for an aggregate of 662,338 shares of common stock. The
conversion price for the Series A Preferred Stock is subject to downward
adjustment in the event the Company sells shares of common stock, or securities
convertible into shares of common stock, at a per share price less than $1.54.
Certain holders of the Series A Preferred Stock contend that the issuance of
shares by the Company in settlement of the Andrieni lawsuit in 2001 requires a
downward adjustment to the conversion price of the Series A Preferred Stock.
The Company disputes the claim of such holders of Series A Preferred Stock and
believes the conversion price should remain at $1.54. However, there can be no
assurance that such holders of Series A Preferred Stock will not prevail in
their claim for a downward adjustment to the conversion price, in which case
the Company would be required to issue a greater number of shares of common
stock upon conversion of the Series A Preferred Stock than would be issuable at
a $1.54 conversion price. Any issuance of common stock upon the conversion of
Preferred Stock will substantially dilute the voting rights and other interests
of stockholders of the Company. The holders of Series A Preferred Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company. The affirmative vote of 66 2/3% of the Series A
Preferred Stock is required in order to amend the Companys Certificate of
Incorporation or Bylaws to materially affect the rights of the holders of
Series A Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series A Preferred Stock. Since two or
more quarterly dividends payable on the Series A Preferred Stock are in
arrears, the holders of Series A Preferred Stock, by a majority vote, are
entitled to designate two additional directors to serve on the Companys Board
of Directors F-16




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
I  EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator of the basic
net loss per share (diluted loss per share equals basic loss per share since
the effects of common stock equivalents are anti-dilutive in loss years): 2003
    
    2002Numerator:Net loss
    
    $
    (2,662,041
    )
    
    $
    (3,173,040
    )Preferred stock dividends
    
    
    (195,600
    )
    
    
    (195,600
    )Net loss applicable to common stockholders
    
    $
    (2,857,641
    )
    
    $
    (3,368,640
    )Denominator:Basic weighted average common shares outstanding
    
    
    12,121,492
    
    
    
    12,121,492Effect of dilutive common stock equivalents
    
    
    
    
    
    
    Weighted average shares outstanding
    
    
    12,121,492
    
    
    
    12,121,492Loss per common share, basic and diluted
    
    
    (.24
    )
    
    
    (.28
    )
 NOTE
J  STOCK OPTIONS AND WARRANTS In December 1989, the Company adopted a stock option plan (the 1989 Plan).
Under the 1989 Plan, the Company may grant incentive and nonstatutory stock
options to employees, directors, and consultants of the Company. Unexercised
options expire ten years from the date of grant. The 1989 Plan expired in
December 1999. At December 31, 2003, options to purchase 338,150 shares of
common stock are outstanding under the 1989 Plan. In May 1995, the Company adopted the 1995 Non-Employee Director Stock Option
Plan (NEDSOP). Under NEDSOP, the Company may grant stock options to
nonemployee directors of the Company. The maximum number of shares available
for grant under NEDSOP is 400,000. The NEDSOP options vest in 25% increments
on each succeeding anniversary of the grant date, with unexercised options
expiring ten years from the date they vest. At December 31, 2003, options to
purchase 65,000 shares of common stock are outstanding under the NEDSOP. In December 1999, the Company adopted a stock option plan to replace the 1989
Plan (the 2000 Plan). Under the 2000 Plan, the Company may grant incentive and
nonstatutory stock options and restricted shares of common stock to employees,
directors, and consultants of the Company. Unexercised options vest in 25%
increments on each succeeding anniversary of the grant date, with unexercised
options expiring on the tenth anniversary of the date of grant. The maximum
number of shares available for grant under the 2000 Plan is 3,500,000,
including 2,000,000 shares under option grants and 1,500,000 shares of
restricted stock. At December 31, 2003, options to purchase 245,000 shares of
common stock are outstanding under the 2000 Plan. Under all plans, the exercise price must be at least equal to the stocks
market price on the date of grant. At December 31, 2003, 648,650 shares of
common stock are reserved for future issuance under all plans. The Company periodically grants options to employees and directors outside of
any plan. However, no such options were granted in 2003 or 2002. F-17




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
J  STOCK OPTIONS AND WARRANTS - continued A summary of the status of the Companys stock options at December 31, 2003 and
2002, and changes during the years then ended, is presented in the table below: 2003
    
    2002Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExercisePrice Per
    
    
    
    
    
    Price PerShares
    
    Share
    
    Shares
    
    ShareOutstanding, beginning of year
    
    
    1,350,600
    
    
    $
    1.89
    
    
    
    1,423,400
    
    
    $
    1.89Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (5,285
    )
    
    
    .001
    
    
    
    (72,800
    )
    
    
    1.42Outstanding, end of year
    
    
    1,345,315
    
    
    
    .74
    
    
    
    1,350,600
    
    
    $
    1.89Options exercisable, end of year
    
    
    1,342,815
    
    
    
    .74
    
    
    
    1,300,600
    
    
    $
    1.92Weighted average fair value
of options granted
    
    $
    NA
    
    
    
    
    
    
    $
    NA
 The following table summarizes the information about options outstanding at December 31, 2003: Weighted Average
    
    NumberRemaining
    
    Exercisable atExercise Price
    
    Number
    
    Contractual Life
    
    December 31,Per Share
    
    Outstanding
    
    (years)
    
    2003$.003
    
    
    895,900
    
    
    
    5.13
    
    
    
    895,900.14
    
    
    85,000
    
    
    
    7.01
    
    
    
    85,0001.00
    
    
    115,000
    
    
    
    6.07
    
    
    
    112,5002.50
    
    
    750
    
    
    
    2.12
    
    
    
    7503.00
    
    
    160,000
    
    
    
    2.97
    
    
    
    160,0003.25
    
    
    2,000
    
    
    
    4.11
    
    
    
    2,0004.38
    
    
    73,333
    
    
    
    3.72
    
    
    
    73,3335.03
    
    
    13,332
    
    
    
    3.75
    
    
    
    13,3321,345,315
    
    
    
    
    
    
    
    1,342,815
 F-18




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##### Table of Contents



DEXTERITY SURGICAL, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002 NOTE
J  STOCK OPTIONS AND WARRANTS - continued Warrants:At December 31, 2003, the Company has 1,547,500 warrants outstanding.
Each warrant, when exercised, is exchangeable for one share of the Companys
common stock. The following table summarizes the information about warrants outstanding at
December 31, 2003: Exercise
    
    Number
    
    Exercisable atPrice
    
    Outstanding
    
    December 31, 2003
    
    Expiration$1.00
    
    
    1,500,000
    
    
    
    1,200,000
    
    
    
    2009$2.00
    
    
    22,500
    
    
    
    22,500
    
    
    
    2004$2.25
    
    
    25,000
    
    
    
    25,000
    
    
    
    2004
 F-19