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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended November 30, 1995
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
Commission File No. 0-8350
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STAODYN, INC.
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(Name of small business issuer in its charter)
Delaware 84-0684224
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1225 Ken Pratt Boulevard, Longmont, CO 80501
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 772-3631
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
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(Title of Class)
Common Stock Purchase Warrants (Expiring 11/1/96)
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $18,371,001
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State the aggregate market value of the voting stock held by nonaffiliates of
the registrant, computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
$9,913,009 as of February 7, 1996
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, $.01 par value 6,344,326
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Class Outstanding at February 7, 1996
Documents Incorporated by Reference: Portions of the definitive Proxy Statement
with respect to the May 23, 1996 Annual Meeting of Stockholders are incorporated
by reference in Part III hereof.
Transitional Small Business Disclosure format (check one): Yes X No
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This Form 10-KSB consists of 39 pages.
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PART I
ITEM 1. BUSINESS
GENERAL
Staodyn, Inc. (the "Company" or "Staodyn") was incorporated in 1975. Staodyn
designs, develops, manufactures, and markets noninvasive electrotherapeutic
devices, supplies, and accessories for use by physicians, physical therapists,
athletic trainers, and their patients. The Company's electrotherapeutic
products are used in the treatment of chronic and acute pain and neuromuscular
rehabilitation. The Company's pain management products treat chronic and acute
pain with transcutaneous electrical nerve stimulation or "TENS" that delivers
carefully controlled pulses of electricity through the skin to sensory nerves,
thereby relieving pain without the side effects often associated with drugs or
surgery. Staodyn's muscle rehabilitation devices use neuromuscular electrical
stimulation or "NMES" to produce controlled involuntary muscle contractions to
speed recovery of normal function in muscle and other soft tissue affected by
disease or trauma.
The Company operates both a retail sales division, acquired in 1992, which
sells the Company's products directly to patients, third-party payors, and
medical practitioners, and a wholesale division, which sells primarily to home
healthcare dealers. In 1995 the retail division accounted for 76% of the
Company's sales. Based on total sales, the Company believes that it now ranks
second in the domestic market for TENS and NMES proceeds, estimated at about
$150 million annually.
The Company is continually seeking to broaden and diversify its products
through internal development, by adding complementary products developed and/or
manufactured by others, through acquisitions, and by entering into selected
marketing arrangements with other manufacturers. By utilizing its expertise in
electrotherapeutic products, the Company developed SPORTX(TM), introduced in
June 1995, designed primarily to accelerate recovery from athletic injuries. The
Company has also developed a system, known as Dermapulse(R), for the treatment
of severe skin wounds such as pressure ulcers. The commercial opportunity for
this product in the U.S. is subject to FDA approval. The product is currently
being marketed in Canada, Germany, and to a lesser extent in other European
Union countries. The Company's retail division currently sells complementary
biofeedback, dynamic splint, and iontophoresis products manufactured by others .
PRODUCTS
The Company's business is composed primarily of electrotherapeutic devices,
supplies, and accessories for pain management and for rehabilitation. In
addition, as part of its rehabilitation product line, the Company markets
traction devices that are not electrical in nature.
TENS Devices
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Although TENS is not effective for every patient or all types of pain,
physicians and physical therapists have treated their patients with TENS for
over twenty years and have generally accepted TENS as an effective treatment for
acute and chronic pain. The acceptance of TENS, and its efficacy as a treatment
modality, has led to its use in other applications where drug use may be
undesirable, such as in sports medicine and certain kinds of postoperative
recovery. TENS has been useful for treatment of a variety of conditions,
including pain from arthritis and back injuries. The pain relief generally
lasts only as long as the devices are being used. For this reason, TENS devices
are often needed by patients for several months or years. Pursuant to FDA
regulations, the sale of TENS devices is restricted to persons who receive a
physician's prescription for their use.
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While TENS devices generally offer a safe, noninvasive alternative to drugs,
there are contraindications and precautions for their use. TENS is
contraindicated in patients with demand-type cardiac pacemakers, over the
carotid sinus nerves, and transcerebrally. TENS devices have no curative value
and may mask the sensation of pain which would otherwise warn the user that
something is not right physiologically. TENS devices generally work most
effectively on local (single site) peripheral original pain as opposed to
systemic or central original pain. The safety of TENS for use during pregnancy
and delivery has not been established. Electronic monitoring equipment, such as
EKG equipment, may not operate properly when TENS is in use.
TENS devices consist of a small, portable, battery-powered electrical pulse
generator that is connected by wires to electrodes placed on or near the pain
site. The electrodes are attached to the skin with an intervening layer of
conductive gel. The stimulator produces low voltage pulses, delivered
continuously or intermittently, in different waveforms.
Two theories have been proposed as to the manner in which TENS alleviates
pain. The "gate control theory" postulates that the electrical impulses from
TENS devices block or interfere with the transmission of pain signals from the
site of the injury to the brain. A second theory proposes that the electrical
impulses prompt the release of endogenous opiates, or endorphins, the body's
natural pain suppressing agents. The gate control theory was first postulated
in 1965 by Drs. Melzack and Wall, professors at McGill University in Montreal.
Their theory proposed that the stimulation of primary afferent neurons closed a
hypothetical "gate" mechanism at the spinal column, thereby preventing pain
impulses from reaching the brain. During the 1970s, after the discovery of
opiate receptor sites in the brain stem, researchers unveiled a natural
morphine-like peptide called an endorphin. Later developments established a
possible relationship between electrical nerve stimulation and a release of
endorphins within the body. Although it is still unclear what precise
neuromechanisms are involved in electrostimulation analgesia, one conclusion has
remained constant: TENS is both safe and effective for many types of pain,
chronic or acute, mild or severe.
The use of TENS for pain relief, when successful, is extremely cost effective
for the third-party payor and patient. When used in a chronic pain situation,
such as chronic lower back pain, TENS generally permits return to a more normal
lifestyle and work, which might not be possible otherwise. In an acute pain
situation (e.g., TENS used postoperatively), the cost for TENS rental should be
comparable to drug cost, both of which would be nominal relative to the
hospitalization and surgical costs preceding them. As a result of the ease with
which drugs may be administered, TENS in an acute pain setting would normally
only be used where an intolerance for drugs or risk of addiction was present.
TENS selling prices tend to be in the $300-$500 range, and rentals in the $50-
$100 per month range. Prices for related supplies (leads, electrodes, and gel)
might average $50-$100 per patient per month. Successful treatment with a TENS
device normally requires a clinician who has been trained in the use of the
device and its variable parameters, such as its intensity, pulse width, rate,
and mode, as well as the different types of electrodes and their placement.
Such training is not difficult for most healthcare professionals.
The Company's pain management product line consists primarily of three
different products. The Maxima(R) II, introduced in 1987, is a multi-mode unit
that is easy to use. It offers normal, modulation, and burst modes. Its
Automatic Power Miser significantly extends the Maxima II's battery life up to
150 hours. The microprocessor-based Maxima(R) III, introduced in mid-1990, has
all of the features of the Maxima II plus strength duration modulation features.
It has soft turn-on, a patented feature that provides for slow ramp up of the
electrical current at turn on or after current interruption. Maxima III also
allows the patient to alter pulse width without having to readjust the intensity
control. The Nuwave(R) electrical stimulation system is marketed primarily for
the treatment of chronic lower back pain and was introduced by the Company in
November 1988. This product utilizes a patented electrical waveform that was
based on research directed at improving the effectiveness of TENS for pain
management. Nuwave does not have the adjustable parameters of the Maxima II and
III, but is therefore simpler for patient use, and has a waveform which has been
optimized for chronic lower back pain.
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A clinical trial conducted by the Pain Treatment Center of the University of
Tennessee in 1990 concluded that Nuwave TENS often proves to be beneficial in
patients with post-laminectomy or peripheral neuralgic pain, even if they have
not responded to other TENS therapy. The study sample consisted of 98 patients
suffering from chronic pain of several etiologies, who had previously tried and
been unsuccessful in obtaining relief using TENS therapy. Fifty-two of the 98
patients obtained relief using a Staodyn Nuwave TENS, and in the case of those
with post-laminectomy pain, the success ratio was 83%-that is, 40 of 48 patients
obtained noticeable relief from pain with the Nuwave. The Company uses the
results of this study to take to third-party payors on a case by case basis to
differentiate this product and demonstrate the justification for higher
insurance reimbursement levels. The Company's distribution strategy and
marketing approach with respect to this product focuses on the physician in
addition to the physical therapist markets.
TENS devices generally are eligible for insurance reimbursement in whole or in
part by Medicare, Medicaid, workers' compensation, and by most medical insurance
carriers. Medicare, however, has reduced TENS reimbursement by approximately
one-third over the past several years and some workers' compensation and private
insurers have reduced, limited, and in a few cases, attempted to deny
reimbursement. TENS devices do not provide pain relief in all cases, and the
industry has been subject to some abuse by medical practitioners prescribing and
billing for TENS services not warranted, or not properly treating the patient.
TENS therapy for pain relief is not as widely utilized by the medical profession
as compared to drugs and is more difficult to administer. Pain relief also
tends to be subjective.
NMES Devices
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The use of electrical stimulation to provide passive muscle exercise and
rehabilitation predates TENS. As a natural extension of its development of
electrical modalities for pain management, the Company developed a line of
portable neuromuscular electrical stimulators (NMES) to assist faster recovery
of normal function in muscle and other soft tissue affected by disease or
trauma. The Company's NMES devices work noninvasively to activate the motor
nerves that control muscle function. These devices produce regulated,
involuntary muscle contractions, thereby enabling the patient to begin
rehabilitative exercise before such time as the patient can perform voluntary
muscle contraction. Clinicians, or other licensed healthcare practitioners,
normally prescribe these products in conjunction with other therapeutic
techniques in orthopedic, sports, and physical medicine. The Company's NMES
product line started in 1980 with the Staodyn EMS, which has been modified and
improved several times to its current version, the EMS+2.
The EMS+2 is a two-channel, two-waveform neuromuscular stimulator designed
primarily for clinical use in a variety of rehabilitative programs, including
muscle exercise against disuse atrophy, gait training, inhibition of spasticity,
and soft tissue management. The two-channel capability enables opposing muscles
to be exercised reciprocally or separate muscles to be exercised simultaneously;
the second waveform option provides additional flexibility for the clinician.
This is a dual channel device, which utilizes microcomputer-based circuitry,
designed to be simple for the clinician to program and for the patient to
continue using in a nonclinical setting.
Medicare has approved insurance reimbursement for neuromuscular electrical
stimulators for use in retarding disuse atrophy of normally innervated muscle
due to prolonged immobilization. NMES is well accepted as a therapy for
rehabilitation, and in general has not been subject to the downward pricing
pressures or reimbursement problems encountered in the TENS market. The Company
normally receives full price reimbursement on NMES devices, including the EMS+2.
NMES devices in general, and the EMS+2 in particular, have similar
contraindications to TENS devices. That is, they should not be used on patients
with cardiac demand pacemakers and should not be used transcerebrally or over
the carotid sinus nerves. In addition, NMES devices are contraindicated for
cancer patients.
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SPORTX
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A predecessor product to SPORTX, the Tuwave(R), was introduced in 1992. It
had limited market success, and was followed in 1995 by the SPORTX, targeted
specifically at sports medicine applications. SPORTX is an electrotherapeutic
product that combines in one small, portable device, two different
electrotherapeutic waveforms: (i) the unique pain management features of the
Nuwave transcutaneous electrical nerve stimulator and (ii) the pulsed galvanic
current aspect of the EMS+2 neuromuscular electrical stimulator. Pulsed
galvanic stimulation utilizes direct current to reduce swelling (or edema),
influence local blood circulation, reduce muscle spasm, and increase range of
motion.
Following various types of injuries or surgeries, the affected tissue or joint
is subject not only to pain, but also to swelling and muscle spasm, which in
turn increase the pain and restrict the use of the affected area. For example,
after an injury or surgery of the knee, swelling may be severe, lasting a week
or more. Physicians wish to begin physical therapy of the joint as soon as
possible after injury to speed the rehabilitative process and prevent disuse
atrophy of the muscles. They may use analgesic drugs to control the pain, and
elevation of the extremity and ice to control the edema. Drugs have problems
with side effects, including the potential for addiction, while the edema
reduction measures are often not very effective.
The Nuwave component is designed for relief of post-surgical and post-
traumatic pain. The Company believes it may reduce or eliminate the need for
analgesic drugs. Pulsed galvanic stimulation is effective at reducing edema and
muscle spasm, and influencing local blood flow. This effect also contributes to
pain reduction and may promote rapid return to function by increasing range of
motion and preventing disuse atrophy. The Company believes this product is
suited to certain medical uses, especially by sports medicine specialists and
orthopedic surgeons, as well as in physical therapy, where treatment of post-
surgical and post-traumatic injuries are common. The product is currently used
by approximately 40 professional sports teams.
Traction Devices
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As part of its rehabilitation focus and as an adjunct to its NMES products,
the Company introduced the Action Traction(R) in 1985, a mechanical traction
product designed to treat a variety of back ailments, including chronic low back
pain, strained ligaments, muscle spasm, and similar symptoms. In 1989, a
similar traction product, the Cervitrak(R), was introduced to treat chronic neck
pain symptoms. The Company distributes these products, which are manufactured
by others.
Accessories and Supplies
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Both the pain management and rehabilitation electrotherapeutic products
require accessories and supplies, including electrodes, electrode attachment
systems, conductive media, skin care products, and batteries. Patients purchase
these accessories and supplies on a recurring basis. For fiscal 1995 and 1994,
respectively, sales of accessories and supplies accounted for approximately 39%
and 36% of total sales. Although the Company manufactures some of the
electrodes it sells, the majority of its electrodes are purchased by the Company
from outside suppliers. The Company has expanded its manufacturing for
electrodes, and currently manufactures all of the active sterile dressings used
in the Company's Dermapulse wound management system. The Company believes that
this capability will find additional profitable applications for sterile
treatment electrodes.
SALES AND MARKETING
The Company distributes its products through the retail division of Staodyn
and on a wholesale basis to independent home healthcare dealers via
telemarketing and through independent manufacturers'
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representatives. The Company supports its sales efforts with a full line of
quality pain management and rehabilitation products, supported by promotional
aids, educational literature, and training programs. The Company utilizes
several methods to promote its products and services, including advertising in
trade publications, product-oriented literature, and clinical applications
literature. In addition, the Company exhibits its products at national and
regional trade shows and provides clinical and technical instruction at Company-
sponsored seminars .
Most of the Company's foreign sales are in Canada and those accounted for less
than 5% of total sales in 1995 and 1994.
The Company fills all orders for its products promptly as received, and
generally maintains sufficient finished product inventory in most product lines
to fill anticipated orders. The Company carries significant inventory both in-
stock and at retail clinics to meet rapid delivery requirements. The Company
seldom has a backlog of orders.
Retail
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The retail division presently sells TENS, NMES, other durable medical
equipment, and related supplies to the physical therapy and rehabilitation
clinic markets throughout the United States. The retail field sales force
presently calls on approximately 3,000 physical therapy clinics and physician
rehabilitation practices located throughout the continental United States. The
Company's plans include growing the retail sales force by adding sales
representatives and independent rep groups, and by acquiring dealer sales
organizations. The retail division's products (devices) generally are placed in
clinics on a consignment basis, and subsequently used, rented and/or sold to
patients as needed with the appropriate physician prescription and supervision.
The retail division's internal operations are focused on supporting the field
sales activity through (1) a full-service distribution capability, providing
next day service of products and supplies to clinics and patients; (2) a trained
staff who work with physicians, rehabilitation clinics, insurance carriers, and
adjusters to provide billing, collection, and reimbursement services for clinics
and their patients; and (3) a telemarketing sales staff utilizing proprietary
computer software to follow-up with patients to ensure that their product,
supplies, and paperwork needs are met, as well as assisting them in the purchase
process.
Wholesale
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The Company's products are also sold "wholesale" via telemarketing and in
limited geographic areas by independent manufacturers' representatives, most of
whom sell the Company's products and other noncompeting medical products to
approximately 600 active home healthcare dealers. Independent representatives
have exclusive geographic territories and are paid commissions for all sales
within their territories. Sales commissions to independent sales
representatives for the years ended November 30, 1995 and 1994 totaled about 8%
and 11% of wholesale sales, respectively. The home healthcare dealers, also
known as durable medical equipment (DME) dealers, sell or rent the products to
individual users, who are referred by a physician, physical therapist, or other
medical professional. To support its wholesale distribution network, the
Company has employees dedicated to providing customer support, product
management, field sales and account management, clinical support, and training
and education.
MANUFACTURING AND QUALITY ASSURANCE
The Company manufactures its electrotherapeutic products at its facilities in
Longmont, Colorado. The Company's manufacturing capabilities include a broad
variety of operations required in the development and production of its
electronic devices and accessory items, including manual and automated
electronic assembly equipment, automatic surface mounted device equipment,
electrode fabrication equipment, and design and
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fabrication of automated test equipment. The Company purchases discrete
electronic components, printed circuit boards, batteries, cases and other
packaging materials, lead wire and electrode materials, and other standard items
from outside suppliers. Most purchased items are tested by the Company before
assembly into finished products.
In 1994, the Company developed and brought on line new electrode manufacturing
equipment. This equipment has the capacity to manufacture the treatment
electrodes used in wound healing and would permit the Company to expand its in-
house manufacturing capability for other electrodes used with its pain
management and NMES devices. The adaptation of this equipment to either wound
healing electrodes or electrodes for use with the Company's TENS or NMES
products will depend upon management's analysis of the market opportunity for
Dermapulse domestically and internationally.
The Company believes that product quality and reliability are of critical
importance in medical equipment and takes extensive measures to assure that all
of its products meet the highest standards. The extensive use of surface mount
technology in each of its products contributes to their quality, reliability,
and low energy consumption characteristics. Each product is tested at several
subassembly stages during the assembly process. In addition, all of the
Company's electronic devices are "burned in" for a minimum of 16 hours prior to
final testing. A final review of each step of the assembly process is conducted
by the quality organization before the devices are released for shipment.
RAW MATERIALS
The Company's electronic devices involve electromechanical-mechanical
assemblies and proprietary electronic circuitry. Most of the raw materials and
manufactured components used in the Company's products are available from a
number of different suppliers. The Company maintains multiple sources of supply
for most significant items and believes that alternative sources could be
developed, if required, for present single supply sources without a material
disruption of its operations.
RESEARCH AND DEVELOPMENT AND NEW PRODUCTS
The Company conducts research and development in present and proposed areas of
its business, including the development of new products and product
applications, and the improvement and redesign of its existing products.
Existing devices and accessories are updated and redesigned to improve their
features, performance, reliability, and convenience.
Research and development expenditures have been reduced over the past several
years as part of cost-containment efforts, and due to completion of the
Premarket Approval (PMA) submission in December 1990 for Dermapulse. Additional
investment in research and development related to domestic regulatory approval
for the wound healing technology may occur in the future dependent upon the
Company's assessment of the regulatory climate and the market potential. The
Company also pursues additional new product opportunities in its core business
that require research and development expenditures. In 1995, the Company
received FDA 510(k) approval for the Varapulse-2, a product that will be
marketed in medical applications where an increase in blood flow would be
beneficial.
Wound Care
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Dermapulse is a portable, microcomputer-based, pulsed galvanic stimulator.
The technology embodied in this device is the subject of two U.S. patents which
have been issued to date. The disposable, single-use treatment electrode is the
subject of patent filings in the United States, Canada, England, Germany, Italy,
and three other European countries. In 1994, the Company formed a legal
subsidiary in the Netherlands, Staodyn B.V., to facilitate the marketing of
Dermapulse in the European Union.
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Since 1985, when the Company first became aware of the potential use of its
electrical stimulation technology to promote the healing of wounds, it has
pursued the development and approval of proprietary wound healing technology.
In addition to engineering the device and a new single-use, sterile, disposable
electrode, it has conducted animal and human studies to support a PMA
application to the FDA. The PMA was submitted in December 1990 and was subject
to amendments in 1991 and 1992. The Company and medical experts met with FDA in
August 1994. In a subsequent letter, the FDA reiterated their position that the
data previously provided by the Company was not sufficient for them to approve
the Company's PMA and a new clinical study was required. As a result of this,
the Company withdrew its PMA in November 1994. To date, no active treatment
device or therapy for wound healing has been approved by the FDA, although
several companies have devices approved for other applications which are
marketed "off-label" for wound care. In December 1994, the U.S. Agency for
Healthcare Policy and Research issued guidelines for the treatment of pressure
ulcers, which recommended "that a course of electrical stimulation be considered
for Stage III and IV pressure ulcers that do not respond to conventional
therapy." Total fixed assets related directly to the Dermapulse system at
November 30, 1995 were approximately $375,000, net of accumulated depreciation.
The Company has conducted two human clinical trials to demonstrate the
effectiveness and safety of the Dermapulse system in the treatment of pressure
ulcers (also known as decubitus ulcers or bedsores). In management's opinion,
each of the two clinical studies included in the Dermapulse PMA demonstrated
significant improvement in the healing rate of serious pressure ulcers, when
used as an adjunct to standard care. These studies were carried out at a
variety of institutions, including university medical centers, a Veterans
Administration hospital, a hospital's specialized pressure ulcer treatment unit,
and nursing homes.
The Company has obtained the U.S. and foreign government approvals necessary
to market Dermapulse in Canada and the European Union. The product is currently
being marketed in Canada, Germany, and the Netherlands. Additional European
Union distribution is anticipated in 1996. However, Dermapulse revenue for
fiscal 1996 is not anticipated to have a material effect on the Company's
results.
COMPETITION
Numerous other companies currently manufacture and distribute TENS and NMES
devices and related accessories that compete with the Company's products. Some
of these competitors have substantially greater capital resources, marketing and
distribution capabilities, research and development staffs, and experience in
obtaining regulatory approvals than the Company. The largest such direct
competitor is Empi, which is about four times the size of the Company, with an
estimated 50% market share. In terms of product offerings and marketing and
distribution presence, Empi is by far the dominant competitor of the Company in
the Company's markets. Other significant competitors are Rehabilicare (formerly
Medical Devices), which is about half the size of the Company with a comparable
product line, and the Physical Medicine Division of Maxxim Medical (formerly
Henley International), which incorporates Maxxim's TENS and NMES products.
Maxxim has substantially greater total resources than the Company, but the
Company believes that Maxxim's TENS and NMES revenues, which are not disclosed
separately, are lower than those of the Company.
The TENS market is considered to be a mature market characterized by slow or
limited growth. This has been accentuated in dollar terms in recent years by
reductions in reimbursement levels and the growth of managed care. The
Company's pain control products, in addition to competing with the TENS products
of other manufacturers, also in some instances may be deemed to compete against
drugs for pain relief. The wide public acceptance and availability without a
prescription of ibuprofen has served to adversely impact the growth rate of TENS
for pain relief. See "Business - Third-Party Reimbursement."
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The Company is unaware of any significant competitive devices for its wound
healing Dermapulse product. However, it can be expected that companies who
market complex dressings (e.g., the ConvaTec subsidiary of the Bristol-Myers
Squibb Co. which sells DuoDerm, 3M Company which sells Tegaderm, and Smith &
Nephew PLC which sells Op-Site) may view Dermapulse as a competitor to the
extent to which it may shorten treatment time or make the use of complex
dressings less necessary. In addition, several companies are developing growth
factors for wound healing, which may compete directly as "active" wound healing
modalities. As the market for wound healing devices develops, it can be
anticipated that Dermapulse will be subject to increased competition as well as
pressures to reduce healthcare costs, and there can be no assurance that
Dermapulse will be able to successfully establish a market position.
PATENTS AND TRADEMARKS
The Company has maintained the practice, where possible, of obtaining patent
protection on its products and processes. As of November 30, 1995, the Company
had 25 United States patents and three Canadian patents issued as well as eight
foreign patents pending relating to the design and output of its products. Of
the patents issued, 19 relate to TENS and related products (seven of which are
for Nuwave), and four relate to Dermapulse. The Company plans to make
additional patent applications as appropriate. The Company also holds several
registered or applied for trademarks in the United States, including
"Staodyn(R)," "Staoderm(R)," "Maxima(R)," "Nuwave(R)," "Dermapulse(R)," "Action
Traction(R)," "Lo-Back(R)," "Cervitrak(R)," "Contress(TM)," "Soft Start(TM),"
"Tuwave(R)," and "TMD(R)."
The Company believes that it owns, has the right to use, or has the right to
license all proprietary technology necessary to manufacture and market its
products under development. The Company has no knowledge that it is infringing
upon any patents held by others. The Company may decide for business reasons to
retain a patentable invention as a trade secret. In such event, or if patent
protection is not available, the Company must rely on trade secrets, know-how,
and continuing technological innovation to develop and maintain its competitive
position. The Company's key employees and consultants have access to
proprietary information and have signed confidentiality agreements.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant factor in the production and marketing of the
Company's products and in its ongoing research and development activities. The
FDA's Center for Devices and Radiological Health regulates medical devices.
This regulation has become increasingly stringent and the approval process more
expensive and time consuming. Whether congressionally-imposed or self-imposed
regulatory reforms will occur in the future is problematical. The Company's
products are subject to these regulations. The FDA's device regulations
categorize devices into three regulatory classifications subject to varying
degrees of regulatory control, with Class I devices being subject to the least
regulatory control and Class III devices being subject to the most control. In
general, Class I devices require compliance with labeling and record-keeping
regulations and are subject to other general controls. Class II devices are
subject to performance standards, in addition to general controls, and Class III
devices, which are products that are life supporting or life sustaining, or are
of substantial importance in preventing impairment of human health, require
clinical testing to assure safety and effectiveness prior to marketing and
distribution.
The Company's pain management and rehabilitation devices (such as TENS, NMES,
Tuwave) are Class II devices, subject to a premarket notification process
pursuant to Section 510(k) of the Federal Food Drug and Cosmetic Act. This
regulation requires that new products being introduced into commercial
distribution for the first time, or changes in existing products that could
significantly affect the safety or effectiveness of the device, be preceded by a
510(k) notification containing information which establishes that the product is
substantially equivalent to an existing device that is legally marketed. Once
the FDA determines that the
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product is substantially equivalent, the Company is granted clearance to market
the product. In 1995, it took an average of 179 days for 510(k) clearance, a
decrease of 17% from the previous year.
The Company's Dermapulse wound care system is a Class III device, subject to
the Premarket Approval (PMA) regulations. In order to receive marketing
approval, such devices must undergo preclinical and clinical testing in
compliance with the Investigational Device Exemption (IDE) regulations, which
permit human testing of the device in controlled trials. If the device is a
"significant risk" device, the sponsor of the research must file an IDE
application and obtain approval from the FDA prior to beginning clinical trials.
If it is a "non-significant risk" device (such as Dermapulse), then the sponsor
need not file an IDE, but must adhere to the provisions of the regulation, such
as obtaining approval for the study from an institutional review board (IRB) or
committee established for this purpose, obtaining informed consent from the
patients, and adhering to good study practices, especially with regard to data
integrity and record keeping.
Upon completion of required clinical studies, results are presented in a PMA
application for review by the FDA. Generally, a PMA application is given an
initial review by the FDA to determine if the data are sufficiently complete and
of such quality to allow a determination of safety and effectiveness for the
desired claims, and the FDA will ask the sponsor questions. If after the
questions are answered, the PMA still does not meet FDA's criteria, it will be
sent back to the sponsor as "Not Filed." If the FDA decides to "File" the
application, it is then committed to take the application to an expert advisory
panel with expertise relevant to the product under review. After the
application is filed, the FDA undertakes additional review of the PMA and
usually asks the sponsor additional questions. Once the expert advisory panel
meeting is scheduled, the company presents its data to the panel, and the panel
votes to recommend to FDA that it approve or not approve the PMA. The FDA has
the final authority to accept or reject the panel's advice.
FDA regulations pertain not only to human healthcare products and medical
devices, but also to the processes and facilities used to manufacture such
products. Among the conditions for marketing products cleared by the FDA is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's Good Manufacturing Practice (GMP)
regulations, which must be followed at all times. In complying with standards
set forth in these regulations, manufacturers must continue to expend time,
money, and effort in the areas of production and quality control to ensure full
technical compliance. Good Manufacturing Practice regulations require adherence
to strict quality control procedures, including documentation of all aspects of
the manufacturing process to demonstrate that products are made by a
"controlled" process that ensures consistency and reliability of the end
product. Significant changes to the manufacturing process require notification
to the FDA, and all changes require documentation. The FDA has the right to
conduct inspections of the manufacturing facility at any time at its discretion.
The Company adheres to these regulations and has full-time quality assurance
personnel. In August 1995, the FDA completed a GMP inspection of the Company's
manufacturing facilities and determined that the Company is in compliance.
The Company's products are subject to foreign regulatory approval before they
may be marketed abroad. In some cases, in order to comply with foreign
regulations, products have to be modified in their electronics, appearance, or
labeling.
Compliance with Federal, State, and local provisions, which have been enacted
or adopted regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment, have not had a material
effect upon the capital expenditures, earnings or competitive position of the
Company, nor are they expected to be significant in the future.
-9-
<PAGE>
THIRD-PARTY REIMBURSEMENT
Governmental and other efforts to reduce healthcare spending have affected,
and will continue to affect, the Company's operating results. The cost of a
significant portion of medical care in the United States is funded by government
and private insurance programs, such as Medicare, Medicaid, health maintenance
organizations, and private insurers, including Blue Cross/Blue Shield plans.
Governmentally imposed limits on reimbursement of hospitals and other healthcare
providers have significantly impacted their spending budgets. Under certain
government insurance programs, a healthcare provider is reimbursed a fixed sum
for services rendered in treating a patient, regardless of the actual charge for
such treatment. Private third-party reimbursement plans are also developing
increasingly sophisticated methods of controlling healthcare costs through
redesign of benefits and exploration of more cost-effective methods of
delivering healthcare. In general, these government and private cost-
containment measures have caused healthcare providers to be more selective in
the purchase of medical products.
All of the Company's products are subject to reimbursement from third-party
payors, including Medicare. Reimbursement levels vary among geographic regions
and among payors within a particular region. Reimbursement levels are partially
dependent on the Company's billing (retail) price for the product, and how the
payor views the comparability of this price to the prices of competitive
products. Reimbursement ranges for the Company's device products tend to be at
80-100% of retail price levels.
Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products, and there can be no assurance that adequate third-
party coverage will be available. Limitations imposed by government and private
insurance programs and the failure of certain third-party payors to fully or
substantially reimburse healthcare providers for the use of the Company's
products could have a material adverse effect on the Company.
EMPLOYEES
On November 30, 1995, the Company employed 165 persons, 15 of whom were
employed on a part-time basis, compared with a total of 168 on November 30,
1994. The Company presently has a 1983 Employee Qualified Stock Purchase Plan,
a 401(k) Profit Sharing Plan, and a 1992 Stock Option Plan in effect for the
benefit of its employees, which are administered by a Compensation Committee
consisting of outside members of the Board of Directors. Company contributions
to the 401(k) Profit Sharing Plan are partially dependent upon Company earnings,
and the contribution to be made for fiscal 1995 is $22,961. No contributions
were made for fiscal 1994. For additional information concerning these Plans,
see Notes 5 and 7 to the Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company's Longmont, Colorado operations occupy a single two-story building
consisting of approximately 50,000 square feet. The Company previously owned
26,000 square feet of the building. In July 1993, the Company sold the 26,000
square feet and 6.25 acres of related land in a sale and leaseback transaction
to a limited liability company of which an officer of the Company is a 16%
participant. The Company leases the remaining 24,000 square feet from an
unrelated party. The Company has an option to purchase each leased portion at
any time during a five-year period commencing July 1998. The present building
sits on a site of approximately 5.9 acres, and preliminary plans exist to
increase the available building area up to a maximum of 125,000 square feet as
necessary. The Company has no present requirement to expand its facilities.
-10-
<PAGE>
The retail division's operations in Tampa, Florida occupy 9,500 square feet
and are leased from Pharmacy Management Services, Inc., the former parent
company of TMD, which is now a part of the Pharmacy Corporation of America (PCA)
subsidiary of Beverly Enterprises, Inc. PCA has notified the Company that it
does not wish to renew the Company's lease (which expires in March 1996), and
the Company plans to move to comparable space in the Tampa area.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary and routine litigation incidental to its
business, none of which is expected to have a material adverse effect on the
Company's results of operation or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a stockholder vote during the last quarter
of the fiscal year ended November 30, 1995.
-11-
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ SmallCap Market under the
symbol "SDYN." The following table sets forth, for the periods indicated, the
range of high and low bid quotations for the Common Stock as reported by NASDAQ.
These quotations represent inter-dealer prices, without retail markup, markdown
or commissions and do not necessarily represent actual transactions.
The Company has never paid a dividend and does not anticipate payment of
dividends in the foreseeable future.
<TABLE>
<CAPTION>
Fiscal year ended November 30, 1994 High Low
------- ------
<S> <C> <C>
First Quarter $6.25 $3.375
Second Quarter $3.375 $2.375
Third Quarter $2.875 $2.00
Fourth Quarter $2.25 $1.25
Fiscal year ended November 30, 1995
First Quarter $1.875 $1.187
Second Quarter $2.125 $1.187
Third Quarter $2.875 $1.687
Fourth Quarter $2.375 $1.625
</TABLE>
On February 7, 1996 the closing price of the Common Stock on NASDAQ was
$1.5625 per share. As of February 7, 1996 there were approximately 1,015
holders of record of the Common Stock.
-12-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from its operations consistently throughout the
fiscal year ended November 30, 1995. Cash generated from operating activities
totaled approximately $1,457,000 in fiscal 1995, compared to a use of cash for
operations of $2,002,000 in fiscal 1994. The operational cash usage in fiscal
1994 was related primarily to the increase in accounts receivable; this required
over $2.0 million in 1994, as compared to less than $.9 million in 1995. This
reduction in the use of cash was accomplished through the conversion of the
Company's billing and collection system in early 1994, as well as subsequent
investments in enhancements to the system and additional personnel.
Additionally, operating cash was used for inventory of $128,000 in 1994, but
inventory provided cash of $542,000 in 1995. This cash flow improvement was due
to the relocation of the warehousing and shipping function for the retail
division from Tampa, Florida to Longmont, Colorado. The establishment of a
central distribution facility allowed the Company to lower inventory levels.
Cash of $445,000 was used for investing purposes in fiscal 1995, primarily for
additional investment in short-term investments and purchases of property and
equipment in the normal course of business. This is a decrease of $765,000 from
fiscal 1994. In 1994, cash was used for investing activities of $1,210,000, as
a significant investment in information systems was made, and as excess cash
became available for investment from the proceeds of the November 1993 offering.
Cash was used for financing activities in 1995 totaling $254,000, compared to
$319,000 in fiscal 1994. The decrease of $65,000 is due primarily to cash used
in 1994 for the purchase of treasury stock totaling $73,000. Other financing
activities in both fiscal years consisted of scheduled payments for notes
payable and capitalized lease obligations.
The Company's net working capital at November 30, 1995 was $9,433,000, with a
current ratio of 7:1, as compared to $8,546,000 and 6:1 at November 30, 1994.
The Company believes that funds on hand are sufficient to support its existing
and planned operations for at least the next twelve months. Should additional
financial resources be required, the Company believes that funds would be
available from the collateralization of accounts receivable and inventory
through a credit facility.
RESULTS OF OPERATIONS
Fiscal Year ended November 30, 1995
- -----------------------------------
Net sales for the fiscal year ended November 30, 1995 were $18,371,000, an
increase of $1,774,000 or 11% as compared to the prior year. This increase was
attributable entirely to increased sales in the retail division, which were
impacted by an increase in the number of sales personnel of approximately 15%.
Sales through the wholesale distribution channel have continued to decline as
the wholesale market continues to consolidate. Device sales accounted for
approximately 60% of total Company sales, with the balance being accessories and
disposable supplies.
Gross profit was $11,797,000 or 64%, as compared to $10,446,000 or 63% in the
prior year. The improvement in gross margin is attributable to a higher
percentage of supplies and accessories sold (at higher margins than device
sales).
-13-
<PAGE>
Selling, general, and administrative expenses were $11,084,000 for the year
ended November 30, 1995, as compared to $11,278,000 for the prior year. This
decrease of $195,000, or 2%, is due primarily to a decrease in sales and
marketing expenses related to the wholesale division, as sales commissions and
administration expenses have been reduced consistent with the sales decrease in
that division. These savings have been partially offset by increased sales
commissions paid on higher sales in the retail division.
Research and development expenses in fiscal 1995 were $437,000, an increase of
26,000 or 6% over fiscal 1994. The increase is due primarily to a higher level
of activity relating to modifications required for European distribution of the
Company's core products and Dermapulse.
Other income (expense) was $(73,000) for the fiscal year ended November 30,
1995, as compared to $(79,000) for the year ended November 30, 1994. Income
generated from the collection of accounts receivable for PMSI, the former parent
of the retail division, decreased by $78,000, as the related receivables aged to
three years. This was offset by increased interest income of $15,000 on higher
levels of excess cash available for investment and by an increase of
approximately $65,000 in other income (expense).
Net income for the fiscal year ended November 30, 1995 was $204,000 or $.03
per share, compared to a net loss of $(1,322,000) or $(.24) per share for the
prior year.
Fiscal Year Ended November 30, 1994
- -----------------------------------
Net sales for the fiscal year ended November 30, 1994 were $16,597,000, an
increase of $1,255,000 or 8% as compared to the prior year. All of this
increase occurred in the retail division, primarily as a result of increased
sales personnel. Wholesale sales declined slightly (approximately $85,000), as
the wholesale market continued to consolidate and shrink due to the increased
number of manufacturers operating in the retail market.
Gross profit was $10,446,000 or 63% as compared to $9,373,000 or 61% in the
prior year. The increase in gross profit percentage resulted from a shift in
the product mix of the retail division, with a higher percentage of supplies and
accessories sold, as well as an increase in the gross profit generated from
Company-manufactured devices sold at the retail level. These improvements were
offset by increases in unabsorbed manufacturing overhead costs related to low
volumes of production during the last quarter as inventory manufacturing levels
were reduced. This reduction was caused by an influx of devices from the
consigned units in the field as well as by the consolidation of the retail and
wholesale warehouse operations.
Selling, general, and administrative expenses were $11,278,000 for the year
ended November 30, 1994, as compared to $10,090,000 for the comparable period of
the prior year. This 12% increase is due to expenses associated with the
increased number of sales representatives and related support staff in the
retail division, as well as the commencement of Dermapulse marketing activities
in Canada and Europe during the year. Additionally, general and administrative
expenses increased due to costs associated with the MIS implementation including
consulting fees, depreciation on computer hardware and software, and duplication
of MIS services during the conversion period.
Research and development expenses in 1994 were $411,000, a decrease of $38,000
or 8% as compared to the prior year. Research and development activity has
continued to decline slightly over the past two years pending the outcome of
filings made by the Company with the FDA related to marketing of new products
(both domestically and internationally).
Other income (expense) was $(79,000) in the current year, as compared to
$(119,000) in the prior year. The lower net expense in fiscal 1994 results
primarily from increased interest income from the investment of excess cash, as
well as lower interest expense. Debt incurred with the acquisition of the
retail division was
-14-
<PAGE>
repaid in the fourth quarter of 1993 with the proceeds from the secondary public
offering. Interest expense in 1994 related primarily to new leases for computer
hardware and software entered into late in fiscal 1993 for the MIS
implementation in Tampa. Additionally, the Company generated lower income from
the collection of accounts receivable on behalf of PMSI.
The net loss for the fiscal year ended November 30, 1994 was $(1,322,000) or
$(.24) per share as compared to $(1,285,000) or $(.33) per share for the prior
year. Substantially all of this loss was incurred in the first two quarters of
the year; the Company has operated close to breakeven over the last two
quarters. The decrease in the loss per share is due to the additional number of
shares issued in the November 1993 public offering.
-15-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is herein on pages F-1 through F-18.
-16-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements between the Company and its independent
accountants on any matter of accounting principles or practices or financial
statement disclosure since the Company's inception.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT OF THE REGISTRANT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Part III, Items 9 through 12, is incorporated by
reference to sections captioned "Election of Directors," "Executive Officers,"
"Executive Compensation," "Security Ownership of Certain Beneficial Owners and
Management," and "Stock Options and Warrants" from the registrant's definitive
proxy statement to be filed with the Securities and Exchange Commission on or
before March 29, 1996.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits:
--------
The following documents are filed as exhibits or, where indicated, are
incorporated by reference:
No. Exhibit Document
--- ----------------
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
3.3 Certificate of Merger of Staodynamics, Inc. (a Colorado corporation)
into Staodynamics, Inc. (aDelaware corporation) (2)
3.4 Amendments to the Bylaws of the Registrant (3)
3.5 Certificate of Amendment to Certificate of Incorporation (4)
3.6 Articles of Association of Staodyn B.V. (17)
4.1 Specimen Common Stock Certificate (5)
4.2 Specimen Warrant (11)
4.3 Warrant Agreement (12)
-17-
<PAGE>
10.1 1983 Employee Stock Purchase Plan (6)
10.2 1982 Incentive Stock Option Plan (7)
10.3 1992 Stock Option Plan (8)
10.4 Employment Agreement and Severance Agreement - W. Bayne Gibson (9)
10.5 Asset Purchase Agreement dated November 6, 1992 between the Company and
Technical Medical Devices, Inc. (10)
10.6 Lease Agreement dated July 16, 1993 between the Company and 1225
Building, LLC (13)
10.7 Lease Agreement dated July 16, 1993 between the Company and Pendleton
Construction Co., Inc. (14)
10.8 IBM Credit Corporation Term Lease Agreement and Remarketer Supplement
dated July 8, 1993 (15) (Superseded)
10.9 IBM Credit Corporation Term Lease Agreement and Remarketer Supplement
dated October 11,1994 (17)
11.1 Statement re Computations of Pro Forma per share earnings (16)
16.1 Letter on Change in Certifying Accountant (17)
21.1 Subsidiaries of the Registrant (17)
23.1 Consent of Price Waterhouse LLP, independent auditors, to incorporation
by reference of their report into Registration Statement Nos. 33-74614,
2-96535, 2-87595, and 33-42053, and in the prospectuses constituting
part of the Registration Statement Nos. 33-46186 and 33-74464*
27 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
A report on Form 8-K was filed on October 13, 1995 covering the transfer
of the Company's stock and warrants from the NASDAQ National Market to
the NASDAQ Small Cap Market.
- -------
(1) Incorporated by reference from Form 10-K for fiscal year ended March 3,
1990.
(2) Denoted as Exhibit 3.2 to Registration Statement No. 33-40195 on Form S-1
and incorporated herein by reference.
(3) Denoted as Exhibit 3.5 to Registration Statement No. 33-40195 on Form S-1
and incorporated herein by reference.
(4) Denoted as Exhibit 3.3 to Registration Statement No. 33-40195 on Form S-1
and incorporated herein by reference.
(5) Denoted as Exhibit 4.1 to Registration Statement No. 33-40195 on Form S-1
and incorporated herein by reference.
(6) Denoted as Exhibit 4.4 to Registration Statement No. 33-40195 on Form S-1
and incorporated herein by reference.
-18-
<PAGE>
(7) Incorporated by reference from the Company's Registration Statement No. 2-
87595 on Form S-8 and as amended in Registration Statement No. 2-96535 on
Form S-8.
(8) Denoted as Exhibit 10.3 to Company's Annual Report on Form 10-K for fiscal
year ended February 29, 1992 and incorporated herein by reference.
(9) Denoted as Exhibit 10.2 to Registration Statement No. 33-40195 on Form S-1
and incorporated herein by reference.
(10) Denoted as Exhibit 2.1 to Company's Current Report on Form 8-K dated
November 15, 1992.
(11) Denoted as Exhibit 4.2 to Registration Statement No. 33-58074 on Form S-2
and incorporated herein by reference.
(12) Denoted as Exhibit 4.3 to Registration Statement No. 33-58074 on Form S-2
and incorporated herein by reference.
(13) Denoted as Exhibit 10.7 to Registration Statement No. 33-58074 on Form S-2
and incorporated herein by reference.
(14) Denoted as Exhibit 10.8 to Registration Statement No. 33-58074 on Form S-2
and incorporated herein by reference.
(15) Denoted as Exhibit 10.9 to Registration Statement No. 33-58074 on Form S-2
and incorporated herein by reference.
(16) Incorporated by reference from Form 10-K for fiscal year ended November
30, 1993.
(17) Incorporated by reference from Form 10-KSB for fiscal year ended November
30, 1994.
* Filed as part of this report.
-19-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Sections 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STAODYN, INC.
By:/s/ W. Bayne Gibson
-------------------
W. Bayne Gibson
President
DATED: February 15, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name and Capacity Date
- ----------------- ----
/s/ W. Bayne Gibson February 15, 1996
- --------------------------------------------
W. Bayne Gibson, President and Chief
Executive Officer, Principal Executive
Officer, Chairman and Director
/s/ Michael J. Newman February 15, 1996
- --------------------------------------------
Michael J. Newman, Vice President,
Finance and Administration, Secretary,
Principal Financial and Accounting Officer
/s/ Frederick H. Ayers February 15, 1996
- --------------------------------------------
Frederick H. Ayers, Director
/s/ Patrick F. Crane February 15, 1996
- --------------------------------------------
Patrick F. Crane, Director
/s/ Margaret S. Hansson February 15, 1996
- --------------------------------------------
Margaret S. Hansson, Director
/s/ Alan C. Stormo February 15, 1996
- --------------------------------------------
Alan C. Stormo, M.D., Director
/s/ Gerald D. Van Eeckhout February 15, 1996
- --------------------------------------------
Gerald D. Van Eeckhout, Director
-20-
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheet as of November 30, 1995........................ F-3, F-4
Consolidated Statements of Operations for the years
ended November 30, 1995 and 1994......................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended November 30, 1995 and 1994......................................... F-6
Consolidated Statements of Cash Flows for the years
ended November 30, 1995 and 1994......................................... F-7, F-8
Notes to Consolidated Financial Statements................................ F-9 through F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Staodyn, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Staodyn, Inc. and its subsidiary at November 30, 1995, and the results of their
operations and their cash flows for the fiscal year then ended, in conformity
with generally accepted accounting principles. 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 audit. We conducted our
audit of these statements in accordance with generally accepted accounting
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boulder, Colorado
January 19, 1996
F-2
<PAGE>
Staodyn, Inc.
Consolidated Balance Sheet
As of November 30, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 1,610,640
Short-term investments 985,717
Accounts receivable, net of allowance for doubtful
accounts of $1,655,124 4,659,215
Inventories, net 3,616,550
Prepaid expenses and other assets 170,087
-----------
Total current assets 11,042,209
-----------
Property, plant, and equipment (at cost)
Land 156,554
Buildings and improvements 1,417,993
Production and laboratory equipment 2,289,871
Office furniture and fixtures 863,281
Data processing equipment 2,078,006
Automotive equipment 8,153
-----------
6,813,858
Less accumulated depreciation and amortization (4,524,790)
-----------
2,289,068
-----------
Intangible assets:
Product supply agreement, net of accumulated
amortization of $270,000 630,000
Goodwill, noncompete agreement, and other intangibles,
net of accumulated amortization of $545,893 746,144
Other assets 35,479
-----------
Total assets $14,742,900
===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Staodyn, Inc.
Consolidated Balance Sheet
As of November 30, 1995
(continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities:
Current portion of note payable-related party $ 31,170
Current portion of capitalized lease obligations 213,773
Accounts payable 469,590
Commissions payable 146,894
Accrued payroll expense 405,116
Taxes payable, other than income 105,424
Other accrued liabilities 237,606
----------
Total current liabilities 1,609,573
----------
Long-term debt:
Finance obligation, net of unamortized debt expense
of $24,954 1,250,046
Capitalized lease obligations, long-term 211,913
----------
Total long-term debt 1,461,959
----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Preferred stock - $0.01 par value; 1,000,000
shares authorized; none issued --
Common stock - $0.01 par value; 10,000,000
shares authorized; 6,325,036 shares
issued and outstanding 63,250
Additional paid-in capital 15,106,068
Retained deficit (3,497,950)
-----------
11,671,368
-----------
Total liabilities and stockholders' equity $14,742,900
===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Staodyn, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Sales $18,371,001 $16,596,771
Cost of sales 6,573,697 6,150,988
----------- -----------
Gross profit 11,797,304 10,445,783
----------- -----------
Operating expenses:
Selling, general, and administrative 11,083,684 11,278,346
Research and development 436,943 410,816
----------- -----------
11,520,627 11,689,162
Income (loss) from operations 276,677 (1,243,379)
----------- -----------
Other income (expense):
Interest income 97,602 82,395
Other income-related party 17,430 94,941
Interest expense (209,462) (202,770)
Interest expense-related party (8,623) (18,738)
Other income (expense), net 30,032 (34,903)
----------- -----------
(73,021) (79,075)
Income (loss) before income taxes 203,656 (1,322,454)
Income taxes - -
----------- -----------
Net income (loss) $ 203,656 $(1,322,454)
=========== ===========
Income (loss) per common share $ .03 $ (.24)
=========== ===========
Weighted average number of
common shares outstanding 6,286,260 5,424,776
=========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Staodyn, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Retained
-------------------- Paid In Earnings Treasury
Shares Amount Capital (Deficit) Stock
---------- -------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1993 5,394,405 $53,944 $14,937,939 $(2,379,152) $ -
Issuance of common stock
upon exercise of warrants 39,837 398 45,540 - -
Issuance of common stock upon
exercise of incentive stock
options, employee stock bonus,
and employee stock purchase
plan purchases 48,685 487 62,514 - -
Issuance of common stock pursuant
to asset purchase agreement 750,389 7,504 (7,504) - -
Issuance of common stock
as compensation 10,000 100 9,900 - -
Purchase of treasury stock - - - - (73,371)
Retirement of treasury stock (29,000) (290) (73,081) - 73,371
Net loss - - - (1,322,454) -
--------- ------- ----------- ----------- --------
Balance at November 30, 1994 6,214,316 62,143 14,975,308 (3,701,606) -
Issuance of common stock
upon exercise of warrants 10,000 100 11,775 - -
Issuance of common stock for
employee stock bonus and
employee stock purchase plans 64,720 647 75,483 - -
Issuance of common stock as
compensation to directors 26,000 260 24,852 - -
Issuance of common stock
as compensation 10,000 100 18,650 - -
Net income - - - 203,656 -
--------- ------- ----------- ----------- --------
6,325,036 $63,250 $15,106,068 $(3,497,950) $ -
========= ======= =========== =========== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
Staodyn, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 203,656 $(1,322,454)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 971,545 845,532
Provision for doubtful accounts 755,159 594,780
Stock compensation 35,284 -
Increase (decrease) from changes in assets and liabilities:
Accounts receivable (897,164) (2,010,371)
Inventories, net 541,859 (127,508)
Prepaid expenses and deposits (35,045) 1,550
Other assets - 4,000
Accounts payable (231,655) (12,850)
Accounts payable-related party - (24,985)
Accrued payroll (18,382) 86,592
Commissions payable (16,151) (90,116)
Taxes payable, other than income 54,961 (1,741)
Other current liabilities 92,911 55,846
----------- -----------
Net cash provided by (used in) operating activities 1,456,978 (2,001,725)
----------- -----------
INVESTING ACTIVITIES
Payments for purchases of property, plant, and equipment (108,081) (508,237)
Payments for other noncurrent assets (44,231) (8,751)
Purchases of short-term investments (3,382,661) (5,433,056)
Maturities of short-term investments 3,090,000 4,740,000
----------- -----------
Net cash used in investing activities (444,973) (1,210,044)
----------- -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
Staodyn, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30
-------------------------
1995 1994
----------- ------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuances of common stock $ 77,833 $ 108,939
Principal payments of note payable-related party (117,714) (107,619)
Principal payments under capital lease obligations (214,602) (247,328)
Purchase of treasury stock - (73,371)
---------- -----------
Net cash used in financing activities (254,483) (319,379)
---------- -----------
Net increase (decrease) in cash and cash equivalents 757,522 (3,531,148)
Cash and cash equivalents at beginning of period 853,118 4,384,266
---------- -----------
Cash and cash equivalents at end of period $1,610,640 $ 853,118
========== ===========
Supplemental information:
Interest paid $ 218,085 $ 221,508
Supplemental schedule of noncash investing activities
Equipment acquisitions through capital lease
obligations $ 31,620 $ 176,654
Stock issued as compensation 18,750 10,000
</TABLE>
See accompanying notes.
F-8
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
In 1994, the Company incorporated a subsidiary in the Netherlands (Staodyn
B.V.) in anticipation of marketing products to the European Community. The
consolidated financial statements include the accounts of this wholly-owned
subsidiary.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents. Short-term
investments at November 30, 1995 represent investments in mortgage-backed
government securities of approximately $986,000, whose cost approximates fair
market value. These securities mature within six months or less. Under
Statement of Financial Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," these securities are carried at amortized cost as
the Company has the ability and intent to hold to maturity.
INVENTORIES
Inventories are generally stated at the lower of first-in, first-out (FIFO)
cost or market.
INCOME TAXES
Deferred income taxes are provided for the difference between the book and tax
basis of assets and liabilities.
DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT
Depreciation is calculated on the straight-line method over the estimated
useful lives of the assets. Property, plant, and equipment held under capital
leases are amortized on the straight-line method over the shorter of the lease
term or estimated useful lives of the assets. The estimated useful lives of
property, plant, and equipment for purposes of computing depreciation are:
Buildings 30 years
Leasehold improvements 15 years
Production and laboratory equipment 3 to 5 years
Office furniture and fixtures 3 to 5 years
Data processing equipment 3 to 5 years
Automotive equipment 3 years
Depreciation expense totaled approximately $740,000 and $607,000 for the
fiscal years ended November 30, 1995 and 1994, respectively.
F-9
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets are amortized over the following estimated useful lives:
Product supply agreement 10 years
Goodwill 20 years
Noncompete agreement 5 years
RESEARCH AND DEVELOPMENT
The Company expenses all research and development costs as incurred.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share is based on the weighted average number of
common and common equivalent shares, including dilutive common stock options and
warrants outstanding during the year. Options and warrants outstanding during
the fiscal years ended November 30, 1995 and 1994 are not included in the
computation of weighted average shares outstanding as their inclusion results in
a dilution of less than three percent, or as their inclusion would be
antidilutive.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are due from approximately 600 active
medical product dealers and distributors primarily located in the United States
and Canada and from a large number of individuals and insurance carriers
throughout the United States.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. The more significant areas
requiring the use of management estimates relate to accounts receivable and
inventory reserves, the estimated useful lives of intangible assets, and the
valuation allowance for deferred tax assets. Actual results could differ from
those estimates.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
year presentation.
F-10
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
2. ASSET ACQUISITION
On November 15, 1992, the Company purchased substantially all of the assets,
excluding accounts receivable, of Technical Medical Devices, Inc. (TMD), a
wholly-owned medical products distribution subsidiary of Pharmacy Management
Services, Inc. (PMSI). In conjunction with the purchase, the Company entered
into a transition support agreement with PMSI whereby PMSI agreed to provide
operating facilities and support services subsequent to the purchase. During
fiscal 1995 and 1994, expenses totaling approximately $136,500 and $122,000,
respectively, were paid to PMSI for support services under this agreement.
Pursuant to the acquisition, the Company and PMSI entered into a shareholder
agreement which provided that the number of shares issued and held by PMSI as of
November 15, 1994, up to a maximum of 400,000 shares, would be increased in
proportion to any decrease in the per share market value of the Company's common
stock below $5.00 per share. A total of 750,389 shares were issued to PMSI as
contingent consideration in fiscal 1994 under the terms of this agreement.
After this issuance, PMSI's ownership percentage increased to 18.5% as of
November 30, 1994. The shareholder agreement also granted PMSI demand
registration rights after June 30, 1994. PMSI was acquired by Beverly
Enterprises in June 1995.
3. INVENTORIES
Inventories at November 30, 1995 include the following components:
Raw materials $ 802,698
Work in process 36,725
Finished goods 2,777,127
----------
$3,616,550
==========
4. LONG-TERM DEBT
Long-term debt at November 30, 1995 consists of the following:
Finance obligation, net $1,250,046
Capitalized lease obligations 425,686
Note payable-related party 31,170
----------
1,706,902
Less current portion (244,943)
----------
$1,461,959
==========
F-11
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
4. LONG-TERM DEBT (CONTINUED)
FINANCE OBLIGATION-SALE AND LEASEBACK OF BUILDING
In July 1993, the Company completed a sale and leaseback transaction on the
owned portion of its facilities and related land in Longmont, Colorado. The
property was sold to a limited liability company (LLC) for $1,275,000 in cash.
The sale and leaseback transaction is accounted for as a financing; the sales
price (net of unamortized debt expenses) is reflected as a long-term financing
obligation and the operating lease payments as interest until the earlier of the
end of the lease term or the exercise of the purchase option included in the
lease. The building and related improvements are carried as assets on the
Company's books and depreciated. One of the officers of the Company is a
minority (16%) participant in the LLC.
NOTE PAYABLE-RELATED PARTY
The Company issued a promissory note payable to PMSI for a total of $300,000
in February 1993. The note bears interest at 9% and requires monthly payments
of principal and interest of $10,500 through February 1996. The note is secured
by approximately $550,000 of furniture and equipment which was purchased from
PMSI.
Annual maturities of all long-term debt other than capitalized leases are as
follows:
1996 $ 31,170
1997 -
1998 -
1999 -
2000 -
Thereafter 1,250,046
----------
Total 1,281,216
Less current portion (31,170)
----------
$1,250,046
==========
CAPITALIZED LEASE OBLIGATIONS
The capitalized lease obligations relate to certain production, data
processing, and office equipment. Original cost and accumulated depreciation of
assets under capital leases at November 30, 1995 are:
Cost $939,719
Less accumulated depreciation (593,242)
--------
$346,477
========
F-12
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
4. LONG-TERM DEBT (CONTINUED)
CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments at November 30, 1995 for these leases are as
follows:
1996 $ 256,985
1997 222,373
1998 4,104
Thereafter 1,390
---------
Total minimum lease payments 484,852
Less amounts representing interest (59,166)
---------
Present value of lease payments 425,686
Less current portion (213,773)
---------
$211,913
========
5. PROFIT SHARING PLAN
All full-time employees who have completed at least one year of service are
eligible to participate in the Company's 401(k) Plan. The Plan meets the
requirements of Section 401(k) of the Internal Revenue Code, and total Company
contributions are limited to 50% of the aggregate employee contributions to the
Plan, subject to a maximum amount of 3% of regular compensation for each
employee. The rules applicable to Section 401(k) may also serve to further
limit the Company's contributions to the Plan, particularly with respect to
highly compensated employees. Company contributions to the Plan were
approximately $23,000 for fiscal 1995. There was no Company contribution for
fiscal 1994.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases land and a building in Longmont, Colorado under two
operating leases expiring in July 2003. The leases call for payments totaling
$219,500 per year; the annual payments may be adjusted in fiscal 1998 based upon
the prime rate at the anniversary date of the leases. Each lease gives the
Company the option to purchase the respective property at any time after the
fifth year of the lease (July 1998); the purchase option prices vary based upon
the year exercised and range from 110% of an established price in the fifth year
to 120% in the tenth year (the established price is $1,275,000 for the portion
which was sold and leased back; $720,000 for the second lease). Total interest
expense in fiscal 1995 and 1994 was $140,250 in each year for the portion sold
and leased back. Total rent expense was $79,200 for the remaining portion in
both fiscal 1995 and 1994.
F-13
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES (CONTINUED)
The Company subleases building space for its operation in Tampa, Florida from
PMSI under an operating lease expiring in March 1996. Total rent expense under
this lease was $100,100 and $98,600 in fiscal 1995 and 1994, respectively.
Additionally, the Company leases a separate warehouse facility under an
operating lease which expires in February 1996. A portion of this facility was
subleased to PMSI in September 1995 for approximately $2,700 per month, or a
total of $8,300 in 1995. Rent expense under this lease, net of sublease income,
was $28,000 and $36,300 in fiscal 1995 and 1994, respectively.
The Company also leases various equipment under noncancelable operating
leases. Total rent expense under these leases was $23,000 in each of the years
ended November 30, 1995 and 1994, respectively.
Future minimum lease payments for all noncancelable operating leases and
subleases having remaining terms in excess of one year as of November 30, 1995
are as follows:
1996 $ 266,800
1997 219,500
1998 219,500
1999 219,500
2000 219,500
Thereafter 577,200
----------
Total minimum lease obligations $1,722,000
==========
7. STOCKHOLDERS' EQUITY
STOCK OPTIONS
The Company maintains the 1982 and 1992 Stock Option Plans (SOP) which provide
for the granting of incentive and nonincentive options to employees, directors,
and consultants of the Company. The Company's 1982 SOP expired on May 31, 1992.
The 1992 SOP permits options to be granted to purchase a maximum of 400,000
shares of the Company's common stock. The term of the options granted may not
exceed 10 years.
F-14
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Stock option activity was as follows:
<TABLE>
<CAPTION> RANGE OF
PRICES PER
SHARES SHARE
------- ---------------
<S> <C> <C> <C>
Outstanding at November 30, 1993 266,500 $1.81 $5.25
Granted 56,500 2.00 4.38
Exercised (54,500) 1.81 2.50
Canceled (38,000) 2.75 5.00
-------
Outstanding at November 30, 1994 230,500 1.81 5.25
Granted 88,000 1.25 2.50
Canceled (46,000) 1.41 4.38
-------
Outstanding at November 30, 1995 272,500 1.25 5.25
=======
At November 30, 1995:
Number of shares exercisable 136,230
Number of shares authorized and
available for future grant 183,000
</TABLE>
STOCK PURCHASE PLAN
The 1983 Employee Qualified Stock Purchase Plan (the ESPP) permits employees
to purchase a maximum of 400,000 shares of the Company's common stock. Eligible
employees are offered the right to purchase shares semiannually in June and
December at a purchase price equal to 85% of the lesser of the fair market value
on either the first or the last business day of the purchase period.
Participants may contribute up to 10% of their regular base pay toward the
purchase of the shares. During the fiscal years ended November 30, 1995 and
1994, 58,170 and 28,998 shares were purchased at an average price of $1.14 and
$2.44 per share, respectively. At November 30, 1995 there were 83,363 shares
authorized and available for issuance under the ESPP.
F-15
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK WARRANTS
Members of the Company's Board of Directors are periodically granted warrants
to purchase shares of the Company's common stock. The warrants are exercisable
at a price equal to 100% of the fair market value of the Company's common stock
on the date of grant, are immediately exercisable, and have terms of up to 10
years. All outstanding warrants expired in 1995. Activity relative to
directors' stock warrants is as follows:
<TABLE>
<CAPTION>
RANGE OF
PRICES PER
SHARES SHARE
-------- ---------------
<S> <C> <C> <C>
Outstanding at November 30, 1993 157,500 $1.19 $2.19
Exercised (75,000) 1.19 2.19
Forfeited (10,000) 1.19 2.19
-------
Outstanding at November 30, 1994 72,500 1.19 2.19
Exercised (10,000) 1.19 2.19
Forfeited (62,500) 1.19 2.19
-------
Outstanding at November 30, 1995 0
=======
</TABLE>
In June 1991, the Company completed a public offering totaling 920,000 units
which consisted of 920,000 shares of common stock and warrants to purchase a
total of 460,000 shares of common stock. Two warrants entitled the holder to
purchase one share of common stock for $5.00 per share through February 1995.
The warrants contained certain redemption provisions. These warrants expired in
February 1995. In connection with the public offering, underwriters were
granted a Unit Purchase Option entitling the underwriters to purchase up to
80,000 units for $5.10 per unit. This option is currently exercisable and
expires in June 1996.
In November 1993, the Company completed a public offering totaling 1,495,000
units; each unit consists of one share of common stock and a warrant to purchase
one share of common stock for $5.00 per share. These warrants contain certain
redemption provisions and expire in November 1996. In connection with this
public offering, underwriters were granted a Unit Purchase Option entitling the
underwriters to purchase up to 130,000 units for $6.75 per unit. This option
became exercisable in November 1994 and expires in November 1998.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" was issued in 1995 with an effective date for fiscal years
beginning after December 15, 1995. The Company has elected that upon adoption
in fiscal year 1997, they will continue to measure compensation cost using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued
F-16
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
to Employees" and will make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting as defined in SFAS 123 had
been applied.
8. INCOME TAXES
The Company has net operating loss carryforwards of approximately $1,328,000
expiring from 2006 to 2009. The Company has research and development tax credit
carryforwards of approximately $214,000 expiring from 1997 to 2005.
Utilization of net operating losses and credits may be subject to an annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986. The annual limitation may result in the expiration of net
operating losses and credits before utilization.
A valuation allowance is recorded against deferred tax assets to the extent
that management considers that it is unlikely as to whether such deferred tax
assets will be realized. Significant components of the Company's long-term
deferred tax liabilities and assets at November 30, 1995 are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
1995
------------------
<S> <C>
Deferred tax liabilities:
Property and equipment $ (9,259)
------------
Deferred tax assets:
Sale and leaseback 309,870
Accounts receivable reserves and allowances 714,166
Expenses not deductible until paid:
Vacation accrual 68,378
Warranty accrual 9,325
Bonus accrual -
Contributions 15,417
Inventory-related (4,138)
Alternative minimum tax credits 1,656
Net operating loss carryforwards 495,214
------------
1,609,888
Valuation allowance for deferred tax assets (1,600,629)
Deferred tax assets, net of valuation allowance 9,259
------------
Net deferred tax asset (liability) $ -
============
</TABLE>
F-17
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1995
8. INCOME TAXES (CONTINUED)
The valuation allowance decreased by approximately $92,500 in fiscal 1995.
A reconciliation between the Company's actual income tax expense (benefit) and
income taxes computed by applying the federal statutory rate is as follows:
<TABLE>
<CAPTION>
NOVEMBER 30 NOVEMBER 30
1995 1994
------------ ------------
<S> <C> <C>
Computed income tax expense (benefit) at the statutory rate $ 69,200 $(449,600)
Effect of net operating losses (98,100) 435,600
Goodwill amortization 9,300 6,800
Nondeductible T & E 13,600 7,200
Effect of state income taxes 8,700 -
Other (2,700) -
-------- ---------
$ - $ -
======== =========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company sells products to PMSI under the terms of the Product Supply
Agreement entered into in conjunction with the acquisition of TMD. Sales to
PMSI under this agreement totaled approximately $217,000 and $590,000 in the
years ended November 30, 1995 and 1994, respectively.
Additionally, the Company provided services related to the collection of pre-
acquisition accounts receivable for PMSI for which fees are received. Total
income under this agreement was approximately $17,500 and $95,000 for the years
ended November 30, 1995 and 1994, respectively.
F-18
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-74614, 2-96535, 2-87595 and 33-42053) and in the
Prospectuses constituting part of the Registration Statements on Form S-3 (Nos.
33-74464 and 33-46186) of Staodyn, Inc. of our report dated January 19, 1996
appearing on Page F-2 of this Form 10-KSB.
PRICE WATERHOUSE LLP
Boulder, Colorado
February 15, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<CASH> 1,610,640
<SECURITIES> 985,717
<RECEIVABLES> 4,659,215
<ALLOWANCES> 1,655,124
<INVENTORY> 3,616,550
<CURRENT-ASSETS> 11,042,209
<PP&E> 6,813,858
<DEPRECIATION> 4,524,790
<TOTAL-ASSETS> 14,742,900
<CURRENT-LIABILITIES> 1,609,573
<BONDS> 0
0
0
<COMMON> 63,250
<OTHER-SE> 11,608,118
<TOTAL-LIABILITY-AND-EQUITY> 14,742,900
<SALES> 18,371,001
<TOTAL-REVENUES> 18,371,001
<CGS> 6,573,697
<TOTAL-COSTS> 6,573,697
<OTHER-EXPENSES> 11,520,627
<LOSS-PROVISION> 755,159
<INTEREST-EXPENSE> 218,085
<INCOME-PRETAX> 203,656
<INCOME-TAX> 0
<INCOME-CONTINUING> 203,656
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203,656
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
