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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, 1996
[ ] 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 Number)
incorporation or organization)
1225 Ken Pratt Boulevard, Longmont, CO 80501
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(Address of principal executive offices) (Zip Code)
Issuer'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 NASDAQ SmallCap
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(Title of Class) (Name of each exchange
on which registered)
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. $18,943,519
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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.
$9,771,626 as of February 3, 1997
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 6,665,022
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Class Outstanding at February 3, 1997
Documents Incorporated by Reference: Portions of the definitive Proxy Statement
with respect to the May 21, 1997 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 35 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 ("NMES") or pulsed galvanic stimulation
("PGS") 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, 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 1996 the retail division accounted for 78% of the
Company's sales. The Company believes that it ranks second in the domestic
market for TENS and NMES products, 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 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.
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 four
different products. The micro-processer-based Maxima(R) III 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 III's battery life up to
150 hours. The Maxima III offers strength duration modulation features and 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 Maxima(R) II is similar to the Maxima III, without the strength duration
modulation or soft turn-on features. The Company also offers the Maxima(R) I,
which is equivalent to a Maxima II without burst mode. The Nuwave(R) electrical
stimulation system is marketed primarily for the treatment of chronic lower back
pain. 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 series, but is
therefore simpler for patient use, and has a waveform which has been optimized
for chronic lower back pain.
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.
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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, 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.
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.
Pulsed Galvanic Stimulation (PGS) Devices
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Pulsed galvanic stimulation utilizes direct current to reduce swelling (or
edema), influence local blood circulation, reduce muscle spasm, and increase
range of motion.
The Company's SporTX unit was introduced in 1995 and is targeted
specifically at sports medicine applications. SporTX is an electrotherapeutic
product that combines in one small, portable device, two different
electrotherapeutic waveforms: (i) the pulsed galvanic current aspect of the
EMS+2 neuromuscular electrical stimulator and (ii) the unique pain management
features of the Nuwave transcutaneous electrical nerve stimulator.
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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 more than 60 professional sports teams, as well as by numerous colleges and
universities.
Dermapulse is a portable, microcomputer-based, pulsed galvanic stimulator.
The technology embodied in this device is the subject of two issued U.S.
patents. 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.
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, 1996 were approximately $286,000, net of accumulated depreciation.
The Company 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 Germany and the European Union. Dermapulse revenue
for fiscal 1996 was approximately $220,000.
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Traction Devices
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As part of its rehabilitation focus and as an adjunct to its NMES products,
the Company distributes the Action Traction(R), a mechanical traction product
designed to treat a variety of back ailments, including chronic low back pain,
strained ligaments, muscle spasm, and similar symptoms. A similar traction
product, the Cervitrak(R), is distributed to treat chronic neck pain symptoms.
These products 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 both fiscal 1996 and
1995, sales of accessories and supplies accounted for approximately 39% 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' 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 Europe, and those
accounted for less than 5% of total sales in 1996 and 1995.
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 physician, 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.
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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, 1996 and 1995 totaled about 6%
and 8% 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 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
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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 held relatively constant
over the past several years as part of cost-containment efforts. Additional
investment in research and development related to the Company's wound healing
technology may occur in the future dependent upon the Company's assessment of
the regulatory climate and the domestic and international 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.
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, the TENS
division of Sparta Surgical Corporation, and Henley Homecare, a subsidiary of
Lasermedics, Inc.
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."
PATENTS AND TRADEMARKS
The Company has maintained the practice, where possible, of obtaining
patent protection on its products and processes. As of November 30, 1996 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),"
"SporTX(TM)," "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
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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, SporTX) 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 product is substantially equivalent, the Company is
granted clearance to market the product.
The Company's Dermapulse wound management 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.
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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 was 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. In January 1996 the Company received ISO 9001 certification to the
European Medical Devices Directive. Additionally, the Company's SporTX, Nuwave,
and Dermapulse products and associated accessories bear the CE mark. ISO 9001
certification as well as compliance with CE requirements enable the Company to
market its products in European Union countries.
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.
THIRD-PARTY REIMBURSEMENT
Governmental and other efforts to reduce healthcare spending have effected,
and will continue to effect, 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.
-9-
<PAGE>
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, 1996 the Company employed 181 persons, 18 of whom were
employed on a part-time basis, compared with a total of 165 on November 30,
1995. The Company presently has a 1983 Employee 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
contributions made for fiscal 1996 and 1995 are $28,549 and $22,961,
respectively. 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. A limited liability
company, of which an officer of the Company is a 16% participant, owns 26,000
square feet and 6.25 acres of related land and leases it back to the Company.
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.
The retail division's operations in Tampa, Florida, occupy approximately
9,500 square feet of leased office space. The lease was amended in February
1997 to include an additional 2,300 square feet. The lease expires in April
2001; the Company has an option to extend this lease for an additional five
years after the initial period.
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, 1996.
-10-
<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 closing prices for the Common Stock as reported by
NASDAQ.
The Company has never paid a dividend and does not anticipate payment of
dividends in the foreseeable future.
Fiscal year ended November 30, 1995 High Low
------ ------
First Quarter $1.875 $1.187
Second Quarter $2.125 $1.187
Third Quarter $2.875 $1.687
Fourth Quarter $2.375 $1.625
Fiscal year ended November 30, 1996
First Quarter $1.750 $1.375
Second Quarter $2.125 $1.312
Third Quarter $1.750 $1.375
Fourth Quarter $1.687 $1.312
On February 3, 1997 the closing price of the Common Stock on NASDAQ
was $1.50 per share. As of February 3, 1997 there were approximately 1,009
holders of record of the Common Stock.
-11-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations throughout the fiscal year
ended November 30, 1996. Cash generated from operations totaled $235,000,
compared to $1,457,000 in 1995. The decrease in cash generated from operations
was due to a usage of $1,437,000 used to finance accounts receivable, due
primarily to higher sales in the third and fourth quarters; this compared to a
use for this purpose of $897,000 in 1995. Additionally, $774,000 was used to
finance inventories, also due partially to increased demand in the third and
fourth quarters; lower inventory levels had provided cash of $542,000 in 1995.
These uses of cash were offset to some extent by the change in the level of
accounts payable (which provided cash of $261,000 in 1996 as opposed to using
cash of $232,000 in 1995); the levels of accounts payable fluctuate due to
timing of payroll and check runs.
Cash of $617,000 was used for investing activities in 1996, as
compared to $445,000 in the prior year. The increase was due primarily to
investments in property, plant, and equipment of $326,000, up from $108,000 in
1995. The operations in Tampa were moved to a new facility early in the second
quarter, and the new facilities required some buildout as well as the
installation of additional computer and communications equipment. Excess cash
continues to be invested in short-term investments; the net increase in invested
cash was $281,000 in 1996 and $292,000 in 1995.
Cash used for financing activities totaled $204,000, as compared to
$254,000 in 1995. The note payable to a related party was satisfied early in
1996, which resulted in $87,000 lower cash usage in 1996; this was offset by a
lower amount of cash provided from the issuance of common stock (primarily
through employee stock purchase plans) of $37,000.
The Company's net working capital at November 30, 1996 was
$10,200,000, with a current ratio of 5:9, as compared to $9,433,000 and 7:1 at
November 30, 1995. 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, 1996
- -----------------------------------
Net sales for the fiscal year ended November 30, 1996 were
$18,943,519, an increase of $572,518 or 3% from the prior fiscal year. Retail
sales increased $655,858 or 5%. This increase in retail sales was due to the
expansion of the retail sales force, primarily in the second half of the year.
Net sales in the second half of the year were up 11% over the same period of
1995. Two independent representative groups, who had previously been customers
of the wholesale division, were added to the retail distribution network.
Wholesale division sales decreased by $83,340 or 2%.
Gross profit was $12,311,448 for the year, or 65% of net sales, as
compared to $11,797,304 or 64% of net sales in 1995. The improvement in gross
profit is attributable to the sales mix improvement between the retail and
wholesale division sales.
Selling, general, and administrative expenses in fiscal 1996 totaled
$11,553,939, as compared to $11,083,684 in fiscal 1995. The increase of
$470,255, or 5%, is due to several factors. Sales and marketing expenses were
higher due to a significant expansion of the retail sales force during the year,
as well as higher commissions on the higher sales in the retail division.
Additionally, the Company hired a new President and
-12-
<PAGE>
Chief Executive Officer in June 1996 in anticipation of the retirement of W.
Bayne Gibson in December 1996. This resulted in increased salary and moving
expenses.
Research and development expenditures remained fairly level. Research
and development expenses increased by $8,871 or 2%, to $445,814.
Other expenses for the year ended November 30, 1996 were $54,880, as
compared to $73,021 for fiscal 1995. Other income (expense) consists primarily
of interest earned on short-term cash investments and interest expense on debt
and capital leases. Interest earned on short-term investments increased by
$23,873; interest expense decreased by $31,418 as related debt principal was
decreased. These improvements, totaling $55,291, were offset by lower other
income of $32,855. Other income in fiscal 1995 consisted primarily of a rebate
of rent which had been paid in prior years.
Net income for the fiscal year ended November 30, 1996 was $256,815 or
$.04 per share, compared to $203,656 or $.03 per share for the fiscal year
ended November 30, 1995.
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).
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.
-13-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is herein on pages F-1 through
F-16.
-14-
<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 30, 1997.
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. (a Delaware 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. (16)
4.1 Specimen Common Stock Certificate (5)
4.2 Specimen Warrant (11)
4.3 Warrant Agreement (12)
-15-
<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* (16)
10.10 Employment Agreement - John R. South
21.1 Subsidiaries of the Registrant (16)
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*
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
-------------------
None
-------------------------------
(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.
(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.
-16-
<PAGE>
(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-KSB for fiscal year
ended November 30, 1994.
* Filed as part of this report.
-17-
<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/ John R. South
-------------------------
John R. South
President
DATED: February 27, 1997
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/ John R. South February 27, 1997
- --------------------------------------------
John R. South, President and Chief
Executive Officer, Principal Executive
Officer, and Director
/s/ Michael J. Newman February 27, 1997
- --------------------------------------------
Michael J. Newman, Vice President,
Finance and Administration, Secretary,
Principal Financial and Accounting Officer
/s/ Frederick H. Ayers February 27, 1997
- --------------------------------------------
Frederick H. Ayers, Director
/s/ Patrick F. Crane February 27, 1997
- --------------------------------------------
Patrick F. Crane, Director
/s/ W. Bayne Gibson February 27, 1997
- --------------------------------------------
W. Bayne Gibson, Director
/s/ Margaret S. Hansson February 27, 1997
- --------------------------------------------
Margaret S. Hansson, Director
/s/ Alan C. Stormo February 27, 1997
- --------------------------------------------
Alan C. Stormo, M.D., Director
-18-
<PAGE>
Index to Consolidated Financial Statements
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheet as of November 30, 1996.................... F-3, F-4
Consolidated Statements of Operations for the years
ended November 30, 1996 and 1995................................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the years
ended November 30, 1996 and 1995................................ F-6
Consolidated Statements of Cash Flows for the years
ended November 30, 1996 and 1995........................... F-7, F-8
Notes to Consolidated Financial Statements.................... F-9 through F-16
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, 1996 and the results of their
operations and their cash flows for each of the two fiscal years in the period
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 audits. We conducted our audits of these statements in accordance with
generally accepted accounting standards which require that we plan and perform
the audits 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 audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boulder, Colorado
January 30, 1997
F-2
<PAGE>
Staodyn, Inc.
Consolidated Balance Sheet
As of November 30, 1996
ASSETS
Current assets:
Cash and cash equivalents $ 1,025,343
Short-term investments 1,323,706
Accounts receivable, net of allowance for doubtful
accounts of $950,821 5,319,749
Inventories, net 4,398,525
Prepaid expenses and other assets 235,220
-----------
Total current assets 12,302,543
-----------
Property, plant, and equipment (at cost)
Land 156,554
Buildings and improvements 1,442,839
Production and laboratory equipment 2,330,971
Office furniture and fixtures 988,799
Data processing equipment 2,206,159
Automotive equipment 8,153
-----------
7,133,475
Less accumulated depreciation and amortization (5,204,990)
-----------
1,928,485
-----------
Intangible assets:
Product supply agreement, net of accumulated
amortization of $360,000 540,000
Goodwill, noncompete agreement, and other intangibles,
net of accumulated amortization of $732,610 873,457
Other assets 9,967
-----------
Total assets $15,654,452
===========
See accompanying notes.
F-3
<PAGE>
Staodyn, Inc.
Consolidated Balance Sheet
As of November 30, 1996
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations $ 207,086
Accounts payable 730,938
Commissions payable 184,585
Accrued payroll expense 502,650
Taxes payable, other than income 113,102
Other accrued liabilities 364,229
----------
Total current liabilities 2,102,590
----------
Long-term debt:
Finance obligation, net of unamortized debt expense
of $21,681 1,253,319
Capitalized lease obligations, long-term 4,827
----------
Total long-term debt 1,258,146
----------
Commitments and contingencies
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; 6,641,217 shares
issued and outstanding 66,412
Additional paid-in capital 15,468,439
Accumulated deficit (3,241,135)
-----------
12,293,716
-----------
Total liabilities and stockholders' equity $15,654,452
===========
See accompanying notes.
F-4
<PAGE>
Staodyn, Inc.
Consolidated Statements of Operations
YEAR ENDED
NOVEMBER 30
-------------------------
1996 1995
----------- -----------
Sales $18,943,519 $18,371,001
Cost of sales 6,632,071 6,573,697
----------- -----------
Gross profit 12,311,448 11,797,304
----------- -----------
Operating expenses:
Selling, general, and administrative 11,553,939 11,083,684
Research and development 445,814 436,943
----------- -----------
11,999,753 11,520,627
----------- -----------
Income from operations 311,695 276,677
Other income (expense):
Interest income 121,475 97,602
Other income--related party 13,135 17,430
Interest expense (186,667) (209,462)
Interest expense--related party - (8,623)
Other income (expense), net (2,823) 30,032
----------- -----------
(54,880) (73,021)
Income before income taxes 256,815 203,656
Income taxes - -
----------- -----------
Net income $ 256,815 $ 203,656
=========== ===========
Income per common share $ .04 $ .03
=========== ===========
Weighted average number of
common shares outstanding 6,469,618 6,286,260
=========== ===========
See accompanying notes.
F-5
<PAGE>
Staodyn, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
------------ In Accumulated
Shares Amount Capital Deficit
------------ ------- ----------- ------------
<S> <C> <C> <C> <C>
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
--------- ------- ----------- -----------
Balance at November 30, 1995 6,325,036 $63,250 $15,106,068 $(3,497,950)
Issuance of common stock
for acquisition of distribution
channels 264,357 2,644 300,583 -
Issuance of common stock for
employee stock bonus and
employee stock purchase plans 31,824 318 40,988 -
Issuance of common stock
as compensation to directors 20,000 200 20,800 -
Net income - - - 256,815
--------- ------- ----------- -----------
Balance at November 30, 1996 6,641,217 $66,412 $15,468,439 $(3,241,135)
========= ======= =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
Staodyn, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 256,815 $ 203,656
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 997,842 971,545
Provision for doubtful accounts 776,242 755,159
Stock compensation - 35,284
Loss on sale of equipment 2,582 -
Accrued interest (58,000) -
Increase (decrease) from changes in assets and liabilities:
Accounts receivable (1,436,776) (897,164)
Inventories, net (773,615) 541,859
Prepaid expenses and deposits (63,508) (35,045)
Other assets 2,819 -
Accounts payable 261,348 (231,655)
Commissions payable 37,691 (16,151)
Accrued payroll 97,534 (18,382)
Taxes payable, other than income 7,678 54,961
Other current liabilities 126,623 92,911
----------- -----------
Net cash provided by operating activities 235,275 1,456,978
----------- -----------
INVESTING ACTIVITIES
Payments for purchases of property, plant, and equipment (325,783) (108,081)
Payments for other noncurrent assets (18,055) (44,231)
Purchases of short-term investments (2,796,097) (3,382,661)
Maturities of short-term investments 2,515,000 3,090,000
Proceeds from sale of equipment 8,000 -
----------- -----------
Net cash used in investing activities (616,935) (444,973)
----------- -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
Staodyn, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30
-------------------------
1996 1995
----------- ------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuances of common stock $ 41,306 $ 77,833
Principal payments of note payable--related party (31,170) (117,714)
Principal payments under capital lease obligations (213,773) (214,602)
---------- ----------
Net cash used in financing activities (203,637) (254,483)
---------- ----------
Net (decrease) increase in cash and cash equivalents (585,297) 757,522
Cash and cash equivalents at beginning of period 1,610,640 853,118
---------- ----------
Cash and cash equivalents at end of period $1,025,343 $1,610,640
========== ==========
Supplemental information:
Interest paid $ 186,667 $ 218,085
Supplemental schedule of noncash investing activities
Equipment acquisitions through capital lease obligations $ - $ 31,620
Stock issued as compensation 21,000 18,750
Stock issued for acquisition of distribution channels 295,975 -
Stock issued for purchase of inventory 7,252 -
</TABLE>
See accompanying notes.
F-8
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
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, 1996 represent investments in commercial paper
of approximately $1,324,000, whose amortized 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 both the ability and intent to hold to maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, short-term investments, accounts receivable, payables and accrued
liabilities whose fair value approximates the carrying amount due to the short
maturities of these instruments.
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 5 to 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 $698,000 and $740,000 for
the fiscal years ended November 30, 1996 and 1995, respectively.
F-9
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
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 3 to 20 years
Noncompete agreement 5 years
RESEARCH AND DEVELOPMENT
The Company expenses all research and development costs as incurred.
EARNINGS PER SHARE
Earnings per common share are 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, 1996 and 1995 are not included in the
computation of weighted average shares outstanding as their inclusion results in
a dilution of less than three percent.
CONCENTRATION OF CREDIT RISK
The Company's accounts receivable are due from a large number of
insurance carriers and individuals throughout the United States and from
approximately 600 active medical product dealers and distributors.
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.
2. ASSET ACQUISITIONS
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 1996 and 1995, expenses totaling approximately $42,250 and $136,500,
respectively, were paid to PMSI for support services under this agreement.
F-10
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
2. ASSET ACQUISITIONS (CONTINUED)
PMSI's ownership percentage is approximately 18% as of November 30,
1996. The shareholder agreement granted PMSI demand registration rights after
June 30, 1994. PMSI was acquired by Beverly Enterprises in June 1995.
In connection with the purchase of two distribution channels during
1996, the Company issued 264,357 shares of unissued, restricted common stock.
The holders of these shares have demand registration rights effective in 1998.
Approximately 71,000 shares are subject to a contingent guarantee which provides
that the number of shares issued may be adjusted as of August 12, 1998. Such
shares will be increased proportionately should the value of these shares fall
below $87,500, or decreased proportionately if the value exceeds $125,000.
3. INVENTORIES
Inventories at November 30, 1996 include the following components:
Raw materials $ 684,860
Work in process 46,450
Finished goods 3,667,215
----------
$4,398,525
==========
4. LONG-TERM DEBT
Long-term debt at November 30, 1996 consists of the following:
Finance obligation, net $1,253,319
Capitalized lease obligations 211,913
----------
1,465,232
Less current portion (207,086)
----------
$1,258,146
==========
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.
The financing obligation will mature in July 2003.
F-11
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
4. LONG-TERM DEBT (CONTINUED)
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, 1996 are:
Cost $ 866,489
Less accumulated depreciation (728,103)
---------
$ 138,386
=========
Future minimum lease payments at November 30, 1996 for these leases are as
follows:
1997 $ 222,373
1998 4,104
1999 1,390
---------
Total minimum lease payments 227,867
Less amounts representing interest (15,954)
---------
Present value of lease payments 211,913
Less current portion (207,086)
---------
$ 4,827
=========
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 expense for contributions to the Plan was
approximately $28,500 and $23,000 for fiscal 1996 and 1995, respectively.
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 1996 and 1995 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 1996 and 1995.
F-12
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES (CONTINUED)
The Company subleased building space for its operation in Tampa,
Florida, from PMSI under an operating lease which expired in March 1996. Total
rent expense under this lease was $41,068 and $100,100 in fiscal 1996 and 1995,
respectively. Additionally, the Company leased a separate warehouse facility
under an operating lease which expired 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 $17,242 and $8,300 in 1996 and 1995, respectively. Rent
expense under this lease, net of sublease income, was $3,025 and $28,000 in
fiscal 1996 and 1995, respectively.
The Company leased new office facilities for its operation in Tampa,
Florida, in May of 1996. This lease was amended to include additional office
space in January of 1997. The lease, which expires in April of 2001, calls for
total monthly payments of approximately $12,000. Total rent expense under this
lease was $60,713 for fiscal 1996.
The Company also leases various equipment under noncancelable
operating leases. Total rent expense under these leases was approximately
$11,500 and $23,000 in each of the years ended November 30, 1996 and 1995,
respectively.
Future minimum lease payments for all noncancelable operating leases
and subleases having remaining terms in excess of one year as of November 30,
1996 are as follows:
1997 $ 356,967
1998 361,693
1999 366,623
2000 372,505
2001 284,412
Thereafter 356,606
----------
Total minimum lease obligations $2,098,806
==========
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-13
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
Stock option activity was as follows:
PRICE PER
SHARES SHARE
------- ---------
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
Granted 138,000 1.38 - 1.97
Canceled (4,001) 1.38 - 3.38
-------
Outstanding at November 30, 1996 406,499 $1.25 - $5.25
=======
At November 30, 1996:
Number of shares exercisable 189,841
Number of shares authorized and
available for future grant 49,001
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, 1996 and
1995, 29,424 and 58,170 shares were purchased at an average price of $1.26 and
$1.14 per share, respectively. At November 30, 1996 there were 53,939 shares
authorized and available for issuance under the ESPP.
STOCK WARRANTS
In connection with the Company's November 1993 public offering,
underwriters were granted Unit Purchase Options entitling the underwriters to
purchase up to 130,000 units for $6.75 per unit. These options are currently
exercisable and expire 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
F-14
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
7. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued 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
$1,370,000 expiring from 2006 to 2010. The Company has general business tax
credit carryforwards of approximately $296,000 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 whether such deferred tax
assets will be realized. Management has considered a variety of factors, both
positive and negative evidence, in reaching this conclusion, which is based
primarily on the cumulative operating loss over the last three years.
Significant components of the Company's deferred tax assets and liabilities at
November 30 are as follows:
1996 1995
Deferred tax liabilities: $ - $ (9,259)
Property and equipment ----------- -----------
Deferred tax assets:
Sale and leaseback 311,091 309,870
Accounts receivable reserves and allowances 484,049 714,166
Inventory 245,753 331,806
Accrued liabilities 108,110 77,703
Contribution carryforwards 16,629 15,417
Property and equipment 59,817 -
Alternative minimum tax credits 5,729 5,729
General business tax credits 296,486 296,486
Net operating loss carryforwards 517,256 437,708
----------- -----------
Subtotal 2,044,920 2,188,885
Valuation allowance (2,044,920) (2,179,626)
----------- -----------
Total deferred tax assets - 9,259
----------- -----------
Net deferred tax assets (liability) $ - $ -
=========== ===========
F-15
<PAGE>
Staodyn, Inc.
Notes to Consolidated Financial Statements
November 30, 1996
8. INCOME TAXES (CONTINUED)
A reconciliation between the Company's actual income tax expense and
income taxes computed by applying the federal statutory rate of 34% is as
follows:
NOVEMBER 30 NOVEMBER 30
1996 1995
----------- -----------
Computed income tax expense at the
statutory rate $ 87,300 $ 69,200
Effect of net operating losses (130,700) (98,100)
Goodwill amortization 21,800 9,300
Nondeductible T & E 13,400 13,600
Effect of state income taxes 8,500 8,700
Other (300) (2,700)
--------- --------
$ - $ -
========= ========
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 $228,000 and $217,000 in the years
ended November 30, 1996 and 1995, 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 $13,000 and $17,500 for the
years ended November 30, 1996 and 1995, respectively.
F-16
<PAGE>
Exhibit 10.10
EMPLOYMENT AGREEMENT
AGREEMENT made as of this 1st day of June 1996, by and between STAODYN, INC., a
Delaware corporation, with its principal offices located at 1225 Ken Pratt
Boulevard, Longmont, Colorado 80501 (hereinafter the "Company") and JOHN R.
SOUTH, residing at 7 Alison Way, Andover, Massachusetts 01810 (hereinafter the
"Officer").
The Company hereby employs the Officer and the Officer hereby accepts employment
on the terms and conditions hereinafter provided.
1. Term. Subject to the provisions for renewal and termination as hereinafter
provided, the term of this Agreement shall commence on June 1, 1996 and
terminate on May 31, 1997. This Agreement will be renewed automatically,
upon the same terms and conditions, for successive periods of one year each,
until either party at least sixty (60) days prior to the expiration of the
original term or of any extended term, shall give written notice to the
other of intention not to renew such employment. Any election not to renew
or to terminate by the Company shall be effected by a duly adopted
resolution of the Company's Board of Directors. Unless otherwise stated, any
notice of nonrenewal shall by treated as a termination without cause.
It is the intention of the parties to this Agreement, that it be redrafted
prior to December 1, 1996, and that certain provisions be rediscussed at
that time at a meeting including at least a majority of the members of the
Board of Directors. The new Agreement shall incorporate the specific
performance criteria relating to the Officer's cash and/or stock bonus
opportunity for fiscal 1997.
2. Duties. The Company agrees to employ the Officer as President and Chief
Executive Officer of the Company and to cause the Officer to be elected as a
member of the Board of Directors so long as he is so employed.
3. Extent of Services. The Officer shall report to the Board of Directors and
all other officers of the Company shall report to him or as he shall direct.
The Officer shall have primary accountability for the performance of the
Company. He shall be responsible for the overall revenue and profit of the
Company; establishing short-term and long-range objectives, plans and
policies subject to the approval of the Board of Directors; and he shall be
responsible for representing the organization with major customers, the
financial community, and the public.
The Officer shall not be constrained from continuation of limited outside
business commitments so long as such commitments do not interfere or
conflict with the performance of his duties as President and Chief Executive
Officer of the Company. All such outside business activities, which involve
remuneration to the Officer, require prior approval of the Board of
Directors. Such approval shall not be unreasonably withheld.
1
<PAGE>
4. Compensation. For all services rendered by the Officer under this
Agreement, the Company shall pay to the Officer base cash compensation of
$150,000 for the first 12 months, increasing to $175,000 on June 1, 1997,
subject to such merit increases as may be granted from time-to-time by the
Board of Directors, payable biweekly in equal installments. In addition, the
Company will provide life insurance of one and one-half (1 1/2) times base
pay (premium cost taxable to Officer above $50,000). The Officer will be
eligible for participation in all other employee benefit programs including
but not limited to medical, dental, workers compensation, and disability
insurance, as well as 125(k) and 401(k) plans and existing or future pension
or other employee benefits. Any additional benefits not normally provided by
the Company and desired by the Officer may be, at the Officer's discretion,
deducted from the base compensation in lieu of payment by the Officer
thereof.
Options: Officer shall receive a 100,000 share incentive stock
option under the Company's 1992 Stock Option Plan. Such
option shall vest in four equal annual increments
commencing one year from the date of grant, and shall
expire seven years from the date of grant. The Board will
consider future option grants to the Officer based on
performance against Company objectives, and normal
industry practices.
Bonus Plan: The Officer shall be eligible for a performance-based
cash bonus of up to 25% of the greater of $175,000 or the
base salary set by the Board for any future year. This
bonus eligibility shall begin for the fiscal year
commencing December 1, 1996, and shall be based on
specific financial or other performance criteria agreed to
by the Officer and the Board.
Moving Expenses: The Officer shall receive $75,000 as a reasonable
estimate of the costs of his relocation to Colorado. The
Company will pay for the Officer's COBRA coverage
(Medical, Accident, Life, Disability) during the 90-day
waiting period required to obtain Staodyn plan coverage.
In addition, the Company will pay for cost-effective
interim travel and lodging for the Officer while still
based in Andover, working in Longmont, Tampa and other
areas from June 1, 1996 through November 30, 1996.
5. Expenses. The Officer shall be entitled to reimbursement for all
reasonable expenses including travel, entertainment and similar items which
may be incurred in connection with performance of his duties hereunder.
Expenses incurred by the Officer pursuant to this Section will be reimbursed
by the Company upon presentation by the Officer from time to time of an
itemized account of such expenditures, in a form reasonably acceptable to
the Company's chief financial or accounting officer.
6. Working Facilities. The Officer shall be furnished with all such
facilities and services suitable to his position and adequate for the
performance of his duties at the Company's executive office in Longmont,
Colorado. The Officer's principal business activities shall be at such
office or other location within 30 miles of Longmont, Colorado.
2
<PAGE>
7. Vacation. The Officer shall be entitled each year to a vacation
of four (4) weeks, (20 days), during which time his compensation will be
paid in full. Vacation shall accrue at a rate of 6.15 hours per payroll from
date of hire.
8. Disability. If the Officer is unable to perform his services by
reason of illness or incapacity for a period of more than 26 weeks in any
12-month period, the Company shall not be obligated to pay him any
compensation after the expiration of such period. Notwithstanding anything
hereunder to the contrary, the Company may terminate this Agreement without
payment of compensation other than accrued salary and benefits, at any time
after the Officer shall be absent from his employment for whatever cause for
a continuous period of more than 180 days, and all obligations of the
Officer hereunder shall cease upon such termination. No such termination
shall prejudice the Officer's rights under applicable disability benefits or
insurance. The Officer agrees that this disability provision shall be
utilized only in the event of bonafide illness or incapacity of the Officer.
9. Termination.
(a) Either party may terminate this Agreement for cause at any time on
thirty (30) days written notice to the other party thereof. In any
termination for cause by the Company, "cause" shall mean the commission
by the Officer of any act involving gross misconduct, such as, but not
limited to dishonesty, gross neglect of duty, frequent unexplained
absence from work (after notice and failure to cure), or other
misconduct seriously detrimental to the interests of the Company.
(b) If the Officer terminates without cause before June 1, 1997 in order to
accept other employment, the Officer will be required to reimburse
Staodyn for moving expense payments received from the Company. If the
Officer terminates this Agreement without cause at any other time, he
shall provide 30 days notice to the Company thereof, and shall be
entitled to accrued salary, benefits through the notice period, and
optional COBRA coverage as authorized by law.
(c) In the event of a change of control of the Company, regardless of
whether such change of control has received the endorsement or
recommendation of the Board of Directors of the Company, the Officer
shall be paid compensation as set forth in the Change of Control
Agreement attached hereto as Exhibit A.
(d) If the Company terminates Officer without cause, the Officer shall
receive 12 months salary if such termination occurs prior to December 1,
1996. If such termination occurs subsequent to November 30, 1996, the
Officer shall receive no less than six months' salary. The Officer shall
have the option of selecting regular biweekly payments or a lump sum
payable within 30 days of Officer's election.
10. Noncompetition Agreement. Officer acknowledges that the Company has trade
secrets and confidential information, that as President and Chief Executive
Officer he will have access to all such trade secrets and confidential
information and that in performing duties in an executive position for
another company he might necessarily use and divulge such trade secrets and
confidential information. Therefore, in consideration for the severance
benefits
3
<PAGE>
set forth above, the Officer agrees that for a period of six months
subsequent to the Termination Date, the Officer will not, directly or
indirectly:
(a) Call upon any person or entity which was a customer of the Company
immediately prior to the Termination Date for the purpose of diverting,
taking away the business of, or selling products or services competitive
with significant products or services provided by the Company on the
Termination Date;
(b) In any manner, misuse or divulge to any person any list of customers,
confidential information or trade secrets of the Company;
(c) Alone or in any capacity solicit or in any manner attempt to solicit or
induce any person or persons employed by the Company within one year
prior to the Termination Date to leave such employment;
(d) Within the United States of America, either as an employee, employer,
consultant, agent principal, partner, more than 5% stockholder,
corporate officer, director, or in any other individual or
representative capacity, engage or participate in any business that is
in competition in any significant manner with any material business
conducted by the Company on the Termination Date that comprises in
excess of 20% of the Company's revenues.
11. Officer Indemnification. The Company will execute no later than December 1,
1996, a separate agreement to hold harmless and advance expenses to
indemnify the Officer from claims made by third parties or by shareholders
on behalf of the Company against the Officer and/or the Company to the
fullest extent allowable under the law for all actions or omissions by the
Officer in his position with the Company. The Company agrees to reimburse
the Officer up to $1,000 annually for the premium cost of any umbrella
liability insurance policy purchased by the Officer which covers any such
claims which may be made against him in connection with his positions with
the Company.
12. Disclosure of Proprietary Information; Inventions. The obligations of the
Officer with respect to inventions and proprietary information of the
Company are specified in that certain Employer-Employee Invention and
Protected Information Agreement, a copy of which is attached hereto as
Exhibit B and hereby made a part of this Agreement.
13. Notices. All notices hereunder shall be in writing and sent by registered
or certified mail, postage prepaid and addressed as follows:
If to the Company: Board of Directors
Staodyn, Inc.
1225 Ken Pratt Boulevard
P.O. Box 1379
Longmont, Colorado 80502-1379
If to the Officer: John R. South
(Address to be designated after
relocation to Colorado)
4
<PAGE>
or at such other address as either party may specify from time to time in
writing to the other.
14. Assignment. No party may assign or otherwise transfer this Agreement or any
of its rights or obligations hereunder without the prior written consent to
such assignment or transfer by the other party hereto. All of the provisions
of this Agreement shall be binding upon the successors and assigns of the
Company.
15. Further Instruments. The parties shall execute and deliver any and all such
other instruments and shall take any and all such other actions as may be
reasonably necessary to carry the intent of this Agreement into full force
and effect.
16. Severability. Should a court or other body of competent jurisdiction
determine that any provision of this Agreement is excessive in scope or
otherwise invalid or unenforceable, such provision shall be adjusted rather
than voided, if possible, so that it is enforceable to the maximum extent
possible, and all other provisions of the Agreement shall be deemed valid
and enforceable to the extent possible.
17. Waiver. All the rights and remedies of either party under this Agreement
are cumulative and not exclusive of any other rights and remedies provided
by law. No delay or failure on the part of either party in the exercise of
any right or remedy arising from a breach of this Agreement shall operate as
a waiver of any subsequent right or remedy arising from a subsequent breach
of this Agreement. The consent of any party where required hereunder to any
act or occurrence shall not be deemed to be a consent to any other act or
occurrence.
18. Headings. The headings of the Sections hereof are inserted for convenience
only and shall not be deemed to constitute a part hereof nor to effect the
meaning thereof.
19. Governing Law. The Agreement shall be governed by the laws of the State of
Colorado.
20. Arbitration. Any controversy or claim relating to this Agreement, or the
breach thereof, which cannot be resolved through negotiations between the
parties hereto, shall be submitted to binding arbitration in Boulder County,
Colorado. If the parties fail to reach a settlement of their dispute within
fifteen (15) days after the earliest date upon which one of the parties
notified the other of its desire to attempt to resolve the dispute, then the
dispute shall be promptly submitted to arbitration by a single arbiter
through the Judicial Arbiter Group ("JAG"), any successor of the Judicial
Arbiter Group, or any similar arbitration provider who can provide a former
judge to conduct such arbitration if JAG is no longer in existence, or an
arbiter appointed by the court. The arbiter shall be selected by JAG or the
court on the basis, if possible, of his or her expertise in the subject
matter(s) of the dispute. The decision of the arbiter shall be final,
nonappealable, and binding upon the parties, and it may be entered in any
court of competent jurisdiction.
21. Entire Agreement. This instrument contains the entire agreement of the
parties and there are no understandings, agreements, or representations
expressed or implied, not specified herein. This Agreement may not be
changed, modified or discharged unless consented to in writing by both
parties.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
THE OFFICER STAODYN, INC.
/s/ John R. South /s/ W. Bayne Gibson
- --------------------- -------------------------------------------
John R. South Chairman of the Board
June 19, 1996 /s/ Michael J. Newman
- ---------------------- -------------------------------------------
Date Vice President - Finance and Administration
Corporate Secretary
June 19, 1996
-------------------------------------------
Date
6
<PAGE>
EXHIBIT A
CHANGE OF CONTROL AGREEMENT
AGREEMENT made as of this 1st day of June 1996, by and between STAODYN, INC., a
Delaware corporation, with its principal offices located at 1225 Ken Pratt
Boulevard, Longmont, Colorado 80501 (hereinafter the "Company"), and JOHN R.
SOUTH, residing at 7 Alison Way, Andover, Massachusetts 01810 (hereinafter the
"Officer").
1. Definitions. For purposes of this Agreement, the following terms shall have
the meanings set forth below:
(a) For the purposes of this Agreement, a "Change of Control" shall be
deemed to have occurred if (a) any "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934) other than a trustee or other fiduciary holding securities under
an employee benefit plan of the Company, beneficially owns 50% or more
of the Company's voting common stock; or, (b) at any time during the
period of three consecutive years (not including any period prior to the
date hereof), individuals who at the beginning of such period constitute
the Board (and any new director whose election by the Board or whose
nomination for election by the Company's stockholders were approved by a
vote of at least two-thirds of the directors then still in office who
either were directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any
reason to constitute a majority thereof; or (c) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation in which both (i) a
majority of the directors of the surviving entity were directors of the
Company prior to such consolidation or merger; and (ii) which would
result in the voting securities of the Company outstanding immediately
prior thereto continue to represent (either by remaining outstanding or
by being changed into voting securities of the surviving entity) at
least 51% of the combined voting power of the voting securities of the
surviving entity outstanding immediately after such merger or
consolidation; or (d) the stockholders approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
(b) "Cause" shall mean the commission by the Officer of any act
involving gross misconduct such as, but not limited to, dishonesty,
gross neglect of duty, frequent unexplained absence from work, or other
misconduct seriously detrimental to the interests of the Company.
(c) "Termination Date" shall mean the date following a Change of
Control when the Officer receives written notice that his employment is
Terminated without Cause or, if later, such other termination date
specified in the written notice.
1
<PAGE>
(d) "Terminate" shall mean not only a complete termination of
employment by the Company or its successor but also a significant
negative change in the terms of employment with the Company or its
successor, including but not limited to a requirement to relocate or a
significant reduction in salary and benefits.
(e) "Termination Following a Change of Control" shall mean a termination
without cause by the Company following or in connection with a change of
control or a termination by the Officer for "Good Reason" of the
Officer's employment with the Company within two years following a
"Change of Control" (as defined below).
(f) For purposes of this Agreement, "Good Reason" shall include, but not be
limited to, any of the following (without the Officer's express written
consent):
i) the assignment to the Officer by the Company of duties inconsistent
with or a substantial alteration in the nature or status of, the
Officer's responsibilities as in effect immediately prior to a
Change of Control;
ii) a reduction by the Company in the Officer's compensation or
benefits as in effect immediately prior to the date of a Change of
Control;
iii) a relocation of the Company's principal offices beyond 30 miles
from the present Longmont, Colorado location, or the Officer's
relocation to any place other than the Longmont, Colorado offices
of the Company, except for reasonably required travel by the
Officer on the Company's business;
iv) any material breach by the Company of any provision of this
Agreement if such material breach has not been cured within thirty
(30) days following written notice of such breach by the Officer to
the Company setting forth with specificity the nature of the
breach; or
v) any failure by the Company to obtain the assumption and performance
of the Employment Agreement and this Agreement by any successor (by
merger, consolidation or otherwise) or assign of the Company.
2. Severance Benefits. In the event there is a Termination Following a Change
of Control, the Officer shall be entitled to the following severance benefits
for a period of 12 months after the Termination Date:
(a) Continued base salary in regular biweekly payments, or if so
elected by the Officer, a lump sum payable within 30 days of the
Officer's election.
(b) Bonus payable in such amount as would be payable to the Officer had he
been employed by the Company for the full fiscal year during which the
termination occurred, and the Company had achieved Plan performance for
such fiscal year. Such bonus shall be paid in the same manner as
elected by the Officer in (a) above;
(c) Continued medical, dental, life and disability insurance
benefits; and
2
<PAGE>
(d) Continued retirement benefits, including 401(k) plan.
Such benefits shall be identical to the salary, bonus, insurance and
retirement plan benefits to which the Officer was entitled immediately prior
to the Change of Control. During such 12-month period, the Officer shall
continue to be an employee of the Company for purposes of participation in
the plans which provide the benefits described in subsections (c) and (d)
above but shall have no further responsibilities as an employee and shall not
be required or permitted to continue his former duties. Subject to Section
4, the Officer shall be free to accept other employment during such period,
and there shall be no offset of any employment compensation earned by Officer
in such other employment during such period against payments due the Officer
hereunder, and there shall be no offset in any compensation or benefits
received from such other employment against the continued salary and benefits
set forth above.
3. Stock Option Vesting. In the event of a Termination Following a Change of
Control, all outstanding stock options held by the Officer which are not then
exercisable, shall become exercisable in their entirety, as of the date
immediately preceding the Termination Date.
4. Noncompetition Agreement. Officer acknowledges that the Company has trade
secrets and confidential information, that as President and Chief Executive
Officer he will have access to all such trade secrets and confidential
information and that in performing duties in an executive position for
another company he might necessarily use and divulge such trade secrets and
confidential information. Therefore, in consideration for the severance
benefits set forth above, the Officer agrees that for a period of 12 months
subsequent to the Termination Date, the Officer will not, directly or
indirectly:
(a) Call upon any person or entity which was a customer of the Company
immediately prior to the Termination Date for the purpose of diverting,
taking away the business of, or selling products or services
competitive with significant products or services provided by the
Company;
(b) In any manner, misuse or divulge to any person any list of customers,
confidential information or trade secrets of the Company;
(c) Alone or in any capacity solicit or in any manner attempt to solicit or
induce any person or persons employed by the Company within one year
prior to the Termination Date to leave such employment;
(d) Within the United States of America, either as an employee, employer,
consultant, agent principal, partner, more than 5% stockholder,
corporate officer, director, or in any other individual or
representative capacity, engage or participate in any business that is
in competition in any significant manner with any material business
conducted by the Company on the Termination Date.
5. Termination. This Agreement may be terminated only as follows:
(a) by mutual written agreement of the parties;
3
<PAGE>
(b) upon termination of Officer's employment prior to, and not in
connection with, a Change of Control.
(c) when the Officer attains age 65.
6. Severability. Should a court or other body of competent jurisdiction
determine that any provision of this Agreement is excessive in scope or
otherwise invalid or unenforceable, such provision shall be adjusted rather
than voided, if possible, so that it is enforceable to the maximum extent
possible, and all other provisions of the Agreement shall be deemed valid and
enforceable to the extent possible.
7. Assignment. The parties may assign their economic rights under this
Agreement but shall not assign any personal obligations from this Agreement.
8. Miscellaneous. This Agreement: (a) contains the entire agreement among the
parties regarding the subject matter hereof and supersedes any prior
agreements on this subject between the parties; (b) may not be amended nor
may any rights hereunder be waived except by an instrument in writing signed
by the party sought to be charged with such amendment or waiver; (c) shall be
construed in accordance with, and governed by, the laws of Colorado; and (d)
shall be binding upon and shall inure to the benefit of the parties and their
respective personal representatives and permitted assigns, including, without
limitation, any successor to the business of the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
THE OFFICER STAODYN, INC.
/s/ John R. South /s/ W. Bayne Gibson
- ------------------------- -------------------------------------------
John R. South Chairman of the Board
June 19, 1996 /s/ Michael J. Newman
- ------------------------- -------------------------------------------
Date Vice President - Finance and Administration
Corporate Secretary
June 19, 1996
-------------------------------------------
Date
4
<PAGE>
EXHIBIT B
ASSIGNMENT AND AGREEMENT CONCERNING
INVENTIONS AND NON-DISCLOSURE OF
PROPRIETARY INFORMATION
In consideration of my employment by STAODYN, INC., a corporation organized and
existing under the laws of the State of Delaware (the "Company") I hereby agree
as follows:
I. INVENTIONS
I hereby assign to the Company or its designee all rights, title and
interest I may have in and to any and all inventions, trade secrets,
confidential and proprietary information, software programs, discoveries,
conceptions, preparations and developments, whether or not eligible for or
covered by patent, copyright, or trade secret protection, and whether or not
such constitute works for hire or would otherwise belong to the Company by
operation of law (all collectively hereinafter referred to as "Invention") that
become known to, or are discovered or developed by, me, alone or jointly with
others, or are suggested by or result from work assigned to me during the term
of my employment with the Company, but only to the extent such Inventions are
reasonably related to or result from the use of premises or personal property
(tangigle or intangible) of the Company, the actual or anticipated research and
development, customers, products, services or other business activities of the
Company and are not excluded herefrom by virtue of the Company's express written
agreement or resolution of its Board of Directors after full disclosure by me to
the Company of the Invention. I shall promptly disclose to the Company any such
Invention and shall communicate all information relating thereto.
I shall assist the Company at any time during or after my employment, at
the Company's expense, in the preparation, execution and delivery of
disclosures, patent applications, and other papers, and shall do such other acts
as are reasonably necessary to obtain, enforce or defend patents or other rights
to Inventions covered by the foregoing assignment, as may be necessary to vest
title thereto in the Company, its assigns, successors, or legal representatives.
I agree to cooperate with and assist the Company, at the Company's expense, with
respect to any suits or legal proceedings relating to the rights of the Company
in such Inventions at any time during or after my employment.
In the event the Company, after reasonable effort, is unable to secure
my signature on any letters patent, copyright or other analogous protection or
applications therefor, relating to any Invention, I hereby irrevocably designate
and appoint the Company and its duly authorized officers and agents as my agent
and attorney-in-fact to act for and in my behalf and stead to execute and file
any such application or applications and to do all other lawfully permitted acts
to further the prosecution and issuance of letters patent, copyright or other
analagous protection thereon with the same legal force and effect as if executed
by me.
<PAGE>
II. PROPRIETARY INFORMATION
I agree to:
(a) Treat as confidential and preserve the confidentiality of all of
the Company's trade secrets and confidential and proprietary information,
including confidential and proprietary information of third parties disclosed to
the Company by such third parties ("Proprietary Information");
(b) Make no use of the Proprietary Information except in connection
with my employment by the Company.
(c) Make no disclosures of any Proprietary Information to any party
not an employee or consultant of the Company without the prior written consent
of the President or other officer of the Company.
(d) Limit access to the Proprietary Information to such employees or
consultants of the Company as reasonably require such access; and
(e) Upon termination of my employment or upon the request of an officer
of the Company, return to the Company all Proprietary Information in my
possession, including, but not limited to, original documents, drawings, models,
samples and any copies thereof which have been received or derived by me in
connection with my employment by the Company.
For purposes of this Agreement, the term Proprietary Information shall
not include information that is known to the general public through publication
or otherwise.
I agree that either during my employment or afterward, if requested by
the Company, I will acknowledge my possession of confidential Proprietary
Information of the Company by signing an appropriate list of any and all
Proprietary Information of the Company of which I have knowledge or about which
I have acquired information.
III. FORMER EMPLOYER TRADE SECRETS
I shall not, during my employment hereunder, either directly or
indirectly, disclose or use any protected trade secret, proprietary right or
information of any former employer of mine.
IV. SEVERABILITY
If any clause, provision or term of this Agreement is declared illegal,
invalid, or unenforceable under applicable present or future laws, then the
remainder of this Agreement shall not be affected and, in lieu of any such
clause, provision, or term, there shall be added as a part hereof a substitute
clause, provision or term as similar in substance to such illegal, invalid or
unenforceable clause, provision or term as may be possible.
-2-
<PAGE>
V. EMPLOYMENT
Nothing contained in this Agreement shall be construed as impairing my
right or the right of the Company to terminate my employment hereunder, and my
obligations under this Agreement shall continue whether or not employment with
the Company shall be terminated voluntarily or involuntarily with or without
cause.
VI. INJUNCTIVE RELIEF
I agree that any breach of this Agreement by me will cause irreparable
damage to the Company and that in the event of such breach, the Company shall
have, in addition to any and all remedies at law, the right to an injunction,
specific performance or other equitable relief to prevent the violation of my
obligations hereunder.
VII. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Colorado.
VIII. MISCELLANEOUS
No modification or changes in this Agreement shall be valid unless such
modifications or changes are in writing and signed by all parties hereto. Any
waiver of any of the terms and conditions of this Agreement shall not operate as
a waiver of any other breach of such terms or conditions, or any other term or
condition, nor shall any failure to enforce any provision hereof operate as a
waiver of such provision or any other provision hereof. The rights of the
Company under this Agreement shall inure to its successors and assigns.
EMPLOYEE:
/s/ JOHN R. SOUTH
-------------------------------
STAODYN, INC.
By: /s/ MICHAEL J. NEWMAN
-------------------------------
July 17, 1996
-3-
<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 30, 1997
appearing on Page F-2 of this Form 10-KSB.
PRICE WATERHOUSE LLP
Boulder, Colorado
February 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 1,025,343
<SECURITIES> 1,323,706
<RECEIVABLES> 5,319,749
<ALLOWANCES> (950,821)
<INVENTORY> 4,398,525
<CURRENT-ASSETS> 12,302,543
<PP&E> 7,133,475
<DEPRECIATION> (5,204,990)
<TOTAL-ASSETS> 15,654,452
<CURRENT-LIABILITIES> 2,102,590
<BONDS> 0
0
0
<COMMON> 66,412
<OTHER-SE> 12,227,304
<TOTAL-LIABILITY-AND-EQUITY> 15,654,452
<SALES> 18,943,519
<TOTAL-REVENUES> 18,943,519
<CGS> 6,632,071
<TOTAL-COSTS> 6,632,071
<OTHER-EXPENSES> 11,999,753
<LOSS-PROVISION> 776,242
<INTEREST-EXPENSE> 186,667
<INCOME-PRETAX> 256,815
<INCOME-TAX> 0
<INCOME-CONTINUING> 256,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256,815
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
