<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number: 0-8632
MEDICAL DYNAMICS, INC.
(Exact name of Registrant as specified in its charter)
Colorado 84-0631765
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
99 Inverness Drive East
Englewood, Colorado 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(303) 790-2990
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No _____
(2) 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, 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 amendments to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $1,195,200.
The aggregate market value of the voting stock held by non- affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of September 30, 1995 was approximately
$8,819,500.
Class Outstanding at September 30, 1995
Common Stock 6,879,500 shares
Documents incorporated by reference: None
<PAGE>
MEDICAL DYNAMICS, INC.
FORM 10-KSB
PART I
Item 1. Business.
(a) Business Development
Medical Dynamics, Inc. and MedPacific Corporation, its wholly owned
subsidiary (the "Registrant"), are engaged in the design, development,
manufacture and marketing of medical video cameras and related surgical
disposable products for a variety of medical specialties. The Registrant's
principal products are small, color, medical video camera systems for use in
medical diagnosis and surgical procedures. The Registrant has been
manufacturing such cameras since August of 1981. The Registrant's principal
executive offices and manufacturing facilities are at 99 Inverness Drive East,
Englewood, Colorado, 80112. Its telephone number at that address is (303) 790-
2990.
The Registrant was incorporated under the laws of the State of Colorado on
March 23, 1971, and began operations in 1973. During 1979, the Registrant began
its involvement with medical video camera systems. Initial operations relating
to such cameras consisted of the Registrant's purchase of completed cameras from
their manufacturer and the retail sale of those products to the medical
community. Exclusive marketing rights to a camera system manufactured by
another company were acquired and the Registrant served as the distributor of
that product until the arrangement was terminated in July of 1981. In August of
1981, the Registrant introduced its first medical video camera of which it was
the manufacturer. Thereafter, additional cameras were acquired or developed by
the Registrant.
During the fiscal year ended September 30, 1995, the Registrant was not
involved in any bankruptcy, receivership or similar proceeding nor did it engage
in any material reclassification, merger or consolidation. During that period,
the Registrant did not dispose of any material amounts of its assets other than
in the ordinary course of its business, with the exception of patent licensing
agreements, see note 3 to the financial statements.
On October 1, 1989, the Registrant acquired all of the outstanding shares
of MedPacific Corporation from Viox Corporation in exchange for 195,000 shares
of the Registrant's Common Stock. Included in this acquisition was a trademark
and exclusive license to produce, market and distribute the Laser Doppler
through March 1994. This investment was fully written-off in the fourth quarter
of Fiscal 1992. See "Model LD6000 Laser Doppler" under (b)(1) of this Item 1.
During fiscal 1995 the Registrant entered into a distribution agreement
with Micro-Medical Devices, Inc. (MMD), of Castle Rock, Colorado. MMD is a
corporation formed by and 100% wholly-owned by the Registrants Chairman. MMD
manufactures and sells medical products to the Registrant. The distribution
agreement signed with MMD will allow the Registrant more flexibility in matching
inventory requirements and purchases with currently anticipated sales, thereby
reducing inventory carrying costs. See item 12 - Certain Relationships and
Related Transactions, "Distribution Agreement."
(b) Business of the Issuer
The Registrant's principal business is the design, development, manufacture
and marketing of medical video cameras and related surgical disposable products
for a variety of medical specialties. These products are used in surgical,
diagnostic, research and teaching applications by physicians and other health
care professionals.
In recent years, a variety of less invasive diagnostic and surgical
techniques have been developed. Such techniques enable operations to be
performed or observation to occur with minimal surgical incisions. Among the
most common of such surgical techniques is the arthroscopic operation used by
orthopedic surgeons. That surgical technique is made possible by means of a
rigid endoscope known as an arthroscope. The arthroscope is a high quality
optical instrument which is a tube approximately four millimeters in diameter.
A light source is attached to the arthroscope and it is inserted through a small
incision made in the patient's body. The surgeon is able to observe inside the
joints through the lenses of the arthroscope and special surgical instruments
are used to perform corrective surgery without open surgery. Arthroscopy has
obtained widespread acceptance by orthopedic surgeons and is commonly used to
remove damaged cartilage tissue which may result from athletic and other
injuries. The use of the technique is less destructive of healthy tissue and
thereby decreases the time necessary for healing of the damaged area and reduces
the costs of hospitalization and rehabilitation.
A much more common surgical technique involves the use of a rigid endoscope
known as a laparoscope. The laparoscope is used in much the same way as the
arthroscope, but is limited primarily to use in the abdominal area. The latest
technique involves the use of the laparoscope to remove the gall bladder, a
procedure commonly known as laparoscopic cholecystectomy. The laparoscope also
is used to perform appendectomies, kidney removal and certain gynecologic
procedures. The gynecologic usage accounts for the majority of all laparoscopic
procedures at this time.
The Registrant's camera systems are utilized in conjunction with an
arthroscope, laparoscope or other endoscope. They may also be connected with a
microscope for use in microscopic surgery such as hand or eye surgery. The
image which may be seen by the surgeon through the endoscope or microscope is
viewed by the camera and transmitted to a television monitor. This use of a
video camera provides an image which may be viewed by all persons in the
operating room, diagnostic laboratory or classroom. The ability to observe the
surgery permits the support staff to anticipate the needs of the surgeon and
provides a mechanism which facilitates instruction of others. Additionally, the
surgeon is provided with a television screen used to reduce intervals of viewing
through the endoscope, thereby attenuating eye fatigue. The video camera may
also be attached to peripheral equipment which enables the image to be
recorded. The procedure and the patient may thereby be studied at a later time.
As of September 30, 1995 and 1994, the Registrant had approximately $60,400
and $98,600, respectively, in firm backlog orders for its products. Backlogs
are not recorded in sales revenue until the order is shipped.
(b)(1) Principal Products and Their Markets.
Models 5960, 5970 and 5980 Cameras. The Registrant currently manufactures
and markets a video camera which is designed for most endoscopic applications.
Previously, differing light conditions for varying procedures required that
different camera models be provided. The current camera models, the 5960, 5970
and 5980, contain a high performance video sensor which provides a brighter
picture in lower light level environments than prior solid state cameras. In
July 1990, the Model 5960 replaced the model 5940 in the United States. In
October 1992, the Model 5970 replaced the Model 5960 in the United States. The
Model 5980 utilizes a more advanced "Digital" base camera which provides
enhanced visualization of the affected areas of the body without the aid of an
automatic light source. These models are submersible for liquid sterilization,
and have a detachable cable (facilitating replacement of the most frequently
failing component).
The construction of the Registrant's camera is from standard video camera
components which are purchased from major manufacturers of video cameras. The
Registrant disassembles the components to enable its cameras to be separated
into the camera head and power unit. The electronics are also adjusted as
necessary. The Registrant adjusts the focal length of the camera to match the
particular endoscope or microscope with which the camera will be used and makes
other adjustments to each camera so that the camera will be suitable for use
with the particular endoscope and in the particular application for which it is
intended. The Registrant produces variations of the Model 5980 camera for use
with European format video equipment and to meet specifications of original
equipment manufacturer ("OEM") customers. These OEM customers market the
cameras under their labeling. As a camera accessory, the Registrant offers a
character generator whereby a keyboard is used to generate and display patient
case data, including such items as date of procedure, patient name, physician,
surgical procedure and elapsed procedure time.
During the years ended September 30, 1995, and 1994 approximately 15 and
10, respectively, Model 5960, 5970, and 5980 cameras were sold by the Registrant
at prices ranging from $1,600 to $8,075.
The Model 5990 Optical Catheter SystemTM. In June 1989 the Registrant
introduced a new product in the micro-invasive surgery field, its 5990 Optical
Catheter System. The Registrant developed this product from technology
originally developed by the Chairman and licensed to the Registrant in response
to the trend toward less invasive and less expensive diagnostic and surgical
procedures which now are being performed in physicians' offices and outpatient
clinics. The system was under development for three years and a prototype was
introduced to the medical community during fiscal 1988. The Registrant is
manufacturing the 5990 Optical CatheterTM System in its facility and commenced
marketing in June 1989. During the fiscal years ended September 30, 1995, and
1994, 10 and 18 Model 5990 Optical Catheter systems were sold by the Registrant,
netting sales of approximately $87,500, and $158,200 respectively.
The 5990 Optical Catheter System consists of a modular console containing a
video camera, a light source, and a monitor. A flexible, small diameter
endoscope utilizing the smallest, most flexible and versatile fiber optic image
bundles available is attached to the console. This endoscope allows medical
specialists to examine almost any area in the body with a puncture as small as
that caused by a standard hypodermic needle.
The optical fibers contained in the endoscope transmit light from the
console to the lens at the tip, and transmit the image from the lens to the
camera in the console. The image is then displayed on the video monitor. The
endoscopes which can be used with the console range from .5 millimeters up to
1.9 millimeters in diameter. Images produced by the 5990 Optical Catheter
System can be preserved by use of recording and printing devices already
marketed by the Registrant.
The 5990 Optical Catheter System in the future may be configured into a
"Smart" Optical Catheter System by including additional diagnostic devices with
the image sensor. The basic System includes only the image sensor as described
in the foregoing paragraphs. The Registrant has developed or purchased
additional components which can be inserted through the same catheter. These
additional components can monitor and measure pressure, temperature, capillary
blood flow, fluorescence and oxygen saturation levels to assist a physician in
whatever procedure he or she may be performing on a patient. Although
monitoring and measuring such functions is by no means a new concept,
traditional methods use a separate piece of equipment which is not an integral
part of the viewing system and which require an additional entry way into the
body. In the 5990 System, because these additional devices can be inserted
through the same catheter which is an integral part of the viewing system, the
physician has the ability to view placement of the measuring devices to obtain
optimum readings. The features of the Optical Catheter System which allow
direct coupling of the diagnostic devices to the image sensors and which convert
the light signals into usable diagnostic information are patented to the
Registrant.
The Optical Catheter System is designed for use in every surgical and
medical specialty. As noted, the optical catheter itself can be made very small
in diameter (small enough to fit through a 20 gauge hypodermic needle) and can
be made to any length. Lengths up to 180 inches have been made without loss of
picture quality. The terminal end of optical catheter which contains one or
more lenses can be made in any configuration including flexible, rigid and
steerable, to suit any procedure required by the physician. Steerability of the
terminal end can be in one direction, or in many directions. The Optical
Catheter device therefore, is suitable for a wide variety of uses such as
looking into joints, the ventricles of the brain, around the spinal cord,
through the abdominal wall to look at structures within the peritoneum, or
examining the fetus inside the uterus and peering into small diameter blood
vessels.
Models 6400, 6500 and 6600 Light Sources. The Registrant currently
produces several light sources used in various procedures in conjunction with
the model 1001.00, 5980 and 5500 cameras. The Registrant began production of
the model 6500 light source during its 1990 fiscal year and began to market and
produce the model 6600 light source during fiscal 1993. The Company began
production of the model 6400 light source during fiscal 1995. All model numbers
represent current lines used for Arthroscopy, Laparoscopy and various other
endoscopic procedures and vary only in the amount and frequency of light emitted
from each piece of equipment. The Registrant sold 39 and 26, new light source
units during fiscal 1995 and 1994, respectively, netting sales of $137,100 and
$99,100.
Adair/Veress NeedleTM. The Registrant has sold 1,402 and 1,044 units of a
needle used to perforate the abdominal wall for fiscal years ended September 30,
1995 and 1994. Total sales of this product during fiscal 1995 and 1994 were
approximately $26,700 and $28,400, respectively. The Medical Dynamics 5990
catheter and other manufacturers fiber scopes can be inserted through the
needle, facilitating viewing of affected areas of the abdomen without an
incision. The Registrant developed this needle in anticipation of its use in
emergency rooms and for certain established laparoscopic procedures. The needle
has FDA approval and is patented. See (b)(7) under this Item 1 below.
Peripherals. The Registrant provides a variety of products designed for
use in connection with its cameras. Because the Registrant's cameras are used
with a variety of endoscopes and microscopes requiring varying light sources,
optical couplers must be supplied to enable connection of the camera, light
source and endoscope. These optical couplers are made by a supplier. The
Registrant also provides the video monitors for use in connection with its
cameras. These monitors are purchased from major electronics manufacturers and
then disassembled and modified as needed for medical uses. Installation of
medical grade cords, plugs, conductive castors, opto-isolation for control of
current leakage and remote footswitching are a few of the modifications
provided. Similarly, video cassette recorders of major manufacturers also are
purchased by the Registrant, modified and resold for use in connection with its
medical cameras.
The Registrant continues to market the video printer which it introduced in
the fiscal year ended September 30, 1986 and the video floppy introduced during
the fiscal year ended September 30, 1987. The video printer enables a video
image to be stored on a photographic print while the video floppy unit records
field-still pictures on a 2x2 still video floppy. During the fiscal years ended
September 30, 1995 and 1994, the Registrant sold approximately 3 and 8 video
printer units netting sales of $12,400 and $32,900, respectively. Additionally,
1 and 1 video floppy units were sold during the same periods generating net
sales of $1,200 and $1,800, respectively. Sales of related video supplies
totaled $34,842 and $71,220 for these same respective periods.
Cam-WrapTM. The Registrant markets a sterile camera cover (the Cam-Wrap)
which permits the head and cable of soakable and non-soakable cameras (which
cameras were previously manufactured and sold by the Registrant and others) to
be draped for sterile requirements of operating rooms. The plastic camera cover
is manufactured for the Registrant by a non-affiliated company. Approximately
21,400 and 23,100 units were sold in fiscal 1995 and 1994, respectively, for
total sales of $202,500 and $217,500.
Bayne Pap BrushTM. During the fiscal year ended September 30, 1987, the
Registrant started manufacturing and marketing a disposable product used to
collect cells for Pap smears. The Bayne Pap Brush is constructed of DuPont
nylon fibers that can be fitted to any position in or on the cervix. The Bayne
Pap Brush collects 10 to 100 times more cells than traditional techniques which
significantly decreases the number of false negative Pap smears. Dr. Dean
Bayne, the developer of the Bayne Pap Brush, is a director and former employee
of the Registrant. The Registrant sells a minimal amount of these brushes
annually. Approximately 18,500 and 18,700 units were sold in fiscal 1995 and
1994, respectively, for total sales of $9,990 and $9,930. The Registrant
discontinued the production and sale of this device during fiscal 1995 and is
interested in licensing the patent and technology of this product to a third
party experienced in the distribution, manufacturing and marketing of high
volume disposable products. See "Item 12 - Certain Relationships and Related
Transactions."
Model LD6000 Laser Doppler Blood Flow Monitor. The Laser Doppler is an
apparatus enabling the measurement of capillary blood flow using coherent light.
The unit can be used as a stand alone product or can be combined with the
Registrant's Optical CatheterTM System to view and monitor (via laser light) the
healing process of affected areas. The Registrant has not sold any units of the
LD6000. The main use of the laser doppler will be to measure capillary blood
flow of cancerous tissue after the application of certain photo-dynamic therapy
drugs have been administered to the affected regions. These photosensitizers
emit fluorescent properties which then can be useful in the localization of
cancerous tissue. This device when married with the Registrant's Optical
Catheter System is expected to form the basis for a Fluorescence Detection
System/Photodynamic Therapy System to be developed in the future, in conjunction
with patents owned or licensed by the Registrant regarding the delivery of laser
light through endoscopes.
Electronic Video Laparoscope (EVL). The Model 5500 is a rigid endoscope
that utilizes the latest in image processing without the need for multiple
optical coupling lenses. The endoscope also eliminates the need for coupling
and light source enhancement because it incorporates these features within the
design. The Registrant introduced this product in October 1992 and commenced
active marketing in April, 1993. During the fiscal years ended September 30,
1995 and 1994, the Registrant sold 35 and 28 units of the EVL control module, to
both domestic and foreign markets generating net sales of $175,800 and
$127,200. Total gross revenues for all EVL associated products, which
includes ancillary scopes, umbilical cables, heads and control modules
totalled $264,600 and $326,600 for the respective fiscal years.
Unlike a conventional surgical camera system which utilizes a separate
camera head and coupler that never enters the body, the EVL incorporates an
image sensor chip at the tip of the laparoscope. As a result, the EVL, dubbed
"Chip on a Stick", places the imaging chip in closer proximity to the anatomy
being viewed, thereby creating a significantly higher resolution picture and
increased illumination. With the elimination of the ancillary head and coupler,
the Registrant has created a lighter weight device that requires only an
optional focusing or magnification mechanism and eliminates the problem of
fogging between the coupler and eyepiece. All of these features add up to a
safer, more efficient device for use by surgeons.
In addition to the diagnostic versions of the EVL in 0 and 30 degree
viewing angles, the Registrant received FDA approval in September, 1994 for the
Operative Video LaparoscopeTM in both 3 and 5 millimeter working channels.
These devices are believed to be a significant improvement over existing
operative scopes on the market in that they allow the same bright, high
resolution picture as the standard EVL, with additional capability to insert
operative instruments or laser fibers through the working channels. Most
competing operative scopes lack illumination and picture quality due to their
less-than-optimal configuration. These devices have been added to the current
product line.
Lap-WrapTM. In conjunction with the EVL, Medical Dynamics also
markets the Lap-Wrap, a disposable sterile sheath and sleeve for the EVL and
other manufacturers' brands of laparoscopes and camera systems. The product
is part of the Company's line of higher-margin disposable accessories. The
Lap-Wrap is a low cost alternative ($24 list) to current sterilization and
disinfection techniques. It reduces repair costs on scopes and camera
systems, and also eliminates the potential environmental and health hazards
associated with exposure to chemical soaking solutions or ETO (gas)
sterilization. During the fiscal years ending September 30, 1995 and 1994,
314 and 689 cases of Lap-Wrap were sold resulting in revenues of $49,100 and
$117,500, respectively. Both the EVL and Lap-Wrap, which combine to form a
patented device, have been licensed (See Licenses in Part I (b)(7)) to
Medical Dynamics by the inventor and Chairman of the Registrant, Dr. Edwin L.
Adair.
Universal Sterile Endoscopy SystemTM (USESTM). At the end of fiscal 1995
the Registrant introduced this new product. It consists of a non-soakable
camera system that utilizes a proprietary "closed system" drape with each use.
The advantages of this system over competitors models is the ability to have an
absolutely sterile camera for every surgical case, at approximately one-third
the price of competing models. Fiscal 1995 sales were minimal as the product is
in the introductory stage. See item 12 - Certain Relationships and Related
Transactions, "Distribution Agreement."
Inventory. The Registrant is required to carry significant quantities of
inventory to meet rapid delivery requirements of customers or to assure itself
of a continuous allotment of goods from suppliers. The Registrant has continued
to maintain its inventory of components on its Models 5500, 5960, 5970, and 5980
cameras; the 5990 Optical CatheterTM System, and various peripherals.
Sufficient quantities of the Registrant's disposable product line such as
Lap-Wrap and Cam-Wrap must also be maintained in anticipation of customer's
future needs. The Registrant typically sells product on a net 30 day basis to
all domestic customers and a net 60 to 90 day basis to foreign customers and
distributors. With some exceptions, most foreign distributors post letters of
credit to insure payment on orders. Inventory levels net of allowance for
obsolescence for the fiscal years ended September 30, 1995 and 1994 were
$948,500 and $984,300 respectively.
Warranty. The Registrant's medical video cameras are warranted for a one-
year period with respect to parts and labor required as a result of defects in
material and workmanship. Cables and optical couplers are warranted to be free
of defects for a period of 180 days. Defects or malfunctions are corrected by
the Registrant at the Registrant's cost, if the applicable conditions to the
warranty are satisfied. In the event warranty repairs cannot be effected within
five days, the Registrant generally provides loaner cameras for customer use.
Failures normally occur during the early life of the cameras, and repair
expenses usually occur in the same year in which the camera is initially placed
in service. The Registrant estimates future warranty costs and enters the
estimated expenses into its results of operations based upon historical
experience and revenues currently reported. The estimated warranty reserve at
fiscal year end September 30, 1995 and 1994 was $25,000 and $50,000,
respectively.
(b)(2) Distribution Methods
The Registrant's video camera systems and disposable medical products are
sold principally to physicians and hospitals. The Registrant has engaged in
marketing and advertising of its products at professional seminars and specialty
meetings, direct mail promotions, telemarketing, and through a sales
representative network. During the years ended September 30, 1995 and 1994, the
Registrant expended $258,800 and $254,200, respectively, on sales promotions,
conventions and advertising expenses.
The Registrant has engaged approximately 18 organizations with
approximately 38 field sales representatives to market its camera systems in the
United States. Most major domestic sales territories are covered by the current
sales representative network. The sales representatives enter into a one year
agreement with the Registrant under which they receive commissions of 15% to 20%
on video camera sales revenues, 10% to 15% on camera accessories and 10% to 20%
on disposable product sales generated by them in exclusive marketing areas. All
selling expenses are borne by the sales representative. The sales
representative agreements prohibit each representative from purchasing or
dealing in products of competitors of the Registrant. In addition to sales made
in this manner, the Registrant also modifies some of its products to display the
labeling of its customers. Those customers then sell the products directly to
end-users.
As of the fiscal year ended September 30, 1995, the Registrant engaged
approximately 12 agents to sell video cameras in areas outside the United
States. The primary foreign territories where the Registrant has distributors
are Japan, United Kingdom, Western Europe, Spain, and Latin America.
During each of the past two fiscal years, sales of various models of video
camera systems (including ancillary camera equipment) contributed more than 15%
of the Registrant's total revenue. The percentages of the Registrant's revenues
contributed by this product group during the fiscal years ended September 30,
1995 and 1994 were 36% and 40%, respectively.
(b)(3) Status of New Products.
The Registrant has several products which are in various stages of
development.
3-D Electronic Video LaparoscopeTM (patent pending). Medical Dynamics has
developed a prototype (not yet FDA approved), through its licensing agreement
with the Registrant's Chairman, of this new technology, which combines two EVL
systems within a single laparoscope to produce a three-dimensional view of the
target area. In laparoscopic surgery, where surgeons are required to grasp and
manipulate organs, vessels and tissue, the depth of field obtained through 3-D
is superior to the "flat field" effect of two-dimensional camera systems. A
commercial product is expected to be introduced within two years provided the
market warrants such an introduction and FDA approval is received.
(b)(4) Competition.
With regard to the Registrant's medical video cameras, the principal
competitive factors to which it is subject are price, technological
configuration, product performance, and product line diversification. Principal
competitors in the United States include Circon/ACMI Corporation, Stryker
Corporation, Olympus, Wolf, and Karl Storz, each of which manufactures and sells
some form of medical video system, and there are certain competitors overseas.
The principal reasons why sales volumes remain volatile are fluctuating OEM
revenue, the limited product line presently offered by the Registrant, a limited
amount of capital available to promote the products through successful marketing
efforts and distribution channels, and the continuing uncertainty surrounding
the effects of a proposed national health care plan. Such limitations have
proven detrimental to the ongoing operations of the Registrant to date. The
industry has experienced a contraction of camera manufacturers over the past
several years but the Registrant anticipates that other companies may enter into
the manufacture and sale of small color video systems, thereby causing further
competition in this field. The prices charged and warranties provided by the
Registrant and competing manufacturers of surgical video camera systems are
similar.
The Registrant's 5990 Optical Catheter SystemTM is protected by a number of
patents licensed to the Registrant by it's Chairman, and to the Registrant's
knowledge, no similar systems are presently being marketed. Both the 5990
Optical Catheter System and the 5500 EVL are subject to competition from the
Registrants model 5980 camera and similar cameras manufactured by the
Registrant's competitors, although the Registrant believes the 5990 is more
suitable for office use than such other cameras.
(b)(5) Availability of Raw Materials.
For a number of years, the Registrant had purchased cameras from Panasonic
Industrial Company - Audio Video Systems Group ("Panasonic") exclusively. The
Registrant now procures cameras from additional sources without sacrificing
product or picture quality. Management believes the additional product
resources, combined with current purchasing practices more in line with "just-
in-time" inventory management, are beneficial to the Company. The Registrant
has entered into an agreement with a United States manufacturer to supply the
head cables used in its camera products and has negotiated a similar agreement
with another United States manufacturer. If these sources of head cables were
not available, the Registrant believes it would be materially affected, as other
sources for these camera head cables may not be available to the Registrant.
(b)(6) Principal Customers.
The Registrant had one customer who contributed 10% or more of gross
revenues for fiscal year 1995. There were two such customers during fiscal year
1994. Gross billings to Rosot Enterprises of Locust Valley, New York during
fiscal years 1995 and 1994 were $297,700 and $189,300 or 23.1% and 12.2% of
Registrant revenues, respectively. Rosot Enterprises is an international
distributing company which concentrates on Mexico, Central and South America.
During fiscal year 1994 Shipments to Endosurgical Development Corporation (EDC)
of Rolling Hills, California totaled $227,000 or 14.7% of the Registrants gross
billings.
(b)(7) Patents, Trademarks, etc.
Patents. Although the Registrant does not own any patents relating to its
Optical Catheter SystemTM, it holds an exclusive license on three patents
related to this camera system. United States Patents No. 4,782,819, No.
4,736,733, and No. 4,754,328 expiring November 8, April 12, and June 28, 2005,
respectively, relating to the Optical CatheterTM are owned by Dr. and Mrs. Adair
and licensed on an exclusive basis to the Registrant. The terms of the license
agreement are described under "Licenses" below. In addition, Dr. and Mrs. Adair
have applied for several more patents on behalf of the Company relating to the
5990 Optical CatheterTM System, which applications are pending at the date of
this filing.
In addition to the above referenced patents, the following patents are also
licensed to the Registrant from the Chairman:
<TABLE>
<CAPTION>
TITLE ISSUE DATE PATENT NUMBER
<S> <C> <C>
"Laser Endoscope" 5/20/86 4,589,404
"Laser Endoscope" (Divisional) 6/28/88 4,754,328
"Endoscope with Removable 4/12/88 4,736,733
Eyepiece"
"Gas Insufflation Needle with 9/26/89 4,869,717
Instrument Port" (Adair Veress
Needle)
"Rigid Video Endoscope with 11/07/89 4,878,485
Heat Sterilizable Sheath"
(EVL and Lap-Wrap)
Reissue 3/24/92 RE 33854
"Deformable and Removable
Sheath for Optical Catheter" 3/30/93 5,197,457
"Deflectable Sheath for 6/30/92 5,125,395
Optical Catheter"
"Heat Sterilizable Electronic 2/23/93 5,188,094
Video Endoscope"
(Autoclavable EVL)
</TABLE>
The Registrant has also licensed the rights on pending patents covering
such technology and devices as "Miniaturized Electronic Imaging Chips", "Imaging
Tissue or Stone Removal Basket", "Steerable Sheath for use with Selected
Removable Optical Catheter", and "Stereoscopic Endoscope", among others.
The Bayne Pap BrushTM is subject to United States Patents No. 4,762,133,
No. 4,754,764 and No. 4,873,992 expiring August 9, 2005 through October 17,
2006. Dr. Bayne, a director of the Registrant, assigned these patents to the
Registrant and is entitled to receive a royalty of two percent of net sales of
the product after recovery of certain expenses. No royalties have been accrued
or paid to Dr. Bayne on this product.
Trademarks. The Registrant is also the holder of United States Trademarks,
registration numbers 1,299,413, 1,299,414, and 1,719,664 which relate to the
name "Medical Dynamics", the corporate logo of the Registrant, and the
Adair/Veress Needle respectively. The trademarks are granted for a term of 20
years expiring October 8, 2004, and if still in use at that time may be renewed
for successive 20-year periods by application. In addition, the Registrant
claims rights in numerous unregistered trademarks which it uses in interstate
commerce, and which are subject only to common law protection. Additionally,
the Registrant holds trademark registration number 1,282,319 which relates to
the name "MedPacific Corporation" and its corporate logo. This Trademark was
renewed for a 20 year term in June 1990. The Registrant also has trademark
applications pending on a variety of products including the EVL and Lap-WrapTM.
Licenses. The Registrant entered into an exclusive revocable license
agreement with Dr. Edwin Adair effective June 3, 1987, as amended, relating to
use of certain technology invented and developed by Dr. Adair relating to
certain malleable endoscopes, flexible optical catheters, the Adair/VeressTM
needle and complementary viewing systems for use in connection with detection,
diagnosis and treatment of disease or injury in humans and animals. The
Registrant used this technology to develop the 5990 Optical CatheterTM System,
the Electronic Video Laparoscope (EVL), and the Lap-WrapTM. Dr. Adair is
entitled to receive a royalty equal to the greater of two percent of net sales
involving the licensed technology or a minimum annual royalty. Since inception
and through September 30, 1995, $510,000 has been paid to Dr. Adair under this
license agreement, and an additional $90,000 has been accrued. See Item 12,
below for more information regarding license agreements.
(b)(8) and (9) Government Regulation.
The United States Food and Drug Administration (the "FDA"), pursuant to the
Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act (the "Act")
and regulations promulgated thereunder, regulates the testing, manufacturing,
packaging, distribution and marketing of medical devices in the United States,
including the products manufactured by the Registrant.
The Act requires manufacturers of medical devices to register annually and,
semi-annually, to list new devices being produced by the manufacturer for
commercial distribution.
The Act also classifies medical devices and requires compliance with
specific manufacturing and quality assurance standards. The FDA has published
regulations defining good manufacturing practices to provide that each step of
the manufacturing process for any device is controlled to maximize the
probability that the finished product meets all quality and design
specifications. The regulations also require that each manufacturer establish a
quality assurance program by which the manufacturer monitors the manufacturing
process and maintains records which show compliance with the FDA regulations and
the manufacturer's written specifications and procedures relating to the
devices.
The Registrant's facilities and records are subject to periodic unannounced
inspections by the FDA for compliance with the applicable FDA regulations. The
FDA may issue reports or citations where the manufacturer has failed to comply
with all appropriate regulations and procedures. If the FDA finds a
manufacturer not to be in such compliance, the FDA may prohibit a manufacturer
from marketing the products for which the manufacturer is not in compliance,
until such time as the manufacturer complies with the applicable FDA regulations
with respect to those products. Compliance with the provisions of the Act and
the FDA's regulations is time consuming and expensive due to the extensive
record keeping required.
During October, 1994, The Federal Food and Drug Administration performed a
routine inspection of the Registrant's premises and issued a Form 483
"Inspectional Observations" itemizing certain deviations in the Registrant's
sterilization procedures from that required in the FDA's regulations. The
registrant has responded with a letter defending it's practices and to date has
received no further response from the FDA. If the FDA continues to request the
proposed changes after receipt of the company's response, the registrant will
implement the requested changes. Management expects no negative product or
financial ramifications from this action, although no assurances to that effect
can be made.
(b)(10) Research and Development.
During the fiscal years ended September 30, 1995 and 1994, the Registrant
spent approximately $228,100 and $142,500, respectively, on company-sponsored
research and development activities. During those periods, there were no
customer-sponsored research activities relating to new products, services, tech-
niques or to the improvement of existing products, services or techniques.
(b)(11) Compliance With Environmental Laws.
The Registrant is not materially affected by 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.
(b)(12) Employees.
At September 30, 1995, the Registrant employed 18 persons, including 4
persons engaged in general administration, and 14 persons engaged in production,
distribution, and customer service of the Registrant's products.
Item 2. Description of Property.
The Registrant leases 18,358 square feet of space at 99 Inverness Drive
East, Englewood, Colorado, where its principal executive offices are located and
its business activities, including research, assembly, storage and customer
service, are conducted. The Registrant has used the bulk of these facilities
since 1981. A three-year extension to the lease expired December 31, 1995.
This lease has been renewed for an additional three-year term, expiring on
December 31, 1998. The current lease and all extensions obligate the Registrant
to pay monthly rentals in the following amounts:
Through December 31, 1995 $11,075
January 1 - December 31, 1996 $12,315
January 1 - December 31, 1997 $13,080
January 1 - December 31, 1998 $13,845
The Registrant pays certain maintenance, insurance, common area and other
expenses with respect to the property to the extent that the lessor's costs for
such items exceed a specified amount. The Registrant also pays any increases in
property taxes due to improvements on the property and pays for utilities.
The Registrant also rents temporary storage space in mini-warehouses
located near its principal executive offices. During the fiscal year 1995 the
average monthly cost amounted to $380.
Item 3. Legal Proceedings.
There are no material pending legal proceedings or proceedings known to be
contemplated by governmental authorities.
Item 4. Submission of Matters to a Vote of Security Holders.
The Registrant has not submitted any matter to a vote of security holders
during the fourth quarter of the fiscal year ended September 30, 1995.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
(a) Market Information
The Registrant's $.001 par value common stock (the "Common Stock") is
traded in the over-the-counter market and price quotations for the two years
shown below were reported on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") under the symbol "MEDY". The quotations
shown below were compiled by the Registrant from Monthly Statistical Reports
supplied by the NASD. All quotes represent inter-dealer quotations, without
retail markup, mark-down or commission and may not necessarily represent actual
transactions in the Common Stock:
<TABLE>
<CAPTION>
High bid Low bid
<S> <C> <C>
Fiscal Year ended
September 30, 1995
First quarter $2.83 $1.00
Second quarter 1.69 1.00
Third quarter 2.19 1.00
Fourth quarter 1.69 0.94
Fiscal Year ended
September 30, 1994
First quarter $6.63 $5.00
Second quarter 5.25 2.88
Third quarter 3.50 1.56
Fourth quarter 2.19 1.13
</TABLE>
(b) Holders
The number of record holders of the Common Stock, as of September 30, 1995,
was 13,604 not including an unknown number of beneficial holders in street name.
(c) Dividends
(c)(1) Payment of Dividends.
The Registrant has never paid a dividend with respect to its Common Stock
and does not intend to pay such a dividend in the foreseeable future.
(c)(2) Restrictions on the payment of dividends.
There are no contractual restrictions on the Company's present or
future ability to pay dividends.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources. (September 30, 1995 as compared
to September 30, 1994) During the fiscal year ended September 30, 1995, the
Registrant's current ratio declined to 7.2 as compared to 10.1 at September 30,
1994. Net working capital decreased approximately $1,073,800, due primarily to
the use of cash in operations and the resulting operating loss. Cash has been
used primarily to fund the general operations of the Registrant including
research and development, and to promote the sales and marketing of products.
Principal changes in the components of net working capital for
the twelve months ended September 30, 1995 consist of a decrease in accounts
receivable of $66,200, a decrease in trade notes receivable of approximately
$16,000, Micro-Medical Devices, Inc. cash advances of $110,000, a decrease in
reported inventory levels by $35,800 (net of an increase in the obsolete
inventory reserve of $100,000 and non-cash loaner equipment transfers of
$15,700), net purchases and sales of short term investments with maturities of
60 days or less of $1,000,500, a reduction in prepaid expenses of $9,200, and a
reduction in current liabilities by $7,800 to the current level of $354,300.
During the twelve months ended September 30, 1995, the Registrant
experienced a negative cash flow from operations of approximately $1,102,200 as
compared to a negative cash flow from operations of approximately $937,200
during the comparable period of the prior fiscal year. The aggregate increase
in cash used for operations during FY 1995 versus FY 1994 was a result of the
following factors: Cash of $79,900 was used in FY 1995 to increase inventory
levels of current products in anticipation of expected future sales, where
during FY 1994 the Company reduced inventory by the amount of $226,300.
Accounts payable, accrued expenses and product warranty costs were reduced
during FY 1995 and FY 1994 requiring cash outlays of $7,800 and $278,200
respectively. Aggregate trade accounts and notes receivable cash collections
reduced outstanding balances by $66,200 during FY 1995 versus a reduction of
$267,500 during FY 1994.
To curtail operating losses, negative cash flow from operations
and liquidity erosion further, management is continually reviewing all expense
accounts to determine if any additional reductions in expenditures are possible.
Purchasing procedures have also been implemented to minimize product cost and
avoid excess inventory levels.
During Fiscal 1995 the Registrant maintained workforce levels
approximately the same as the levels of fiscal year 1994. Health insurance
expense and property and casualty insurance expense were rebid at the end of
fiscal 1994 in a successful effort to maintain equivalent coverage at
significantly reduced expense. During fiscal 1995 the Registrant realized
savings of approximately $19,400 in insurance expenses.
A distribution agreement signed with Micro Medical Devices, Inc.
will allow the Company more flexibility in matching inventory requirements and
purchases with currently anticipated sales, thereby reducing inventory carrying
costs. See item 12 - Certain Relationships and Related Transactions,
"Distribution Agreement."
The Company also entered into a revised license agreement with
Dr. Edwin Adair in an effort to reduce patent maintenance costs and other
associated costs. In addition, the Registrant prepaid royalties due to Dr.
Adair for fiscal year 1996 by issuing an option to him in lieu of cash.
Without significant sales increases, the Registrant anticipates
negative cash flow from operations for fiscal 1996 and beyond. The Registrant's
future viability depends on its ability to generate cash to fund it's
operations. In the short term, this was accomplished through equity placements
during fiscal 1994, and in previous fiscal years through loans from the
Registrant's Chairman. However, the Registrant's ability to fund its operations
will be dependant upon achieving profitability and in generating a positive cash
flow from operations. Unless the Registrant is able to increase sales revenues
and maintain profitability, the Registrant may be facing significant working
capital shortages beginning in fiscal year 1996. There can be no assurance that
the Registrant will be able to achieve this goal as there are no new sales
revenue sources at September 30, 1995. Should the Registrant be unable to meet
future minimum royalty payments to the Registrant's Chairman beginning October
1, 1996, then under the terms of the licensing agreement the majority of patent
rights under the agreement could revert back to the Registrant's Chairman,
unless further compensatory arrangements are made. Possible compensation
arrangements could include stock options in lieu of royalties or deferral of
royalty payments, among others. No assurances can be given that these
arrangements will be made. The majority of the Registrant's products use patents
licensed to the Company by the Chairman. See item 12 - Certain Relationships and
Related Transactions, "Distribution Agreement."
The Registrant believes that its existing capital resources are
sufficient for the current fiscal year, and the Registrant has planned no
significant capital expenditures. The Registrant is not seeking additional debt
or equity capital at this time. If, however, the Registrant does obtain
additional capital (of which there can be no assurance), the Registrant will be
able to allocate more resources to sales and marketing efforts (including
negotiations with prospective OEM relationships), and research and development.
Results of Operations. (September 30, 1995 as compared to
September 30, 1994) As an aid to understanding the Registrant's operating
results, the following table indicates the percentage relationships of principal
revenue and expense items to total net sales included in the consolidated
statements of operations for the years ended September 30, 1995, and 1994 and
the percentage changes in those items for the same years.
<TABLE>
<CAPTION>
As a percent of total
revenue for the years Percentage
ended September 30, change from
1995 1994 Revenue/ExpenseItems FYE 1994to FYE 1995
---- ---- --------------------- --------------------
<C> <C> <S> <C>
100.0% 100.0% Net sales (17.4%)
93.1% 84.3% Cost of goods sold ( 8.8%)
6.9% 15.8% Gross profit (63.6%)
11.4% 8.8% Other operating revenue 6.1%
114.2% 114.6% Selling general and (11.4%)
administrative
19.1% 9.8% Research and development 60.1%
(131.1%) (99.9%) Operating loss (8.4%)
6.9% 2.0% Other income/(expense) 173.3%
(124.2%) (97.8%) Net income (loss) (4.8%)
</TABLE>
Additionally, as an aid to understanding trends and factors of
the Registrant, the following ratios describe historical summaries of liquidity,
activity and profitability ratios for the years ended September 30, 1995 and
1994.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Liquidity
Current ratio 7.22 10.05
Current ratio less inventory 4.54 7.33
Activity
Trade receivables turnover 2.81 3.16
Inventory turnover 1.15 1.47
Profitability
Return on assets (40.9%) (32.4%)
Return on equity (45.4%) (35.3%)
Return on sales (124.2%) (97.8%)
</TABLE>
Revenue. Revenue decreased $251,600, or 17.4% primarily as a
result of a decrease in sales of the following product groups: catheters &
accessories of $137,600, a decrease in general accessories of $15,800, and a
decrease in cam wrap and lap wrap sales of $88,600. The continuing decrease in
domestic, non OEM sales is primarily the result of the decrease in capital
budget expenditures in hospitals and increased competition from other
manufacturers of surgical cameras. The Registrant believes the capital
equipment market will rebound somewhat in fiscal 1996 due to both the expansion
of the office endoscopy market and the hospitals needing to replace outdated
endoscopy equipment, but the Registrant is also taking steps to introduce
products in the fiscal 1996 time frame that address the combined issues of cost
and sterility that plague the capital tight hospital market, although no
assurances of the success of that strategy can be given.
OEM sales decreased during fiscal 1995 to $132,900 from $160,400
during fiscal year end 1994. This decrease is due primarily to reduced
shipments to Endosurgical Development Company (EDC). The Registrant is
attempting to replace the OEM revenue base lost during fiscal 1992 by expanding
existing business with current OEM customers such as Endosurgical Development
Corporation (EDC), and cultivating new relationships that are in the beginning
stages of sales such as Origin Medsystems, Inc., a subsidiary of the Eli Lilly
Company. As of the Registrants fiscal 1995 year end, backorders from these
companies totaled approximately $63,400 consisting of orders from Origin
Medsystems for Adair Veress needles. In the upcoming fiscal year the Registrant
expects to expand revenues from all of these OEM customers as well as attempt to
add others in the areas of general laparoscopy, arthroscopy, cardiovascular
surgery, dental endoscopy, as well as add a national distributor for the
Registrant's Lap-WrapTM and Coupler DrapeTM products, although no assurances can
be given as to the success of these efforts.
Foreign market sales revenues decreased by $139,800, or 23.4%
over fiscal 1994. The Registrant added two additional distributors in Pakistan
and the Middle East and expects expansion of the foreign distribution network in
fiscal 1996 along with an increase in revenues from this source, although no
assurances can be given as to the success of those efforts.
Cost of Goods Sold. Cost of Goods Sold for the fiscal years
ended 1995 and 1994 were $1,112,400 and $1,219,200 respectively, for a decrease
of $106,800 or 8.8%. Cost of goods sold as a percent of revenue increased to
93.1% for fiscal 1994 from 84.2% in Fiscal 1994. The principal reason for the
decrease in overall cost of goods sold is lower sales volumes, while the
increase in cost of sales as a percentage of gross revenue is attributed to
lower production volumes and charging excess manufacturing capacity to cost of
goods sold. Varying sales mixes are an additional factor in the cost of sales
percent increase. Underabsorbed overhead variances will continue to adversely
affect cost of goods sold as a percentage of revenues during fiscal 1996 until
such time that increases in sales and production volumes materialize.
Selling, General & Administrative Expenses (S,G&A). S,G&A
expenses for the fiscal years ended 1995 and 1994 were $1,364,400 and
$1,539,200, respectively, for a decrease of $174,800 or 11.4%. The decrease is
primarily due to the effectiveness of cost cutting measures instituted by
management during fiscal years 1995 and 1994 and precipitated by lower sales and
production volumes. The Registrant continues to reduce or eliminate expenses in
all areas when practical including executive compensation, employee benefits,
and travel & promotions. Subsequent to year end the Registrant amended its
license agreement with its Chairman whereby he will forgo $120,000 in royalty
payments for fiscal 1996 in exchange for options to purchase 120,000 shares of
the Registrants common stock at $1.00 per share. No such waiver exists beyond
fiscal 1996.
Research and Development Costs. Research and Development costs
for the fiscal years ended 1995 and 1994 were $228,100 and $142,500,
respectively, for an increase of $85,600 or 60.1%. The increase is primarily
attributable to projects related to electrical compatibility conversions in the
European market and the USESTM system. The USES system was transferred to Micro
Medical Devices under the new distribution agreement. See item 12 - Certain
Relationships and Related Transactions, "Distribution Agreement." The
Registrant will continue to fund Research and Development as it deems
appropriate to maintain or gain a competitive advantage.
Effect of Changing Prices and Inflation
Generally, inflation has not been a significant factor on the
Registrant's operations.
Item 7. Financial Statements.
The following financial statements are filed as a part of this
Form 10-KSB and are included immediately following the signature page.
Report of Independent Certified Public Accountants
Balance Sheet - September 30, 1995 and 1994
Statements of Operations - Years ended September 30, 1995 and
1994
Statements of Stockholders' Equity - Years ended
September 30, 1995 and 1994
Statements of Cash Flows - Years ended September 30,
1995 and 1994
Notes to Financial Statements
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The Company has not changed its principal independent accountant
during the two most recent fiscal years. Thus, this item is not applicable.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons of
the Company; Compliance With Section 16(a) of the Exchange Act.
(a) Identification of Directors and Executive Officers.
The following table sets forth certain information regarding the
directors and executive officers of the Registrant:
Name Age Position
Edwin L. Adair, M.D. (1) 65 Chairman of the Board and Treasurer
Van A. Horsley 43 Director, President, Chief Financial
Officer and Chief Executive Officer
Pat Horsley Adair (1) 67 Director and Secretary
I. Dean Bayne, M.D. 68 Director and Assistant Secretary
Leroy Bilanich 45 Director
Jo Brehm 59 Vice President - Sales and
Administration
(1) Members of the Compensation Committee.
No arrangement exists between any of the above officers and
directors pursuant to which any one of those persons was elected to such office
or position.
Directors hold office until the next meeting of shareholders and until a
successor is elected and qualified, or until their resignation. Executive
officers are elected at annual meetings of the Board of Directors. Each such
officer holds office for one year or until a successor has been duly elected and
qualified or until death, resignation or removal.
Edwin L. Adair, M.D. has been a director of the Registrant since June 30,
1971, Chairman of the Board since September 8, 1981 and Treasurer since March
27, 1973. From February 6, 1986 until July 13, 1990, Dr. Adair also served as
Chief Executive Officer of the Registrant. Dr. Adair received B.S. and M.D.
degrees from the University of Colorado in 1951 and 1955, respectively. He
practiced medicine from 1956 until 1983 and is a board-certified urologist who
discontinued the practice of medicine due to a physical disability resulting
from an accident. Dr. Adair has published articles in medical journals and has
taught at the University of Colorado School of Medicine. Dr. Adair is a member
of the American Medical Association, American Board of Urology, the American
Urological Society and the American College of Surgeons. The Registrant carried
$1,100,000 of key man insurance on the life of Dr. Adair through the end of the
current fiscal year, however, subsequent to the end of fiscal 1995 this amount
was reduced to $100,000 as a cost cutting measure.
Van A. Horsley has been a director, President and Chief Executive Officer
of the Registrant since July 13, 1990. From March 1, 1990 until July 13, 1990,
Mr. Horsley served as Chief Financial Officer. Mr. Horsley holds a B.S.B.A.
degree in finance from the University of Denver and a graduate degree from the
School of Banking at the University of Colorado. From 1974 to February 28,
1990, Mr. Horsley was employed in various capacities by Affiliated Denver
National Bank in Denver, Colorado and from 1985 through February 28, 1990 served
as executive vice president - head of lending.
Pat Horsley Adair has been a director and Secretary of the Registrant since
September 8, 1981. Mrs. Adair attended McMurray College in Abilene, Texas,
taking courses in English and business which did not lead to a degree. From
June 1974 to July 1983, Mrs. Adair was employed by the Registrant as office
manager. Since that time, Mrs. Adair has served as Corporate Secretary to the
Registrant. From 1964 to 1975, Mrs. Adair served as executive director of the
Arapahoe County Medical Society and from 1976 to 1980 she served as executive
director of the Metro Denver Foundation for Medical Care, an organization which
serves Arapahoe, Denver, Boulder, Jefferson and Adams counties, Colorado.
I. Dean Bayne, M.D. has been a director of the Registrant since July 1987
and Assistant Secretary since October 1988. Dr. Bayne received B.S. and M.D.
degrees from Louisiana State University in 1949 and 1953, respectively, and has
been engaged in private medical practice since 1958. He attended Louisiana
State University. Dr. Bayne was a resident in obstetrics at Herman Kiefer
Hospital, Detroit, Michigan, and a resident in gynecology at Detroit Receiving
Hospital, Detroit, Michigan. He is a member of the Board of Obstetrics and
Gynecology and the American College of Obstetrics and Gynecology.
Leroy Bilanich, Ed.D. has been a director of the Registrant since September
13, 1990. Dr. Bilanich has a B.S. in journalism and broadcasting from
Pennsylvania State University, an M.A. in communication from the University of
Colorado and has an Ed.D. in organizational behavior from Harvard University.
Dr. Bilanich currently works as a consultant to large corporations in the area
of organizational development and in the past has held various positions in the
Human Resource Departments at Pfizer, Inc. from 1983 to March of 1988 and the
Olin Corporation.
Jo Brehm is Vice President - Sales and Administration of the Registrant.
She has been an employee of the Registrant since 1973. From December 1984 to
September 1988, Mrs. Brehm served as Vice President of the Registrant. From
September 1988 until July 1990, Mrs. Brehm served as President of the
Registrant. In each position, Mrs. Brehm has performed various duties including
management of customer service and order processing, as well as administration
of the Registrant's office affairs, personnel relations and medical standard
compliance activities. She also handles all OEM and foreign distributor
relationships. In her present position, Mrs. Brehm continues to direct these
activities as well as supervising the Registrant's general and administrative
activities.
No director of the Company is a director of another company having
securities registered under Section 12 of the Securities Exchange Act of 1934 or
a company registered under the Investment Company Act of 1940.
(b) Identification of Certain Significant Employees.
There are no significant employees who are not also directors or executive
officers, described above.
(c) Family relationships.
Dr. Edwin L. Adair and Pat Horsley Adair are married. Van A. Horsley is
the son of Pat Horsley Adair. There are no other family relationships among the
officers or directors.
(d) Involvement in Certain Legal Proceedings.
During the past five years, no director or officer of the Company has:
(1) Filed or has had filed against him a petition under the
federal bankruptcy laws or any state insolvency law, nor has a receiver, fiscal
agent or similar officer been appointed by a court for the business or property
of such person, or any partnership in which he was a general partner, or any
corporation or business association of which he was an executive officer at or
within two years before such filings;
(2) Been convicted in a criminal proceeding or is a named
subject of a pending criminal proceeding (excluding traffic violations and other
minor offenses);
(3) Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining such person from, or
otherwise limiting his involvement in any type of business, securities or
banking activities.
(4) Been found by a court of competent jurisdiction in a
civil action, the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated any federal or state securities or
commodities law, which judgment has not been reversed, suspended, or vacated.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") requires the Company's directors and officers and persons who
own more than ten percent of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Directors, officers and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports filed.
Based solely on its review of the copies of the reports it
received from persons required to file, the Company believes that during the
period from October 1, 1994 through September 30, 1995 all filing requirements
applicable to its officers, directors and greater than ten-percent shareholders
were complied with except as follows:
Van Horsley, president of the Registrant, filed a form 4 reporting an event
which occurred in June 1995 late. This report was filed in August 1995.
Jo Brehm, vice president of the Registrant, filed a form 4 reporting an event
which occurred in June 1995 late. This report was filed in August 1995.
Dr. & Mrs. Edwin Adair, chairman and secretary of the Registrant, filed a form 4
reporting an event which occurred in June 1995 late. This report was filed in
August 1995.
I. Dean Bayne, director of the Registrant, filed a form 4 reporting an event
which occurred in June 1995 late. This report was filed in August 1995.
Leroy J. Bilanich, director of the Registrant, filed a form 4 reporting an event
which occurred in June 1995 late. This report was filed in August 1995.
Item 10. Executive Compensation.
(a) Summary Compensation Table
The following table sets forth information regarding compensation
paid to the chief executive officer of the Registrant for the four years ending
September 30, 1995. No other person who is currently an executive officer of
the Registrant earned salary and bonus compensation exceeding $100,000 during
any of those years.
<TABLE>
<CAPTION>
Annual Compensation ($$) Long Term Compensation
----------------------- ----------------------
Awards Payouts
------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted
Name and Stock Options LTIP Other
Position Year Salary Bonus Other Awards & SARs Payouts Compensation
- -------- ---- ------ ----- ----- ---------- -------- ------- ------------
($$) ($$) ($$) ($$) (##) ($$) ($$)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Van A. Horsley 1995 105,000 -0- 925 -0- 40,900 -0- 559
President and 1994 105,000 -0- 925 -0- 50,000 -0- 559
Chief Executive 1993 105,400 -0- 925 -0- 42,606 -0- 559
Officer 1992 107,700 -0- -0- -0- 3,958 -0- 374
</TABLE>
401(k) Plan. On January 1, 1990, the Registrant adopted an
employee benefit plan under Internal Revenue Code Section 401(k). The 401(k)
plan is a profit sharing plan under which both employees and the Registrant are
entitled (at their own discretion) to contribute a portion of compensation and
earnings, respectively, to investment funds to supplement employee retirement
benefits. At September 30, 1995, the Registrant's matching contributions to the
plan for the accounts of Van Horsley and Jo Brehm totalled approximately $427
and the matching contribution under the plan for the accounts of all executive
officers as a group totalled $462. These amounts are included in column (i) of
the Summary Compensation Table.
(b) Stock Option Plans.
Options and Option Plans. Until April 10, 1988 the Registrant had
two plans pursuant to which stock options could be granted to its directors and
officers. These plans were the 1981 Non-Qualified Consultants' Plan and the
1981 Incentive Stock Option Plan (the "Old Plans"). On April 10, 1988, the
Board of Directors canceled the Old Plans to the extent that shares reserved for
issuance thereunder were not then under option, and adopted and authorized the
1988 Stock Option Plan (the "1988 Plan") and directed that management prepare
the documents formally defining the plan. At that time the Board also
authorized the issuance of certain options under the 1988 Plan. The Board
formally approved the 1988 Plan on July 14, 1988 and the shareholders approved
the 1988 Plan on September 28, 1988.
Allocations of options under the Registrant's stock option plans
are made by the Compensation Committee based on the duties, contributions and
value of the services of the respective optionee. The Committee has the
authority to determine to whom options were granted, the number of shares
covered by each option, when each option was to be granted, date of initial
ability to exercise, exercise price and certain other terms and to prescribe,
interpret, amend and rescind rules and regulations relating to each plan. Any
options canceled or not exercised within the option period became available for
grants of new options under the plans. The Board also has the power to select
committees consisting of not less than two members to administer each plan. The
1988 Plan contains the same provisions for administration as were contained in
the Old Plans.
Under the 1988 Plan, the Registrant reserved an aggregate of
1,000,000 shares of its common stock for issuance to employees (including
officers), consultants and directors of the Registrant or any subsidiary. The
plan contains restrictions on the number of options granted to officers and
directors, exercise price, maximum term and transferability. On May 14, 1991,
the Registrant filed a registration statement under the Securities Act of 1933
on Form S-8 which registered the shares of common stock underlying options
granted under the 1988 Plan. As such, shares issued upon exercise of
outstanding options can be traded on the open market with limited restriction.
All of the options granted under the Old Plans and the 1988 Plan
may be exercised through payment of the exercise price with shares of the
Registrant's Common Stock or cash, or both. The ability to exercise options
through surrendering shares of Common Stock enables holders of options to
exercise the entire amount of an option by first exercising a small number of
options, followed by successively larger option exercises which the optionee is
able to effect by surrendering the increasing number of shares obtained thereby.
For little or no initial cash payment, repeated exercises of options by
surrendering stock having a market price in excess of the option exercise price,
enable an optionee to provide sufficient consideration to the Registrant to
exercise his entire stock option. The exercise of options might otherwise
require substantial cash consideration. This procedure is often referred to as
pyramiding.
The following table sets forth certain information regarding stock
options granted by the Registrant to the Chief Executive Officer and no other
executive officers received total annual salary and bonus in excess of $100,000
during 1995. No stock appreciation rights were granted.
<TABLE>
<CAPTION>
Option Grants in Fiscal 199
(a) (b) (c) (d) (e)
% of Total
Options Granted Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year ($/sh) Date
<S> <C> <C> <C> <C>
Van A. Horsley 40,900 18.9% $1.50 June 1, 2000
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values.
The Following table sets forth information regarding stock options
exercised by the chief executive officer and certain other officers or directors
during the 1995 fiscal year as well as the year-end value of options being held
by such persons on September 30, 1995: No Stock Appreciation Rights have been
granted, or are held by, any such person:
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Value of
Unexercised In-the-Money
Shares Options at Options at
Acquired FY End FY End
on Value (Exercisable/ (Exercisable/
Name Exercise Realized Unexercisable) Unexercisable)
<S> <C> <C> <C> <C>
Van A. Horsley -0- $0 174,638 / 0 $6,000 / 0
</TABLE>
(c) The Registrant has no long term incentive compensation plans.
(d) Other Compensation
There are no plans to pay bonuses or deferred compensation to
employees of the Company.
The Company has adopted a medical insurance plan for its
employees and provides life, disability, and other insurance plans for the
benefit of its employees.
(e) Compensation of Directors
General. The Registrant's directors are authorized to
receive $200 for each directors' meeting attended by them. To date, the
directors have waived their right to receive directors fees. In September 1990,
certain directors were granted options under the 1988 Stock Option Plan. Dr.
Bayne owns an incentive stock option to acquire 20,000 shares of common stock at
$4.00 per share, expiring June 11, 2003. Leroy Bilanich owns an incentive stock
option to acquire 20,000 shares of common stock at $1.50 per share, expiring
June 11, 2003. The following options were granted during fiscal 1995 to board
members: Dr. Bayne was granted an option to acquire 20,000 shares of common
stock at $1.50 per share, expiring June 1, 2000 on June 2, 1995. Mr. Bilanich
was granted an option to acquire 20,000 shares of common stock at $1.50 per
share, expiring June 1, 2000 on June 2, 1995. Dr. Edwin Adair was granted an
option to acquire 44,000 shares of common stock at $1.50 per share, expiring
June 1, 2000 on June 2, 1995. Pat Horsley Adair was granted an option to
acquire 23,600 shares of common stock at $1.50 per share, expiring June 1, 2000
on June 2, 1995.
Royalty Agreements. Dr. Adair and Dr. Bayne, directors of
the Registrant, are each entitled to receive royalties equal to two percent of
the net sales of products each assigned to the Company. No royalties have been
accrued or paid to Dr. Bayne, however, $510,000 has been paid and $90,000 has
been accrued to Dr. Adair. The Registrant is required to pay Dr. Adair minimum
annual royalties of $120,000. Subsequent to the end of fiscal 1995, in an
effort to help reduce negative cash flow during fiscal 1996, on December 1, 1995
Dr. Adair signed an agreement with the Registrant where he has accepted 120,000
common stock options priced at $1.00 per share in substitution for his customary
cash royalty payment for the 1996 fiscal year. See Item 13 for further
information regarding the royalty agreement, Certain Relationships and Related
Transactions.
Indemnification Agreements. The Registrant has entered
into indemnification agreements with each of its directors and officers
providing for indemnification of each such director by the Registrant to the
full extent permitted by the Colorado Corporation Code. The agreements provide
that in all circumstances in which a director or officer may receive
indemnification by statute, such indemnity shall be provided.
Officer's Life Insurance and Split-Dollar Agreement. In
August 1990, the Registrant purchased a $1,000,000 convertible term key-man life
insurance policy on its Chairman. Additionally, in August 1990, the Registrant
entered into a split-dollar life insurance agreement with an irrevocable trust
established by the Chairman and Secretary of the Registrant. The Registrant had
agreed to pay substantially all of the annual premiums on the $2,000,000 whole-
life, second-to-die policy which had the insurance trust as the beneficiary.
The split-dollar agreement specified that the Registrant would receive the
greater of premiums paid or cash surrender value upon the second insured's
death. However, should the Registrant decide not to pay the premium prior to
the second insured's death, the Registrant would only collect premiums paid to
the extent of the cash surrender value. As such, the Registrant had recorded
the premiums paid in the accompanying consolidated balance sheets to the extent
of cash surrender value. Subsequent to the end of fiscal 1995 the Registrant
terminated both the above policies as a cost-cutting measure. The Registrant
does however, currently maintain a $100,000 whole life key-man insurance policy
on its Chairman which was acquired in 1985.
The Registrant has no other arrangements pursuant to which
it compensates its directors for acting in their capacities as such.
(g) The Registrant has no employment contracts with any executive officer.
The Registrant has no compensatory arrangement which may result from a
change-of-control of the Registrant or a change in any executive officers
responsibilities.
(h) No options were repriced during the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) and (b) Security ownership of certain beneficial owners and
management.
At September 30, 1995, the Registrant had only one class of
outstanding voting securities, its Common Stock, $.001 par value. The following
table sets forth information as of September 30, 1995 with respect to the
ownership of the Company's Common Stock for all directors, individually, all
officers and directors as a group, and all beneficial owners of more than five
percent of the Common Stock. The following shareholders have sole voting and
investment power with respect to the shares, unless it has been indicated
otherwise.
<TABLE>
<CAPTION>
Shares owned Percent
Name of beneficial owner beneficially (1) of class
<S> <C> <C>
Edwin L. Adair, M.D. 1,246,898 (2) 18.1%
and Pat Horsley Adair
317 Paragon Way
Castle Pines Village
Colorado 80104
I. Dean Bayne, M.D. 40,000 0.6%
Van Horsley 253,858 (3) 3.7%
Leroy Bilanich, Ed.D. 40,000 0.6%
All officers and 1,655,556 (4) 24.1%
directors as a
group (6 persons)
</TABLE>
(1) As used in this section, the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the Securities Exchange Act
of 1934 as consisting of sole or shared voting power (including the
power to vote or direct the vote) and/or sole or shared investment
power (including the power to dispose or direct the disposition) with
respect to the security through any contract, arrangement,
understanding, relationship or otherwise. Unless otherwise indicated,
beneficial ownership is of record and consists of sole voting and
investment power.
(2) Includes 367,600 stock options issued to the Chairman of which all are
presently exercisable. Does not include 120,000 options issued to Dr.
Adair in December, 1995 in consideration for cancellation of fiscal
1996 royalty payments due him totaling $120,000.
(3) Includes 174,638 shares under presently exercisable stock options.
(4) Includes shares referenced in notes (2) through (3) and 74,800
additional shares and options held by one officer who is not a
director, all of which are presently exercisable.
(c) Changes in Control.
The Company knows of no arrangement, the operation of which may, at a
subsequent date, result in change in control of the Company.
Item 12. Certain Relationships and Related Transactions.
(a) and (b) Transactions With Management and Others.
The Registrant has engaged in certain transactions with members of its
Board of Directors. In each case, the Board believed that the transaction was
in the Registrant's best interests and the terms of the transaction were at
least as fair to Registrant as could have been obtained from an independent
person, and the transaction was approved by the disinterested directors.
Registrant will continue to follow this procedure in approving any transactions
with affiliated persons. No such transactions are contemplated at this time.
License Agreement with Dr. Adair. The Registrant has entered into a
license agreement, as further amended and explained below, effective June 3,
1987, with its Chairman relating to the use of certain technology invented and
developed by him. Originally, the agreement licensed technology relating to
certain malleable endoscopes, flexible optical catheters, the Adair/VeressTM
needle and complementing viewing systems for use in connection with detection,
diagnosis and treatment of disease or injury in humans and animals. The
Registrant used this technology to develop the Model 5990 Optical Catheter
System.
Pursuant to an amendment, dated February 20, 1989, to the license agreement
described in the preceding paragraph, the Registrant acquired the rights to
certain technology including patent applications for technology related to the
Registrant's (a) speculum camera which uses a small, video camera attached to a
speculum for magnified viewing of the cervix as a diagnostic tool; and (b)
camera with a sterilizable sheath (disposable), a molded or machined container
used to hold the camera in place, and which utilizes a standard, off-the-shelf
camera which is covered by a specialized sheath which provides proper alignment
with endoscopes, sterility of the system and reduced cost to the hospital or
other end-user.
Pursuant to an amendment dated June 22, 1989, to the license agreement
described above, the Chairman agreed not to exercise his right of termination of
the license if the Registrant used its best efforts to manufacture and market
all products developed utilizing the technology included within the license. In
exchange for the agreement not to exercise his right of termination, the
Registrant agreed to pay the Chairman minimum annual royalties of $60,000,
$80,000 and $100,000 for the years ended September 30, 1990, 1991 and 1992,
respectively. Thereafter, the Registrant has agreed to pay the Chairman minimum
annual royalties of $120,000. The license agreement does not specify a
termination date. Through September 30, 1995, the Registrant has paid the
Chairman $510,000 as specified under the agreement.
Pursuant to an amendment dated July 2, 1992, to the license agreement noted
above, the Chairman agreed to add further developed technology along with
patents and trademarks to the license agreement at no additional cost to the
Registrant. This amendment added 23 technologies that had either patents
pending or fully- issued patent coverage.
Pursuant to Amendment No. 4 dated October 8, 1992, to the license agreement
noted above, the Chairman and Registrant agreed to continue the aforementioned
royalty payments indefinitely and issue to the Chairman options to purchase an
additional 300,000 shares of the Registrant's common stock at $4.00 per share.
In exchange for the issuance of additional options and the continuation of the
royalty payment stream, the Chairman agreed to contribute certain patent rights
and technology (including some as yet to be issued patent rights) relating to
rigid video endoscopes using advanced chip technology.
The amendment includes future technology relating to operative channel
endoscopes, thoracic endoscopes, 3-D endoscopes and related disposable products.
Specifically excluded from the license agreement is technology relating to
flexible or steerable endoscopic devices.
Other provisions included in this amendment include an option issued to the
Chairman allowing him to require the Registrant to register the options granted
pursuant to Amendment No. 4. The cost of registration will be borne by the
Registrant. In addition, the Registrant agreed to sub-license technology to the
Chairman relating to the use of laser light through flexible or steerable
endoscopes on a non-exclusive basis.
The Registrant further agreed that, if within a three year period of the
issuance of any patent included in the license agreement, as amended, the
Registrant fails to commercialize such technology, the Chairman, upon written
request, may terminate the license agreement on that specific patent.
Furthermore, the Chairman has the right to terminate the license agreement on
specific technologies upon acquisition by another person of 20% or more of the
outstanding stock of the Registrant unless the acquiror provides notice in
writing, within 30 days, of its intention to commercially exploit the specific
technologies.
The Chairman is free to research and develop future technology and know-how
at his own expense. Such as yet unnamed future technology is not a part of the
aforementioned license agreement and the Registrant has no ownership rights to
such technology. However, the Chairman has agreed to offer the Registrant a
first right of refusal on such future technology prior to offering such
technology to an unrelated third party. The first right of refusal shall be
made in writing to the Registrant and remain open for a period of 60 days.
During the development of this technology, the Registrant will allow the
Chairman access to facilities, equipment and inventory of the Registrant at no
cost provided the activities do not interfere with the ongoing business of the
Registrant or result in an unreasonable expense to the Registrant.
Should the Registrant accept the technology and know-how, such technology
shall automatically be included within the license agreement, including all
amendments. Furthermore, the Registrant shall be responsible to pay all future
patent and development costs associated with the new technology. If the
Registrant rejects the new technology, the Chairman is free to pursue third
party alliances and has no further obligation to re-offer such technology to the
Registrant. However, the Chairman may not use the facilities, equipment,
inventory or other resources of the Registrant for any such further development
of said technology.
The Registrant is free to terminate the license agreement, as amended, at
any time and without penalty. The Chairman must give the Registrant 45 days
prior written notice of his intent to terminate the license upon default by the
Registrant of its obligations under the license agreement. Additionally, the
license will terminate automatically immediately if (i) the Registrant files a
voluntary case in bankruptcy or (ii) any order for relief against the Registrant
shall be entered in an involuntary case in bankruptcy or (iii) the Registrant
shall fail, or admit in writing an inability, to pay its debts as they mature.
The technology added to the license agreement over the years has increased
MEDY's patent maintenance costs and management recently performed a review of
the viability of certain of the technology based upon MEDY's current business
and marketing plans. Management has determined that MEDY would not likely
develop certain of the technology into saleable products because of the
anticipated costs involved and the recent difficulties MEDY has had in obtaining
approval of new devices from the federal Food and Drug Administration ("FDA").
As a result, management recommended, and the Board approved, the return of
twelve items of technology to Dr. Adair. Medical had approximately $73,000
invested in this technology, and the maintenance costs for this technology which
was not likely to be commercialized by MEDY in the near future were in excess of
$20,000 per year. To conserve cash flow and to allow management to concentrate
on MEDY's other products, the Board of Directors approved the return of this
technology to Dr. Adair.
At the same time, the Board approved an amended and restated license
agreement with Dr. Adair which consolidated the original license agreement and
the four amendments thereto, and added an expanded right of first refusal. The
principal amendments are:
The definition of "Technology" included within the license agreement
was modified to more accurately describe the technology developed by
Dr. Adair which is of continuing interest to MEDY: the Optical
CatheterTM technology (including the fluorescence detection system);
the Adair-Veress needleTM, the technology associated with the
Electronic Video LaparoscopeTM, and Lap-WrapTM. The restated license
agreement continues to specifically exclude from its terms technology
relating to flexible or steerable endoscopic devices (other than the
Optical Catheter). In the restated license agreement, MEDY continues
to agree to sub-license technology to the Chairman relating to the use
of laser light through flexible or steerable endoscopes on a non-
exclusive basis.
Under the restated license agreement, Dr. Adair is specifically
permitted to research and develop new technology and know-how at his
own expense. Such technology and know-how will not be a part of the
restated license agreement unless MEDY exercises its right of first
refusal to acquire the new technology or know-how. Dr. Adair is
obligated to offer all new technology which he may develop to MEDY's
Board of Directors under the license agreement, subject only to
reimbursement to him of costs he has in the development and patenting
of the technology. Neither Dr. nor Mrs. Adair would participate in
the Board's vote whether to accept the proffered technology. Should
MEDY accept the technology and know-how, such technology shall
automatically be included within the license agreement, including all
amendments. Furthermore, MEDY shall be responsible to pay all future
patent and development costs associated with the new technology. If
MEDY rejects the new technology, the Chairman is free to pursue third
party alliances and has no further obligation to re-offer such
technology to MEDY.
The financial provisions of the license agreement were not modified in any
material respect. The restated license agreement continues to provide for
minimum royalties payable to Dr. Adair of $120,000 per year. The license
agreement does not specify a termination date. Currently MEDY is accruing these
royalties for future payment to Dr. Adair, without interest. These accrued
royalties are collateral for a guarantee from Dr. Adair of a loan made by MEDY
to an affiliated company, Micro-Medical Devices, Inc. (See further discussion
under "Distribution Agreement," below.) As noted above, Dr. Adair accepted
120,000 of the Registrants common stock options in lieu of the cash royalty
payments due him for fiscal 1996.
The restated license agreement continues to provide that, if within a three
year period of the issuance of any patent included in the license agreement, as
amended, MEDY fails to commercialize such technology, Dr. Adair, upon written
request, may terminate the license agreement on that specific patent.
Furthermore, Dr. Adair has the right to terminate the license agreement on
specific technologies upon acquisition by another person of 20% or more of the
outstanding stock of the Registrant unless the acquirer provides notice in
writing, within 30 days, of its intention to commercially exploit the specific
technologies.
As noted, the restated license agreement contemplates that Dr. Adair will
continue to develop new technology and know-how for his own account, subject to
the right of first refusal. During the development of any new technology, MEDY
will allow the Chairman access to facilities, equipment and inventory of the
Registrant at no cost provided the activities do not interfere with the ongoing
business of MEDY or result in unreasonable expense to MEDY. If, however, MEDY
rejects the technology, Dr. Adair will not be entitled to use any of the
equipment, facilities, or inventory of MEDY for further development.
The termination provisions were not changed materially in the restated
license agreement. MEDY is free to terminate the license agreement, as amended,
at any time and without penalty. Dr. Adair must give MEDY 45 days prior written
notice of his intent to terminate the license upon default by MEDY of its
obligations under the license agreement. Additionally, the license will
terminate automatically immediately if (i) MEDY files a voluntary case in
bankruptcy or (ii) any order for relief against MEDY shall be entered in an
involuntary case in bankruptcy or (iii) MEDY shall fail, or admit in writing an
inability, to pay its debts as they mature.
Distribution Agreement.
The Registrant entered into a distribution agreement with Micro-Medical
Devices, Inc. ("MMD"), a corporation wholly-owned by Dr. Adair during June of
fiscal year 1995. The distribution agreement includes all products developed by
Dr. Adair related to his Universal Sterile Endoscopy SystemTM ("USES"). MEDY
had previously owned certain rights to this technology under the License
Agreement but was required to return the technology to Dr. Adair due to MEDY's
inability to commercialize the product within the required three year period.
MEDY was unable to do so because of its lack of financial capability and its
inability to obtain approval of products from the FDA. Dr. Adair, therefore,
continued the research and development necessary to develop USES and the related
products at his own expense, and through MMD, obtain FDA approval thereof.
MMD has appointed MEDY as its exclusive worldwide distributor for the USES
products through June 30, 2000. MMD also granted MEDY a right of first refusal
to distribute any further products MMD may develop.
Pricing of the products has not yet been established, but MEDY will be free
to resell products at any price it may determine. There are no minimum
performance requirements under the distribution agreement, and MEDY need only
purchase products it has already sold to third parties.
As a condition of the distribution agreement, however, MEDY agreed to loan
MMD up to $120,000 pursuant to a promissory note signed by MMD. The note is
collateralized by the amounts due Dr. Adair under the restated license agreement
as the sole shareholder of MMD, and he has pledged all amounts due to him under
the restated license agreement as collateral for this guarantee. MEDY is
accruing these amounts payable to Dr. Adair without interest. MEDY is not
obligated to advance any amounts to MMD except to the extent these amounts are
fully collateralized by amounts due to Dr. Adair. The promissory note from MMD
to MEDY bears interest at a rate of 1% over the current prime rate per annum.
Furthermore, the distribution agreement provides that MEDY may credit 100% of
the purchase price of any products from MMD under the distribution agreement
against amounts due under the promissory note. As of September 30, 1995 MMD
owed the Registrant $110,000 under the terms of the note, plus accrued interest.
See note 3 to the financial statements.
MMD also agreed to sublease space from MEDY for administration purposes at
cost. The amount of space has not yet been defined, but the rental payment and
reimbursement to MEDY for employees MMD may utilize are intended to compensate
MEDY for all associated expenses, including rent on a per-square-foot basis.
In October 1987, I. Dean Bayne, M.D., a director, assigned his rights and
interest in a then pending patent application related to the Bayne Pap BrushTM
described in "Item 1 - Business -Patents, Trademarks and Licenses." To
reimburse him for his expenses in developing that product and as compensation
for the assignment, the Registrant paid Dr. Bayne 10,000 shares of restricted
common stock and will pay him a royalty for the duration of the patent equal to
two percent of the net sales of the Bayne Pap BrushTM, less certain expenses.
As of September 30, 1995, no royalties have been accrued or paid under this
arrangement. See "Item 1 - Business."
The Registrant employs two sons of Dr. Adair and one son of Pat Horsley
Adair at annual salary rates of approximately $45,600, $45,600, and $105,000.
During the most recently completed fiscal year those persons received no
compensation from the registrant in addition to their salaries.
Except as otherwise stated above, since October 1, 1991, the Registrant has
not been a party to any transaction involving in excess of $60,000, in which any
director or executive officer, nominee for election as a director, security
holder of record or beneficially of more than five percent of any class of the
Registrant's securities, or any member of the immediate family of the foregoing
had or will have a direct or indirect material interest.
The Registrant is not aware of any other relationship between nominees for
election as directors or its directors and the Registrant that are similar in
nature and scope to those relationships listed in this Item 12.
(c) Parents of the Company
Not applicable, inasmuch as there are no "Parents" of the Registrant.
(d) Transactions with Promoters
Not applicable, inasmuch as the Company was organized more than five years
ago.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following isa complete list ofexhibits filed as partof this Annual
Report on Form 10-KSB, which Exhibits are incorporated herein.
Exhibit
Number Description
3.1(k) Restated Articles of Incorporation
(December 30, 1988)
3.2(n) Bylaws, as amended
10.1(m) Amendment Number Five to Lease
Agreement - Englewood Office Space
10.2(a) Stock Option Plan - Consultant's
10.3 Omitted
10.4(j) 1988 Stock Option Plan
10.5 Omitted
10.6(d) Sales Representative Agreement
- Form
10.7(e) International Distributor Agreement
10.8(f) Indemnification Agreement - Edwin L.
Adair, M.D.
10.9(f) Indemnification Agreement - Pat
Horsley Adair
10.10(h) Indemnification Agreement - I. Dean
Bayne
10.11(a) Employee Confidentiality Agreement -
Form
10.12(b) Section 125 Cafeteria Plan
10.13(h) Patent Assignment - Bayne Pap Brush
10.14(o) Amended and restated License
Agreement with Edwin L. Adair
effective as of June 1, 1995
10.15 Omitted
10.19 Omitted
10.20 Omitted
10.21 Omitted
10.22 Omitted
10.23 Omitted
10.24 Omitted
10.25(n) 401(k) Plan
10.26(b) Indemnification Agreement - Van A.
Horsley
10.27(b) Indemnification Agreement - Leroy A.
Bilanich
22.1 Subsidiaries of the Registrant: MedPacific
Corporation, a Washington corporation
24.1* Consent of McGladrey & Pullen, LLP
* Filed herewith.
(a) Incorporated by reference from Registration Statement
on Form S-1, SEC File No. 2-82856.
(b) Incorporated by reference from the Registrant's Form
10-K for the period ended September 30, 1991.
(c) Omitted.
(d) Incorporated by reference from the Registrant's Form
10-K for the year ended September 30, 1984.
(e) Incorporated by reference from the Registrant's Form
8-K reporting an event of February 8, 1985.
(f) Incorporated by reference from the Registrant's Form
10-K for the year ended September 30, 1986.
(g) Omitted.
(h) Incorporated by reference from the Registrant's Form
10-K for the fiscal year ended September 30, 1987.
(i) Omitted.
(j) Incorporated by reference from the Registrant's Form
8-K reporting an event of October 12, 1988.
(k) Incorporated by reference from the Registrant's Form
10-Q for the quarter ended December 31, 1988.
(l) Omitted.
(m) Incorporated by reference from Amendment No. 1 to Registration
Statement on Form S-1, Commission File No. 33-29497, filed with
the Commission on July 26, 1989.
(n) Incorporated by reference from the Registrant's Form 10-K for the
fiscal year ended September 30, 1990.
(o) Incorporated by reference from the Registrant's Form 10-QSB for
the quarter ended June 30, 1995.
(b) Reports on Form 8-K
During the last quarter of the period covered by this Report the
Company filed no reports on Form 8-K.
SIGNATURES
In accordance with Section 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.
MEDICAL DYNAMICS, INC.
By /s/ Van A. Horsley
------------------
Van A. Horsley,
President
Date: January 15, 1996
In accordance with the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates indicated.
January 15, 1996 /s/ Van A. Horsley
-------------------
Van A. Horsley, Principal Executive
Officer, Principal Financial
Officer, and Director
January 15, 1996 /s/ Edwin L. Adair
--------------------
Edwin L. Adair, M.D., Chairman of
the Board and Director
January 15, 1996
I. Dean Bayne, M.D., Director
January 15, 1996 /s/ Pat Horsley
----------------
Pat Horsley Adair, Director
January 15, 1996
Leroy Bilanich, Director
<PAGE>
Contents
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Consolidated balance sheets F2 - F3
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F6 - F7
Notes to consolidated financial statements F8 - F16
<PAGE>
Independent Auditor's Report
Board of Directors and Shareholders
Medical Dynamics, Inc. and Subsidiary
Englewood, Colorado
We have audited the accompanying consolidated balance sheets of Medical
Dynamics, Inc. and its wholly-owned subsidiary, MedPacific Corporation (the
Company) as of September 30, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Medical
Dynamics, Inc. and Subsidiary as of September 30, 1995 and 1994, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 6 to the financial statements, the Company has suffered recurring losses
and negative cash flows from operations. This raises substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 6. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
McGLADREY & PULLEN, LLP
Denver, Colorado
November 27, 1995, except for the fourth
paragraph in Note 6, as to which the date is December 1, 1995
<PAGE>
<TABLE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
Current assets
Cash including cash equivalents
1995 $1,029,900; 1994 $1,076,900 $1,071,700 $1,151,600
Investments 10,000 1,010,500
Trade receivables, less allowance
for doubtful accounts
1995 $45,000; 1994 $55,000 391,600 457,800
Note receivable - officer (Note 3) 110,000 -
Inventories (Note 2) 948,500 984,300
Prepaid expenses 25,100 34,300
----------- ----------
Total current assets 2,556,900 3,638,500
----------- ----------
Equipment
Loaner equipment 678,100 704,800
Machinery and equipment 343,100 325,300
Furniture and fixtures 270,200 266,000
Leasehold improvements 54,500 54,500
----------- ----------
1,345,900 1,350,600
Less accumulated depreciation
and amortization (1,202,000) (1,063,300)
----------- ----------
143,900 287,300
----------- ----------
Other assets
Patents, patents pending, and
trademarks, net of accumulated
amortization 1995 $609,400;
1994 $559,700 155,500 299,000
Other (Note 8) 29,400 142,700
----------- ----------
184,900 441,700
----------- ----------
$2,885,700 $4,367,500
=========== ==========
See Notes to Consolidated Financial Statements.
<PAGE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1995 1994
<S> <C> <C>
Current liabilities
Accounts payable $188,400 $ 161,900
Accrued expenses 50,900 60,200
Product warranty costs 25,000 50,000
Accrued royalties (Notes 3 and 6) 90,000 90,000
----------- ---------
Total current liabilities 354,300 362,100
----------- ---------
Commitments and contingencies
(Notes 3, 4, 6, 8, and 9)
Stockholders' equity (Notes 4 and 6)
Preferred stock, $.001 par value;
authorized 5,000,000 shares;
none issued - -
Common stock, $.001 par value;
authorized 15,000,000 shares;
issued 1995 6,895,400 shares;
1994 6,885,400 shares 6,900 6,900
Additional paid-in capital 16,585,500 16,575,500
Accumulated deficit (13,981,700) (12,497,700)
----------- ----------
2,610,700 4,084,700
Treasury stock at cost, 15,900 shares
1995 and 1994 (79,300) (79,300)
----------- ---------
2,531,400 4,005,400
----------- ---------
$2,885,700 $4,367,500
=========== =========
</TABLE>
<PAGE>
<TABLE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
<CAPTION>
1995 1994
<S> <C> <C>
Net sales (Notes 7 and 10) $ 1,195,200 $ 1,446,800
Cost of goods sold 1,112,400 1,219,200
----------- -----------
Gross profit 82,800 227,600
----------- -----------
Other operating revenue 135,900 128,100
----------- -----------
Operating expenses:
Selling, general and
administrative 1,364,400 1,539,200
Research and development 228,100 142,500
Royalty (Note 6) 120,000 120,000
Loss from patents transferred
to related party (Notes 3 and 6) 73,000 -
----------- -----------
1,785,500 1,801,700
----------- -----------
Operating loss (1,566,800) (1,446,000)
----------- -----------
Financial income (expense):
Interest income 82,900 58,100
Interest expense (100) (27,800)
----------- -----------
82,800 30,300
----------- -----------
Net loss before income taxes (1,484,000) (1,415,700
Income tax expense (Note 5) - -
------------ ------------
Net loss $ (1,484,000) $ (1,415,700)
============ ============
Primary loss per share (Note 1)
Net loss per share $(0.22) $ (0.21)
============ ============
Fully diluted loss per share (Note 1)
Net loss per share $(0.22) $ (0.21)
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
Additional
Common Stock Treasury Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------------------- ------------------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1993 5,795,100 $ 5,800 - $ - $13,825,800 $(11,082,000) $2,749,600
Proceed from sale of
common stock
(Note 4) 974,700 1,000 - - 2,601,800 - 2,602,800
Proceeds from exercise of
common stock options
(Note 4) 115,600 100 15,900 (79,300) 147,900 - 68,700
Net loss - - - - - (1,415,700) (1,415,700)
--------- ------ ------- ------- --------- ---------- ---------
Balance,
September 30, 1994 6,885,400 6,900 15,900 (79,300) 16,575,500 (12,497,700) 4,005,400
Sale and issuance
of common stock 10,000 - - - 10,000 -
Net loss - - - - - (1,484,000) (1,484,000)
--------- ------ ------ -------- ---------- ---------- ---------
Balance,
September 30, 1995 6,895,400 $6,900 15,900 $(79,300) $16,585,500 $(13,981,700) $2,531,400
========= ====== ====== ======== =========== =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
1995 1994
<S> <C> <C>
Cash Flows from Operating Activities
Net loss $(1,484,000) $ (1,415,000)
Adjustments to reconcile
net loss to net cash (used in)
operating activities:
Depreciation and amortization 268,600 335,000
Provision for obsolete inventory 100,000 -
Gain on sale of loaner equipment (51,200) (68,400)
Loss on disposal of patents 76,700 -
Change in assets and liabilities:
Decrease in trade receivables 66,200 267,500
(Increase) decrease in inventories (79,900) 226,300
Decrease (increase) in
prepaid expenses 9,200 (3,700)
(Decrease) in accounts
payable and accrued expenses (7,800) (278,200)
----------- --------
Net cash (used in)
operating activities (1,102,200) (937,200)
----------- --------
Cash Flows From Investing Activities
Proceeds from sale of loaner equipment 52,600 108,100
Proceeds from maturity of
certificate of deposit 25,000 50,000
Proceeds from sale of investments 985,500 -
Advances on notes receivable-officer (110,000) -
Additions to patents (22,100) (26,100)
Purchase of equipment (12,000) (24,800)
Purchase of certificate of deposit (10,000) (25,000)
Purchase of investments - (985,500)
Reductions (additions to) in deposits
and cash surrender value
of life insurance 113,300 (9,900)
----------- --------
Net cash provided by
(used in) investing activities 1,022,300 (913,200)
----------- --------
Cash Flows From Financing Activities
Proceeds from sale and
issuance of common stock - 2,671,000
Payment of note payable -
officer borrowings - (248,200)
Payment of loans on life
insurance policies - (46,200)
----------- --------
Net cash provided by
financing activities - 2,377,100
----------- ---------
<PAGE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
YEARS ENDED SEPTEMBER 30, 1995 AND 1994
1995 1994
<S> <C> <C>
Increase (decrease) in cash
and cash equivalents (79,900) 526,700
Cash and cash equivalents:
Beginning 1,151,600 624,900
----------- -----------
Ending $ 1,071,700 $ 1,151,600
=========== ===========
Supplemental Disclosures of
Cash Flow Information
Cash paid during the year
for interest $ 100 $ 10,000
=========== ===========
Supplemental Schedule of
Noncash Investing
and Financing Activities
Net loaner equipment
transfers from inventory $ 15,700 $ 20,500
=========== ===========
Common stock issued to
purchase equipment $ 10,000 $ -
=========== ===========
Treasury stock acquired in
exchange for issuance of common
stock upon exercise of stock options $ - $ 79,300
=========== ===========
Note payable - officer paid by
reduction of prepaid interest $ - $ 91,800
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of business:
Medical Dynamics, Inc. and Subsidiary (the Company) are engaged in the
design, development, manufacture and marketing of medical video cameras and
related surgical disposable products for a variety of medical specialties.
These products are sold directly to hospitals, health care professionals,
wholesalers, and original equipment manufacturers throughout the United
States and foreign markets. Sales are typically made on terms of net 90
days, though some extended terms are offered on foreign sales, to match terms
normally offered in certain countries.
Principles of consolidation:
The financial statements include the accounts of the Company and its
wholly-owned subsidiary, MedPacific Corporation. All significant
intercompany accounts and transactions have been eliminated.
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company's significant
estimates includes allowance for doubtful trade accounts receivables and an
obsolete inventory reserve. These reserves are established based on review
of accounts receivable and past debt history and a review of inventory usage,
receptively.
Cash and cash equivalents:
For purposes of reporting the consolidated statements of cash flows, the
Company includes all cash accounts, which are not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments purchased
with a maturity of three months or less as cash and cash equivalents on the
accompanying consolidated balance sheets. Cash equivalents include a mutual
fund backed by U.S. Government and Government Agency Securities.
Investments:
Investments, which consists of a certificate of deposit, and U.S. Government
Securities at September 30, 1994, are carried at amortized cost, which
approximates fair market value.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method) or
market. All inventory is classified as a current asset although part of such
inventory, because of current sales volume, is not anticipated to be utilized
within one year.
Equipment:
Equipment is stated at cost. Depreciation and amortization is computed
principally by the straight-line method over the following estimated useful
lives:
Years
Loaner equipment 3
Machinery and equipment 3 - 10
Furniture and fixtures 3 - 10
Improvements to leased property are amortized over the lesser of the life of
the lease or life of the improvements.
Patents and trademarks:
Patents and trademarks are stated at cost and are amortized over their
estimated economic lives up to ten years. In the event patents pending are
not granted, the related costs will be charged to operations. The Company
reviews its patents annually to determine potential impairment by comparing
the carrying value of the intangible with expected future net cash flows
related to the patent. An impairment loss would be recognized if the Company
determined the carrying value exceeded the fair market value of the patent.
Warranty accrual:
The Company provides a warranty against defects in materials and workmanship,
generally for a period between one month and two years following the date of
sale of the equipment. Estimated future costs of product warranties are
charged to selling, general and administrative expenses.
Income (loss) per common share:
For the years ended September 30, 1995 and 1994 earnings per share are
computed based upon 6,879,500 and 6,602,400, weighted average common shares
outstanding for both primary and fully-diluted earnings per share. Shares
issuable under common stock purchase warrants and common stock options were
excluded from the computation of earnings per share because the effect was
deemed to be anti-dilutive.
Income tax matters:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and
tax credit carryforwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
Revenue recognition:
The Company recognizes all revenue when it receives a valid purchase order
and ships completed, finished products to a customer.
Other operating revenue:
Other operating revenue includes product service revenue of $41,300 and
$59,800 for the years ended September 30, 1995 and 1994, respectively.
Note 2. Inventories
Inventories consist of the following at September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Raw materials, purchased,
and replacement parts $466,100 $ 534,700
Finished goods 656,400 525,700
Work in process 26,000 23,900
Obsolete inventory reserve (200,000) (100,000)
------- -------
$948,500 $984,300
======= =======
</TABLE>
Note 3. Note Receivable - Officer and Related Party Transactions
Note receivable - officer consists of a note due from an entity owned by the
Company's Chairman (the Chairman). The note is due January 15, 1996 and
bears interest at prime plus 1% (8.75% at September 30, 1995). The note is
secured by all amounts due or which may become due to the Chairman under a
license agreement with the Company (See Note 6).
In a related transaction, the Company transferred to the entity owned by the
Chairman the licensed right to patents with a net book value of approximately
$21,000. The patents had originally been obtained from the Chairman under the
license agreement described above, and were transferred because the Company
was unable to obtain FDA approval for products using the patents. The
related entity has since obtained FDA approval and has entered into an
exclusive agreement to have the Company distribute all products it
manufactures. The agreement runs through June 30, 2000. The Company has
purchased approximately $25,000 of products under the agreement at September
30, 1995, this amount was also included in accounts payable at September 30,
1995. There has been no significant sales of the products purchased under
the agreement.
Note 4. Common Stock (see also Note 6)
Stock option plan:
The Company has a stock option plan under which options to purchase common
stock are granted generally at not less than the fair market value of the
stock at the date of grant. The Board of Directors approved the plan on July
14, 1988 and a majority of the Company's stockholders approved the plan in
October 1988. An aggregate of 1,000,000 shares were reserved for issuance
pursuant to the terms of the plan. Activity in the stock option plan for the
last two years is as follows:
<TABLE>
<CAPTION>
Stock Option Plan
-----------------------
Average
Number of Price
Option Per Option
-----------------------
<S> <C> <C>
Outstanding
September 30, 1993 282,700 $1.93
Granted - -
Exercised (115,600) 1.28
Canceled and expired (7,300) 1.82
-------- -----
Outstanding
September 30, 1994 159,800 2.47
Granted - -
Exercised - -
Canceled and expired (26,700) 1.33
--------- -----
Outstanding
September 30, 1995 133,100 $2.69
========== =====
</TABLE>
The range of exercise prices of options exercised was $.85 to $3 in 1995 and
1994. During 1994 treasury stock was acquired in exchange for issuance of
common stock pursuant to options exercised. At September 30, 1995, shares of
common stock reserved for issuance under options totaled 133,100. Options
available for future grant at September 30, 1995 totaled 83,100.
The Board has also agreed to issue options to purchase shares of the
Company's common stock to certain employees as part of their compensation
package. The option price on these options will be the market price on the
date authorized. None of these options have been approved under a qualified
plan by the stockholders and, as such, have certain holding period
requirements and trading restrictions.
During 1994, the Company sold 974,700 shares of its common stock for
$2,602,800. The sale of the shares were made pursuant to a Regulation S
placement. Under Regulation S, sales can only be made to qualified foreign
investors, and must be held by the purchasers for a requisite period of time
and meet other Regulation S requirements before they are able to sell the
shares in the United States. The shares were sold at a discount of 37.5% to
40% of the closing bid price of an average of three days prior to the sale.
Note 5. Income Taxes
Under the provisions of the Internal Revenue Code, the Company has available
for federal income tax purposes, net operating loss and business tax credit
carryforwards of approximately $14,500,000 and $188,000, respectively, which
expire in varying amounts from 1996 through 2010.
The net operating loss and business tax credit carryforwards described above
gives rise to a deferred tax asset of approximately $5,500,000. This asset
is recorded net of a valuation allowance of the same amount, therefore no
amounts are reflected in the accompanying balance sheet.
The actual provision for income taxes varied from the expected provision for
income taxes (computed by applying the statutory U.S. Federal income tax
rates to loss before taxes) due to the above carryforward and related
valuation allowance.
Note 6. Commitments and Contingencies
The Company has incurred continued substantial operating losses , negative
cash flows from operations and has had trouble obtaining FDA approval on new
products, the Company's future viability depends on its ability to increase
sales and become profitable. To this end the Company will look for new OEM
customers, increase marketing efforts on new products, explore distribution
of products to new medical specialties, continue to expand in the foreign
market place, and believes it will no longer have difficulty obtaining FDA
approval on new products. However, there are no assurances that these
efforts will result in a long-term increase in sales, profitability and cash
flows, to allow for the long-term viability of the Company. The financial
statements do not include any adjustment relating to the recoverability of
recorded asset amounts, or the amounts of liabilities that might be necessary
should the Company not be able to continue in existence, including the
write-off of patents that would revert back to the Chairman under a licensing
agreement.
Recently, the cost of health care has risen significantly, and there have
been proposals by legislators, regulators and third party health care payors
to curtail these cost increases. Some proposals have involved limitations on
the amount of reimbursement for specific surgical procedures. The Company is
unable to predict the changes to be made in the reimbursement procedures
utilized by third party health care payors. In addition, hospitals and other
health care providers have become increasingly price competitive, and in some
instances, put pressure on medical suppliers to lower their prices. As a
result, the Company is unable to predict the financial impact of these
factors.
The Company has various agreements to pay royalties to both a former officer
and current directors of the Company. These royalties are based on the sales
of specified products, some of which are no longer manufactured by the
Company. In June, 1987, the Company entered into a license agreement with
its then CEO and Chairman relating to the use of certain technology invented
and developed by the Chairman. In connection with the agreement, the Company
has agreed to pay royalties based on the greater of 2% of the sales of
products which relate to this technology or the minimum annual royalties as
described below. For the years ended September 30, 1995 and 1994 the Company
accrued $120,000 in royalty expense of which $90,000 remained unpaid at each
year end. The June, 1987 license agreement, as further amended, requires the
Company to pay the Chairman minimum annual royalties of $120,000 for fiscal
1994 and beyond. The agreement does not specify the termination date, though
both parties can terminate the agreement under certain circumstances. The
Chairman can terminate the agreement with 45 days prior written notice upon
default by the Company of its obligations under the agreement, and for
specific technologies upon acquisition by another person of 20% or more of
the outstanding stock of the Company unless, the acquior provides notice of
its intention to commercially exploit the specific technologies. The
agreement will terminate automatically if the Company is involved in a
bankruptcy proceeding. In the circumstances described, the rights to be
patents would revert back to the Chairman. Also under the agreement any
patents not commercially developed by the Company in three years will revert
back to the Chairman. During 1995, approximately $62,000 of patents were
written off when the rights reverted back to the Chairman under this
provision.
On December 1, 1995, the Chairman agreed to waive all payments due him under
the above license agreement for the year ended September 30, 1996, in
exchange for stock options to purchase 120,000 shares of common stock at $1
per share.
On October 8, 1992, the Company's Board of Directors issued options to
purchase 300,000 shares of the Company's common stock at $4 per share to the
Chairman in exchange for a license to develop and market certain patents
rights and technology developed by the Chairman. The Company has agreed to
register the options under certain circumstances. In connection therewith,
the Board amended its 1987 license agreement and incorporated this technology
in exchange for the options granted. The options can be exercised through
October 2002. These options were not granted pursuant to a qualified plan
and, as such, are subject to certain holding period requirements and trading
restrictions. The commitments relating to the 1987 license agreement
discussed in the previous paragraph were not changed by the above amendment.
During fiscal 1995 and 1994, the Company granted stock options, totaling
216,200 and 100,000, respectively, at the then current market price, to
certain officers, employees and sales representatives of the Company. The
stock options were granted as part of their compensation package to certain
officers and employees for both past and future service and as incentives to
certain affiliates for future services to be performed. The Company may, in
the future and at its discretion, decide to grant additional options to
certain officers, employees and affiliates in lieu of compensation or
services performed by those individuals or entities. These options are not
pursuant to a qualified plan and, as such, will be subject to certain holding
period requirements and trading restrictions. In all cases, options were
granted at market prices in effect at the time of grant. At September 30,
1995, a total of 491,900 options have been granted, at an average price per
option of $2.36. None of the options have been exercised. These option
expire, beginning with 4,000 in the year ending September 30, 1997, 112,000
in 1998 and 375,900 in 2004.
The Company is committed to either compensating certain officers and
employees at market rates or granting additional stock options as part of
their compensation package. Under these circumstances, the Company and
employee will mutually agree, on an annual basis, to the most beneficial
compensation arrangement, subject to the employee or affiliate performing
agreed upon future services.
The Company is regulated by the federal Food and Drug Administration (FDA).
The Company cannot ensure that an adverse financial impact will not occur
should the FDA find the Company's Good Manufacturing Practices are in
non-compliance with current Federal regulations. If the FDA finds that a
manufacturer is not in compliance, the manufacturer may be prohibited from
marketing the products for which they are not in compliance, until such time
as the manufacturer complies with the applicable FDA regulation. The Company
has recently had difficulty obtaining FDA approval on new products due to
past findings during FDA inspections. However, the Company does not expect
problems in the future due to a change in FDA policy.
The Company conducts its operations from leased facilities and leases certain
equipment. The terms of the facilities lease require the Company to pay all
maintenance, utilities, property taxes and insurance. Rent expense has been
recorded on a straight-line basis over the life of the lease. Following is a
schedule of future minimum commitments under operating leases having an
initial or remaining term of more than one year.
Years Ending September 30,
1996 $152,000
1997 162,600
1998 171,100
-------
$485,700
=======
Total rent expense was $136,300 and $113,000 for the years ended September
30, 1995 and 1994, respectively.
Note 7. Foreign Sales
The Company had export sales of $456,600 and $596,400 for the years ended
September 30, 1995 and 1994, respectively. The sales are made in United
States dollars.
Note 8. Officers Life Insurance and Split-Dollar Agreement
In August, 1990, the Company purchased a $1,000,000 convertible term key-man
life insurance policy on its Chairman. Subsequent to the end of the year,
the Company terminated this plan due to cost cutting measures. The Company
also has a $100,000 whole life key-man insurance policy on its Chairman which
was acquired in 1985. The convertible term policy is renewable annually
through year 2003.
Additionally, in August, 1990, the Company entered into a split-dollar life
insurance agreement with an irrevocable trust established by the Chairman and
Secretary of the Company. The Company has agreed to pay substantially all of
the annual premiums on a $2,000,000 whole-life, second-to-die policy which
has the insurance trust as the beneficiary. The split-dollar agreement
specifies that the Company will receive the greater of premiums paid or cash
surrender value upon the second insured's death. However, should the Company
decide not to pay the premium prior to the second insured's death, the
Company would only collect premiums paid to the extent of the cash surrender
value. As such, the Company has recorded the premiums paid in the
accompanying consolidated balance sheets to the extent of cash surrender
value. At September 30, 1995 and 1994 $13,000 and $121,000 of cash surrender
value was recorded, respectively. Subsequent to the end of the year, the
Company terminated this plan due to cost cutting measures
Note 9. Employee Benefit Plans
Effective January 1, 1990, the Company adopted employee benefit plans under
Internal Revenue Code Sections 401(k) and 125. The 401(k) plan is a profit
sharing plan whereby both employees and the Company are entitled to
contribute a portion of compensation and earnings, respectively, to
investment funds to supplement employee retirement benefits. Under the IRS
Section 125 cafeteria plan, employees may contribute to the cost of health
care premiums with pre-tax dollars. Both plans were approved by the Board of
Directors. The Company incurred $900 and $1,100 for the years ended in
September 30, 1995 and 1994, respectively, in 401(k) benefit expense and
$23,000 and $34,000 in Section 125 benefit expense for the years ended
September 30, 1995 and 1994, respectively.
Note 10. Major Customers
Sales to customers for 10% or more of revenues for the year ended September
30, 1995 and the related ending accounts receivable balance at September 30,
1995 are as follows:
<TABLE>
<CAPTION>
1995
-----------------------
Customer Sales Receivable
- --------------------------------------------------------------
<S> <C> <C>
A $297,700 $145,900
B $ * $ *
1994
-----------------------
Customer Sales Receivable
-----------------------
A $ 227,000 $ 99,000
B $ 189,300 $ 94,000
</TABLE>
*had less than 10% of sales in 1995
<PAGE>
Medical Dynamics, Inc.
Englewood, Colorado
In planning and performing our audit of the financial statements of Medical
Dynamics, Inc. for the year ended September 30, 1995, we considered its
internal control structure in order to determine our auditing procedures for
the purpose of expressing our opinion on the financial statements and not to
provide assurance on the internal control structure. However, we noted
certain matters involving the internal control structure and its operation
that we consider to be reportable conditions under standards established by
the American Institute of Certified Public Accountants. Reportable
conditions involve matters coming to our attention relating to significant
deficiencies in the design or operation of the internal control structure
that, in our judgment, could adversely affect the Company's ability to
record, process, summarize, and report financial data consistent with the
assertions of management in the financial statements.
One person performs virtually all of the accounting and financial duties. As
a result, most of those aspects of internal control procedures which rely
upon an adequate segregation of duties are, for all practical purposes,
missing in your Company. We recognize that your Company may not be large
enough to make the employment of additional persons for the purpose of
segregating duties practicable from a financial standpoint, but we are
required, under our professional responsibilities, to call the situation to
your attention.
This report is intended solely for the information and use of the audit
committee, management, and others within the Company.
Denver, Colorado
November 27, 1995
18<PAGE>
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