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, 1996
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.
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(Exact name of Registrant as specified in its charter)
Colorado 84-0631765
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
99 Inverness Drive East
Englewood, Colorado 80112
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(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 $667,800.
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 December 31, 1996 was approximately
$23,613,000.
Class Outstanding at December 31 , 1996
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Common Stock 7,335,511 shares
Documents incorporated by reference: None
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MEDICAL DYNAMICS, INC.
FORM 10-KSB
PART I
Item 1. Business.
(a) Business Development
Medical Dynamics, Inc. is engaged in the design, development, manufacture
and marketing of medical and dental video cameras and related disposable
products for a variety of professional specialties. The Registrant's principal
products are small, color, medical and dental video camera systems for use in
patient diagnosis and various surgical procedures. The Registrant has been
manufacturing such cameras since August of 1981. Medical Dynamics, Inc. has one
inactive subsidiary, MedPacific Corporation, a Washington state corporation. 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 business 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 for retail sale 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. Subsequently, additional cameras were acquired or developed by the
Registrant.
During the fiscal year ended September 30, 1996, the Regis trant 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.
As discussed in Note 2 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 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
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During the fiscal year 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 minimal quantities of various medical products to the
Registrant. See item 12 - Certain Relationships and Related Transactions,
"Distribution Agreement."
(b) Business of the Issuer
The Registrant's principal business is the design, de velopment,
manufacture and marketing of medical and dental video cameras and related
disposable products for a variety of professional specialties. These products
are used in surgical, diagnostic, research and teaching applications by
physicians, dentists, and other health care professionals.
A variety of less invasive diagnostic and surgical techniques have been
developed which enable operations to be performed or observation to occur with
minimal surgical incisions. One such surgical technique is the arthroscopic
operation used by orthopedic surgeons. That 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 then 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 more common surgery 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. One surgical 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.
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
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room, diagnostic laboratory or class room. 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.
The Registrant has recently applied it's surgical camera expertise to the
development of intraoral dental cameras for use as a diagnostic tool for the
dental profession. The Registrant believes that the True Vision(TM) camera it
has created represents the state-of-the-art for this camera technology, with
high resolution surgical camera picture quality coupled with a lower cost than
other competitors' cameras.
As of September 30, 1996 and 1995, the Registrant had approximately
$6,700,000 and $60,400, respectively, in purchase orders for its medical and
dental products. The fiscal 1996 backlog is due to demand for the Registrant's
intraoral dental camera from customers. It is expected that it will take between
12 to 18 months to fulfill this order backlog and there can be no assurance that
there will not be subsequent modifications to the quantities subject to the
purchase orders. Backlog purchase orders are not recorded in sales revenue until
the order is shipped. Subsequent to September 30, 1996 the Registrant received
additional purchase orders for approximately $700,000 in intraoral dental camera
backlog sales.
(b)(1) Principal Products and Their Markets.
True Vision(TM) Intraoral Dental Camera. The Registrant currently
manufactures and markets a dental video camera which is designed for most common
dental applications. This camera model contains a high performance video sensor
coupled with a 1/4" lens and camera system which management believes provides
superior high resolution picture quality compared to other cameras used in the
dental profession. The camera's state-of-the-art technology consists of easy
angle, high resolution viewing, a single lens format, and the smallest and
lightest hand piece available in the market today. Production and sales of this
product began in September, 1996, therefore minimal sales revenue has been
generated.
Model 5980 Digital Surgical Video Camera. The Registrant currently
manufactures and markets a medical 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
model, the 5980, contains a high performance video sensor which provides a
brighter picture in lower light level environments than prior solid state
.
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cameras. The current 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. This model is submersible for liquid
sterilization, and has a detachable cable (facilitating replacement of the most
frequently failing component). The construction of the Registrant's 5980 camera
is from standard video camera components purchased from major manufacturers of
video cameras. The Registrant produces variations of the Model 5980 camera for
use with European format video equipment.
During the years ended September 30, 1996, and 1995 approximately 3 and 15,
respectively, Model 5980 and predecessor model cameras were sold by the
Registrant at prices ranging from $1,600 to $8,075.
The Model 5990 Optical Catheter System(TM). In June 1989 the Registrant
introduced its 5990 Optical Catheter System. The Registrant created this product
from technology originally developed by the Chairman and licensed to the
Registrant in response to the demand for less invasive and less expensive
diagnostic and surgical procedures. These procedures are now being performed in
physicians' offices and outpatient clinics. The Registrant is currently
manufacturing the 5990 Optical Catheter(TM) System in its facility.
The 5990 Optical Catheter System consists of a modular console containing a
video camera, light source, and monitor. A flexible, small diameter endoscope
utilizing small, flexible and versatile fiber optic image bundles 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 back to the
camera in the console. The image is displayed on the video monitor. 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 currently marketed by the
Registrant.
During the fiscal years ended September 30, 1996, and 1995, 5 and 10 Model
5990 Optical Catheter systems were sold by the Registrant, netting sales of
approximately $49,500, and $87,500 respectively.
Electronic Video Laparoscope (EVL). The Model 5500 EVL is a rigid endoscope
that utilizes the latest in image processing without the need for multiple
optical coupling lenses. The endoscope eliminates the need for coupling and
light source enhancement because it incorporates these features within it's
design. The Registrant introduced this product in October 1992 and commenced
active marketing in April, 1993.
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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 places the
imaging chip in closer proximity to the anatomy viewed, thereby creating a
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 result in 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 Laparoscope(TM) 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.
During the fiscal years ended September 30, 1996 and 1995, the Registrant
sold 13 and 35 units of the EVL control module, to both domestic and foreign
markets. Total gross revenues for all EVL associated products, which includes
ancillary scopes, umbilical cables, heads and control modules totalled $80,300
and $326,600 for the respective fiscal years.
Models 6400 and 6600 Light Sources. The Registrant currently produces
several light sources used in various procedures in conjunction with the model
1001.00 USES, 5980 and 5500 EVL cameras. The Registrant began to market and
produce the model 6600 light source during fiscal 1993. The Registrant 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 14 and 39, new light source
units during fiscal 1996 and 1995, respectively, netting sales of $51,000 and
$137,100.
Adair/Veress Needle(TM). The Registrant has sold 2,379 and 1,402 units of
this needle used to perforate the abdominal wall generating sales of
approximately $41,200 and $26,700, during fiscal 1996 and 1995 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
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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. The majority of sales of this device are attributable
to Origin Medsystems, a subsidiary of Guidant Corporation. The Registrant has a
current purchase order to deliver 1,390 additional units in the future totaling
$22,600.
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 an outside supplier. The
Registrant also provides the video monitors for use in connection with its
cameras. These monitors are purchased from major electronics manufacturers.
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.
Cam-Wrap(TM). 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
19,200 and 21,400 units were sold in fiscal 1996 and 1995, respectively, for
total sales of $184,400 and $202,500.
Lap-Wrap(TM). 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 Registrant's line of higher-margin disposable accessories. The Lap-Wrap is a
low cost alternative ($16 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, 1996 and 1995, 264 and 314 cases of Lap- Wrap
were sold resulting in revenues of $38,500 and $49,100, 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.
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Universal Sterile Endoscopy System(TM) (USES(TM)). At the end of fiscal
1995 the Registrant introduced this product group. It consists of a non-soakable
camera system that utilizes a proprietary "closed system" sterile coupler 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 1996 sales were
minimal as the product is still 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 also carries a
significant quantity of repair parts. At September 30, 1996, inventories of
repair parts valued at $450,000 were classified as a long-term asset in the
Registrant's balance sheet. This estimate was determined by considering both
historical and projected levels of sales for goods included in inventories. A
substantial portion of raw materials is expected to be utilized for repairs of
equipment sold over the past several years (see note 3 to the consolidated
financial statements). The Registrant has continued to maintain an inventory of
components for its Models 5500, 5940, 5960, 5970, and 5980 cameras, the 5990
Optical Catheter(TM) 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 270 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, 1996 and 1995 were
$714,400 and $948,500 respectively.
Warranty. The Registrant's medical and dental 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 mal functions 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 cost into its results of operations based upon historical
experience and revenues currently reported. The estimated warranty reserve at
fiscal year end September 30, 1996 and 1995 was $15,000 and $25,000,
respectively.
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(b)(2) Distribution Methods
The Registrant's medical video camera systems and disposable medical
products are sold principally to physicians and hospitals, either directly or
through one of the Registrant's independent sales representatives. The
Registrant's intraoral dental camera is typically sold through a select
distribution network or on an OEM distributor basis. The Registrant has engaged
in marketing and advertising of all its products at professional seminars and
specialty meetings, direct mail promotions, telemarketing, and through a sales
representative network. During the years ended September 30, 1996 and 1995, the
Registrant spent $193,700 and $258,800, respectively, on sales promotions,
conventions and advertising expenses.
The Registrant engaged approximately 12 organizations with approximately 22
field sales representatives to market its medical camera systems in the United
States during fiscal year 1996. 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 approximately 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, 1996, the Regis trant engaged
approximately 12 agents to sell video cameras in areas outside the United
States. The primary foreign territories where the Registrant has distributors
are the 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,
1996 and 1995 were 22% and 36%, respectively.
(b)(3) Status of New Products.
The Registrant has several products which are in various stages of
development.
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3-D Electronic Video Laparoscope(TM). 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, the consolidation of hospitals coupled with
less influence over buying decisions by physicians, 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 System(TM) 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.
Although Panasonic is still the primary supplier of cameras, the Registrant now
procures cameras from additional sources without sacrificing product or picture
quality. Management believes the additional product resources, combined with
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current purchasing practices more in line with "just-in-time" inventory
management, are beneficial to the Registrant. 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 total gross
revenues for both fiscal years 1996 and 1995. Gross billings to Rosot
Enterprises of Locust Valley, New York during fiscal years 1996 and 1995 were
$108,800 and $297,700 or 16% and 25% of Registrant revenues, respectively. Rosot
Enterprises is an international distributing company which concentrates on
Mexico, Central and South America.
(b)(7) Patents, Trademarks, etc.
Patents. Although the Registrant does not own any patents relating to its
Optical Catheter System(TM), 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 Catheter(TM) are owned by Dr. and Mrs.
Adair and are 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 Registrant
relating to the 5990 Optical Catheter(TM) 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:
TITLE ISSUE DATE PATENT NUMBER
- ----- ---------- -------------
"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)
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TITLE ISSUE DATE PATENT NUMBER
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"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)
"Steerable Sheath for Use 7/5/94 5,325,845
With Selected Removable
Optical Catheter"
"Imaging Tissue or Stone 5/17/94 5,311,858
Removal Basket"
"Stereoscopic Endoscope" 1/17/95 5,381,784
(3-D EVL)
"Stereoscopic Endoscope With 2/27/96 5,494,483
Miniaturized Electronic
Imaging Chip"
"Miniaturized Electronic 2/27/96 5,495,114
Imaging Chip"
(For Reduced Diameter
Electronic Endoscopes)
The Bayne Pap Brush(TM) is subject to United States Patents No. 4,762,133,
4,754,764 and 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
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for a 20 year term in June 1990. The Registrant also has trademark applications
pending on a variety of products including the EVL, Lap-Wrap(TM), and True
Vision(TM) dental camera.
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/Veress(TM)
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 Catheter(TM) System,
the Electronic Video Laparoscope (EVL), and the Lap-Wrap(TM). 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, 1996, $600,000 has been paid to Dr. Adair under this
license agreement, and an additional $120,000 of expense was recognized in
fiscal 1996 for the fair value of stock options issued to Dr. Adair. In December
1995, 120,000 options at a $1.00 exercise price were issued in exchange for the
cash royalty payment for fiscal year 1996. See Notes 4 and 5 to the Consolidated
Financial Statements in Item 7 and 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.
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<PAGE>
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 selling
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 1996, The FDA performed a routine inspection of the
Registrant's premises and issued a Form FDA-483 "Inspectional Observations"
itemizing certain deviations in the Registrant's 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 Registrant'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, 1996 and 1995, the Registrant
spent approximately $206,900 and $228,100, respectively, on company-sponsored
research and development activities. During those periods, there were minimal
customer-sponsored research activities relating to new products, services,
techniques 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, 1996, the Registrant employed 15 persons, including 3
persons engaged in general administration, and 12 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
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<PAGE>
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:
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 1996 the
average monthly cost amounted to $380.
Item 3. Legal Proceedings.
There are no material pending legal or regulatory proceedings and the
Registrant is not aware of any that are known to be contemplated.
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, 1996.
-16-
<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 quo tations for the two fiscal
years shown below were reported on the National Association of Securities
Dealers Automated Quotation SmallCap Market 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, markdown or commission and may not
necessarily represent actual transactions in the Common Stock:
High bid Low bid
-------- -------
Fiscal Year ended
September 30, 1996
------------------
First quarter $1.38 $0.50
Second quarter 2.31 1.03
Third quarter 4.06 1.44
Fourth quarter 5.19 2.13
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
(b) Holders
The number of record holders of the Common Stock, as of September 30, 1996,
was 13,227 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.
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<PAGE>
(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.
As discussed in Note 2 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 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Liquidity and Capital Resources. (September 30, 1996 as compared to
September 30, 1995) During the fiscal year ended September 30, 1996, the
Registrant's current ratio declined to 4.7 as compared to 7.2 at September 30,
1995. Net working capital decreased approximately $1,054,400 due primarily to
the use of cash in operations, the resulting operating loss, and a
reclassification of $450,000 of inventory to a non-current asset. These
inventories, consisting of significant quantities of repair parts for equipment
sold over the last several years, were classified as a long-term asset in the
Registrant's balance sheet. This estimate was determined by considering both
historical and projected levels of sales for goods included in inventories. A
substantial portion of raw materials is expected to be utilized for repairs of
equipment sold over the past several years (see note 3 to the consolidated
financial statements). 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 fiscal
year ended September 30, 1996 consist of a decrease in outstanding accounts
receivable by $210,000, a collection of the Micro-Medical Devices, Inc. related
party receivable of $110,000, a decrease in reported current inventory levels by
$684,100 ($450,000 of which was reclassified to other long term assets), a
reduction in prepaid expenses and other of $15,700, and a reduction in total
current liabilities by $43,900 to the current level of $310,400.
During the fiscal year ended September 30, 1996, the Registrant experienced
negative cash flow from operating activities of approximately $789,200 as
compared to negative cash flow from operating activities of approximately
$1,102,200 during the comparable period of the prior fiscal year. The aggregate
decrease in cash used in operating activities during fiscal 1996 versus fiscal
1995 was a result of the following factors:
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<PAGE>
Inventory levels decreasing in fiscal 1996 due to writeoffs and
reclassifications, with no cash used in purchases other than for sales, where
during fiscal 1995 the Company increased inventory by purchases in the amount of
$79,900. Accounts payable and accrued expenses increased during fiscal 1996 by
$56,100 over fiscal 1995 balances. Aggregate trade accounts receivable cash
collections reduced outstanding balances due by $170,000 during fiscal 1996
versus a reduction of $66,200 during fiscal 1995.
Certain consulting services received by the Registrant were paid for
through the issuance of common stock options during the year in lieu of cash.
Although the services required no cash outlay, the options granted, issued at an
exercise price higher than market, still required the recognition of estimated
expense per the accounting rules prescribed in FAS 123 "Accounting for Stock
Based Compensation". This statement requires that the fair value of stock
options issued to non-employees of the company be computed under an option
pricing model and be recorded in the Registrant's accounts. A total of $133,600
of non-cash consulting expense has been recognized to comply with this
accounting rule. The Registrant has elected to continue to use APB 25 for the
computation of employee stock option expense. Total non-cash compensation
expense recognized for employee stock options was $271,400 during fiscal 1996.
See Note 5 to The Consolidated Financial Statements for additional information.
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 1996 the Registrant maintained workforce levels approximately
the same as the levels of fiscal year 1995. In addition, the Registrant paid
royalties due to Dr. Adair for fiscal year 1996 by issuing an option to him in
lieu of cash. Although there was no cash outlay required for the payment of
royalties incurred during fiscal 1996, proper accounting treatment under FAS 123
required that an expense recognition for the fair value of the option be
recorded in the Registrant's books. The Registrant has recorded $120,000 of
non-cash expense under this rule.
Without significant sales increases, the Registrant anticipates negative
cash flow from operating activities for fiscal 1997 and beyond. The Registrant's
future viability depends on its ability to generate cash through profitable
operations. During fiscal 1996 cash flow deficits were funded by employee,
officer, and consultant stock option exercises (raising $611,700 during the
fiscal year), equity placements during fiscal 1994, and in previous fiscal years
through loans from the Registrant's Chairman. However, the Registrant's ability
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<PAGE>
to fund its operations will be dependant upon achieving profitability and in
generating 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 1998. There can be no
assurance that the Registrant will be able to achieve this goal. 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
medical products use patents licensed to the Company by the Chairman. The
Registrant's new dental camera is not made under license agreements from the
Company Chairman. See item 12 - Certain Relationships and Related Transactions,
"Distribution Agreement."
The Registrant believes that its existing capital resources are sufficient
for the 1997 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. (Fiscal 1996 as compared to Fiscal 1995) 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, 1996, and 1995 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
1996 1995 Revenue/Expense Items FYE 1995 to FYE 1996
---- ---- --------------------- ---------------------
<S> <C> <C> <C>
100.0% 100.0% Net sales (44.1%)
97.7% 84.7% Cost of goods sold (35.6%)
2.3% 15.2% Gross profit (91.5%)
15.4% 7.1% Other operating revenue 21.4%
131.5% 91.7% Selling general and (19.8%)
administrative
60.7% 0.0% Fair value of common n/a
stock options
-20-
<PAGE>
As a percent of total
revenue for the years Percentage
ended September 30, change from
1996 1995 Revenue/Expense Items FYE 1995 to FYE 1996
---- ---- --------------------- ---------------------
31.0% 19.1% Research and Dev. (9.3%)
31.0% 22.5% Depreciation 22.7%
18.0% 10.0% Royalties 0.0%
13.0% 8.4% Obsolete Inventory 12.7%
0.0% 6.1% Patent Loss n/a
(267.6%) (135.4%) Operating loss (10.4%)
6.7% 11.2% Other income/(expense) (66.4%)
(260.8%) (124.2%) Net income (loss) (17.4%)
</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, 1996 and
1995.
1996 1995
---- ----
Liquidity
Current ratio 4.67 7.22
Current ratio less inventory 3.85 4.54
Activity
Trade receivables turnover 3.68 2.81
Inventory turnover .94 1.15
Profitability
Return on assets (77.9%) (40.9%)
Return on equity (86.8%) (45.4%)
Return on sales (260.8%) (124.2%)
Revenue. Revenue decreased $527,400, or 44.1% primarily as a result of a
decrease in sales in substantially all product groups, including the following:
catheters & accessories by $39,300, general accessories by $245,900, a decrease
in combined Cam Wrap and Lap Wrap sales by $28,200, a decrease in EVL model 5500
sales by $184,200, and a decrease in the model 5990 sales by $38,000. This sales
decrease was due primarily to a lack of market acceptance for the Registrant's
medical products, a decrease in capital budget expenditures in hospitals coupled
with less influence over purchasing decisions by physicians, reduced marketing
efforts by the Registrant, and increased competition from other manufacturers of
surgical cameras. The Registrant is taking steps to introduce products in the
fiscal 1997 time frame that address the combined issues of cost and sterility
that plague the cost driven hospital market, although no assurances of the
success of that strategy can be given.
OEM sales decreased during fiscal 1996 to $46,800 from $132,900 during
fiscal year end 1995. This decrease was due primarily to a continued reduction
and final termination of shipments to Endosurgical Development Company (EDC).
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<PAGE>
Foreign market sales revenues totaled $235,400 for fiscal 1996. The
Registrant has experienced a slowdown in the foreign marketplace, primarily due
to reduced shipments to Central and South America through Rosot Enterprises, but
still remains optimistic regarding expansion of the foreign distribution network
in fiscal 1997 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 1996 and
1995 were $652,300 and $1,012,400 respectively, for a decrease of $360,100 or
35.6%. Cost of goods sold as a percent of revenue increased to 97.7% for fiscal
1996 from 84.7% in Fiscal 1995. 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 in fiscal 1996 is attributed to lower
production volumes and charging excess manufacturing capacity to cost of goods
sold. Underabsorbed overhead variances will continue to adversely affect cost of
goods sold as a percentage of revenues during fiscal 1997 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 1996 and 1995 were $878,300 and $1,095,800, respectively, for a
decrease of $217,500 or 19.8%. The decrease is primarily due to the continued
effectiveness during fiscal 1996 of cost cutting measures instituted by
management, 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.
Research and Development Costs (R&D). R&D costs for the fiscal years ended
1996 and 1995 were $206,900 and $228,100, respectively, for a decrease of
$21,200 or 9.3%. The decrease is primarily attributable to the Registrant
focusing it's R&D efforts on the intraoral dental camera and reduced allocations
of R&D funds to other projects throughout the fiscal year. The Registrant will
continue to fund R&D as it deems appropriate to maintain or gain a competitive
advantage.
Recent Accounting Standards
In March, 1995, the Financial Accounting Standards Board issued a new
statement entitled "Accounting for Impairment of Long-Lived Assets." This new
standard is effective for years beginning after December 15, 1995 and will
change the Company's method of determining impairment of long-lived assets.
Although the Company has not performed a detailed analysis of the impact of this
new standard on the Company's financial statements, the Company does not believe
that adoption of the new standard will have a material effect on the financial
statements.
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<PAGE>
In October, 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS 123). FAS 123
encourages, but does not require, companies to recognize compensation expense
for grants of stock, stock options, and other equity instruments to employees
based on fair value. Companies that do not adopt the fair value accounting rules
must disclose the impact of adopting the new method in the notes to the
financial statements. The Company does not intend to adopt the fair value
accounting prescribed by FAS 123, and will be subject to the disclosure
requirements prescribed by FAS 123 beginning with the fiscal year ending
September 30, 1997.
Effect of Changing Prices and Inflation
Generally, inflation has not been a significant factor on the Registrant's
operations.
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<PAGE>
Item 7. Financial Statements.
The following consolidated financial statements are filed as a part of this
Form 10-KSB and are included immediately following the signature page.
Reports of Independent Certified Public Accountants
Consolidated Balance Sheets - September 30, 1996 and 1995
Consolidated Statements of Operations - Years ended September
30, 1996 and 1995
Consolidated Statements of Stockholders' Equity - Years ended
September 30, 1996 and 1995
Consolidated Statements of Cash Flows - Years ended
September 30, 1996 and 1995
Notes to Consolidated Financial Statements
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<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
On September 5, 1996 the board of directors of Medical Dynamics, Inc. (the
"Registrant") approved the engagement of Hein + Associates, LLP, of Denver,
Colorado, to audit and report on the Registrant's financial statements for the
year ended September 30, 1996.
On such date, the board of directors also approved the dismissal of
McGladrey & Pullen, LLP, of Denver, Colorado as the Company's previous auditors.
The reports of McGladrey & Pullen, LLP on the Company's financial
statements as of September 30, 1995, and for the year then ended contained an
explanatory paragraph as to the ability of the Registrant to continue as a going
concern. Such reports for the last two years contained no other adverse opinion
or disclaimer of an opinion. None of such reports were qualified or modified as
to uncertainty, audit scope, or accounting principles.
During the Registrant's two most recent fiscal years and subsequent interim
periods through the date of dismissal of McGladrey & Pullen, LLP, there were no
disagreements with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of McGladrey
and Pullen, LLP, would have caused it to make reference to the subject matter of
the disagreement in connection with its report.
The Registrant has provided the former accountant, McGladrey & Pullen, LLP,
with a copy of the foregoing disclosures. A letter, addressed to the Commission,
by the former accountants stating that it agrees with the above statements made
by the Registrant is attached hereto as an exhibit.
During the two most recent fiscal years and the subsequent interim period
preceding McGladrey & Pullen, LLP's dismissal, the Registrant was not advised by
McGladrey & Pullen, LLP that internal controls necessary for the Registrant to
develop reliable financial statements do not exist nor that information has come
to its attention that led it to no longer be able to rely on management's
representations or that has made it unwilling to be associated with the
financial statements prepared by management. The Registrant has not been advised
by McGladrey & Pullen, LLP of the need to expand significantly the scope of the
Registrant's audit, nor has the Registrant been advised that during the two most
recent fiscal years and the subsequent interim periods preceding its dismissal,
information has come to the attention of McGladrey & Pullen, LLP that if
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<PAGE>
investigated may (i) materially impact the fairness or reliability of either a
previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal periods
subsequent to the date of the most recent financial statements covered by an
audit report (September 30, 1995), or (ii) cause McGladrey & Pullen, LLP to be
unwilling to rely on management's representations or be associated with the
Registrant's financial statements.
The Registrant has not been advised by McGladrey & Pullen, LLP that
information has come to its attention that it has concluded materially impacts
the fairness or reliability of either (i) a previously issued audit report or
the underlying financial statements or (ii) the financial statements issued or
to be issued covering the fiscal periods subsequent to September 30, 1995.
No consultations occurred between the Registrant and Hein + Associates, LLP
during the two most recent fiscal years and any subsequent periods prior to Hein
+ Associates, LLP's appointment, regarding the application of accounting
principles, the type of audit opinion, or other information considered by the
Registrant in reaching a decision as to any accounting, auditing, or financial
reporting issue.
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<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) 66 Chairman of the Board and Treasurer
Van A. Horsley 44 Director, President, Chief Financial
Officer and Chief Executive Officer
Pat Horsley Adair (1) 68 Director and Secretary
I. Dean Bayne, M.D. 69 Director and Assistant Secretary
Leroy Bilanich 46 Director
Jo Brehm 60 Vice President
- --------------
(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 prac
ticed 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
currently carries a $100,000 key man life insurance policy on Dr. Adair, reduced
from $1,100,000 as a cost savings measure during fiscal 1996.
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, 1990,
Mr. Horsley was employed in various capacities by Affiliated Denver National
Bank in Denver, Colorado and from 1985 through February, 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 Founda tion 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. 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.
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<PAGE>
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.
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<PAGE>
(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, 1995 through January 14, 1997 all filing requirements applicable to
its officers, directors and greater than ten-percent shareholders were complied
with except as follows:
Dr. and Mrs. Adair, chairman and secretary of the Registrant, filed a form
4 reporting an event which occurred in October, 1996 late. This report was filed
on November 12, 1996.
I. Dean Bayne, director of the Registrant, filed two form 4's late,
reporting an event which occurred in each of the months July and August, 1996,
in October, 1996.
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<PAGE>
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 five years ending
September 30, 1996. 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 1996 105,000 -0- 925 -0- 37,174* -0- 260
President and 1995 105,000 -0- 925 -0- 40,900 -0- 559
Chief Executive 1994 105,000 -0- 925 -0- 50,000 -0- 559
Officer
</TABLE>
* Does not include options to acquire 150,000 shares exercisable at prices
ranging from $2.75 to $3.75 per share which vest based upon defined
performance goals.
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 con tribute a portion of compensation and earnings,
respectively, to investment funds to supplement employee retirement benefits. At
September 30, 1996, the Registrant's matching contributions to the plan for the
accounts of Van Horsley and Jo Brehm totalled approximately $438 and the
matching contribution under the plan for the accounts of all executive officers
as a group totalled $438. 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.
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<PAGE>
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 $100,000 during
1996. No stock appreciation rights were granted.
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<PAGE>
<TABLE>
<CAPTION>
Option Grants in Fiscal 1996
(a) (b) (c) (d) (e)
% of Total
Options Granted Exercise or
Options to Empl. / Cons. in Base Price Expiration
Name Granted (#) Fiscal Year ($/sh) Date
- ---- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Van A. Horsley 37,174 3.0% $1.375 Apr. 18, 2001
Van A. Horsley* 50,000 4.0% $2.00 Sep. 05, 2001
</TABLE>
* Does not include options to acquire 150,000 shares exercisable at prices
ranging from $2.75 to $3.75 per share which vest based upon defined
performance goals.
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 1996 fiscal year as well as the year-end value of options being held
by such persons on September 30, 1996: 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- $ 0 224,638 / 0 $553,037 / 0
Edwin L. Adair 104,000 $160,225 360,000 / 0 $450,000 / 0
Pat H. Adair 23,600 $ 61,950 0 / 0 $ 0 / 0
I. Dean Bayne 20,000 $ 40,000 20,000 / 0 $ 5,000 / 0
Leroy Bilanich 20,000 $ 67,880 20,000 / 0 $ 55,000 / 0
Jo Brehm 14,800 $ 34,040 50,000 / 0 $156,000 / 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.
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<PAGE>
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. All
these options were exercised during the fiscal year ended September, 1996.
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, $600,000 has been paid and $0 has been accrued to Dr. Adair
through the end of fiscal 1996. The Registrant is required to pay Dr. Adair
minimum annual royalties of $120,000. 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. A non-cash expense was recorded for the issuance of this
option per the requirements of FASB 123. See Consolidated Notes to the Financial
Statements No. 4 for additional information. 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.
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<PAGE>
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. During fiscal 1996 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, 1996, 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, 1996 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.
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<PAGE>
Shares owned Percent
Name of beneficial owner beneficially (1) of class
- ------------------------ ---------------- --------
Edwin L. Adair, M.D. 1,239,298 (2) 15.9%
and Pat Horsley Adair
317 Paragon Way
Castle Pines Village
Colorado 80104
I. Dean Bayne, M.D. 20,000 0.3%
Van Horsley 303,858 (3) 3.9%
Leroy Bilanich, Ed.D. 20,000 0.3%
All officers and 1,643,156 (4) 21.1%
directors as a
group (6 persons)
- ---------
(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 240,000 stock options issued to the Chairman of which all are
presently exercisable. Also includes 120,000 options issued to Dr. Adair in
December, 1995 in consideration for cancellation of fiscal 1996 royalty
payments due him totaling $120,000, also presently exercisable.
(3) Includes 224,638 shares under presently exercisable stock options. Does not
include options to acquire 150,000 shares exercisable at prices ranging
from $2.75 to $3.75 per share which vest based upon defined performance
goals.
(4) Includes shares referenced in notes (2) through (3) and 60,000 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.
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<PAGE>
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/Veress(TM) 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 $600,000 as specified under the agreement.
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<PAGE>
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 continua tion 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
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<PAGE>
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:
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<PAGE>
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
Catheter(TM) technology (including the fluorescence detection system);
the Adair-Veress needle(TM), the technology associated with the
Electronic Video Laparoscope(TM), and Lap-Wrap(TM). 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
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<PAGE>
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 System(TM) ("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. There are no minimum
performance requirements under the distribution agreement, and MEDY need only
purchase products it has already sold to third parties.
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<PAGE>
As a condition of the distribution agreement, however, MEDY agreed during
fiscal 1995 to loan MMD up to $120,000 pursuant to a promissory note signed by
MMD. The note was collateralized by the amounts due Dr. Adair under the restated
license agreement as the sole shareholder of MMD, and he had pledged all amounts
due to him under the restated license agreement as collateral for this
guarantee. MEDY was accruing these amounts payable to Dr. Adair without
interest. MEDY was 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 earned interest at a rate of 1% over the
current prime rate per annum. Furthermore, the distribution agreement provided
that MEDY could credit 100% of the purchase price of any products purchased from
MMD under the distribution agreement against any amounts due under the
promissory note. At September 30, 1995 MMD had owed the Registrant $110,000
under the terms of the note, plus accrued interest. This amount was paid in full
during February, 1996. The September 30, 1996 balance owed MEDY by MMD was $-0-.
See note 4. to the consolidated 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.
Other Related Party Transactions.
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 Brush(TM)
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 Brush(TM), less certain expenses. As
of September 30, 1996, 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 other
compensation from the registrant in addition to their salaries.
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<PAGE>
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
Regis trant'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 is a complete list of exhibits filed as part of 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
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<PAGE>
Exhibit
Number Description
------ -----------
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
21.1 Subsidiaries of the Registrant: MedPacific
Corporation, a Washington corporation
23.1* Consent of McGladrey & Pullen, LLP
23.2 Consent of Hein + Associates, LLP
* Filed herewith.
(a) Incorporated by reference from Registration
Statement on Form S-1, SEC File No. 2-82856.
-43-
<PAGE>
Exhibit
Number Description
------ -----------
(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.
-44-
<PAGE>
(b) Reports on Form 8-K
During the period covered by this Report up to January 14, 1997, the
Company filed the following reports on Form 8-K:
September 30, 1996, reporting an event under Item 5 - Other Events, filed
on October 15, 1996.
September 5, 1996, reporting an event under Item 4 - Changes In Registrants
Certifying Accountant, filed on September 11, 1996.
April 17, 1996, reporting an event under Item 5 - Other Events, filed
on July 12, 1996.
-45-
<PAGE>
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 14, 1997
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 14, 1997 /s/ Van A. Horsley
----------------------------------------------
Van A. Horsley, Principal
Executive Officer, Principal
Financial Officer, and Director
January 14, 1997 /s/ Edwin L. Adair
----------------------------------------------
Edwin L. Adair, M.D., Chairman
of the Board and Director
January 14, 1997 /s/ I. Dean Bayne
----------------------------------------------
I. Dean Bayne, M.D., Director
January 14, 1997 /s/ Pat Horsley Adair
----------------------------------------------
Pat Horsley Adair, Director
January 14, 1997 /s/ Leroy Bilanich
----------------------------------------------
Leroy Bilanich, Director
-46-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Reports.......................................... F-2
Consolidated Balance Sheets - September 30, 1996 and 1995.............. F-4
Consolidated Statements of Operations - For the Years Ended
September 30, 1996 and 1995.......................................... F-5
Consolidated Statements of Stockholders' Equity - For the Years Ended
September 30, 1996 and 1995.......................................... F-6
Consolidated Statements of Cash Flows - For the Years Ended
September 30, 1996 and 1995.......................................... F-7
Notes to Consolidated Financial Statements............................. F-8
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Medical Dynamics, Inc.
Englewood, Colorado
We have audited the accompanying consolidated balance sheet of Medical Dynamics,
Inc. and subsidiary (the "Company") as of September 30, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1996, and the results of their
operations and their cash flows for the year 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 2 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 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Denver, Colorado
December 6, 1996
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Medical Dynamics, Inc. and Subsidiary
Englewood, Colorado
We have audited the accompanying consolidated balance sheet of Medical Dynamics,
Inc. and its wholly-owned subsidiary, MedPacific Corporation (the "Company"), as
of September 30, 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 the results of their
operations and their cash flows for the year 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 2 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 2. 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
F-3
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1995
------------ -------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 993,200 $ 1,071,700
Note receivable - related party -- 110,000
Trade receivables, less allowance for
doubtful accounts of $25,000
and $45,000, respectively 181,600 391,600
Inventories 264,400 948,500
Prepaid expenses and other 19,400 35,100
------------ ------------
Total current assets 1,458,600 2,556,900
------------ ------------
PROPERTY AND EQUIPMENT:
Demonstration and loaner equipment 853,800 678,100
Machinery and equipment 266,800 343,100
Furniture and fixtures 266,700 270,200
Leasehold improvements 54,500 54,500
------------ ------------
1,441,800 1,345,900
Less accumulated depreciation and amortization (1,225,300) (1,202,000)
------------ ------------
Property and equipment, net 216,500 143,900
OTHER ASSETS: ------------ ------------
Inventories 450,000 --
Patents, patents pending, and trademarks, net
of accumulated amortization of $681,400 and $609,400,
respectively 96,700 155,500
Other 14,900 29,400
------------ ------------
Total other assets 561,600 184,900
------------ ------------
TOTAL ASSETS $ 2,236,700 $ 2,885,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 217,900 $ 188,400
Accrued expenses 77,500 50,900
Warranty reserve 15,000 25,000
Accrued royalties - related party -- 90,000
------------ ------------
Total current liabilities 310,400 354,300
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 5, and 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.001 par value; authorized
15,000,000 shares, issued 7,180,200 and
6,895,400 shares, respectively 7,200 6,900
Additional paid-in capital 17,721,900 16,585,500
Accumulated deficit (15,723,500) (13,981,700)
------------ ------------
2,005,600 2,610,700
Treasury stock, at cost, 15,900 shares (79,300) (79,300)
------------ ------------
Total stockholders' equity 1,926,300 2,531,400
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,236,700 $ 2,885,700
============ ============
See accompanying notes to these consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
NET SALES $ 667,800 $ 1,195,200
COST OF GOODS SOLD, including under
applied overhead of $281,300 and $155,500, respectively 652,300 1,012,400
----------- -----------
GROSS PROFIT 15,500 182,800
----------- -----------
OTHER OPERATING REVENUE 102,800 84,700
----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 878,300 1,095,800
Fair value of common stock options
granted for compensation and other services
405,000 --
Research and development 206,900 228,100
Depreciation and amortization 207,600 268,600
Royalties - related party 120,000 120,000
Provision for obsolete and slow-moving inventory 87,300 100,000
Loss from patents transferred to related party -- 73,000
----------- -----------
Total operating expenses 1,905,100 1,885,500
----------- -----------
OPERATING LOSS (1,786,800) (1,618,000)
----------- -----------
OTHER INCOME (EXPENSE):
Gain on sale of loaner and demonstration equipment 7,400 51,200
Interest income 39,000 82,900
Interest expense (1,400) (100)
----------- -----------
Total other income 45,000 134,000
----------- -----------
NET LOSS $(1,741,800) $(1,484,000)
=========== ===========
NET LOSS PER SHARE $ (.25) $ (.22)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,898,300 6,879,500
=========== ===========
See accompanying notes to these consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------------- PAID-IN ACCUMULATED --------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
---------- --------- ------------ ------------ ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1994 6,885,400 $ 6,900 $ 16,575,500 $(12,497,700) 15,900 $ (79,300) $ 4,005,400
Common stock issued to
purchase equipment 10,000 -- 10,000 -- -- -- 10,000
Net loss -- -- -- (1,484,000) -- -- (1,484,000)
---------- --------- ------------ ------------ ------- ---------- -----------
BALANCE, September 30, 1995 6,895,400 6,900 16,585,500 (13,981,700) 15,900 (79,300) 2,531,400
Exercise of options to
purchase common stock 284,800 300 611,400 -- -- -- 611,700
Fair value of common stock
options granted for:
Royalty obligation -- -- 120,000 -- -- -- 120,000
Employee compensation -- -- 271,400 -- -- -- 271,400
Marketing arrangements -- -- 78,500 -- -- -- 78,500
Other services -- -- 55,100 -- -- -- 55,100
Net loss -- -- -- (1,741,800) -- -- (1,741,800)
--------- --------- ------------ ----------- -------- ---------- ----------
BALANCE, September 30, 1996 7,180,200 $ 7,200 $ 17,721,900 $(15,723,500) 15,900 $ (79,300) 1,926,300
========= ========= ============ ============ ======== ========== ==========
See accompanying notes to these consolidated financial statements.
F-6
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
----------- -----------
Net loss $(1,741,800) $(1,484,000)
Adjustments to reconcile net loss to net cash
used ub operating activities:
Fair value of common stock options
granted for:
Royalty obligation 120,000 -
Compensation and other services 405,000 -
Depreciation 130,400 165,400
Amortization 77,200 103,200
Provision for obsolete inventory 87,300 100,000
Decrease in warranty reserve (10,000) (25,000)
Gain on sale of loaner equipment (7,400) (51,200)
Loss on disposal of patents - 76,700
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade receivables 170,000 66,200
Inventories (1,700) (79,900)
Prepaid expenses 15,700 9,200
Increase (decrease) in:
Accounts payable 29,500 26,500
Accrued expenses 26,600 (9,300)
Accrued royalties (90,000) -
---------- --------
Net cash used in operating activities (789,200) (1,102,200)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of demonstration
and loaner equipment 7,400 52,600
Proceeds from maturity of certificate of deposit - 25,000
Proceeds from sale of investments - 985,500
Advances on note receivable - related party - (110,000)
Collections on note receivable - related party 110,000 -
Additions to patents (18,400) (22,100)
Purchase of property and equipment (14,500) (12,000)
Purchase of certificate of deposit - (10,000)
Reductions in deposits and cash surrender
value of life insurance 14,500 113,300
---------- ----------
Net cash provided by investing activities 99,000 1,022,300
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from exercise of options to
purchase common stock 611,700 -
---------- ----------
NET DECREASE IN CASH AND EQUIVALENTS (78,500) (79,900)
CASH AND EQUIVALENTS, beginning of year 1,071,700 1,151,600
---------- ----------
CASH AND EQUIVALENTS, end of year $ 993,200 $1,071,700
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid for interest $ 1,400 $ 100
========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Net demonstration and loaner
equipment transfers from inventory $ 148,500 $ 15,700
========== =========
Common stock issued to purchase equipment $ - $ 10,000
========== =========
See accompanying notes to these consolidated financial statements.
F-7
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
- -----------------------------------
Nature of Business Operations - Medical Dynamics, Inc. (the "Company") is
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 30 days, though some extended terms are offered on foreign
sales, to match terms normally offered in certain countries. The Company
markets its products primarily through a group of sales representatives and
distributors.
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.
MedPacific Corporation is an inactive corporation, and there was no
activity during the years ended September 30, 1996 and 1995.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying
notes. The actual results could differ from those estimates.
The Company's consolidated financial statements are based on a number of
estimates, including the allowance for doubtful accounts, the provision for
obsolete and slow-moving inventory, the selection of estimated useful lives
of property and equipment, realization of long-lived assets, and
assumptions affecting the valuation of stock options granted to
non-employees. It is reasonably possible that estimates affecting the
provision for obsolete and slow-moving inventory and realization of
long-lived assets will change in the forthcoming year and such revisions
could be material.
Cash Equivalents - For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
At September 30, 1996 and 1995, cash equivalents include a mutual fund that
invests in money market instruments.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed principally by the straight-line method over the
following estimated useful lives:
Years
------
Demonstration and loaner equipment 3
Machinery and equipment 3 - 10
Furniture and fixtures 3 - 10
F-8
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Leasehold improvements are amortized over the lesser of the life of the
lease or the estimated useful life of the improvement.
Patents and Trademarks - Patents and trademarks are stated at cost and are
amortized over their estimated economic lives of three to ten years. In the
event patents pending are not granted, the related costs are 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
estimated net cash flows.
Impairment of Long-Lived Assets - Management periodically assesses the
Company's long-lived assets for impairment. If it is determined that the
carrying value exceeds the estimated fair value of the assets, then a
charge to operations will be recognized if the deficiency is considered to
be other than temporary.
Warranty Reserve - The Company provides a warranty against defects in
materials and workmanship, generally for a period between one month and one
year following the date of sale of the equipment. Estimated future costs of
product warranties are included in current liabilities in the accompanying
balance sheets.
Research and Development - Research and development costs are charged to
operations in the period incurred.
Net Loss Per Share - Net loss per common share is calculated by dividing
the net loss by the weighted average number of shares of common stock
outstanding during each fiscal year. Common stock equivalents were
anti-dilutive for fiscal 1996 and 1995 and were excluded from the
computation.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted
tax rates.
Revenue Recognition - The Company recognizes sales when finished goods are
shipped to a customer.
Fair Value of Financial Instruments - Management estimates that the fair
value of cash equivalents, accounts payable, and accrued expenses is
approximately equal to carrying value due to the relatively short maturity
for these instruments. Management estimates that the carrying value of
accounts receivable is in excess of fair value by approximately $10,000 due
to delayed payment terms for some of the receivables.
Impact of Recently Issued Accounting Standards - In March 1995, the
Financial Accounting Standards Board issued a new statement titled
"Accounting for Impairment of Long-Lived Assets." This new standard is
effective for years beginning after December 15, 1995 and will change the
Company's method of determining impairment of long-lived assets. Although
the Company has not performed a detailed analysis of the impact of this new
standard on the Company's financial statements, the Company does not
believe that adoption of the new standard will have a material effect on
the financial statements.
F-9
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of
the quoted market price of the Company's common stock at the measurement
date (generally, the date of grant) over the amount an employee must pay to
acquire the stock.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS 123). FAS
123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on fair value. Companies that do not adopt the fair value
accounting rules must disclose the impact of adopting the new method in the
notes to the financial statements. The Company does not intend to adopt the
fair value accounting prescribed by FAS 123, and will be subject to the
disclosure requirements prescribed by FAS 123 beginning with the fiscal
year ending September 30, 1997.
FAS 123 also prescribes accounting requirements for options, warrants, and
similar instruments which are granted to non-employees after December 15,
1995, and requires that all such instruments be recorded at fair value on
the grant date. Fair value is generally determined under an option pricing
model using the criteria set forth in FAS 123.
Reclassifications - Certain amounts in the 1995 financial statements have
been reclassified to conform with the 1996 presentation. These
reclassifications had no effect on the 1995 net loss.
2. BASIS OF PRESENTATION:
- -------------------------
The accompanying financial statements have been presented on the going
concern basis, which contemplates the realization of assets and liquidation
of liabilities in the normal course of business. The Company has incurred
continued substantial operating losses, negative cash flows from operations
and has experienced difficulty obtaining U.S. Food and Drug Administration
(FDA) approval for new products. 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.
F-10
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 new
products to medical and dental 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 sufficient 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.
3. INVENTORIES:
- ---------------
Inventories consist of the following at September 30, 1996 and 1995:
September 30,
-----------------------------
1996 1995
---------- ----------
Raw materials and replacement parts $ 444,600 $ 466,100
Finished goods 479,800 656,400
Work in process -- 26,000
---------- ----------
Total inventory 924,400 1,148,500
Less provision for obsolete and
slow-moving inventory (210,000) (200,000)
---------- ----------
Net inventories $ 714,400 $ 948,500
========== ==========
At September 30, 1996, inventories of $450,000 are classified as a
long-term asset in the accompanying balance sheet. This estimate was
determined by considering both historical and projected levels of sales for
goods included in inventories. A substantial portion of raw materials is
expected to be utilized for repairs of equipment sold over the past several
years. Management believes that it may take up to five years to fully
utilize this portion of the Company's inventories based upon current levels
of repairs and expected production levels of new products.
Due to the declining level of production for the company's medical video
cameras, the Company incurred under applied overhead costs of approximately
$281,300 and $155,500 for the years ended September 30, 1996 and 1995,
respectively. These amounts are included in cost of goods sold in the
accompanying statements of operations.
F-11
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RELATED PARTY TRANSACTIONS AND COMMITMENTS:
- ----------------------------------------------
License Agreement - 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 agreed to pay royalties based on the
greater of 2% of sales of products which relate to this technology or the
minimum annual royalties as described below. For the years ended September
30, 1996 and 1995 the Company incurred $120,000 in royalty expense of which
$90,000 remained unpaid at September 30, 1995. 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 acquirer 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 the
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 the year ended September 30, 1995,
approximately $62,000 of patents were written off when the rights reverted
back to the Chairman under this provision. No patents reverted back to the
chairman during the year ended September 30, 1996.
In a related transaction, during the year ended September 30, 1995, the
Company transferred to an entity owned by the Chairman the rights 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
expires in June 2000. The Company purchased approximately $25,000 of
products under the agreement through September 30, 1996. The $25,000 was
included in accounts payable at September 30, 1995. There have been no
significant sales of the products purchased under the agreement.
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
$1.00 per share. The Company recorded $120,000 of royalty expense as a
result of this transaction.
Note Receivable - Note receivable - related party consists of a note due
from an entity owned by the Company's Chairman (the "Chairman"). The note
was due January 15, 1996 and provided for interest at prime plus 1% (8.75%
at September 30, 1995). The note was collateralized by all amounts due or
which may become due to the Chairman under the license agreement discussed
above. In February 1996, the note was repaid.
F-12
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Officers Life Insurance Arrangements - In August, 1990, the Company
purchased a $1,000,000 convertible term key-man life insurance policy on
its Chairman. During the year ended September 30, 1996, 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
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, $13,000 of cash surrender value was
recorded. During the year ended September 30, 1996, the Company terminated
this plan due to cost cutting measures.
5. STOCK OPTIONS:
- -----------------
Stock Option Plan - The Company has a stock option plan under which
incentive and non-qualified stock options may be granted to officers,
directors, employees, and consultants. Incentive stock options are required
to have an exercise price which is not less than the fair market value of
the stock at the date of grant. The Company's Board of Directors approved
the plan on July 14, 1988 and a majority of the Company's stockholders
approved the plan in October 1988. The maximum term is ten years for
options granted under the plan. 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 years ended September 30, 1996 and 1995 is as
follows:
Weighted
Average
Number of Exercise Price
Shares Per Share
---------- --------------
Outstanding, October 1, 1994 159,800 $ 2.47
Granted - -
Exercised - -
Expired (26,700) 1.33
---------- --------
Outstanding, September 30, 1995 133,100 2.69
Granted 94,300 1.49
Exercised (30,000) 1.73
Expired (94,300) 2.52
---------- --------
Outstanding, September 30, 1996 103,100 $ 2.02
========== ========
F-13
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For options granted during the year ended September 30, 1996, the weighted
average fair value of the Company's common stock was $2.38 on the grant
date. Options available for future grant at September 30, 1996 totaled
138,000 shares.
If not previously exercised, options outstanding at September 30, 1996,
will expire as follows:
Number of Exercise
Year Ending September 30: Shares Price
------------------------- --------- --------
1997 23,800 $ 3.88
1998 15,000 1.88
2001 64,300 1.38
-------
103,100
=======
Non-Qualified Stock Options - The Company has also granted non-qualified
stock options to officers, directors, employees, and consultants. The
following is a summary of activity during the years ended September 30,
1996 and 1995.
<TABLE>
<CAPTION>
Weighted
Number Average
of Exercise Price Expense
Shares Per share Recognized
-------- -------------- ----------
<S> <C> <C> <C>
Outstanding and vested, October 1, 1994 781,900 $ 3.00 $ -
Vested options granted to officers,
directors, employees and consultants 216,200 1.50 -
-------- --------- --------
Outstanding and vested, September 30, 1995 998,100 2.68 -
Vested options granted to:
Employees and officer 84,300 1.45 51,100
Director for royalty obligation
(Note 4) 120,000 1.00 120,000
Consultants 98,800 2.56 55,000
Performance options granted to:
Employees 200,000 2.88 73,400
Officers and directors 260,000 2.88 146,900
Marketing consultants 735,000 3.03 78,600
Vested options expired due to:
Repricing (77,100) 4.20 -
End of term (94,300) 2.52 -
Vested options exercised by:
Directors (167,600) 2.39 -
Employees and consultants (37,200) 1.57 -
Marketing consultants (50,000) 2.00 -
--------- --------- ---------
Outstanding, September 30, 1996 2,070,000 $ 2.74 $ 525,000
========= ========= =========
F-14
</TABLE>
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 1996, a total of 1,110,000 non-qualified stock options are
vested. If not previously exercised, these options expire as follows:
Number of Exercise
Year Ending September 30: Shares Price
------------------------- --------- ---------
1997 4,000 $ 1.91
1998 100,000 1.13
1999 12,000 2.75
2000 120,000 1.00
2000 78,100 1.50
2001 190,000 2.00
2003 120,000 1.50
2003 225,900 2.75
2003 260,000 4.00
---------
1,110,000
=========
At September 30, 1996, unvested employee performance options were
outstanding for 385,000 shares, and unvested non-employee options were
outstanding for 575,000 shares. If not previously vested and exercised,
these options all expire during the year ending September 30, 2001. The
following is a summary of key vesting provisions and exercise prices for
performance options granted to employees:
Number of Exercise
Performance Condition Shares Price
--------------------- --------- --------
Cumulative revenue for the Company
from the sale of dental products
exceeds:
$1,000,000 75,000 $ 2.75
$4,000,000 75,000 3.00
$9,000,000 75,000 3.75
Annual revenue for the Company from
the sale of medical products exceeds:
$2,000,000 40,000 2.00
$3,000,000 40,000 2.75
$4,000,000 40,000 3.00
$5,000,000 40,000 3.75
-------
385,000
=======
The amount of compensation expense related to the employee performance
options will be determined based on market value of the Company's common
stock on the date that the options vest.
F-15
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of key vesting provisions for performance
options granted to non-employees along with the deferred expense that will
be recognized over the period in which vesting occurs:
<TABLE>
<CAPTION>
Number of Exercise Deferred
Shares Price Expense
--------- -------- --------
<S> <C> <C> <C>
Cumulative sales of dental products
attributable to marketing
consultants individually exceeds:
$1,000,000 150,000 2.75 $ 91,000
$4,000,000 150,000 3.00 116,000
$9,000,000 150,000 3.75 127,000
Cumulative purchases of dental
products by option holder
exceeds:
$1,000,000 25,000 3.00 34,000
$3,000,000 25,000 3.25 44,000
$5,000,000 25,000 3.50 50,000
$7,000,000 50,000 4.00 110,000
-------- --------
575,000 $572,000
======== ========
</TABLE>
The common stock option granted to the director in satisfaction of the
royalty obligation was valued based upon the $120,000 contractual payment
in the license agreement. Fair value for all other stock options granted to
non-employees during the year ended September 30, 1996, was determined
using an option pricing model. Significant assumptions included a risk-free
interest rate of 6.7%, expected volatility of 90%, and that no dividends
would be declared during the expected term of the options. The weighted
average contractual term of the options was approximately five years
compared to a weighted average expected term of 2.7 years.
For non-qualified stock options granted to consultants during the year
ended September 30, 1996, the weighted average fair value of the Company's
common stock on the grant date was $1.63 for 610,000 shares of performance
options, $3.38 for 125,000 shares of performance options, and $2.01 for
98,800 shares of vested options.
In addition to the performance options granted to marketing consultants,
the Company has entered into agreements with two of the consultants that
provide for payment of commissions for the sale of each dental camera which
is attributable to the consultant, provided that certain gross margin
requirements are met. The consulting agreements expire in October 1999.
F-16
<PAGE>
6. INCOME TAXES:
- ----------------
The amounts which give rise to the net deferred tax asset at September 30,
1996 and 1995, are as follows:
1996 1995
--------- ---------
CURRENT ASSETS:
Allowance for doubtful accounts $ 9,300 $ 16,700
Inventory allowance -- 74,000
Accrued expenses 13,800 12,300
--------- ---------
Total current assets 23,100 103,000
--------- ---------
LONG-TERM ASSETS (LIABILITIES):
Property and equipment 45,900 49,500
Patents, patents pending, and trademarks (18,000) (1,000)
Inventory allowance 78,300 --
Compensation related to stock options 171,800 --
Net operating loss carryforwards 6,080,000 5,365,000
Research and development tax credits
carryforwards 170,000 188,000
--------- ---------
Net long-term assets 6,528,000 5,601,500
--------- ---------
NET DEFERRED TAX ASSET 6,551,100 5,704,500
VALUATION ALLOWANCE (6,551,100) (5,704,500)
---------- ---------
$ -- $ --
========== ===========
At September 30, 1996, the Company has approximately $16,300,000 of net
operating loss carryforwards, and approximately $170,000 of research and
development tax credits, both of which expire in varying amounts from 1997
through 2011.
For the years ended September 30, 1996 and 1995, the Company's effective
tax rate was -0-% because there was a net loss for book and tax purposes
without regard to prior year temporary differences.
The Company's management has determined that a valuation allowance equal to
the deferred tax assets is required since it is more likely than not that
the benefits of these assets will not be realized. The increase in the
valuation allowance of approximately $850,000 and $500,000 during the years
ended September 30, 1996 and 1995, respectively, was due to the change in
the deferred tax asset balances.
F-17
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES:
- ---------------------------------
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,
--------------------------
1997 $ 162,600
1998 171,100
1999 41,500
----------
$ 375,200
==========
Total rent expense was $163,000 and $136,000 for the years ended September
30, 1996 and 1995, respectively.
8. FOREIGN SALES:
- -----------------
The Company had export sales of $235,400 and $456,600 for the years ended
September 30, 1996 and 1995, respectively. These sales were transacted in
United States dollars.
9. EMPLOYEE BENEFIT PLANS:
- --------------------------
Effective January 1, 1990, the Company adopted an employee benefit plan
under Internal Revenue Code Sections 401(k). 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. The Company
incurred $1,000 and $900 for the years ended in September 30, 1996 and
1995, respectively, in 401(k) benefit expense.
F-18
<PAGE>
MEDICAL DYNAMICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SIGNIFICANT CONCENTRATIONS:
- -------------------------------
During the years ended September 30, 1996 and 1995, the Company had sales
to a single customer which accounted for 16% and 25%, respectively, of net
sales. At September 30, 1996 and 1995, accounts receivable included $75,800
and $145,900, respectively which was due from this customer.
At September 30, 1996 and 1995, the Company had an investment in a single
mutual fund that invests in money market instruments. The amount invested
is not subject to Federal insurance and amounted to $803,200 and $923,400
at September 30, 1996 and 1995, respectively.
At September 30, 1996, substantially all of the Company's inventories (with
a carrying value of approximately $714,400) consist of medical video
cameras and other products related to the micro-invasive surgery field,
including raw materials and replacement parts related to these products.
The Company also owns demonstration and loaner versions of these products
with a net carrying value of $117,200 at September 30, 1996, and the
Company's net investment in patents of $96,700 relates primarily to these
products.
11. FOURTH QUARTER ADJUSTMENTS:
- -------------------------------
During the fourth quarter of the year ended September 30, 1996, the Company
recognized a charge of $525,000 for the fair value of stock options granted
during the year. The Company also recognized an additional provision for
obsolete and slow-moving inventory of approximately $50,000 during the
fourth quarter.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 993,200
<SECURITIES> 0
<RECEIVABLES> 206,600
<ALLOWANCES> (25,000)
<INVENTORY> 714,400
<CURRENT-ASSETS> 1,458,600
<PP&E> 1,441,800
<DEPRECIATION> (1,225,300)
<TOTAL-ASSETS> 2,236,700
<CURRENT-LIABILITIES> 310,400
<BONDS> 0
0
0
<COMMON> 7,200
<OTHER-SE> 1,919,100
<TOTAL-LIABILITY-AND-EQUITY> 2,236,700
<SALES> 667,800
<TOTAL-REVENUES> 817,000
<CGS> 652,300
<TOTAL-COSTS> 2,557,400
<OTHER-EXPENSES> 1,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,741,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,741,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,741,800)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
