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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] for the fiscal year ended December 31, 1995
[ ] Transition report under section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required] for the transition period from
_______________ to _______________
COMMISSION FILE NUMBER 2-94117-D and 33-14106
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MICROTECH MEDICAL SYSTEMS, INC.
(Name of small business issuer in its charter)
Colorado 84-0867911
- ---------------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Laredo St., Unit I 80011
Aurora, Colorado ---------
- ---------------------------------------- (Zip Code)
(Address of principal executive offices)
Issuer's telephone number (303) 363-0007
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
___________________ _________________________________________
Securities to be registered under Section 12(g) of the Act:
Common
- ---------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes No X
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment. [X]
State issuer's revenues for its most recent fiscal year. $475,091
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State 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 a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the
Exchange Act.) $592,168/1/
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/1/ Based on bid price of $.02 per share at 2/28/96
Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate
market value of the common equity held by non-affiliates on the basis of
reasonable assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes_____ No_____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares
outstanding of each of the issuer's classes of common equity, as of the
latest practicable date. 59,080,900 as of March 7, 1996
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DOCUMENTS INCORPORATED BY REFERENCE. If the following documents are
incorporated by reference, briefly describe them and identify the part of
the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b)
or (c) of the Securities Act of 1933 ("Securities Act"). The listed
documents should be clearly described for identification purposes (e.g.,
annual report to security holders for fiscal year ended December 24, 1990).
TRANSITIONAL SMALL BUSINESS DISCLOSURE
FORMAT (CHECK ONE):
Yes No X
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PART I
ITEM I. DESCRIPTION OF BUSINESS
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(a) BUSINESS DEVELOPMENT. Microtech Medical Systems, Inc.
--------------------
(the "Company") was organized on December 8, 1981, under the laws of
the State of Colorado. The Company is engaged in the development,
assembly and marketing of its MIC-CONCEPT[TM] microdilution test
panels used by microbiology laboratories, clinics and doctors' offices
in performing antibiotic susceptibility testing and identification of
bacteria procedures. In September, 1985, the Company obtained
permission from the Food and Drug Administration ("FDA") to begin
marketing several of the Company's products.
The Company maintains its offices at 401 Laredo Street, Unit I,
Aurora, Colorado 80011. Its telephone number is (303) 363-0007.
(b) BUSINESS OF ISSUER. The Company has engaged in business
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in only the industry segment identified in Item 1(a), as to which a
detailed narrative description follows:
Definitions
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Antibiotic - A substance produced by certain microorganisms
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which inhibits or kills other microorganisms.
Antibiotic Therapy - The prescription and administration of the
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efficacious antibiotic medication.
Bacterial Identification - The use of selected biochemicals to
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group bacteria for identification.
MIC Procedure - A method or technique for determining the
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minimal inhibitory concentration ("MIC") of antibiotics, generally
through the utilization of prepared microliter plate systems.
Microbiology - The study of microorganisms which includes
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bacteria, fungus, and viruses.
Microliter/Micro-Tube - A small tube or series of tubes, each
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micro-tube holding less than one millimeter of fluid.
Minimal Inhibitory Concentration - The smallest concentration of
--------------------------------
an antibiotic required to visually inhibit the growth of a specific
bacteria.
Pathogenic - A disease-causing microorganism, or the origin of a
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disease process.
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Susceptibility - The degree of the predictable effect of
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suppression or prevention of microbial growth by an antibiotic.
Introduction
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The Company is engaged in the development, assembly and marketing
of a line of products designated by the Company as the MIC-CONCEPT[TM]
System, which is intended to be utilized in hospital microbiology
laboratories, private and public laboratories, clinics, doctors'
offices and emergency care centers. The MIC-CONCEPT[TM] System is
intended to perform antibiotic test procedures to assist physicians in
identifying bacteria which are isolated from patients' specimens and
in selecting the antibiotic therapy for possible infections. The
Company is marketing the MIC-CONCEPT[TM] products through its own
personnel and regional microbiological supply distributors.
Microbiology laboratories are primarily responsible for the
recovery of potentially disease causing bacteria from patient
specimens such as blood, urine, abscesses and body fluids. Upon
recovery of the bacteria, an identification procedure is necessary to
differentiate the numerous bacterial species which can cause disease.
Also, after recovery of the bacteria, the laboratory performs an
antibiotic susceptibility test to determine which antibiotics appear
to be effective against the specific bacteria isolated from the
patient's specimen.
The primary functions which the modern microbiology laboratory
performs are (1) the recovery and isolation of potentially disease
producing bacteria on specially augmented media containing enrichments
for the growth of bacteria, (2) the identifications of bacteria into
the various genus and species of clinically relevant bacteria, using a
broad range of biochemicals which, based on the various reactions,
provides a "fingerprinting-like" code which is typical for each
bacterial group and (3) tests for antibiotic susceptibility which
determines the effect of various concentrations of antibiotics on the
infecting bacteria in miniaturized test tubes, which information is
used by the physician in determining the appropriate antibiotic
therapy.
Bacteria generally fall into two broad groups which can be
differentiated simply by a procedure known as the "Gram stain" into
gram positive or gram negative. Some of the available antibiotics
work well against gram positive bacteria only, others are effective
only against gram negative bacteria, and still others work well
against both groups of bacteria. The Company has systems which
combine a broad range of antibiotic testing and bacterial
identification procedures into a simplified one step procedure,
thereby potentially reducing inventory requirements and potentially
decreasing the laboratory's technical time and cost.
Current Technology
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Some hospital laboratories are using a standardized disc
diffusion susceptibility test procedure where antibiotic impregnated
discs are placed on the surface of prepared agar media which contains
the test bacteria. The following day, when the test results are read,
a large zone around a disc indicates "sensitivity" to that drug,
whereas if the bacteria is not affected by the
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antibiotic, a small zone around the disc indicates that the bacteria
is resistant to the antibiotic. The MIC procedure provides
quantitative information concerning the concentration of each
antibiotic necessary to inhibit the test bacteria, and the disc
procedure provides qualitative results of sensitive, intermediate or
resistant for each antibiotic tested.
Prior to the 1970s, identification of bacteria was performed
almost exclusively using medium sized test tubes containing individual
biochemicals. Typically, a minimum of three to six test tubes were
used to identify most of the common bacteria.
In the early 1970s, Analytab Products, Inc. ("API") introduced a
product for bacteria identification with approximately 20 small cups
(or capsules) on a cardboard paper strip containing dried
biochemicals. The microbiologist manually adds several drops of the
test suspension to each of the twenty small capsules and places the
product in an incubator for 18-24 hours. The following day, each
biochemical is recorded as either a positive or negative reaction.
Based on the composite of biochemical reactions, the test bacteria are
identified into the genus and species and the results are reported to
the physician.
The disc method of antibiotic testing and the API system for
bacterial identification are performed separately as two different
test procedures. The Company's products, utilizing current
components, make it possible for the laboratory to simultaneously
perform antibiotic testing and bacterial identification on single
patients or multiples of two or four patients on a single panel.
Product Description
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The products, which the Company has designated as the "MIC--
CONCEPT[TM]" and "QUADRA-TITER[R]" Systems, are used to perform
antibiotic susceptibility tests and identification of bacteria using a
plastic plate with 96 distinct small indentations or micro-tubes which
contain separate concentrations of test antibiotics. The micro-tube
plate has rows for testing different antibiotics (such as ampicillin,
tetracycline, chloramphenicol, erythromycin and penicillin). The
products determine the MIC of each antibiotic against the test
bacteria.
Different colonies of the primary bacteria culture are selected
and suspended in approximately one ounce of sterile water. This
suspension is poured into an open and free flowing inoculum reservoir
(seed tray) which accepts the Company's plastic inoculator. An
inoculator, which is a disposable plastic device with 95 cylindrical
prongs, is placed into the inoculum seed tray containing the test
bacteria. Each prong of the inoculator retains a uniform amount of
the test bacteria suspension. The inoculator is then lifted up from
the inoculum seed tray and transferred into the test microtube plate
which contains a range of up to 34 antibiotics, depending on the
Company's specific product test system. Each prong of the inoculator
is designed to fit into the corresponding well of the micro-tube plate
so that the test bacteria are introduced into the antibiotic
concentrations or biochemicals in one simplified step. The inoculum
seed tray reservoir and a single inoculator enables the technologist
to rapidly and uniformly inoculate all the reaction micro-tube wells
at one time, thus reducing technical time.
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One well of the plate is not inoculated to serve as a quality control
check on the sterility of the test panel.
Once inoculated, the test panels are placed into a 35 degrees
Centigrade (95 degrees Fahrenheit) incubator for 15 to 18 hours. The
plates are removed the next day and each row of antibiotics is
observed for growth of the test bacteria. The lowest concentration of
each antibiotic which is observed to stop the growth of the test
bacteria is determined as the MIC for the antibiotics tested. A
laboratory technician prepares the final report which lists the MIC
for each antibiotic, and also includes the achievable blood levels for
each antibiotic using various dosages and routes of administration
(intravenous, oral, intramuscular). The results also are reported,
based on criteria established by the National Committee for Clinical
Laboratory Standards, as either susceptible, moderately susceptible or
resistant, for easy interpretation by the physician. The physician
then determines the most appropriate antibiotic therapy.
MIC-CONCEPT[TM] XL. MIC-CONCEPT[TM] XL is a system for
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performing the antibiotic test of those bacteria which cause patient
infections, using an easy one step inoculation (introduction of
bacteria into individual micro-tubes containing antibiotics). The
test plate is divided into four quadrants: quadrant 1 contains
antibiotics for use against only gram positive bacteria, quadrant 2
contains antibiotics effective against gram negative bacteria,
quadrant 3 contains antibiotics commonly effective for both groups,
and quadrant 4 contains a full range of antibiotics commonly used
against bacteria causing UTI's (urinary tract infections). This panel
is designed for the laboratory which is interested in using a one
plate system for testing gram positive antibiotics, gram negative
antibiotics, UTI effective antibiotics, and the broader spectrum
antibiotics. Urinary tract culture requests can account for
approximately 25-40% of all specimens received by most laboratories
and even higher amounts in some institutions.
MIC-CONCEPT[TM] UN COMBO. A combination of antibiotics and
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bacterial identification for both urine and other gram negative
bacteria. Patient isolates are conveniently tested for antibiotic
susceptibility for cost-effectiveness.
MIC-CONCEPT[TM] POS COMBO. A combination of antibiotics and
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bacterial identification for gram positive bacteria (such as
streptococcus and staphylococcus). Patient isolates are conveniently
tested for antibiotic susceptibility and identification simultaneously
for cost-effectiveness.
ANAEROBE MIC PANEL. A product for testing fifteen different
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antibiotics and their effectiveness against those bacteria which
require anaerobic growth conditions (absence of oxygen). Anaerobic
bacteria can cause various infections including food poisoning, gas
gangrene, tetanus, botulism, abdominal abscesses, etc. The Company's
product provides an easy to perform procedure which complements the
laboratory's existing antibiotic testing methods.
FASTIDIOUS MIC PANEL. A newly developed panel for performing
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antibiotic testing of a group of bacteria known as the "fastidious"
bacteria, meaning they have specialized and enriched growth
requirements. The Company's test product is specially prepared with
the
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enhanced nutrients so these hard-to-grow bacteria can be tested by a
laboratory as easily as other bacteria. The fastidious bacteria
include Hemophilus influenza, Streptococcus, pneumonia, various
streptococcal species, and other miscellaneous bacteria which are more
difficult to grow; and they can cause serious infection such as
meningitis, pneumonia, endocarditis, septicemia, and other
complications. This product is also designed to complement the
laboratory's present antibiotic testing methods.
MIC-CONCEPT[TM] OPTIDOT VIEWER. An illuminated reading device
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for the developed plates with a template to facilitate interpretation.
QUADRA-TITER INOCULATOR. Ancillary items for use in
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transferring the bacterial inoculum from the inoculum tray to the
microplate.
QUADRA-TITER SINGLE INOCULUM TRAYS. Ancillary items used to
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prepare single bacterial inoculum for transfer by the inoculator into
the microplate.
QUADRA-TITER AND MIC-CONCEPT[TM] INTERPRETATIONS MATERIALS
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Bacterial Identification Codebook. A compilation of
---------------------------------
microbiology data from the U.S. Center for Communicable Disease
Control in a data base format coordinated to statistically identify
the numerous species of common bacteria as well as the pathogenic
bacteria.
Report Forms. A comprehensive report form that becomes a
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permanent record in the clinical microbiology laboratory of each test
using the Company's systems.
Product Development
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Prior to his association with the Company, Jerry G. Kilgore
researched and developed the Company's initial products. Mr. Kilgore
transferred his rights in the Company's products in exchange for
Common Stock in 1981. Over one hundred different lot numbers or
batches of antibiotic test products have been prepared by Mr. Kilgore,
and tested against standard bacteria which have known MIC results for
the antibiotic susceptibility test as determined by the National
Committee for Clinical Laboratory Standards ("NCCLS"). Results
obtained from quality control testing of the test lots by Mr. Kilgore
yielded acceptable results of 98.1% for the MIC procedure and 98.3%
for the bacterial identification procedures. The NCCLS has stated
that results should be within the acceptable limits 95% of the times
tested.
The Company has an ongoing program of developing and updating its
products to improve the efficiency of use and to include new
antibiotics as they are introduced to the market. The Company
maintains contact with the major pharmaceutical companies concerning
the availability of new antibiotics. The Company must update its
products to include new antibiotics to retain its present customers
and to offer a competitive product since competing companies also
update their products as new antibiotics become available. Since this
program is necessary to
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provide a competitive product, failure to update the Company's
products would have a negative effect on product acceptance.
Marketing
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The Company markets its products primarily through existing
distributors of medical products, with only limited distribution.
Since December, 1985, INFOLAB, a regional distributor of medical
products based in Memphis, Tennessee, serving 12 southeastern states,
has distributed the Company's products on a nonexclusive basis.
INFOLAB receives a wholesale rate of approximately 25% off of the
Company's retail price for the products sold by it. The oral
agreement with Infolab can be terminated by the distributor or the
Company without notice.
In June, 1990, the Company entered into an exclusive written
distribution agreement with Innovative Diagnostic Systems, Inc.,
Atlanta, GA ("IDS"), a manufacturer and distributor of anaerobe
identification and other specialty products, which agreement calls for
the Company to manufacture an anaerobe MIC susceptibility test panel
for IDS on a private label basis. The Company continues to
manufacture and market its own anaerobe MIC test panel in addition to
the IDS private label product. Although the agreement expired in
June, 1992, the parties orally agreed to continue the terms of the
agreement on a year to year basis.
The Company intends to continue to search for additional
distributors in an effort to establish a broader distribution network.
Because the Company's products must be maintained in frozen
condition until used, the Company generally ships directly to the end
user by next-day air. Since microbiology testing is performed in
hospital labs, independent laboratories, emergency care and walk-in
clinics and selected laboratories of doctors' offices, the Company's
marketing efforts are concentrated in these areas. Most of the
Company's competitors sell their products directly to the end user.
The Company will attempt to obtain additional regional distributors.
The Company plans to exhibit its products at the national annual
microbiology and medical laboratory trade shows each year including
meetings of the American Society of Microbiology and the Interscience
Conference on Antimicrobial Agents and Chemotherapy. Telemarketing
and product description brochure mailings will be used by the Company
to increase exposure of its products to the national laboratory
testing marketplace.
Production
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The Company assembles all of its test systems. The plastic
components for the Company's products are manufactured by
subcontractors to the Company's specifications using Company owned
molds. Many of the other components are standard parts or products
available from multiple sources at competitive prices. If any of
these sources become unavailable, the Company believes that it would
be able to secure alternate supply sources within a short time.
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The Company has the capability of automatically filling
2,000 test panels per batch with the various biochemicals and
antibiotics with the one Anderson dispenser presently owned by it.
Two different lots or batches can be prepared daily. A total of
80,000 panels can be assembled per month. The Company lists its
products at approximately $5.50 per test Panel. The Company presently
fills all of its orders as received, and does not have any backlogged
orders considered to be firm.
Major Customers
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The Company is presently dependent on two major customers which
individually represented more than 10% of the Company's sales in 1995.
These include Infolab and IDS which represented 19% and 20%, of 1995
sales, respectively. The loss of either of these customers could have
an adverse impact on the Company.
Government Regulation
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The development, testing and marketing of medical devices and the
related manufacturing procedures are subject to regulation by the FDA.
Medical devices of the type manufactured and sold by the Company are
subject to regulation under the Federal Food, Drug and Cosmetic Act,
as amended (the "FFDCA"), and regulations promulgated thereunder. In
order for the Company to market its products, the Company is
registered as a medical device manufacturer. The Company must follow
FDA good manufacturing practices which relate to buildings and
facilities, equipment, control of components, production and process
controls, packaging and labeling, holding and distribution, product
evaluation and record keeping. The Company also will be subject to
regular FDA inspections. The Company complies with applicable FDA
regulations concerning good manufacturing practices as well as all
other applicable FDA requirements.
The FDA has adopted regulations which classify medical devices
based upon the degree of regulation it believes necessary to assure
the safety and efficacy of devices. A device is classified as a
Class I, II, or III device based on recommendations of advisory panels
appointed by the FDA. Class I devices are subject only to general
controls. Class II devices, in addition to general controls, are or
will be, subject to "performance standards." Class III devices require
FDA premarket approval before they may be marketed commercially
because their safety and effectiveness cannot be assured by the
general controls and performance standards of Class I and Class II
devices, respectively.
Class II devices are those devices that are or eventually will be
subject to the requirements of a performance standard promulgated in
accordance with Section 514 of the FFDCA. A device is classified as
Class II if general controls alone are insufficient to provide
reasonable assurance of its safety and effectiveness and there is
sufficient information to establish a performance standard to provide
such assurance. Presently, the FDA has not established a performance
standard for MIC micro-tube susceptibility test panels. The FDA has
stated that the performance standard would most likely be very similar
to the acceptable limits set by the NCCLS. In the interim period, the
FDA is using the NCCLS acceptable limits as the
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performance standard to be used in third party evaluation. The
Company has used the NCCLS acceptable limits as the basis for
evaluating all of its own test results.
In May, 1986, the Company received approval from the FDA under
its premarket notification process for its bacteria identification
products. All of the Company's products are Class II devices. It
normally takes 90-180 days for the FDA to recommend approval for
products which are subject only to the premarket notification
procedure.
Patents and Trademarks
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The Company has registered its "QUADRA-TITER[R]" trademark with
the U.S. Patent and Trademark Office. The Company does not presently
intend to file applications to register the trademarks
"MIC-CONCEPT[TM]" or "OPTIDOT[TM]" due to the expense of such
applications.
None of the Company's products are patented and the Company
believes that its products are not patentable.
Presently, the Company does not have any employment contracts or
other agreements with any of its officers, directors, advisors or
other employees containing noncompetition or nondisclosure provisions.
The Company does not intend to enter into such agreements in the near
future. Without such agreements, the Company has no assurance that
any of its employees will not directly enter into competition with it
utilizing technical know-how obtained from the Company.
Competition
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The biomedical laboratory products business is characterized by
intense competition, involving many companies which have extensive
experience in the Company's field and which possess substantially
greater financial, technological and personnel resources than the
Company. At present, the Company's competitive position in this
market is not significant.
In marketing its products, the Company faces competition from
existing companies with products and technologies performing a similar
function. There also is no assurance that other companies are not
engaged in developing products which in the future will compete with
those the Company has developed, or that subsequent advances in
technology will not make the Company's products obsolete.
The Company's direct competitors include Baltimore Biological
Laboratories, Inc., Cockeysville, Maryland; Difco, Inc., Detroit,
Michigan; Baxter Micro Scan, Inc., McGaw Park, Illinois; Analytab
Products, Inc., Plainview, New York; Micro Media Systems, Inc.,
Carlsbad, California and Vitek Systems, Inc., St. Louis, Missouri, all
of which have similar products and testing systems. All of these
companies are well established, each having been involved in
manufacturing biomedical laboratory products for at least ten years,
have well established marketing networks, and greater financial
resources than does the Company. In addition, these
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companies also offer computer software packages and semi-automated or
automated test equipment which work with their products which larger
users require to process the data from testing procedures. The
Company is presently developing a computer software system that is
compatible with its products, however does not have the resources
necessary to develop automated testing equipment.
The Company is attempting to compete by appealing to smaller
users who do not require automated testing procedures, and
emphasizing, where appropriate, convenience, disposability, ease of
performance and reporting results, simplicity and cost-effectiveness.
The Company's targeted market includes hospital labs, independent
laboratories, emergency care and walk-in clinics and selected
laboratories of doctors' offices, all of which perform antibiotic
susceptibility tests and/or bacterial identification procedures.
Business Outlook and Company Diversification Efforts
- ----------------------------------------------------
During the last five years, there appeared to be a trend for more
microbiology laboratories to automate their antibiotic testing and
bacterial identification procedures. During the same period, a
shortage of experienced clinical microbiology technologists, the
health care workers who perform most of the test procedures, was
occurring in various regions nationwide. Laboratory administration,
in many cases appears to have opted to purchase or lease the expensive
automated microbiology equipment to insure the output of test results
for (1) identification of bacteria causing patients' infections and
(2) the antibiotic testing, which aids the physicians in selecting the
appropriate antibiotics for treating the patients' infections. These
two test procedures are several of the primary responsibilities of the
microbiology laboratory. Vitek Systems and Baxter MicroScan Division
are presently the only two automated microbiology systems available,
with API planning to introduce an automated system shortly. The
Company estimates that approximately 95% of the microbiology labs use
API, Vitek, or MicroScan for their bacterial identification
procedures, and 70-75% use Vitek or MicroScan for their antibiotic
testing procedures. Of the remaining 25% antibiotic tests, an
estimated 15-20% of the labs are using an antibiotic disc diffusion
plate method, and the balance are using other MIC products similar to
the ones offered by the Company. It is apparent that the dominant
companies in this area of microbiology are Vitek Systems, Baxter
MicroScan, and API, all three having automated equipment along with
manual test procedures and computerized data management systems.
The emphasis of the Company in the future will be in the areas of
(1) specialty MIC antibiotic test products for anaerobe and fastidious
bacteria, (2) "custom" MIC antibiotic test panels for large hospitals
and university affiliates which are testing newer investigatory
antibiotics and associated pharmaceutical companies which also do
similar testing and (3) working more effectively with Infolab, IDS and
one or two additional distributors to enhance sales of the existing
products for bacteria identification and antibiotic testing. The
Company estimates the U.S. market for anaerobe antibiotic testing to
be 250,000 to 300,000 tests per year, and the market for fastidious
bacteria to be approximately the same size. The Company is also
developing a microbiology computer system, so that test results from
its products may be entered
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directly into the computer using a light pen. The expense of
developing an automated microbiology system is in the millions of
dollars and, thus, is not within the financial capability of the
Company at this time.
In view of the Company's outlook for its present business of
producing and marketing its MIC-CONCEPT[TM] and QUADRA-TITER[R]
antibiotic susceptibility and bacterial identification systems and
related products, the Company has investigated the feasibility of
acquiring or participating in an additional business venture through
mergers/acquisitions, joint ventures or other business related
transactions. Management has reviewed several prospects, but has not
entered into any agreements or letters of intent to acquire or merge
with any particular company. The Company has not conducted, nor have
others made available to it results of, any market research studies
which show the Company's contemplated business activities to be
capable of implementation.
If the Company is unable to complete a merger or acquisition, the
Company will continue to use its best efforts to market its existing
products. In addition, the Company may attempt to develop another
line of products on its own. However, there can be no assurance that
the Company would be successful in developing such a product or have
sufficient resources to do so.
Employees
- ---------
The Company has two full-time employees and two part-time
personnel.
ITEM 2. DESCRIPTION OF PROPERTY.
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The Company leases approximately 1,700 square feet of office,
laboratory, and assembly space in an office-manufacturing complex at
401 Laredo Street, Unit I, Aurora, Colorado, at the cost of $677 per
month, under a two year lease from January, 1996 to the end of
December, 1997. The Company believes this facility is adequate to
handle its current and anticipated needs. Management believes that a
larger facility in the area would be available, if and when required,
at acceptable rates. Tenant finishing completed in 1985 provides a
"clean-room" production area, a quality control laboratory and a
sterilizing room in addition to warehouse space.
ITEM 3. LEGAL PROCEEDINGS.
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The Company knows of no material pending legal proceedings to
which the Company is a party or of which any of its properties is the
subject and no such proceedings are known to the Company to be
contemplated by governmental authorities.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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There were no matters submitted to a shareholder vote during the
fiscal year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
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STOCKHOLDER MATTERS.
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(a) PRINCIPAL MARKET OR MARKETS. The Company's Common Stock
---------------------------
is traded on the over-the-counter market, and is presently quoted on
the NASD OTC Bulletin Board. The following table sets forth the high
and low bid prices of the Common Stock during the two years ended
December 31, 1995, on the NASD OTC Bulletin Board. The prices are
believed to be representative interdealer quotations, without retail
markup, markdown or commissions, and may not represent prices at which
actual transactions occurred.
Bid
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High Low
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Quarter Ended March 31, 1995 $.005 $.005
Quarter Ended June 30, 1995 $.0075 $.005
Quarter Ended September 30, 1995 $.12 $.005
Quarter Ended December 31, 1995 $.0625 $.02
Bid
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High Low
---- ---
Quarter Ended March 31, 1994 $.01 $.01
Quarter Ended June 30, 1994 $.01 $.01
Quarter Ended September 30, 1994 $.01 $.005
Quarter Ended December 31, 1994 $.005 $.005
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK. The
---------------------------------------------
number of holders of record of the Company's $.0005 par value Common
Stock at March 7, 1996 was approximately 357.
(c) DIVIDENDS. Holders of Common Stock are entitled to
---------
receive such dividends as may be declared by the Company's Board of
Directors. No dividends have been paid or
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declared with respect to the Company's Common Stock and no dividends
are anticipated to be paid in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
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The following summarizes the Company's results of operations and
financial condition and should be read in conjunction with the
financial statements.
Liquidity and Capital Resources.
-------------------------------
At the end of 1995, the Company's working capital was $705,819,
an increase of $75,129 from December 31, 1994. The increase is
primarily attributable to net income of approximately $92,000, offset
by capital expenditures of $26,000. During 1995, the Company
increased its holdings of investments by $100,000.
Results of Operations
---------------------
1995 Compared with 1994. Net sales in 1995 were substantially
-----------------------
unchanged from 1994 as they increased by less than 1%. Sales
stability resulted from an increase in demand for the Company's core
products while demand for specialized products for antibiotic studies
sponsored by major pharmaceutical companies declined. Sales to IDS
continued to increase. Cost of goods sold increased by approximately
9%, however, resulting in a 7% decline in gross profit in 1995 as
compared to 1994. The increase in cost of goods sold in 1995 is
primarily the result of allocating a greater percentage of the former
president's time to production and a lesser percentage to general and
administrative expense than in the previous year. Operating and other
expenses were reduced by almost 55% in 1995. In 1994 an expense of
$135,000 for unauthorized transactions described below under "Other
Areas of Discussion" resulted in an unusual increase in operating
expenses, while $12,000 of that amount was repaid to the Company in
1995, resulting in a reduction of the operating expenses in that year.
In addition, selling, general and administrative expenses were reduced
approximately 11% from 1994 to 1995, primarily as a result of the
allocation of more of the former president's time to production.
Interest and dividend income increased by $9,000 in 1995 as a result
of larger balances being invested, and other expense which amounted to
approximately $17,000 in 1994 was offset by approximately $1,000 of
other income in 1995. Net income for the year was thus approximately
$92,000 in 1995 as compared with an approximate $61,000 loss in 1994.
Other Areas of Discussion
-------------------------
The Company's financial condition was adversely impacted in each
of the three fiscal years ended December 31, 1995, by certain
unauthorized expenditures of the Company's funds, which expenditures
were not discovered until approximately the second quarter of 1994.
Beginning on or about October 1, 1992 and continuing through
approximately April 21, 1994, Mr. Jerry Kilgore, who during such
period was the President and Treasurer and a Director of the Company,
made several unauthorized investments of Company funds, which
investments
-13-<PAGE>
were not made on behalf, or recorded in the name, of the Company.
Also, during fiscal years 1991, 1992 and 1993 and until approximately
the end of the first quarter of 1994, Mr. Kilgore made several
payments of Company funds ostensibly as compensation for services to
the Company, which payments were made to relatives and/or associates
of Mr. Kilgore unsupported by any contracts or appropriate invoices.
Mr. Kilgore also took bonus payments during such period which were not
duly authorized. For financial statement purposes, such unauthorized
transactions have been recorded as $135,000, $181,300 and $43,300 for
1992, 1993 and 1994, respectively. As a result of these unauthorized
investments and payments, and after giving effect to partial
reimbursements made by Mr. Kilgore to the Company, Mr. Kilgore's
liability to the Company as of March 1, 1995, was determined by the
Board of Directors to be $422,774.24, which includes interest
retroactive to the date of the first misappropriation of Company
funds.
On August 28, 1995, the Company entered into a Settlement
Agreement (the "Agreement") with Mr. Kilgore, the purpose of which is
to facilitate Mr. Kilgore's satisfaction of his debt to the Company
over a period of time, in recognition of fact that he lacks the
financial capacity to repay immediately the misappropriated funds.
While Mr. Kilgore no longer serves as President and Treasurer or as a
Director of the Company, the Agreement acknowledges that his continued
employment is necessary for the continued operation of the business of
the Company, and he has agreed to be employed by the Company and to
serve in an advisory capacity to the Company's Board of Directors for
certain limited purposes.
Concurrently with the execution of the Agreement, Mr. Kilgore
made and issued to the Company an interest-bearing Promissory Note
(the "Note") payable to the Company in the amount of $422,774.24. The
Note is collateralized by (1) Mr. Kilgore's approximately 19 million
shares of the Common Stock of the Company and his outstanding options
to acquire 10,500,000 shares of such Common Stock (as well as the
shares of Common Stock issuable upon exercise of such options),
(2) his approximately 16,600 shares of stock in Valley of the Sun
Wireless TV, Inc., an Arizona corporation ("Valley"), (3) a promissory
note in the principal amount of $235,000.00 issued to Mr. Kilgore on
August 10, 1994 by Carolina Multi-Communications Corp., a Nevada
corporation ("CM-CC") and (4) Mr. Kilgore's residential real property
located in Denver, Colorado. The Agreement also grants the Company
full authority to receive payment of any principal, interest,
dividends, or any other distribution from CM-CC and/or the shares of
stock in Valley and to liquidate or otherwise dispose of the same at
any time. The Company can give no assurance that the foregoing
security interests are adequate to secure Mr. Kilgore's performance of
his obligations under the Note. For accounting purposes, interest
income on the Note will be recorded if and when received.
The Agreement provides that Mr. Kilgore's obligations under the
Note are not dischargeable in bankruptcy and also preserves to the
Company, and does not release, any of the Company's claims against
Mr. Kilgore unless and until the Note is paid in full and all other
obligations of Mr. Kilgore to the Company under the Agreement are
fully satisfied. The statutes of limitation applicable to any of the
Company's claims against Mr. Kilgore have been tolled from the date of
the Agreement until the Note and all other obligations of Mr. Kilgore
to the
-14-<PAGE>
Company are paid in full or until a default under the Note or other
obligations occurs, entitling the Company to bring an action against
Mr. Kilgore.
Lastly, the Agreement provides that within sixty days after the
Note has been paid in full, Mr. Kilgore must remit to the Company a
sum equal to the reasonable attorneys' fees, accounting fees,
Directors' fees, and any other costs and expenses incurred by the
Company relating to and arising from Mr. Kilgore's misappropriation of
funds, the investigation thereof, the preparation, execution and
performance of the Agreement and any other effort to recover the
Company's funds.
ITEM 7. FINANCIAL STATEMENTS.
- -----------------------------
The Report of Independent Auditors on the Financial Statements
appears at page F-2 and the Financial Statements and Notes to
Financial Statements appear at pages F-3 through F-10 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- --------------------------------------------------------------------
AND FINANCIAL DISCLOSURE.
- ------------------------
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS.
- --------------------------------------------------------------------
(a) The Directors and Executive Officers of the Company are as
follows:
Name Age Position
---- --- --------
Charles Diehl 46 President pro tempore and Director
--- -------
J. Kenneth McClatchy, Ph.D. 58 Secretary and Director
Orian Hunter 46 Controller
All Directors of the Company hold offices until the next annual
meeting of shareholders and until their successors have been elected
and qualified. The last annual meeting of shareholders was held on
June 30, 1986. The Company's Articles of Incorporation state that the
number of directors shall be not less than four nor more than nine, as
fixed by the Bylaws. Currently there are only two directors. The
Officers of the Company are elected by the Board of Directors at the
first meeting after each annual meeting of the Company's shareholders,
and hold office until their successors shall have been duly elected
and qualified or until their death, resignation or removal from
office. The following sets forth information concerning the principal
occupations and business experience of each of the Officers and
Directors of the Company.
-15-<PAGE>
J. Kenneth McClatchy, Ph.D., has been associated with the Company
---------------------------
since its inception. Since 1988, he has been Director of Laboratories
of National Health Laboratories (now known as Laboratory Corporation
of America), Englewood, Colorado. Dr. McClatchy only devotes as much
of his time to the affairs of the Company as is needed.
Charles L. Diehl, became a Director of the Company in May, 1985.
----------------
Since 1990, he has been an executive employment recruiter with
Professional Search and Placement, Inc., Littleton, Colorado. From
1988 to 1990, he was a registered representative stock broker with
Cohig & Associates, Denver, Colorado. Mr. Diehl currently serves as
Technical Recruiting Manager for SOS Technical Services, a
professional placement concern. Mr. Diehl only devotes as much of his
time as is needed to the affairs of the Company.
(b) Significant Employees. Jerry G. Kilgore, age 50, has been
---------------------
associated with the Company since its inception and until August 28,
1995, was the President and Treasurer and a Director of the Company.
As of such date, he became employed by the Company solely in research
and development activities, product development and other aspects of
business development, and as an advisor to the Board of Directors.
Although no longer an executive officer of the Company, Mr. Kilgore is
the Company's only employee who has the technical knowledge and
expertise necessary to continue the operation of its business.
Mr. Kilgore devotes his full time to the affairs of the Company as he
has since the Company's inception.
ITEM 10. EXECUTIVE COMPENSATION.
- --------------------------------
No executive officer received any compensation during 1995, and
the only executive officer of the Company who received any
compensation during 1994 and 1993 was Mr. Kilgore, who was President
and Treasurer until May 1994. The following table sets forth certain
information concerning all compensation paid by the Company to
Mr. Kilgore during the last three fiscal years of the Company:
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term Compensation
Annual Compensation --------------------------------------------
--------------------------------- Awards Payouts
-------------------- ---------------------
Other All
Annual Restricted Options/ Other
Compensa- Stock SARS LTIP Compensa-
Name and Principal Position Year Salary Bonus sation Award(s) (Number) Payout sation
- --------------------------- ---- ------ ----- --------- -------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jerry Kilgore, former President 1995 $48,000 -0- -0- -- -0- -- --
Jerry Kilgore, President 1994 $36,000 -0- -0- -- -0- -- $5,400<F2>
1993 $36,000 -0- $47,400<F1> -- 3,000,000 -- $5,400<F2>
____________________
<FN>
<F1> Represents the difference between the market price and exercise price of stock options granted to Mr. Kilgore in
December, 1992 and October, 1993.
<F2> Represents, in each reported year, the amount paid to a Simplified Employee Pension Plan for Mr. Kilgore.
</FN>
</TABLE>
The Company did not grant any options or SARs in 1995.
-16-<PAGE>
The Company has no employment agreements with its Officers.
Mr. Kilgore presently receives an annual salary of $ 48,000 per year,
pursuant to employment terms set forth in the Settlement Agreement
between the Company and Mr. Kilgore described above under Item 6 -
Management's Discussion and Analysis or Plan of Operations - Other
Areas of Discussion.
Directors were not paid fees for their attendance at meetings of
the Board of Directors, until October 1995. Beginning with the
meeting held in October 1995 the directors are paid $250 for each
meeting attended. The directors are reimbursed for any travel
expenses incurred in attending meetings.
In May, 1986, the Company adopted an Incentive Stock Option Plan
(the "ISOP") under which options granted are intended to qualify as
"incentive stock options" under Section 422A of the Internal Revenue
Code of 1954, as amended. Pursuant to the ISOP, options to purchase
up to 10,000,000 shares of the Company's Common Stock may be granted
to employees of the Company. The ISOP is administered by the Board of
Directors, which is empowered to determine the terms and conditions of
each option, subject to the limitation that the exercise price cannot
be less than the market value of the Common Stock on the date of the
grant, and no option can have a term in excess of 10 years. In June,
1986, the Company's Shareholders approved the ISOP. In March, 1991,
an option to purchase 7,500,000 shares was granted to Mr. Kilgore at
$.0022 per share. This option was exercised in March 1996. In
December, 1992, the Board of Directors granted options to purchase the
following shares at an exercise price of $0.001 per share:
7,000,000 shares to Mr. Kilgore, 1,000,000 shares to Dr. McClatchy,
1,000,000 shares to Mr. Diehl and 1,000,000 shares to Ms. Simone
Martin, the Company's administrative director. The options to
purchase are exercisable until December 11, 1997. Dr. McClatchy
exercised his option in June of 1993 and Mr. Kilgore exercised his
option in December of 1994.
In October, 1993, the Board of Directors granted options to
Mr. Kilgore to purchase 3,000,000 shares at an exercise price of
$0.001 per share. To date, none of these options have been exercised.
In February 1996, the Board of Directors granted options to
Mr. Diehl and to Mr. McClatchy each to purchase 1,500,000 shares at
the price of $.02 per share in recognition of services rendered,
without compensation, for two years.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------------------------------------------------------------
MANAGEMENT.
- ----------
The following table sets forth, as of March 7, 1996, the stock
ownership of each person known by the Company to be the beneficial
owner of five percent or more of the Company's Common Stock, the
Company's only class of securities, each Officer, Director or other
control person individually and all Directors, Officers and other
control persons of the Company as a group:
-17-<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership<F1> of Class
- ------------------------------------------------------ ------------------------ --------
<S> <C> <C>
Jerry G. Kilgore
12931 E. Cedar Avenue
Aurora, CO 80012 29,825,000<F2> 50.48%
J. Kenneth McClatchy, Ph.D.
7925 West Layton, #310
Littleton, CO 80123 3,300,000<F3> 5.58%
Charles L. Diehl
7864 S. Hill Drive
Littleton, CO 80120 3,347,500<F4> 5.66%
All Officers and Directors as a Group
(3 persons) 36,472,500 61.73%
____________________
<FN>
<F1> All shares are owned beneficially and of record except as noted.
<F2> Includes 3,000,000 shares underlying currently exercisable stock options held by Mr. Kilgore.
<F3> Includes 1,500,000 shares underlying currently exercisable stock options held by Mr. McClatchy.
<F4> Includes 37,500 shares held jointly with Mr. Diehl's wife and 2,500,000 shares underlying currently
exercisable stock options held by Mr. Diehl.
</FN>
</TABLE>
The Company has been informed by the representative of an
undisclosed principal that the principal had offered to purchase from
Mr. Jerry Kilgore all of his currently outstanding shares of the
Common Stock of the Company and his outstanding options to acquire
shares of Common Stock. The Company was later informed by Mr. Kilgore
that he had rejected or terminated any contract to sell his shares to
that party. The Company does not know whether there exists any
binding agreement for the sale of Mr. Kilgore's shares. Such a sale,
if consummated, could result in a change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- --------------------------------------------------------
Except for Mr. Kilgore's unauthorized appropriation of Company
funds during 1994 and prior fiscal years of the Company, which
conduced to the Settlement Agreement (all as described more fully in
Item 6), there have been no material transactions between the Company,
its Officers, Directors, and principal shareholders during the
Company's last fiscal year. There is currently a disagreement between
the directors and Mr. Kilgore regarding the non-payment of annual
premiums of $25,000 for 1995 and 1996 on life insurance covering
Mr. Kilgore, and an ownership of the cash surrender value of the life
insurance.
-18-<PAGE>
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K.
- -------------------------------------------
(a) Exhibits:
--------
Exhibit
- -------
Number
- -------
3.1 Articles of Incorporation, as amended /1/
3.2 Bylaws /1/
4.1 Form of Underwriter's Warrant /1/
10.1 Lease Agreement /2/
10.2 Incentive Stock Option Plan /2/
10.3 Distribution Agreement with Innovative Diagnostic Systems,
Inc. /3/
10.4 Settlement Agreement between the Company and Jerry Kilgore
/3/
/1/ Incorporated by reference to the Company's Registration Statement
No. 2-94117-D on Form S-18 pursuant to the Securities Act of
1933, as amended.
/2/ Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990.
/3/ Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
(b) No reports on Form 8-K were filed by the Company during
its last fiscal quarter.
-19-<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
MICROTECH MEDICAL SYSTEMS, INC.
Dated: March 29, 1996 By Charles L. Diehl
---------------------------------------
Charles L. Diehl, President pro tempore
--- -------
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates
indicated.
Name and Capacity Date
----------------- ----
Charles L. Diehl March 29, 1996
- --------------------------------------------
Charles L. Diehl, President pro tempore
--- -------
and Director
J. Kenneth McClathy March 29, 1996
- --------------------------------------------
J. Kenneth McClatchy, Secretary and Director
Orian Hunter March 28, 1996
- --------------------------------------------
Orian Hunter, Controller
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT:
The Registrant has
not yet sent any annual reports covering its last two fiscal years to
security holders. In the event that the Registrant sends an annual
report to its security holders for either of such years, it will
provide copies thereof as supplemental information to the Commission
when it is sent to security holders, along with copies of any proxy
materials sent to its security holders.
<PAGE>
MICROTECH MEDICAL SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . F-2
BALANCE SHEET - December 31, 1995. . . . . . . . . . . . . . . . . F-3
STATEMENTS OF OPERATIONS - For the Years Ended December 31,
1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . . . . F-4
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - For the Years
Ended December 31, 1995 and 1994. . . . . . . . . . . . . . . . F-5
STATEMENTS OF CASH FLOWS - For the Years Ended December 31,
1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . F-6
NOTES TO THE FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . F-7
F-1<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Microtech Medical Systems, Inc.
Aurora, Colorado
We have audited the accompanying balance sheet of Microtech Medical
Systems, Inc. as of December 31, 1995, and the related statements of
operations, changes in stockholders' equity and cash flows for the
years ended December 31, 1995 and 1994. These financial statements
are the responsibility of the Company's management. Our responsi-
bility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Microtech
Medical Systems, Inc. as of December 31, 1995, and the results of its
operations and its cash flows for the years ended December 31, 1995
and 1994 in conformity with generally accepted accounting principles.
Hein + Associates LLP
Denver, Colorado
March 7, 1996<PAGE>
MICROTECH MEDICAL SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 506,519
Certificates of deposit 104,065
Accounts receivable, net of allowance of $12,000 116,274
Inventory 56,631
---------
Total current assets 783,489
EQUIPMENT, at cost 184,406
Less accumulated depreciation (153,486)
---------
30,920
OTHER ASSETS:
Deferred taxes 69,000
Other 500
---------
69,500
---------
TOTAL ASSETS $ 883,909
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 39,424
Income tax payable 38,246
---------
Total current liabilities 77,670
COMMITMENTS AND CONTINGENCY (Notes 2 and 6)
STOCKHOLDERS' EQUITY:
Common stock, $.0005 par value; 200,000,000 shares authorized,
59,080,900 shares issued and outstanding 29,540
Additional paid-in capital 1,010,605
Accumulated deficit (233,906)
---------
Total stockholders' equity 806,239
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 883,909
=========
</TABLE>
See accompanying notes to these financial statements.
F-3<PAGE>
MICROTECH MEDICAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1995 1994
------------- -----------
<S> <C> <C>
NET SALES $ 475,091 $ 473,258
Less cost of goods sold (247,960) (228,070)
---------- -----------
GROSS PROFIT 227,131 245,188
OPERATING AND OTHER EXPENSES:
Selling, general and administrative 131,606 148,302
Stock option expense - -
Bad debt expense 13,794 11,500
Unauthorized transactions (recoveries) (Note 2) (12,000) 135,000
---------- -----------
133,400 294,802
---------- -----------
INCOME (LOSS) FROM OPERATIONS 93,731 (49,614)
---------- -----------
OTHER INCOME (EXPENSE):
Interest and dividend income 24,177 15,829
Other income (expense), net 1,440 (16,647)
---------- -----------
Total other income (expense), net 25,617 (818)
INCOME (LOSS) BEFORE INCOME TAXES 119,348 (50,432)
PROVISION FOR INCOME TAXES:
Current expense (36,000) (11,000)
Deferred benefit 9,000 -
---------- -----------
(27,000) (11,000)
---------- ----------
NET INCOME (LOSS) $ 92,348 $ (61,432)
========== ==========
NET INCOME (LOSS) PER SHARE $ <F1> $ <F1>
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 62,992,000 51,200,000
========== ==========
________________________
<FN>
<F1> Less than $.01 per share.
</FN>
</TABLE>
See accompanying notes to these financial statements.
F-4<PAGE>
MICROTECH MEDICAL SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID-IN ACCUMULATED
STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ---------- ---------- ----------- -----------
- --
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 51,080,900 $ 25,540 $ 1,006,605 $ (264,822) $ 767,323
Options exercised 8,000,000 4,000 4,000 - 8,000
Net loss - - - (61,432) (61,432)
---------- --------- ---------- --------- ---------
BALANCE, December 31, 1994 59,080,900 29,540 1,010,605 (326,254) 713,891
Net income - - - 92,348 92,348
---------- --------- ---------- --------- ---------
BALANCE, December 31, 1995 59,080,900 $ 29,540 $ 1,010,605 $ (233,906) $ 806,239
========== ========= ========== ========= =========
</TABLE>
See accompanying notes to these financial statements.
F-5<PAGE>
MICROTECH MEDICAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1995 1994
------------- -----------
<S> <C> <C>
Net income (loss) $ 92,349 $ (61,432)
Adjustments to reconcile to net cash from operating activities:
Depreciation 9,113 7,601
Options issued below market - -
Unauthorized transaction losses (recoveries) (12,000) 135,000
Bad debt expense 13,794 11,500
Deferred income taxes (9,000) -
Other, net 4,602 2,053
Changes in operating assets and liabilities:
Accounts receivable (17,711) (40,613)
Unauthorized advances, former president - (138,000)
Inventory (2,578) 821
Accounts payable and other current liabilities 8,504 11,912
Income tax payable 24,046 11,000
-------- --------
Net cash provided by (used in) operating activities 111,119 (60,158)
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayments, former president 12,000 55,000
Purchase of certificates of deposit (100,000) -
Sale of securities - 463,343
Purchase of property and equipment (26,000) -
-------- --------
Net cash provided by (used in) investing activities (114,000) 518,343
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from sale of common stock - 8,000
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(2,881)466,185
CASH AND CASH EQUIVALENTS, beginning of year 509,400 43,215
-------- --------
CASH AND CASH EQUIVALENTS, end of year $ 506,519 $ 509,400
======== ========
</TABLE>
See accompanying notes to these financial statements.
F-6<PAGE>
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
----------------------------------------------------------
POLICIES:
--------
Nature of Operations - Microtech Medical Systems, Inc. (the
--------------------
Company) was incorporated in Colorado on December 8, 1981, to
develop and manufacture a line of products for sale to clinical
microbiology laboratories throughout the United States. The
Company is dependent on one employee, the former president, for
technical knowledge and expertise necessary to continue the
operation of its business. The industry is considered intensely
competitive and there appeared to be a trend during the last five
years for microbiology laboratories to automate their antibiotic
testing and bacterial identification procedures. The Company
endeavors to compete by appealing to smaller users who do not
require automated testing procedures, and emphasizing
convenience, disposability, simplicity, and cost-effectiveness.
Cash Equivalents - The Company considers all highly liquid debt
----------------
instruments with original maturities of three months or less to
be cash equivalents.
Inventory - Inventory is stated at the lower of cost or market on
a first-in, first-out (FIFO) basis. Below is a summary of
inventories as of December 31:
1995 1994
-------- --------
Materials $ 28,592 $ 20,857
Finished goods 28,039 33,196
------- -------
$ 56,631 $ 54,053
======= =======
Property and Equipment - Property and equipment is stated at
----------------------
cost. Depreciation is computed using the straight-line method
over the estimated useful lives of 5 years. Maintenance and
repairs are charged to operations as incurred; expenditures for
major improvements are capitalized.
Revenue Recognition - Revenue is recognized from product sales at
-------------------
the time of shipment.
Net Income (Loss) Per Share - Net income (loss) per share is
---------------------------
calculated by dividing net income (loss) by the average shares of
common stock and common stock equivalents (stock options)
outstanding. Common stock equivalents are not included in loss
years as their effect is anti-dilutive.
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 statements and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-7<PAGE>
Use of Estimates - The preparation of the Company's financial
----------------
statements in conformity with generally accepted accounting
principles requires the Company's management to make estimates
and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results
could differ from those estimates. Significant estimates include
the allowance established in the collectibility of the Company's
note receivable from its former president (see Note 2) and the
related valuation allowance on the Company's deferred tax asset.
It is reasonably possible that these estimates could materially
change within the next year, if the former president is able to
repay his note.
Fair Value of Financial Instruments - The carrying amounts of the
-----------------------------------
Company's financial instruments, which include trade receivables,
certificates of deposit, and trade payables, approximate fair
value because of the short maturity of those instruments.
Financial instruments also include the note receivable from the
former president (see discussion in Note 2).
2. RECEIVABLE, FORMER PRESIDENT:
----------------------------
The Company's former president was involved in various
unauthorized transactions. These transactions totaled
approximately $380,000, including $135,000 in 1994. All amounts
have been expensed in operations in the year incurred, net of
recovery by the Company. These transactions related to company
funds which were either invested in the name of the former
president or disbursed in other unauthorized transactions. As
of December 31, 1995, the investments consisted of common stock
or notes receivable totaling $285,000 in two development stage
private companies.
The Company has entered into an agreement with the former
president, which was finalized in August 1995. The agreement
calls for the repayment of approximately $423,000, which includes
accrued interest through February 1995 and is collateralized by
his shares of the Company's common stock and stock options,
investments in the above mentioned companies, and his personal
residence. The agreement provides for defined repayment terms
and bears interest. The former president also resigned as an
officer and a director under the agreement. He, however, remains
a Company employee with a four-year employment agreement and as
an advisor to the Board of Directors. There currently is a
disagreement between the directors and the former president
regarding the non-payment of an annual life insurance premium of
$25,000 for 1995 and 1996 and the ownership of the cash surrender
value of the life insurance. No amounts have been accrued in the
financial statement for the 1995 insurance premium and the cash
surrender value of the life insurance has not been recorded as an
asset.
For financial presentation purposes an allowance has been
established for possible unrecoverable amounts for the total
amount due under the agreement, even though the Company and the
former president are actively seeking recovery of the funds. To
the extent amounts are recovered and/or the former president
makes payments under his note agreement (including accrued
interest) in the future, it will be recorded as income, when
received. Payments totaling $12,000 were received in 1995, and
in March 1996, an additional payment of $34,000 was received.
F-8<PAGE>
3. STOCKHOLDERS' EQUITY:
--------------------
The Company has reserved 10,000,000 shares of its common stock
for issuance under the terms of an incentive stock option plan,
which was adopted during 1986. Under the plan, the Board of
Directors has the authority to grant, with certain restrictions,
stock options to employees of the Company. In a prior year, the
Company had granted 7,500,000 options with an exercise price of
approximately $.002 per share to the Company's former president.
These shares are vested and expire in March 1996. Subsequent to
year-end, the options have been exercised.
In prior years, the Company granted 12,000,000 non-qualified
stock options, with an exercise price of $.001 per share,
primarily to the Company's former president and to the directors.
During 1994, options were exercised to purchase 8,000,000 shares
of common stock (including 7,000,000 options of the former
president). The outstanding options are vested and exercisable
through December 1997 (1,000,000 options) and October 1998
(3,000,000 options). In February 1996, an additional
3,000,000 options have been granted to the Company's two Board
members. These options are exercisable at $.02 per share for
five years.
The Board of Directors has approved a 1 for 100 reverse stock
split, subject to stockholder approval which has not yet occurred
as of December 31, 1995. Therefore, shares outstanding have not
been restated.
4. INCOME TAXES:
------------
Deferred tax assets (liabilities) result from temporary
differences between financial statement and tax basis of assets
(liabilities). The amounts which give rise to the net deferred
tax asset (liability) as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
Current Long-Term
--------- -----------
<S> <C> <C>
Note receivable from former president $ - $ 79,000
Compensation on options granted at less than fair market value - 22,000
Other, net 2,000 5,000
-------- -------
2,000 106,000
Valuation allowance (2,000) (37,000)
-------- -------
Net deferred tax (liability) asset $ - $ 69,000
======== =======
</TABLE>
The valuation allowance decreased $10,000 in 1995, net of an
adjustment for graduated rates.
F-9<PAGE>
Total income tax expense (benefit) differed from the amounts
computed by applying the U.S. federal statutory tax rates to pre-
tax income as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------
1995 1994
------ ------
<S> <C> <C>
Total expense (benefit) computed by applying the U.S.
statutory rate 34% 34%
State income taxes, net of Federal tax benefit 2% 12%
Effect of graduated rates, net of valuation allowance (9)% (63)%
Permanent differences (3)% (5)%
Other (1)% - %
---- ----
23% (22)%
==== ====
</TABLE>
5. MAJOR CUSTOMERS AND SIGNIFICANT CONCENTRATION OF CREDIT RISK:
------------------------------------------------------------
The Company made sales to unaffiliated customers which individ-
ually represent more than 10% of the Company's total sales for
the years ended December 31, 1995 and 1994, as follows:
Customers 1995 1994
-------- ---- ----
A 20% 19%
B 19% 18%
Credit risk represents the accounting loss that would be
recognized at the reporting date if counterparties failed
completely to perform as contracted. Most of the Company's
accounts receivable are with hospitals throughout the United
States. The receivables are not collateralized.
At December 31, 1995, the Company maintained cash balances and
certificates of deposit with a commercial bank which were
approximately $130,034 in excess of FDIC insurance limits. In
addition, the Company has invested approximately $345,750 in a
money market mutual fund, which is not FDIC insured.
F-10<PAGE>
6. COMMITMENTS:
-----------
Lease - The Company leases office space under a lease that
-----
expires in 1997. Rent expense for the years ended December 31,
1995 and 1994 was approximately $8,000 for each year. The total
minimum rental commitments at December 31, 1995 are as follows:
1996 $ 8,880
1997 8,880
--------
$ 17,760
========
Simplified Employee Pension Plan - The Company has a Simplified
--------------------------------
Employee Pension Plan (the Plan). The Company, at its sole
discretion, shall determine the amount contributed to the Plan in
each plan year. The contribution is allocated in the ratio that
each participant's compensation is to the total compensation of
all participants. During 1995 and 1994, $-0- and $5,400 were
contributed to the Plan. All contributions made under the Plan
are fully vested at the date of the contribution.
7. SUBSEQUENT EVENTS (UNAUDITED):
-----------------------------
The Company is aware of a proposal, communicated by the
representative of an undisclosed principal, whereby the principal
would purchase from the former president all of his currently
outstanding shares of the common stock of the Company and his
outstanding options to acquire shares of common stock. The
Company was later advised by the former president that he had
rejected or terminated any contract. The proposal or any other
such sale, if consummated, could result in a change in control of
the Company.
F-11
