ADVANCED MEDICAL PRODUCTS, INC.
111 Research Drive
Columbia, SC 29203
September 30, 1996
Securities and Exchange
Commission
Washington, D.C. 20549
Gentlemen:
Pursuant to the requirements of the Securities Exchange Act of
1934, we are
transmitting herewith the attached Form 10KSB.
Sincerely,
Advanced Medical Products, Inc.
Pat Mack
Controller
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ______
Commission File No. 0-16341
ADVANCED MEDICAL PRODUCTS INC.
(Name of Small Business Issuer in its Charter)
Delaware 16-1284228
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification
No.)
111 Research Drive, Columbia, South Carolina
29203
(Address of Principal Executive Offices)
(Zip Code)
(803) 935-0906
Issuer's Telephone Number, Including Area Code)
Securities Registered Under Section 12(b) of the Exchange
Act
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities Registered Under Section 12(g) of the Exchange
Act
Common Stock, $.01 par value
(Title of class)
by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter
period that the Issuer was required to file such reports) and (2)
has been
subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check here if disclosure of delinquent filers in response to Item
405 of
Regulation S-B is not contained in this form, and no disclosure
will be
contained, to the best of the Issuer's knowledge, in definitive
proxy or
information statements incorporated by reference in Part III of
this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The Issuer's total revenues for its most recent fiscal year were
$4,232,428.00.
The aggregate market value, as of September 20, 1996, of voting
stock held by
non-affiliates was approximately $789,137.
The number of outstanding shares of common equity on September 20,
1996 was
4,812,496. .
Transitional Small Business Disclosure format (check one):
Yes [ ] No [ X ]
Total pages = 84. Exhibit Index Appears
on Page 36.
INDEX
Item
Page
PART I 1. Description of Business
3
2. Description of Property
16
3. Legal Proceedings
17
4. Submission of Matters to a Vote of
Security Holders
18
PART II 5. Market for Common Equity
and Related Stockholder Matters
18
6. Management's Discussion and Analysis
21
7. Financial Statements
25
8. Changes in and Disagreements with
Accountants on Accounting
and Financial Disclosure
25
PART III 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act
25
10. Executive Compensation
28
11. Security Ownership of Certain Beneficial
Owners and Management
33
12. Certain Relationships and Related
Transactions
34
PART IV 13. Exhibits, List and Reports on Form 8-K
Advanced Medical Products Inc. (the "Registrant" or the
"Company") develops, manufactures, assembles and markets medical
diagnostic equipment and software primarily for use in physicians'
offices. Holter monitors (24 hour electrocardiogram (ECG)
monitors) and ambulatory blood pressure (ABP) instruments provided
most of the Company's past sales, but a new portable ultrasound
imager is expected to contribute substantially to future sales.
The Company has demonstrated it's ability to develop, produce
and market miniaturized electronic devices for medical applications
that are generally smaller, lighter and take less power than
similar products offered by competitors; it's mission is to provide
to the medical profession leading edge hardware and software
technology that will save physicians time, reduce cost of health
care and improve patient outcomes. Most of the Company's revenues
in the past have resulted from sales to office based family
practice physicians, internists and cardiologists. Because of
changes taking place in health care, the Company is redirecting
much of it's marketing efforts towards managed care organizations,
including Health Maintenance Organizations (HMO's), Group
Purchasing Organizations (GPO's), Integrated Health Networks
(IHN's) and hospitals where many of the purchasing decisions are
now being made. In addition, much of the engineering development
efforts are being directed toward enhancements and features such as
personal computer (PC) interfaces, "Windows" based software and
digital storage and electronic transfer of medical records
(telemedicine) that make the Company's products more attractive to
the markets available in the current health care environment. The
Company intends that all future products will be PC based.
The Registrant was incorporated under the laws of the State
of
Delaware on September 3, 1986, and in June 1987, successfully
concluded an initial public offering of its Common Stock, providing
net proceeds to the Registrant of approximately $2,034,000.
Effective September 13, 1989, the Registrant reverse split its
outstanding Common Stock at the rate of 1:100, and recapitalized so
as to authorize the issuance of a total of 5,000,000 shares of
Common Stock, $.01 par value. All references to shares and per
share data in this Annual Report give retroactive effect to such
reverse split and recapitalization. During the 1994 fiscal year,
the Company amended its Certificate of Incorporation so as to
create a class of stock consisting of 4,000 shares of redeemable
Class A Preferred Stock, and sold 2,000 of such shares, for
$2,000,000, to Nishimoto Sangyo Company, Ltd., a distributor of the
Company's products (see "Distributor/OEM Arrangements", and "Market
for Common Equity and Related Stockholder Matters"). In 1996,
Nishimoto assigned all rights of redemption on the preferred stock
to the Company and purchased an additional 113 shares of preferred
stock, and subscribed for 300,000 shares of common stock, paid in
satisfaction of $215,000 in unpaid dividends and interest.
Carolina
Medical Inc. and BIOTEL International Inc. ("BIOTEL"), a holding
company that owns a majority interest in Carolina Medical's stock,
purchased from the Company a combined total of 2,150,000 shares, or
44.44%, of the Company's issued and outstanding common stock for
$430,000.
For the two fiscal years ended June 30, 1995 and June 30,
1996, the Registrant generated revenues of $4,232,428, and
$4,684,664, respectively, and incurred net losses of $(1,040,418),
and $(1,988,816), respectively. At the end of fiscal 1995 the
Company had several items, primarily a net capital deficiency, that
raised substantial doubt about its ability to continue as a going
concern. However, with the 1996 equity investments of $430,000,
the conversion of the $2,000,000 in redeemable preferred stock
(debt) into non-redeemable preferred stock (equity), the conversion
of $215,000 in unpaid dividends into equity, the conversion of
$160,000 in past due rent into long term liability (which was
subsequently converted to equity in September 1996), the
cancellation of certain future long term lease payment obligations
and the implementation of operating cost reductions totaling more
than $60,000 per month, the Company's financial position has been
substantially improved. Stockholders equity improved by $1,357,106
from a deficit of ($914,527) at June 30, 1995 to a net positive
equity of $442,579 at June 30, 1996.
PRODUCTS
The Company's products include various solid state electronic
medical diagnostic devices supported by several proprietary D.O.S.
and "Windows" based software programs that run on personal
computers. Current products consist of a family of ambulatory
electrocardiogram ("ECG") monitors, a family of ambulatory blood
pressure ("ABP") monitors, a peripheral vascular doppler system, a
12 lead interpretive ECG system and a hand-held, ultrasound imager.
The Company's products are assembled at and shipped from the
Company's corporate and production headquarters (see "Assembly and
Shipping", below) and are marketed by the Company and by several
private label distributors (see "Distributor/OEM", below). The
Company markets its products through in-house marketing personnel,
with extensive use of direct mail and telemarketing in conjunction
with independent manufacturers representatives (see "Sales and
Marketing", below). During fiscal 1996, a substantial portion of
product revenues was derived from sales of ambulatory ECG monitors
and blood pressure monitors and a unique combination unit that
monitors both ECG and blood pressure. The new MICROS QV
Ultrasound Imager and the Company's first marketable software
product, the MICRO ANALYST I were both announced at a national
sales meeting in early September and are expected to contribute
substantially to 1997 revenues.
Marketing of the Company's existing and proposed products are
Drug Administration ("FDA"). In addition, the ability of the
Company to successfully market its products is materially dependent
upon the extent to which medical procedures utilizing the Company's
products are reimbursable under insurance programs. While most
procedures utilizing the Company's existing products are currently
reimbursable, there is no assurance that current reimbursement
policies will continue. Further, changes in the national health
care system brought about by changes in governmental regulation,
and in the insurance industry have had and will continue to have
substantial affect on the Company and its operations. (See
"Government Regulation" and "Insurance Reimbursement", below.)
Ambulatory ECG (Holter) Monitor
An electrocardiogram ("ECG") is a primary source of
diagnostic
information for the physician as it has the capability to non-
invasively (without puncture or incision of the skin or insertion
of an instrument into the body) record and detect electrical events
of the heart, including arrhythmias (disorders of the cardiac
rhythm) and/or symptomatic or asymptomatic (without symptoms)
ischemia (the interruption of blood supply and oxygen to the heart,
caused by the blockage of coronary arteries). An ambulatory (a
diagnostic technique where the patient is monitored while engaging
in normal activities) ECG monitor consists of electrodes which are
taped to the patient's chest and connected by cables to a monitor
which records up to 24 hours of ECG information transmitted from
the electrodes. The ECG monitor stores the information received,
and, when connected to a computer and/or external printer, can be
stored for future use, displayed on a viewing monitor and/or
printed, or transmitted electronically to a remote site for
interpretation by a specialist.
The various ECG monitoring systems produced and marketed by
the Company are designed to produce a concise printout of the
recorded information. The Company currently offers a variety of
models of ECG monitoring systems. Each system consists of a
monitor, weighing approximately six ounces and powered by two
"triple A" 1.5 volt batteries, a printer, which is a standard
computer printer with certain modifications, computer software,
connecting cables and, in certain models, a personal computer and
laser printer (if desired by the customer).
The Company's proprietary MICRO FD ECG Monitor has the
ability to continuously record, and subsequently print out, up to
24 hours of ECG waveforms in a compressed format known as "full
disclosure". In addition, this system prints full size, diagnostic
quality ECG strips of clinically significant events, such as
arrhythmias and ischemia.
The Company's proprietary MICRO SI was introduced in 1988.
The MICRO SI utilizes the same basic technology as the MICRO FD,
and, in addition, by interfacing the monitor with a computer, the
reporting and/or storage options, including comprehensive printout
capabilities. Included is an option for high speed,
superimposition scanning.
The Company's proprietary "New Age" ambulatory ECG monitoring
system introduced in 1992 is an advancement over the MICRO FD and
MICRO SI systems due to its smaller size and lighter weight. The
"New Age" system is used with a direct operator interface or by
interfacing with a monitor and computer, using proprietary "New
Age" software developed by the Company, which runs on the D.O.S.
operating system. The Company has recently introduced a new
software product called "MICRO ANALYST I" for use with the New Age
which operates on a PC under the "Windows" or "Windows 95"
operating systems.
The Company has received FDA pre-marketing authorization to
market its family of ambulatory ECG (Holter) monitoring systems.
Procedures utilizing technology of the type incorporated in its
family of ambulatory ECG systems are currently reimbursable under
guidelines recommended by the Health Care Financing Administration
("HCFA"), and under most private third-party reimbursement
programs. (See "Government Regulation", below.)
Ambulatory Blood Pressure Monitor
The Company also markets a family of diagnostic devices
incorporating an ambulatory blood pressure monitor (the "ABP
Monitor"). The ABP Monitor records up to 24 hours of blood
pressure data, including systolic, diastolic and mean arterial
pressures and pulse rate in a solid state recorder. Management
believes that the ABP Monitor is smaller, lighter and quieter than
similar units available from other manufacturers, and is designed
to be more comfortable for the patient. Results recorded by the
ABP Monitor are capable of being printed out in a tabular format on
a printer or displayed on a viewing monitor.
The Company currently offers both a stand-alone ABP monitor
and combined ECG Holter and ABP Monitor. The other system is a
stand-alone ABP Monitor. The Company has received FDA pre-
marketing clearance to market the ABP Monitor. The stand-alone
blood pressure monitoring procedure is not generally reimbursable
under many existing government-sponsored reimbursement programs;
however, private, third-party insurers are increasingly approving
reimbursement for the blood pressure procedure. Management
believes that this trend is due to lower long-term costs to
carriers when hypertension is diagnosed early. The ECG Holter
procedure performed simultaneously with the blood pressure
procedure, utilizing the Company's combined ECG Holter and ABP
Monitor, is currently reimbursable under existing reimbursement
guidelines recommended by HCFA. Due to current reimbursement
guidelines, Management anticipates that domestic sales of ABP
Monitors will continue to be predominantly for the combined ECG
unique in the market as the Company believes it is currently the
only manufacturer producing a combination system.
Peripheral Vascular Doppler Recorder
For the past four years the Company has marketed a peripheral
vascular doppler recorder system (the "ULTRA PVD") manufactured for
the Company by another manufacturer. The ULTRA PVD is capable of
assisting the physician in performing diagnostic tests to determine
possible peripheral circulation problems (circulatory disorders
generally occurring in the limbs, e.g., arms, legs, hands, fingers,
feet, toes, etc.) in either the arterial or venous systems. The
system supports examinations via doppler (a recording of changes in
frequency), pneumoplethysmography (a recording of changes in air
pressure), and photoplethysmography (a recording of changes in
light intensity). The system provides the doctor with a hard copy
printout of the results of the diagnostic procedure.
Management believes that peripheral vascular doppler systems
like the ULTRA PVD complement the Company's present line of
diagnostic products and provides the office physician with a low
cost means to add extended diagnostic capability to his practice.
Procedures utilizing technology of the type incorporated in the
ULTRA PVD are currently reimbursable under HCFA recommendations
and under most private third-party reimbursement programs.
However, the Ultra PVD has become too expensive for the features
that it offers and the Company is investigating developing,
purchasing, or licensing other similar products that are P.C. based
which offer greater capabilities, and can be sold with better
profit margins.
Twelve Lead Electrocardiograph
During fiscal 1993, the Company commenced marketing a twelve
lead electrocardiograph (the "SPECTRA ECG") for use in the
physicians' office. The SPECTRA ECG is designed to operate in
conventional "12 lead" or "rhythm" modes, thus allowing the
physician to perform in-office ECG analysis. To assist the
physician in this analysis, the SPECTRA ECG performs an
"interpretive" analysis. The SPECTRA ECG incorporates computer
software that is proprietary to an unaffiliated third party. The
Company has licensed the non-exclusive right to use such software
in the SPECTRA ECG, and incurs annual license fees for such right.
The Company pays royalties based upon products actually sold,
subject to minimum annual guaranteed royalties payable to the
licensor.
The Company has FDA pre-marketing authorization for the
SPECTRA ECG. Procedures utilizing technology of the type
incorporated in the Company's family of 12 lead ECG systems are
currently reimbursable under guidelines recommended by HCFA and
under most private third-party reimbursement programs.
successful at selling the SPECTRA ECG product against aggressively
priced competitive products at prices and in sufficient quantity
that would cover manufacturing, royalty and selling expenses.
Therefore, the Company intends to phase out the SPECTRA ECG product
and investigate alternative products that are P.C. based and may
offer more capability for less cost. Reserves were booked in 1996
to cover the costs of such phase out. Effective April 1, 1996 the
minimum annual guaranteed royalty was terminated by agreement with
the Licensor.
Ultrasound Imager
The Company has completed product development of the first
model of a family of miniaturized, hand-held, ultrasound imager
(the "MICROS QV" previously known as the "Ultra PCI"). Market
introduction of this product at the American College of Emergency
Physicians show in early September gave indicators of strong market
interest. The MICROS QV displays real time, ultrasound images of
internal organs on a small flat panel television screen (3"
diagonal). The unit permits the physician to "freeze" any image on
the television screen and store up to ten images internally in
digital memory. The image may be reproduced to a hard copy through
an accompanying printer or transmitted to a personal computer for
storage on a hard disk or floppy disk for subsequent image storage,
archiving, processing or for electronic transfer to a remote
location for interpretation or "second opinion" by a specialist.
The MICROS QV weighs approximately 33 ounces and its size is
approximately 5"x2"x9". The unit is powered by a rechargeable
battery pack that provides up to two hours of continuous scanning.
Management believes that the MICROS QV is a unique product
which provides two major advantages over other currently available
ultrasound technology: first, the ease of use of a small unit, and;
second, the lower cost of the device. Management is not aware of
another hand held ultrasound imager currently available in the
marketplace. Management believes that the market for the MICROS QV
includes various hospital departments such as emergency departments
and radiology and a wide range of physicians, including
gynecologists, obstetricians, cardiologists, internists, family
practitioners and general practitioners. In obstetric examinations
the MICROS QV may be used to view fetal development; in abdominal
and gastronomical investigations, to monitor internal organs; and
in cardiology, to monitor the heart. In emergency room, ambulance
of emergency helicopter situations, life saving answers may
sometimes be found using the portable MICROS QV Ultrasound system
for immediate abdominal or pelvic exams. Findings may include (but
not limited to) pericardial effusion, left ventricle hypertrophy,
ectopic pregnancy, ovarian cyst, fluid in the abdomen, abdominal
aortic aneurysm, gall stones and kidney stones.
The Company has received FDA pre-marketing authorization for
the MICROS QV, and is currently in initial production. The Company
has been field testing pre-production units in several clinical
suggested through field testing, as well as other refinements.
While Management believes that procedures utilizing the MICROS QV
will be reimbursable on a basis equivalent to procedures utilizing
other ultrasound imagers, there is no assurance that such
reimbursement will continue at its present rate. (See "Government
Regulation", below.)
Other Products - The Company intends to identify, develop,
license or purchase technology consistent with its objective of
marketing medical diagnostic equipment and software for use in the
physicians' office and for selective niche hospital applications.
While Management is currently considering several technologies for
development by the Company, no material contractual and/or capital
commitments have yet been made with respect to any such technology.
INTERNATIONAL DISTRIBUTION/OEM ARRANGEMENTS
The Company sells its products internationally through
foreign
distributors, some of whom resell the products under their own
private label. In addition, the Company derives a portion of its
revenues from domestic and international arrangements pursuant to
which the Company manufactures products intended to conform to
specifications provided by customers, for resale by such customers
under their own respective product designations. In some cases,
the Company grants the Distributor/OEM an exclusive geographic
territory in which the Company agrees not to authorize any other
Distributor/OEM to sell products bearing the product name and/or
product configuration manufactured for any other Distributor/OEM.
The Company intends to continue to pursue Distributor/OEM business
on a purchase order basis, and is currently a party to written
Distribution/OEM Agreements with customers including Nishimoto
Sangyo Company, Ltd. ("Nishimoto"), Kontron Instruments Ltd.,
Multispiro, Inc. and Delmar Avionics.
Pursuant to the Company's distributor agreement with
Nishimoto, Nishimoto has agreed to purchase products from the
Company for resale under its product name and design in Japan and
Taiwan. In addition, at the time of execution of the initial
Distribution/OEM Agreement, Nishimoto purchased $2,000,000 of the
Company's redeemable Class A Preferred Stock. The Distribution/OEM
Agreement which expired in October 1995 was extended to October
1996. The Company believes that the Distribution Agreement will be
extended year to year. On March 31, 1996 the preferred stock
agreement was renegotiated and Nishimoto all redemption rights to
the Company. See "Market for Common Equity and Related Stockholder
Matters", below.
Nishimoto accounted for 13% of the Company's total revenues
in
fiscal 1996 and 11% in fiscal 1995; Kontron accounted for 16% in
revenues in 1996 and 10% in 1995.
Regulations applicable to the marketing of medical devices,
including claims as to product capability and performance, are
generally administered by the Federal Food and Drug Administration
("FDA"). In addition, policies concerning insurance reimbursement
for procedures performed by physicians using the Company's products
are influenced by determinations of the United States Health Care
Financing Administration ("HCFA"). The Company has, from time to
time, consulted with professional advisors experienced in FDA and
HCFA matters, however no written legal or other opinions have been
obtained from such advisors in connection with their consulting
activities or the Company's FDA filings. The Company relies upon
the expertise of Management in formulating Company policy affected
by FDA and HCFA regulations and guidelines. Further, changes in
national health care policy and other changes in governmental
regulation, have affected and will continue to affect the Company
and its operations.
FDA Review
The proprietary non-invasive diagnostic medical products
currently marketed and under development by the Company are subject
to regulatory approvals by various government agencies. The FDA
regulates diagnostic devices such as those sold and under
development by the Company. If a diagnostic product is
"substantially equivalent" to one or more pre-existing defined
products or test procedures, the FDA may not conduct a detailed
review. When there is no "substantial equivalent" to one or more
pre-existing defined products or test procedures, however, the
review process may be lengthy. While the Company does not believe
that review of its diagnostic devices currently under development
will be required, there can be no assurance that FDA clearance may
not be required and if required will be obtained, or that the FDA
will, in fact, determine that they are "substantially equivalent"
devices, or that additional testing or modifications will not be
necessary to obtain FDA clearance, all of which would result in
additional expense to the Company and would delay marketing and
sales of the products affected. The Company cannot proceed with
sales of such products until it receives clearance notification
from the FDA. In the event that the FDA requests additional
information, there could be multiple cycles of submissions, each
involving a 90 day waiting period, until clearance is obtained. If
the FDA grants pre-marketing clearance of a product, its
regulations will apply to manufacturing and marketing of the
product, including product labeling. In the event that FDA
clearance is not obtained for a product, the Company may be unable
to market such product. FDA marketing clearance does not evidence
any endorsement or product recommendation on its part.
The Company has received FDA pre-marketing clearance for its
family of Holter and ECG monitors, its ABP monitors, as well as for
the ULTRA PVD and the MICROS QV ultrasound imagers.
Suppliers of health care products and services are greatly
affected by Medicare and other government reimbursement programs,
which reimbursement rates Management believes generally parallel
government reimbursement rates. Physicians are currently
reimbursed specified amounts for diagnostic procedures performed
with the Company's products. Reimbursement programs, including
those applicable to Federal, State and private insurance carriers,
are greatly influenced by determinations and rate recommendations
made by HCFA. Regional Medicare and Medicaid administrators, as
well as private carriers, often establish their reimbursement rates
and policies, based upon HCFA recommendations.
The ability of physicians to perform procedures that are
reimbursable under insurance programs has a significant impact upon
the ability of the Company to successfully market its products. In
the event that HCFA reclassifies procedures and/or recommends new
or different reimbursement rates, or should other regulatory
changes make it uneconomic to perform diagnostic tests in a
physician's office, the Company's business could be adversely
affected.
Procedures utilizing the Company's existing family of
ambulatory ECG monitors, 12 lead ECG systems, ULTRA PVD and MICROS
QV are reimbursable under existing reimbursement codes recommended
by HCFA. However, there is no assurance that procedures utilizing
such products will continue to be reimbursable or that
reimbursement will continue at current rates. Management believes
that blood pressure diagnostic procedures are currently
reimbursable under insurance guidelines in certain regions and that
procedures utilizing the ABP Monitor are reimbursable by some
private carriers. Management expects that such reimbursement will
increasingly be approved by private carriers as the long-term cost
saving benefits of early diagnosis of hypertension are shown.
Changes in Legislation
The current political and social climate in the United States
includes the pursuit of health care reforms designed to provide
health care benefits to all Americans. However, the Republican
controlled Congress and the Democratic President have been unable
to agree upon the direction that health care reform should take.
Management believes that the original version of the "American
Health Security Act" proposed by President Clinton, if enacted,
would have had a favorable impact upon the Company's operations
because the proposed health care reforms address the need for
primary care physicians to undertake responsibility for diagnostic
testing in their office practices. An emphasis of the health care
proposal was on preventative care, i.e., early diagnostic testing
and early intervention and treatment, rather than high cost,
critical care at a later date.
While management continues to believe that health care reform
impracticable to predict the precise direction and nature that
health care reform may take. The extent of governmental regulation
in the medical diagnostic area which might arise from future
legislative or administrative action, and the consequences thereof
to the Company, cannot accurately be predicted at this time.
SALES AND MARKETING
The Company markets its products through an in-house network
consisting of marketing persons, regional sales managers and
territorial sales managers. Marketing personnel utilize on-going
direct mail campaigns and selected trade shows to create awareness
and generate leads for its sales force, and to qualify leads for
further marketing efforts. Territorial sales managers and regional
sales managers then follow-up leads and pursue sales. Sales
personnel are compensated primarily on a commission basis (and, in
certain cases, by salary plus commission). The Company also
markets its products in the U.S. through independent manufacturers'
representatives.
The Company has focused its marketing efforts toward office-
based, primary care physicians, and has found that, due to their
large number, direct mail is an efficient tool to create awareness
and generate interest in the Company's products. The Company has
also diversified lead generation through promotional campaigns in
nationally circulated magazines and journals directed towards
physicians.
The Company sells its products internationally through
foreign
distributors. Currently the Company has distribution agreements
with Nishimoto Sangyo Company Ltd for distribution in Japan and
Tiawan and with Kontron Instruments for distribution throughout
Europe.
RESEARCH AND DEVELOPMENT
The Company currently conducts research and development
activities in order to enhance existing and develop proposed
products. For the two fiscal years ended June 30, 1996 and June
30, 1995, the Company incurred research and development
expenditures of approximately $363,000, and $451,000, respectively.
Research and development expenses during the most recent fiscal
year were incurred in connection with development of the MICROS QV
and the "New Age" ECG system, and the MICRO ANALYST I software
product.
The Company intends to rely upon trade secret protection and
confidentiality agreements, as well as restrictions on disclosure
of information contained in design documentation, to safeguard its
proprietary product designs and technology. Nevertheless,
competitors may be able to learn certain of the Company's trade
Should the Company be unable to safeguard its trade secrets, it
could materially impact on the Company's business. (See "Patents
and Trademarks", below.)
ASSEMBLY AND SHIPPING
The Company's ECG monitors, its ABP Monitors and MICROS QV
Ultrasound products consist of solid state electronic components
and circuit boards, electrical cables and computer software
programs. Some components are standard items, while others will be
manufactured to the Company's specifications. The components are
generally available from multiple sources and the Company does not
believe it will be dependent upon specific suppliers as the sole
source of components for its existing and proposed products. The
Company currently has no binding arrangements with any
subcontractors. Molded plastic parts for the various products
manufactured by the Company are subcontracted for manufacture to
the Company's specifications by unaffiliated parties using tooling
owned by the Company. Component parts are assembled at and systems
are shipped from the Company's facilities.
The ULTRA PVD has been manufactured to the Company's
specifications pursuant to an agreement with an unaffiliated
manufacturer of vascular testing equipment (the "Manufacturer").
The MICROS QV consists of six modules - a transducer,
display,
interface electronics, housing, battery pack and battery charger.
The interface electronics and housing are designed to the Company's
specifications and are subcontracted for manufacture. The Company
has arranged with a subcontractor for the manufacture of such
components, and is currently seeking alternate sources of these
components so that the Company will not be dependent upon one
subcontracting manufacturer. The transducer and display are
standard items and may be obtained from a number of suppliers.
Operations at the Company's facilities include assembly,
quality control testing of components and circuit boards that
comprise the Company's existing and proposed products, servicing,
and shipping. The Company performs test and inspection procedures
in order to minimize errors and enhance operating reliability. The
Company believes that its procedures are consistent with
regulations established by the FDA with respect to manufacturing
practices for medical devices. The FDA periodically reviews the
Company's facilities and procedures.
There is a risk that the Company may have to repair or
replace
products which it markets or reimburse persons for products in use
that prove to be defective, and the Company books warranty reserve
to cover an estimate of these expenses. In addition, the Company
could be subject to claims for personal injuries or property damage
resulting from the use of its products. To date, Management is not
Company does not currently maintain product liability insurance,
and a successful product liability claim could have a materially
adverse impact on the Company's financial condition.
BACKLOG
As of June 30, 1996 and 1995, the Company did not have
significant backlog of orders. Generally, the Company builds
product to forecast and ships from stock and does not have a
significant backlog.
COMPETITION
The Company's current and proposed products face competition
from a variety of professionally accepted and recognized diagnostic
systems. Competition is based on product characteristics
(including reliability and performance efficiency), price, warranty
terms and service. Numerous companies produce medical electronic
equipment, many of which have substantially greater financial
resources and personnel than the Company. The Company also
competes with commercial services which provide ambulatory ECG and
ABP monitoring, peripheral vascular testing and ultrasound imaging
services to individual physicians, physicians' group practices and
hospitals.
The Company believes that its principal competitors in the
office ambulatory ECG market are Rozin, Burdick, Biosensor and Q-
Med, Inc.; and in the ambulatory blood pressure market are
Spacelabs, Inc., and Welch Allyn. Competitors in the peripheral
doppler market include IMEX, Inc. and New Med, Inc. The Company
believes there is currently limited competition in the portable
ultrasound market as Management knows of no hand held ultrasound
imager currently being produced or manufactured; however, larger,
less portable ultrasound imagers are currently being marketed for
use in hospitals, labs, clinics and in the physicians' office. The
efficacy of the Company's products has not been verified by
independent sources.
PATENTS AND TRADEMARKS
Management does not believe that the technology incorporated
into its ECG monitors, ABP Monitors and other current products, or
to be incorporated in the Company's proposed products, is amenable
to patent protection because such technology is not new, but rather
represents innovative uses for existing technology. The Company
intends to rely upon trade secret protection and confidentiality
agreements, as well as restrictions on disclosure of information
contained in design documentation, to safeguard its proprietary
product designs and technology. Nevertheless, competitors may
"reverse engineer" the Company's products and thereby learn certain
of the Company's trade secrets or copy its product designs or
develop similar products. Should the Company be unable to
safeguard its trade secrets, it could materially impact on the
law ownership and unpatented proprietary processes to protect its
trade secrets, there is no assurance that others will not
independently develop such processes or independently develop
substantially similar processes and even obtain patents thereon.
(See "Research and Development", above.)
The Company claims common law trademark ownership of the
identifying names of its products (e.g., MICRO SI, ULTRA PVD,
SPECTRA ECG, MICROS QV, MICRO ANALYST I, etc.), and evidences such
ownership claims through the use of symbol "TM". The Company
intends to claim trademark ownership with respect to identifying
names of proposed products, as and when such proposed products are
shipped or sold. The Company has not sought and does not currently
intend to seek formal Federal trademark registration for its
product names. Such common law trademark ownership provides
trademark protection only in jurisdictions in which the trademark
is actually used and, therefore, it is possible that third parties
may claim trademark ownership in the Company's marks in
jurisdictions where the Company is not actually using the
trademark. While Management believes that Federal registration is
not required in order to obtain trademark protection, such
registration would provide certain protection in addition to those
afforded by the use of the symbol "TM" (e.g., the right to sue in
Federal court for trademark infringement; constructive notice of a
claim of ownership, which eliminates a good faith defense for a
party adopting the trademark subsequent to the date of
registration; and prima facie evidence of the validity of the
registration, Registrant's ownership of the mark and of
Registrant's exclusive right to use the mark in commerce in
connection with the goods specified in the registration
certificate). In the event a third party were to successfully
challenge any trademarks used by the Company, significant expense
in adopting new trademarks could be incurred.
EMPLOYEES
The Company currently employs 32 full-time persons consisting
of its Chief Executive Officer, its 3 Vice Presidents, a sales and
marketing staff of 11, a manufacturing staff of 8 persons, 2
service persons and 1 quality control person, a product development
engineering staff of 3, and 3 administrative persons. The Company
is not a party to any collective bargaining agreement and believes
it enjoys harmonious employee relations.
Item 2. Description of Property
The Company is a party to a lease agreement (the "Lease")
with
South Carolina Real Estate Development Company, Inc. (the
"Landlord"), pursuant to which the Company leases approximately
20,800 square feet situated thereon. The land and building (the
"Premises") are located at the Carolina Research Park, in Columbia,
South Carolina. The Lease was originally for a term of fifteen
years, which commenced on or about January 20, 1993. In January
1996, the Company made an agreement with the Landlord to pay
$6,250.00 per month of the $13,004.92 monthly accruing rent, as
well as, $7,000 per month against $29,593.83 in accrued property
taxes. The accrued rent of $169,446.83 has been in arrears since
April 1995. The agreed upon reduced monthly payment is being
applied to the arrearage. On September 20, 1996, the Company
terminated it's lease effective October 31, 1996 and satisfied all
past due amounts with the issuance of 160 shares of $1,000 per
share face value Class A Preferred Stock. The Class A Preferred
Stock carries an annual dividend of five percent (5%) payable in
January of each year. The lease was terminated with no further
obligations on future periods of the lease.
The Company is a party to a new lease agreement (the "Lease")
with T & L A Partnership (the "Landlord"), pursuant to which the
Company has leased a 10,080 square foot building located at 6
Woodcross Drive, Columbia, South Carolina 29212. This Lease is for
a term of five years, which commences on November 1, 1996. The
Lease provides for the Company's payment of rent in the amount of
$6,720 per month for year one, $7,056 per month for year two,
$7,392 per month for year three, $7,728 per month for year four,
and $8,064 per month for year five of the Lease term. The Company
is required to maintain the property at its expense, and to pay the
costs of electricity, lights, water, sewer, heat, janitor service
and all other utility services consumed in connection with the
Company's tenancy. The Company will have the option of
renewing
the lease for an additional five (5) years at the prevailing rate
in effect at the end of the initial five year lease period, with
all terms and conditions of the original lease applicable
throughout the second or optional five years. The Company also has
an eighteen (18) month purchase option with the right to buy the
property or assign this option to an affiliated party.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the
Registrant is a party or of which any of its property is subject,
nor is the Company aware of any material proceedings to which any
officer, director or affiliate of the Registrant or beneficial
owner of more than 5% of Registrant's outstanding securities, or
any associate of any such persons, is a party adverse to the
Registrant or has a material interest adverse to the Registrant,
except as follows:
The Company is a third party defendant in a lawsuit commenced
on or about July 28, 1993 under the caption Joseph W. Grefer v.
Paul Anderson, individually, and d/b/a Crossroads Commons (New York
commenced by a former employee of the Company against the landlord
of the Company's prior Liverpool, New York facilities. The action
involves injuries allegedly sustained by the plaintiff as a result
of falling on a walkway on which ice and snow had accumulated. The
defendant has cross-claimed that any injury sustained by the
plaintiff resulted from the Company's negligence. The plaintiff is
seeking $720,000 from the defendant. The Company has notified its
insurance carrier of the commencement of the third party claim and
believes it has meritorious defenses thereto. The parties are in
the process of discovery.
The Company is a defendant in a lawsuit commenced on August
12, 1994 in Court of Common Pleas, State of South Carolina, under
the caption Keshlear Associates, Inc. v. Advanced Medical Products
Inc. The plaintiff is seeking to recover an employment fee
allegedly due in an amount of less than $10,000. However, one of
plaintiff's claims seeks $132,840 in damages, plus attorneys fees
and has asserted a right to treble damages under a provision of
South Carolina law authorizing such damages upon a finding of a
willful failure to pay an employment fee. The Company is
vigorously defending this litigation, is advised by litigation
counsel that the plaintiff's motion for summary judgment was
denied, and the parties are awaiting trial of this matter.
The Company is a defendant in a lawsuit commenced on March
14,
1996 in the Court of Common Pleas, State of South Carolina, under
the caption Shannon M. Groff vs. Advanced Medical Products Inc.
This civil action is filed on an alleged wrongful employment
termination and breach of an employment agreement complaint. The
plaintiff is seeking to recover approximately $75,000 in damages.
The Company intends to vigorously defend this litigation.
Discovery is currently being conducted and trial is not expected
for another six months. Shannon M. Groff is the daughter of
Clarence P. Groff, a shareholder and past Chief Executive Officer
and director of the Company.
On or about February 16, 1993, the United States Securities
and Exchange Commission ("SEC") commenced a private investigation
of the Company's accounting and recordkeeping practices to
determine if violations of Federal securities laws have occurred.
In 1995 the SEC notified the Company that they intended to pursue
allegations that the Company filed with the SEC financial reports
that did not follow Generally Accepted Accounting Principles (GAAP)
in a number of instances for periods from 1988 to 1992. On
September 5, 1996, the Securities and Exchange Commission accepted
an offer of settlement dated January 26, 1996 (see footnote 10 to
the Financial Statements).
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders,
the solicitation of proxies or otherwise, during the fourth quarter
of the fiscal year covered by this report.
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters
The Registrant's Common Stock, $.01 par value, is traded in
the over-the-counter market and, through February 1, 1995 was
quoted on the NASDAQ automated quotation system under the symbol
"ADVA". The Company's Common Stock was delisted from NASDAQ
trading commencing February 2, 1995, due to the Company's inability
to meet NASDAQ capital and surplus requirements.
Set forth below is the range of high and low bid information
for the Registrant's Common Stock for the two preceding fiscal
years. Quotations through February 1, 1995 are reported by NASDAQ
and reflect closing bid prices. Quotations subsequent to February
1, 1995 are reported from the Pink Sheets and reflect daily bid
prices. These quotations represent prices between dealers, do not
reflect retail mark-up, mark-down or commissions, and may not
represent actual market transactions.
High Bid
Low Bid
Third Calendar Quarter, 1994 15/16
5/8
Fourth Calendar Quarter, 1994 1
1/2
First Calendar Quarter, 1995 3/4
1/16
Second Calendar Quarter, 1995 5/16
1/16
Third Calendar Quarter, 1995 7/16
3/16
Fourth Calendar Quarter, 1995 1/2 3/16
First Calendar Quarter, 1996 7/16
1/4
Second Calendar Quarter, 1996 1/2
1/4
record holders of the Registrant's outstanding Common Stock.
The Registrant has never paid any cash dividends on its
Common
Stock and does not anticipate paying cash dividends on its common
stock in the foreseeable future, but rather intends to retain
earnings, if any, for future growth and expansion opportunities.
Payment of cash dividends in the future will be dependent upon the
Registrant's earnings, financial condition, capital requirements
and other factors determined to be relevant by the Board of
Directors.
Registrant has 4,000 shares of authorized Class A Preferred
Stock, no par value, of which 2,273 shares are currently issued and
outstanding. Nishimoto Sangyo Company, Ltd. ("Nishimoto") owns
2,113 shares, and 160 shares are owned by SCANA Corporation. The
Class A Preferred Stock provided that a majority of the holders of
such shares may require Registrant to redeem all or any portion of
such shares at any time following the expiration or termination of
that certain Distribution Agreement between Registrant and
Nishimoto, dated September 8, 1992, as amended, or in the event of
a change of control of Registrant of a nature which would be
required to be reported in response to Item 6(e) of Schedule 14A of
the Securities Exchange Act of 1934, as amended. Further,
Registrant was required to redeem all outstanding shares of the
Class A Preferred Stock on October 15, 2002.
Pursuant to that certain First Amendment to Preferred Stock
Purchase Agreement between Registrant and Nishimoto, effective as
of March 31, 1996 (the "Amendment"), Nishimoto assigned to
Registrant all rights of redemption, mandatory or otherwise, to
which Nishimoto was entitled with respect to all or any part
of the Class A Preferred Stock. The rights of redemption which
were assigned included all demand redemption rights upon the
expiration or termination of the Distribution Agreement or as of
October 15, 2002.
Nishimoto further agreed that any transaction which has or
may
result in a change of control of Registrant which is sufficient to
entitle it to demand redemption rights were waived and are not
applicable in the event Carolina Medical, Inc. or any of its
affiliates, including BIOTEL International, Inc., is the party or
parties acquiring control of Registrant. In any other transaction
involving a change of control sufficient to result in demand
redemption rights to Nishimoto, if Nishimoto does not consent to
any such change of control, Nishimoto will continue to enjoy demand
redemption rights with respect to such transaction.
Additionally, Registrant and Nishimoto modified the
definition
of "change of control" for this purpose. A "change of control"
the voting rights of greater than fifty percent (50%) of each class
of outstanding voting shares of capital stock of Registrant or the
transfer of substantially all of Registrant's assets. These
modifications were effected solely by contract between Nishimoto
and Registrant, and have not been incorporated in Registrant's
certificate of incorporation.
The terms of the Class A Preferred Stock entitled the holder
thereof to cash dividends at the rate of $50.00 per annum per
share. Dividends on such shares are cumulative. Such dividends
are payable annually in arrears. The dividends payable upon the
Class A Preferred Stock for December 31, 1994 and December 31, 1995
were not paid to the holder of such shares. As of March 31, 1996,
the total arrearage was $215,000. Pursuant to the Amendment with
Nishimoto, Registrant satisfied the accrued, but unpaid, December
31, 1994 dividend and interest thereon by the issuance of an
additional 113 shares of no par preferred stock as an offset to
$113,000 of their accrued dividend and accumulated interest. The
balance of $102,000 of their accrued dividend and interest due
December 31, 1995 was converted into 300,000 shares of $0.01 par
common stock at $0.34 per share as of March 31, 1996 to be issued
by December 31, 1996. Registrant must amend its certificate of
incorporation to increase the number of authorized shares of common
stock in order to issue 300,000 shares to Nishimoto. If
stockholder approval is not obtained by December 31, 1996, and the
shares are not issued, then the accrued December 31, 1995 dividend
of $100,000, together with all interest accrued thereon through
such date, will become immediately due and payable. Nishimoto
waived and released any and all claims and causes of action against
Registrant arising on account of the nonpayment of the December 31,
1995 dividend.
On January 12, 1996 Carolina Medical, Inc., a privately held
medical device manufacturing company located in King, North
Carolina, purchased 750,000 shares of Advanced Medical Products,
Inc.'s authorized but unissued common stock for $150,000. BIOTEL
International, Inc., a holding company that owns a majority
interest in Carolina Medical's stock, purchased an additional
1,400,000 shares of Advanced Medical's common stock on March 29,
1996 for $280,000. As a result of these stock purchases, BIOTEL
International beneficially owns an aggregate of 2,150,000 shares,
or 44.43%, of the Company's common stock.
Item 6. Management's Discussion and Analysis
This analysis of the Company's financial condition, capital
resources and operating results should be viewed in conjunction
with the accompanying financial statements, including the notes
thereto.
RESULTS OF OPERATIONS
Net sales decreased 10% to $4,232,428 in fiscal 1996 from
$4,684,664 in fiscal 1995 following a 29% decline in sales from
1994 to 1995, and a 7% decrease from 1993 to 1994. These decreases
were primarily the result of unsettled market conditions in the
medical device market, and in the health care industry in general,
caused by governmental and insurance company driven health care
reform. Many of the Company's customers, primarily office based
physicians, have sold their practices to hospitals or managed care
groups, or have seen their incomes capped, which caused them to
delay investing in capital equipment to enhance their practices.
Gross margin decreased from 45% in fiscal 1995 to 42% in
fiscal 1996, due to the write-offs and reserves totalling $406,000
for obsolete and discontinued inventory. Without these write-offs
and reserves, the 1996 gross margin would have improved to 51%.
Selling, general and administrative expense included wages
and
salaries of approximately $748,043 in fiscal 1996 (including the
severance package of $85,040 for the previous President), and
$762,000 in fiscal 1995 with the fiscal 1996 decrease being
attributed primarily to the January 1996 layoffs. The Company is
currently under a hiring and wage freeze in order to control
payroll expenses. Selling and marketing costs related to sales and
distribution of the Company's products decreased to $1,157,206 in
fiscal 1996 compared to $2,206,789 in fiscal 1995. The fiscal 1996
decrease occurred primarily in the second half of the year due to
layoffs of sales personnel, commission restructuring and other cost
cutting measures, and more cost efficient lead generation programs.
The overall decrease in selling, general and administrative from
$3,561,249 in fiscal 1995 to $2,651,628 in fiscal 1996 is primarily
due to January layoffs and continued efforts to reduce and control
costs.
The net loss for fiscal 1996 was $(1,040,418), compared to
$(1,988,816) for fiscal 1995. Management attributes $800,000 of
the 1996 loss to the write-off of and reserves against
manufacturing inventory of $406,000, write-offs of $115,332 of
previously capitalized engineering prototype inventory, $194,933 of
bad debts from prior periods, and the severance package of $85,040
for the Company's previous President. These expenses are not
expected to recur in future operations. The remaining loss of
$240,000 was the result of disproportionate operating expenses
during the first half of the fiscal year which were substantially
reduced during the third and fourth quarters. The Company
generated $43,000 in profit from operations, prior to write-offs
and reserves, during the fourth quarter of fiscal 1996.
Accounts receivable decreased from $643,153 in June 30, 1995
to $547,441 at June 30, 1996. The decrease resulted from decreased
revenues and efforts to expedite collections.$749,770 at June 30, 1996.
The decrease resulted from efforts to
reduce purchases and from write-offs of certain obsolete inventory
and reserves for discontinued product lines.
Other current assets decreased from $256,678 in fiscal 1995
to
$117,095 in fiscal 1996. The decrease is primarily due to the
expensing of an uncollectible note receivable and the elimination
of lease deposits as a result of debt restructuring.
Accrued wages and commissions increased from $93,287 in
fiscal
1995 to $121,014 in fiscal 1996. The increase results from a
change to semi-monthly from bi-weekly payroll.
Research and development costs for fiscal 1996 were
approximately $363,000 compared to approximately $451,000 in fiscal
1995. The fiscal 1996 expenses include $115,000 resulting from
write-offs of prototype inventory charged to engineering
development. The decrease is due to the reassignment of certain
engineering personnel.
Fiscal 1995 Compared to Fiscal 1994
The Company's net sales decreased 29% to $4,684,664 in fiscal
1995 from $6,567,573 in fiscal 1994. This decrease was primarily
a function of decreased domestic sales due to continued uncertainty
in the marketplace resulting from proposed healthcare reforms. As
proposed healthcare reform lost momentum during the latter part of
fiscal 1995, domestic sales began to increase; however, these
increases did not enable the Company to recover the substantial
revenues lost in the earlier part of the year. Sales to the
Company's original equipment manufacture customers remained
approximately constant at $2,333,069 in fiscal 1995 compared to
$2,485,310 in fiscal 1994.
The Company's gross profit margin decreased from 56% in
fiscal
1994 to 45% in fiscal 1995. This reduction is primarily attributed
to losses in efficiency resulting from reduced production volume.
Selling, general and administrative expenses in fiscal 1995
and fiscal 1994 consisted primarily of salaries and wages
(approximately $762,000 in 1995 and $755,000 in 1994, with the 1995
increase being primarily attributable to the annual officers'
contractual salary increases), selling and marketing costs relating
to sales and distribution of the Company's products (approximately
$2,206,789 in fiscal 1995 compared to $2,481,198 in fiscal 1994),
and expenses incurred as a result of re-valued assets
(approximately $1,105,521 in fiscal 1995 compared with
approximately $277,622 in fiscal 1994, with the 1995 increase being
attributed to adjustments in accounts receivable, inventory and
other current assets).$(371,607) for fiscal 1994. Management attributes
this loss to significantly reduced revenue in the fiscal year.
Accounts receivable decreased from $2,008,001 in fiscal 1994
to $643,153 in fiscal 1995. This decrease results from decreased
revenues, efforts to expedite collections and the write-off of
older receivables deemed uncollectible.
Inventory decreased from $1,496,615 in fiscal 1994 to
$1,208,358 in fiscal 1995, as efforts to reduce inventory and
increase inventory turn over began to take effect, and certain
obsolete inventory was written off.
Other current assets decreased from $329,751 in 1994 to
$256,678 in the current year, as a result of adjustments in re-
valuing certain assets, including past employee loans.
Accrued wages and commissions decreased from $127,157 in
fiscal 1994 to $93,287. This decrease is a result of decreased
sales and correspondingly decreased commissions.
Research and development costs for fiscal 1995 were
approximately $451,000, compared with approximately $718,000 in
fiscal 1994. This decrease reflects a general decrease in
development activities.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities used $309,453 of cash during fiscal 1996
compared with $81,558 used during fiscal 1995. In fiscal 1996,
$90,459 was used for capital expenditures compared with $50,818 in
fiscal 1995.
Cash decreased from $32,111 at June 30, 1995 to $14,631 as of
the end of fiscal 1996.
On March 12, 1996 the Company restructured eight operating
leases and it's short term note with Onbank of Syracuse, New York
into one long term note. The principal portion at June 30, 1996
was $74,964. As part of the agreement, $83,096 in delinquent lease
payments and $8,754 past due interest on the short-term note were
forgiven and recorded on the Company's income statement as an
extraordinary item. The agreement further stipulates that should
the Company be 10 days delinquent with payment the forgiven
interest of $8,754 will become payable.
Note Payable -Onbank
Term: 4 years $33,248 secured by furniture,
Interest: 11% fixtures & equipment
Payment: $2,000/mo* $41,716 unsecured
Beginning: 4/1/96
During fiscal 1996 the Company was released from a factoring
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<RECEIVABLES> 589,487
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