ITEM 1. BUSINESS
Aequitron Medical, Inc. (the "Company" or "Aequitron") is primarily engaged in the development, manufacture and distribution of medical electronic devices for home health care and hospital use. The Company was formed as a Minnesota corporation on May 8, 1980. The Company's medical electronic products include electronic equipment and related accessories for monitoring and analyzing respiration and heart rate data for infants considered susceptible to episodes of apnea, a line of ventilator products used to assist respiration in patients suffering from chronic obstructive pulmonary disease or other breathing difficulties, and sleep disorder diagnostic products.
The Company, through its Crow River Industries, Incorporated subsidiary ("Crow River"), also manufactures and sells wheelchair lifts, securement systems and automobile hand controls for the mobility-impaired.
In June 1995, the Company acquired a line of products and inventory for the diagnosis of sleep disorders. As a result of the acquisition, the Company now designs, manufactures and markets computer-based diagnostic devices for sleep disorders such as sleep apnea (the cessation or interruption of breathing during sleep), insomnia and narcolepsy. The products produced include (i) a sleep lab product line, SLEEPLAB(R), which records, processes and permits analysis of comprehensive sleep study data, (ii) a portable sleep staging device, the Sleep I/T(R), (iii) a portable recording device, the PolyG(R), for in-home sleep apnea testing, (iv) portable recording devices, Serena(TM) and Serena MX(TM) and (v) Matrix Sleep(TM), a Windows(R)-based sleep analysis software package.
INFANT APNEA PRODUCTS
The Company designs, manufactures and markets monitors intended to detect central apnea, bradycardia (an abnormally low heart rate) and tachycardia (an abnormally fast heart rate) in infants. Prolonged apnea incidents are generally considered to be a contributing factor of Sudden Infant Death Syndrome ("SIDS"), commonly referred to as "Crib Death." Although it is presently impossible to predict precisely which infants are susceptible to SIDS due to apnea, it is known statistically that certain categories of infants have a higher incidence of SIDS. These categories include infants with low birth weights, premature infants, infants with siblings who have had apnea-related problems or have succumbed to SIDS, and infants who have experienced apnea episodes and survived.
The Company's principal products in this area are its Model 9500/9550 respiration/heart rate memory monitors (the "Model 9500/9550 Memory Monitors"), which are designed to be used in homes and hospitals. The Model 9500/9550 Memory Monitors, which were introduced in May 1989, have respiration and heart rate monitoring capabilities as well as internal recording capabilities. The Company has manufactured and marketed respiration/heart rate monitors since June 1982. Additionally, the Company offers the Model 9216 respiration/heart rate monitor used in hospital monitoring.
Since June 1990, the Company has also been selling the Model 9101 multi-channel recording and analysis system (the "Model 9101"), which is a diagnostic device designed to assist physicians in managing patients of all ages who experience breathing disorders while sleeping. A portable version of the Model 9101 was introduced in July 1991 for home or hospital use.
The Company's infant apnea-related products and accessories accounted for approximately 18%, 27% and 28% of the Company's net sales in fiscal 1996, 1995 and 1994, respectively.
Model 9500/9550 Respiration/Heart Rate Memory Monitors
The Model 9500/9550 Memory Monitors are portable monitoring devices which are attached by placing a padded belt holding electrodes around the infant's torso in the correct position on the infant's skin. Model 9500/9550 Memory Monitors are used to monitor the infant's respiratory and cardiac functions and are intended to sound an alarm when these detected functions deviate from norms established by the physician for that infant. The alarm can be set for apnea, tachycardia and bradycardia events. The alarm normally alerts the parents or caregiver in attendance of the possible need to stimulate the infant or take other appropriate action.
Model 9500/9550 Memory Monitors have capabilities so that information on apnea, bradycardia or tachycardia events is recorded internally and can be printed out at a later time in graphic format. Both the Model 9500 and 9550 Memory Monitors record on/off times and provide a complete log, a summary report of what happened during the monitoring period, and a compliance graph and event histograms. The information generated provides clinicians with compliance patterns, objective alarm verification data, and assistance in determining monitor discontinuance. The Model 9550 Memory Monitor also interfaces with a pulse oximeter which measures pulse rate and blood oxygen saturation level.
Recorded information can be transmitted by telephone or by a direct connection from the Model 9500/9550 to a compatible PC. Report generator software analyzes the data received and provides the physician with a printed copy of the recorded data.
The Model 9500/9550 Memory Monitors, which have been designed for both hospital and home use, are used primarily for the monitoring of infants in the home. Monitoring at home is less expensive than hospitalization and has proven to be a cost-effective alternative to hospital monitoring when the necessary training, service and supervision for in-home use are available.
The Company sells its products primarily to home health care dealers, who in turn rent or sell units to families of infants who have been diagnosed as susceptible to apnea. The expense of the monitor is generally covered by third party payors.
The Company also has a series of accessories that may be used with Model 9500/9550 Memory Monitors or may be sold separately. These include remote alarms, a digital ratemeter, an impedance tester, cables, carrying cases and a variety of electrodes.
Model 9216 Respiration/Heart Rate Monitor
In February 1988, the Company introduced and sold its first Model 9216 Respiration/Heart Rate Monitor, which is designed to meet the needs of hospitals that monitor both adult and pediatric patients. The Model 9216 is portable (7 lbs.), contains an eight-hour rechargeable battery and displays the patient's heart and respiration rates. The Model 9216 is used in a number of cardiorespiratory monitoring applications, such as in neonatal intensive care units, patient transport and recovery rooms.
Model 9101 Recording and Analysis System
In June 1990, the Company introduced the Model 9101, a multi-channel recording and analysis system which can be used in conjunction with the Company's respiration/heart monitors. This diagnostic device has been designed to help physicians manage patients of all ages who experience breathing disorders while sleeping. It records and analyzes eight physiological parameters including the patient's respiration, EKG, air flow, blood oxygen saturation and esophageal pH. The Model 9101 processes the recorded data through a sophisticated software program for analysis. The Model 9101 has been designed for use in sleep or breathing disorder laboratories and in neonatal and pediatric intensive care units. A portable version of the Model 9101 was introduced in July 1991 for both home and hospital use.
PORTABLE COMPACT VENTILATORS
In August 1986, the Company purchased for $6 million all the outstanding stock of Life Products, Inc. ("Life Products"), a Colorado-based corporation engaged in the manufacture and sale of portable breathing assistance devices. With the acquisition of Life Products, the Company began to manufacture a line of compact, portable breathing assistance devices and related accessories for use in home, hospital, nursing facility and patient transport settings. The devices are used to assist and monitor respiration in patients suffering from chronic obstructive pulmonary disease or breathing difficulties caused by spinal cord injuries, polio or other trauma. In June 1991, the Company introduced the Model LP10 Compact Volume Ventilator ("LP10 Ventilator"). The LP6 Plus Ventilator ("LP6 Plus") was introduced in July 1992 to replace the Company's original LP6 Ventilator ("Original LP6"). The Company designed the LP6 Plus in order to utilize more current technology and incorporate parts and supplies which are more readily available. In July 1996, the Company introduced the Model LP20 Portable Volume Ventilator ("LP20 Ventilator").
Traditionally, positive-pressure ventilators are one of two types: (i) intensive care unit ventilators designed for continuous use in hospitals and (ii) portable ventilators designed for continuous use in the home, subacute settings or for transport. The LP6 Plus, LP10 Ventilators and LP20 Ventilators, like all positive pressure ventilators, force air into the patient's lungs at regular pre-set intervals and are used in all patient care settings.
The Company believes the LP6 Plus and LP10 Ventilators are well known to dealers as state-of-the-art technology and are well established in the marketplace. The LP6 Plus and LP10 Ventilators use a microprocessor controlled system with an integrated motor, gear box and pumping process, which greatly reduces periodic maintenance intervals and improves access to the system. The LP6 Plus and LP10 Ventilator casing has a one-piece molded manifold that reduces potential for air leaks. The LP6 Plus and LP10 Ventilators have been designed for ease of operation with calibrated control knobs, an analog pressure meter and audible/visual alarms. The units are portable (32 lbs.) and have a remote alarm and remote printer accessories, as well as other accessories. The most notable features of the LP10 Ventilator include a pressure plateau valve for the pediatric market and a printer interface for recording data to assist resolution of potential problems and offer greater detail to alarm occurrences.
The LP6 Plus and LP10 Ventilators are marketed for general use in the home; in hospitals for various uses including intensive care units, burn care units, cardio-pulmonary treatment, and patient transport; in nursing homes; in air and ground emergency transport; and in long-term acute care/subacute care facilities. The Company's principal focus has historically been home health care sales. The LP6 Plus (or its predecessor, the Original LP6) and LP10 Ventilators and accessories accounted for approximately 47%, 47% and 44% of the Company's net sales in fiscal 1996, 1995 and 1994, respectively.
Pursuant to an original equipment manufacturer agreement between the Company and Dragerwerk Aktiengesellschaft, a corporation with its principal place of business in Germany ("Dragerwerk"), the Company has redesigned the Original LP6 and LP10 Ventilators to Dragerwerk's specifications for distribution by Dragerwerk outside the United States. Dragerwerk markets the redesigned ventilators under the name Drager EV800 and EV801.
The LP20 Ventilator, which just received FDA approval in July 1996, is very similar to the LP6 Plus and LP10 Ventilators, except that it was designed especially for subacute and acute care markets. The significant differences include a built-in nurse call system without the use of an additional interface device and differentiating low and high pressure alarms for more accurate analysis of the user's breathing condition.
SLEEP DISORDER DIAGNOSTIC DEVICES
On June 1, 1995, the Company acquired the sleep diagnostic business from CNS, Inc. pursuant to an Asset Purchase Agreement dated May 8, 1995. The assets acquired include all rights to CNS, Inc.'s sleep diagnostic products, all applicable patents and a product currently under development.
Following the acquisition, the Company now manufactures two new types of computer-based products used to diagnose sleep disorders: (i) hospital and clinic-based sleep laboratory equipment and (ii) portable devices for use primarily outside traditional hospital sleep laboratories. The diagnosis and treatment of sleep disorders such as sleep apnea, insomnia and narcolepsy have expanded significantly in recent years.
The Company believes the largest market for its sleep disorder diagnostic devices is sleep apnea, which is estimated to afflict 4% of the U.S. adult population. Sleep apnea patients typically stop breathing hundreds of times during the night, disrupting their sleep and causing significant cardiorespiratory problems. In addition, because their sleep is frequently disrupted, apnea patients have greater difficulty staying awake during the day and are more likely to fall asleep at work or while driving. The Company believes that the level of interest in providing more testing for sleep apnea has been increasing because of the large number of people believed to be affected by this disorder and because safe and effective therapy is available. However, the extent to which this trend will continue may be influenced by potentially lower reimbursement rates.
In sleep labs, patients are typically monitored for one or two nights with a polysomnograph which records any or all of the following data: EEG, EKG, eye movement, respiration (flow and effort of breathing), muscle activity from the chin and legs, blood oxygen level, snoring sounds and body position. The Company's sleep disorder diagnostic products reduce the costs and time required to gather, analyze and store sleep study data obtained compared with other data that is obtained without the use of computer-based diagnostic equipment and when compared to competitive systems.
The Company currently manufactures and sells the following computer-based products used principally in the diagnosis of sleep related disorders.
SLEEP LAB(R) (Sleep Disorders Laboratory Systems)
The Company's laboratory systems are used primarily in hospital sleep labs where comprehensive sleep studies are performed. The Company's systems record EEG, EKG, eye movement, respiration, muscle activity from the chin and legs, blood oxygen level, snoring sounds, body position and penile tumescence, and stores that information on an optical disk cartridge or onto a hard disk. In addition to recording and storing the patient's physiologic data, the systems process data on-line during the recording session using the Company's proprietary software algorithms, and provide a compressed representation of the data for rapid review and analysis after the recording session has been completed. The operator reviews samples of the raw data selected from the findings in the processed data and has the ability to set parameters so that the analysis of the data can be tailored to a specific patient. In addition, the analysis software provides the user with extensive editing capabilities that allow a user to override the computer's decisions on an event-by-event basis.
The Company believes its diagnostic systems increase the operating efficiencies and improve the results of sleep labs by reducing analysis time, increasing technician productivity, expediting communication of test results, reducing recording and storage costs and providing a more standardized analysis.
Sleep I/T(R) (Sleep Integrated Technology) Portable Sleep Staging Device
The Sleep I/T is a portable sleep staging device intended for use outside the sleep laboratory. This small, 1.5 pound, battery-operated device can be placed at the home bedside for nighttime recording of the patient's sleep data. The information recorded using Sleep I/T differs from PolyG and includes EEG, eye movements, limb activity and muscle activity from either the chin or legs, providing the operator with information regarding the quality of the patient's sleep. Oxygen saturation, snoring sounds and respiratory effort can also be recorded. Once the unit is returned to the physician, the data can be transferred to a computer, analyzed and viewed. In addition to testing for sleep apnea, the device may also be used to test for a variety of other sleep disorders, including insomnia.
PolyG(R) Portable Apnea Recorder
The PolyG is a portable sleep disorder diagnostic device used primarily for sleep apnea testing. This small, 12 pound, battery-operated device measures and records EKG, oxygen saturation, respiratory flow and effort, body position and the level of positive airway pressure delivered to the patient via continuous positive airway pressure ("CPAP") delivered at the nose. The information collected with the PolyG can be analyzed using the Company's sleep disorders laboratory system or an IBM(R) compatible personal computer operating the Company's analysis software.
Patients can be tested using the portable PolyG in locations other than in the sleep laboratory. For example, the PolyG is useful in intensive care units for testing patients too ill to be tested in the sleep lab. It is well suited for small hospitals and physician group practices. Additional software programs for IBM compatible personal computers are available to allow users to manipulate and analyze data collected using a PolyG.
Serena(TM) Portable Apnea Recorder
The Serena(TM) and the Serena Mx(TM) are portable devices used primarily to perform sleep testing on adults. There are a maximum of nine channels of physiologic data that can be recorded including pulse rate, respiratory flow, body position and limb activity. The Serena Mx(TM), in addition, records respiratory effort and tracheal sound. Both devices are battery operated and are capable of performing an analysis function without the aid of an additional computer. The products are sold both in the domestic and international markets. Apnoescreen, a brand name that covers four models, performs apnea recording and analysis and is sold in the European market only.
Matrix Sleep(TM) Analysis Software
Matrix Sleep is a Windows(R)-based sleep analysis software package which provides user-friendly options in recording, analyzing and reporting sleep study data. Some of these options include customer requested features such as "Snapshot," which lets the user capture specific segments of important data for immediate or later review. Also, the Patient Profile Screen provides the viewer with critical and milder events simultaneously allowing a patient classification by sleep disorder and severity. The ReportGenerator function allows the user to print reports while analyzing a case or using other Windows applications.
MOBILITY EQUIPMENT
In December 1986, the Company acquired all the assets, properties and equipment of Crow River Industries, Inc., a Minnesota corporation that manufactured and marketed wheelchair lifts, securement systems and automobile hand controls for the mobility-impaired. These products are manufactured and sold through the Company's subsidiary which operates under the name Crow River Industries, Incorporated ("Crow River").
Crow River products are installed in vans, school buses, nursing home transporters and certain municipal buses used in transportation of handicapped or mobility-impaired persons. The Company's wheelchair lifts are sold under the names Vangater(TM), Vangater(TM) II, Mini-Vangater(TM), Transgater(TM) and Ultragater(TM).
The lifts are powered either electro-mechanically or electro-hydraulically. Crow River also markets a complete line of driving assistance aids under the name Mobility Products and Design. Crow River products accounted for approximately 21%, 26% and 26% of the Company's net sales in fiscal 1996, 1995 and 1994, respectively.
OTHER MATTERS
New Products and Research & Development
The Company's research and development efforts focus primarily on developing improvements to its existing products and introducing new products in its areas. Research and development costs of $3,369,400, $2,953,700 and $1,896,600 were incurred in the fiscal years ended April 30, 1996, 1995 and 1994, respectively, for product development and improvements of existing products.
Raw Materials and Supplies
The Company assembles its medical electronic products from electronic components and housings manufactured by other companies and from other parts, including control panels, which subcontractors make to comply with Company specifications. The Company has not experienced any significant shortage of materials or parts, even though a few of the components that the Company uses are manufactured by only one or a few companies. The Company believes it maintains sufficient inventory and, in most cases, has the ability to design around temporary shortages caused by an inability to obtain components from its suppliers.
Intellectual Property
The areas in which the Company is engaged are characterized by significant research and development and are noted for frequent introduction of new and advanced techniques, products and devices. Therefore, despite existing and potential patent protection, products in this market, including the Company's, are subject to possible technological obsolescence. In addition, there can be no assurance that the Company will be successful in obtaining patents on its products. Therefore, although the Company has obtained patents on several of the processes used in its products and will continue to seek patent protection for its significant products in the future, it believes such protection is not essential to its continued competitiveness. The Company has obtained registration of its trademark, Aequitron Medical. The Company believes that its trademarks have been and will be useful in developing and protecting market recognition for its products.
As a result of the Company's acquisition of the sleep disorder diagnostic business from CNS, Inc., the Company acquired all the domestic and foreign patents and patents-pending and the U.S. trademark registrations for "SLEEPLAB", "Sleep I/T", "PolyG" granted by the United States Patent and Trademark Office. In addition, a trademark registration for Serena(TM) is pending.
The Company also has submitted patent applications for its Vangater(TM) II and a new infant apnea monitor.
Seasonal Aspects of Business
The Company has not experienced significant seasonal variations in the sale of its products.
Working Capital Requirements
The Company is not subject to unusual working capital requirements with regard to receivables, inventories and payables.
Government Contracts
No portion of the business of the Company is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government.
Competition
Traditionally, the Company's main competitor in the production of apnea monitoring systems has been Healthdyne, Inc., which has substantially greater financial resources than the Company and which the Company believes traditionally accounted for a predominant share of the market. Since entering the market in fiscal 1983, the Company has been able to develop a significant market share, which management attributes to the reliability of its monitors (including low false alarm rates), portability and the Company's customer service, sales and support. As a result, the Company is the second largest seller of apnea memory monitors nationally. Apart from itself, Healthdyne, Inc., Corometrics Medical Systems, Inc., Arvee and Nellcor (EdenTec), the Company believes no other company has a significant market share in the apnea monitoring market.
Competition within the market for apnea monitoring systems is based primarily on the quality and features of the products sold as well as the price of the systems. The Company believes its future success in the apnea field depends upon its service and responsiveness to the physicians and other health care professionals who are involved in apnea monitoring and recording, and upon its ability to design innovative and reliable products that meet the needs of the marketplace.
Competition within the home health care ventilator market is based upon a number of factors including product features, ease of operation, service, reliability and price. The market is competitive, and the Company faces competition from such companies as LIFECARE Services, Inc. and Bear Medical Systems, Inc. The Company believes its competitive strengths include the state-of-the-art design of its ventilators and their multiple applications, effective distribution methods and the Aequitron reputation for quality and service, including its technical support and clinical education for individuals who use and maintain the equipment.
The apnea and ventilator industries in which the Company operates are subject to rapid technological change. Although the Company has been a leader in the apnea and ventilator industries, there can be no assurance that the Company will be able to react and adapt to any such change or that developments by competitors will not render the Company's products and services obsolete.
Within the sleep disorder diagnostic market, the Company competes with several companies that market products designed for use in hospital-based sleep labs. Telefactor Corporation, Oxford Medilog, Inc. (EdenTec), Nicolet Instrument Corporation, Bio-Logic Systems Corp., Healthdyne Technologies, Inc. and Sensormedics, Inc. offer computerized sleep disorder diagnostic systems. Several companies, including Nellcor (EdenTec) and Healthdyne Technologies, Inc., market products that compete with the Company's portable devices. The sleep disorder diagnostic market is not believed to be the primary market served by the competitors named above.
The Company competes in the sleep disorder diagnostic products market on the basis of its technology and broad diagnostic product line. The competitors' systems also allow for electronic data storage, but provide only a portion of the analysis capability of the Company's sleep disorders laboratory systems. The Company's laboratory systems, and its portable PolyG and Sleep I/T devices, complement one another.
There are a number of companies that compete with the Company's Crow River subsidiary in the sales of wheelchair lifts, securement systems and hand controls. The Company believes that traditionally these markets have been fragmented with no company dominating the market.
The medical device industry is highly competitive and characterized by rapid technological change. Moreover, the adoption of government-imposed and other changes to reimbursement programs has created economic incentives to reduce health care costs. The Company believes that these factors may shorten medical product life cycles and increase clinical evaluation expenses and regulatory compliance expenditures.
There can be no assurance that other companies have not developed, are not developing, or will not develop products which will be perceived as superior to the Company's products. Further, as the markets for the Company's products develop more fully, the Company will likely face additional competition from more established companies with greater technological, financial, manufacturing and marketing resources. There can be no assurance that the Company will be able to compete effectively with either present or future competitors in any of its markets.
Regulatory Matters
The manufacture, testing, packaging, labeling and distribution of medical devices and the manufacturing procedures relating to devices are regulated under the Federal Food, Drug and Cosmetic Act, as amended (the "Act"), and additional regulations promulgated thereunder. In general, these statutes and regulations require that manufacturers conform to certain procedures and controls designed to ensure the safety and effectiveness of medical products.
Under the Act, all medical devices are classified as Class I, Class II or Class III devices. All of the Company's products are classified as Class II devices. In general, Class II devices must comply with labeling and record-keeping requirements and are subject to other general controls. In addition to general controls, certain Class II devices may have to comply with special controls established by the FDA, and all manufacturers are subject to periodic inspection by the FDA. Class III devices must receive premarket approval from the FDA before they can be commercially distributed in the United States. Furthermore, state, local and foreign governments have adopted regulations relating to the manufacture and marketing of medical health care products. The Company believes that it is presently in material compliance with all applicable regulations.
Environmental Regulation
The Company believes that the federal, state and local regulations relating to the protection of the environment have had no material effect upon the Company.
Employees
The Company had approximately 277 full-time employees as of July 15, 1996, including 11 in management, 30 in administration, 160 in production, 36 in research and development and 40 in sales and marketing.
Sales and Marketing
The Company's apnea and ventilator products are sold to home health care dealers, hospitals and hospital distributors through the Company's sales and distribution force of both independent manufacturers representatives and direct sales representatives.
The Company markets its sleep products primarily to hospital sleep lab personnel and sleep specialty physicians. This group is believed to have the necessary expertise to effectively diagnose and treat sleep disordered patients, and is normally involved in the decision to purchase sleep diagnostic products. Portable sleep disorder diagnostic products can provide the necessary screening and postdiagnostic follow-up function, and their use may serve to expand the number of patients which may be tested for sleep disorders. The Company believes that home care providers are becoming more involved in non-sleep lab testing, and are excellent candidates to purchase portable systems.
The Company's Crow River products are sold to independent dealers for resale to the ultimate consumers.
The Company's marketing of its products includes advertising in appropriate medical journals, trade show attendance and direct mail campaigns.
Foreign Sales
Prior to fiscal 1990, substantially all of the Company's sales had been generated from domestic sales of its products. In fiscal 1996, 1995 and 1994, foreign sales amounted to 13%, 12% and 11% of total sales, with Dragerwerk accounting for 5%, 5% and 4% of such sales, respectively. See also footnote 12 to the Company's 1996 Financial Statements.
On March 3, 1988, the Company entered into an original equipment manufacturer agreement (the "Agreement") with Dragerwerk. Under the Agreement, Dragerwerk was granted the exclusive right to purchase the Original LP6 Ventilator on an original equipment manufacturer's basis for distribution in selected European countries, and non-exclusive distribution rights in other international markets. Dragerwerk agreed to develop and implement an effective program for marketing, distribution and servicing of the ventilators, to use its best efforts to promote and increase sales of the ventilators and accessory products, and to purchase all of this type of ventilator from Aequitron. The Agreement was first amended and extended through December 31, 1993. In March 1994, the Agreement was again amended. The current agreement was automatically renewed through December 31, 1996, and covers both the Company's LP6 and LP10 ventilators and offers certain volume incentives. Dragerwerk markets the ventilators under the name Drager EV800 and EV801.
Significant Customers and Suppliers
The Company sells a substantial portion of its product to one customer (the loss of which, however, would not materially adversely impact the Company). During 1996, 1995 and 1994, sales to that customer aggregated $3.5 million, $2.8 million and $4.3 million, respectively. At April 30, 1996 and 1995, amounts due from that customer included in trade accounts receivable were $542,500 and $301,100, respectively.
Firm Backlog of Orders
As of April 30, 1996 and 1995, the Company had a firm backlog in the amount of $1,339,500 and $1,252,700, respectively.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the names and ages of the Company's Executive Officers, together with all positions and offices held with the Company by each such Executive Officer. Officers are appointed to serve until the meeting of the Board of Directors following the next Annual Meeting of Shareholders and until their successors have been elected and have qualified.
Name Age Office
James B. Hickey, Jr. 43 President, Chief Executive Officer and Director
Jeffrey A. Blair 48 Senior Vice President, Sales and Marketing
Patricia A. Hamm 42 Vice President, Human Resources
William M. Milne 52 Chief Financial Officer
Robert C. Samec 43 Vice President, Quality Assurance/Regulatory Affairs
Earl H. Slee 36 Vice President, Research and Development
Edson R. Weeks, III 43 Vice President, Operations
- ------------------
James B. Hickey, Jr. has been the President and Chief Executive Officer of the Company since June 1993. From October 1989 to June 1993, Mr. Hickey served as President of Baxter Healthcare, Inc.'s Respiratory/Anesthesia Systems Division, and, prior to October 1989, he was President of Baxter's Hospitex Division for three years.
Jeffrey A. Blair joined the Company as Senior Vice President of Sales and Marketing in September 1993. From May 1989 through April 1993, Mr. Blair served as Senior Vice President of Sentinel Monitoring, Inc., a medical device manufacturing company based in Indianapolis. Prior to May 1989, Mr. Blair held various management positions with Glasrock Home Health Care, Inc. and Baxter Healthcare, Inc.
Patricia A. Hamm has been with the Company since January 1995 in the position of Vice President of Human Resources. Prior to joining the Company, she held a variety of positions with First Bank System in Minneapolis, most recently as Vice President, Marketing, from August 1991 through December 1995.
William M. Milne has served as Chief Financial Officer of the Company since August 1989 and was acting President and acting Chief Executive Officer of the Company from January 1993 to June 1993. From 1984 through July 1989, Mr. Milne was employed by The Griffin Cos., Inc. of Minneapolis, Minnesota, a real estate investment and property management firm, where he served as Vice President of Finance, Secretary and Treasurer. He was employed by Graco, Inc. of Minneapolis, Minnesota from 1974 to 1984, holding various positions including corporate tax manager and assistant treasurer.
Robert C. Samec has been with the Company since January 1982, serving as vice president primarily in roles relating to quality assurance and regulatory affairs. Since August 1993, he has held the position of Vice President, Quality Assurance/Regulatory Affairs.
Edson R. Weeks, III has been with the Company since May 1984 and has served as Vice President, Operations since November 1995. Prior to that, Mr. Weeks served as Vice President, Manufacturing from May 1990 to November 1995, Director of Manufacturing from September 1986 through April 1990 and Materials Manager from May 1984 to September 1986.
Earl H. Slee joined the Company as its Vice President of Research and Development in August 1995. Prior to joining the Company, Mr. Slee was Director of Engineering for Instromedix, a medical device manufacturing company in Portland, Oregon, from July 1992 to August 1995. Mr. Slee attended Dartmouth College from September 1990 to June 1992 in its Masters of Business Administration program.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases approximately 67,140 square feet of office, production and warehouse space in a building in suburban Minneapolis under a lease expiring on December 31, 1996. Monthly payments are currently $46,300. The Company believes there is adequate adjacent space for its short-term growth. The Company's Crow River subsidiary owns a 34,000 square foot manufacturing facility in Brooten, Minnesota. Both facilities have adequate space for the Company to conduct its current business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Currently there are no material products liability claims pending against the Company; however, the Company believes that products liability claims are incidental to its business and the medical products industry. Generally, the Company maintains reserves for the cost of defending such claims, which, together with its products liability insurance coverage, are believed to be adequate to protect the Company against losses that could have a material adverse impact on the Company. Nevertheless, there is no assurance that future products liability claims will not be made seeking compensation significantly in excess of the Company's reserves and insurance coverage, and such claims could, if upheld in a court of law, have a material adverse impact on the Company's financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Aequitron shareholders during the fourth quarter of fiscal year 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
The Company's Common Stock trades on The Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "AQTN." The following table sets forth, for the periods indicated, the high and low last sales prices.
Fiscal 1996: High Low
First Quarter 6-3/4 4-3/4 Second Quarter 9-1/4 6-1/4 Third Quarter 8-1/2 6-7/8 Fourth Quarter 8 6-5/8
Fiscal 1995: High Low
First Quarter 3-7/16 2-3/4 Second Quarter 5-3/4 2-13/16 Third Quarter 5-3/8 4 Fourth Quarter 5-3/8 4-1/8
Approximate Number of Holders of Common Stock
Approximate Number of Record Holders as of Title of Class July 24, 1996
Common Stock, $.01 par value 726
Dividends
The Company has never paid any cash dividends on its Common Stock. The Board of Directors presently intends to retain all earnings for use in the Company's business and does not anticipate paying cash dividends in the foreseeable future. Any future determinations as to payments of dividends will depend upon the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
* Includes $712,900 charge for the disposal of the oxygen concentrator line. ** Includes $522,500 resulting from the settlement of a claim against a vendor. *** Cumulative effect of change in accounting for income taxes.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Year Ended April 30, 1996 Compared to Year Ended April 30, 1995
Results of Operations
Net sales in fiscal 1996 increased $7,675,500, or 24.9 percent from fiscal 1995. Sales increased in the ventilation and mobility product lines, and also reflect the additional sales generated by the sleep diagnostics product line acquired in June 1995. Service revenue increased while rental revenue decreased marginally from fiscal 1995. Service revenue was strong for the existing product lines and also increased due to the new product line acquisition. Rental revenue of existing products decreased as customers continue to purchase units previously being rented. The Company experienced strong sales in fiscal 1996 and expects positive sales trends to continue.
Gross margins for fiscal 1996 increased to 55.2 percent compared to 54.9 percent for the prior year. This increase reflects the benefit of product mix, including the newly acquired sleep diagnostics product line, and the increased absorption of overhead due to increased volume in production. Gross margins may decrease slightly due to competition and expense increases, but should remain strong in fiscal 1997.
Sales and marketing expenses increased $2,134,500 in fiscal 1996 compared to fiscal 1995. The increase in expenses reflects the increase in commissions paid to the Company's manufacturers representatives as a result of the increased sales volume, as well as expenses associated with the newly acquired product line. Overall sales and marketing expenses as a percentage of sales increased to 21.8 percent in fiscal 1996 from 20.3 percent in fiscal 1995 due to the additional ongoing costs incurred to incorporate the sleep diagnostics product line. Sales and marketing expenses are expected to remain at similar levels for fiscal 1997.
General and administrative expenses increased $815,400, or 16.2 percent, over fiscal 1995, which represents a decrease to 15.2 percent from 16.3 percent of sales in fiscal 1995. The decrease reflects the benefit of increased sales. The Company expects fiscal 1997 general and administrative expenses to be consistent with fiscal 1996 levels.
Research and development expenses for fiscal 1996 were $415,700 higher than fiscal 1995. However, fiscal 1995 expenses include a write-off of $500,000 associated with Adahan, Inc. Excluding the write-off, research and development expenses were up $915,700, or 37.3 percent, but represent only 8.8 percent of sales compared with 9.6 percent of sales in fiscal 1995. The increase was due to additional costs to finalize several projects for FDA submittal and increased expenses due to the addition of the sleep diagnostics product line. With the Company's ongoing commitment to increase funding for product development projects, expenditures are expected to increase for fiscal 1997.
Other income decreased by $28,400 from fiscal 1995, which is the result of a decrease in interest income with the reduction of cash due to the acquisition of the sleep diagnostics product line. Interest expense increased $199,200 from fiscal 1995 as a direct result of the increase in long-term debt used to finance the balance of the acquisition.
The effective tax rate for fiscal 1996 decreased to 36.3 percent from 39.0 percent for fiscal 1995. The decrease is due to the effect of non-deductible goodwill on higher earnings and the benefit of the Foreign Sales Corporation on increased international sales.
On June 1, 1995, the Company acquired all assets, including inventory, fixed assets, receivables and certain intangibles, of the sleep diagnostics division of CNS, Inc. for $2.3 million in cash, $3.1 million in notes payable and $452,000 in liabilities. The acquisition was accounted for as a purchase and, accordingly, the net assets and results of operations are included in the fiscal 1996 financial statements from the date of acquisition.
Liquidity and Capital Reserves
Cash and cash equivalents decreased to $3,143,300 at April 30, 1996, a decrease of $1,843,500 from $4,986,800 at April 30, 1995. Operating activities provided cash of $2,020,100 during the fiscal year compared to $3,285,300 during fiscal 1995. The decrease in cash provided by operating activities during fiscal 1996 was attributable to the increase in accounts receivable of $1,825,500, coupled with a decrease in inventory of $331,200. The Company expects to make increased capital expenditures in fiscal 1997. The Company renewed its line of credit with its bank for $2,000,000 on June 1, 1995. The line of credit expires on October 30, 1996. In addition, a long-term note of $2,500,000 was obtained to purchase the sleep diagnostics product line from CNS, Inc. The Company believes that internally generated funds and existing borrowing potential will provide sufficient working capital to meet all present and anticipated commitments.
Year Ended April 30, 1995 Compared to Year Ended April 30, 1994
Results of Operations
Net sales in fiscal 1995 increased $4,492,100, or 17.1 percent from fiscal 1994. Sales increased in the ventilation, apnea and mobility product lines. Service and rental revenue decreased from the prior year due to two major accounts converting their rental units to purchases.
Gross margins for fiscal 1995 increased to 54.9 percent compared to 50.5 percent for the prior year. This increase reflects the benefit of the discontinuation of the oxygen concentrator produce line and the increased absorption of overhead due to increased volume in production.
Sales and marketing expenses increased $412,200 in fiscal 1995 compared to fiscal 1994. The increase in expenses reflects the increase in commissions paid to the Company's manufacturers' representatives as a result of the increased sales volume. However, overall sales and marketing expenses as a percentage of sales decreased to 20.3 percent in fiscal 1995 from 22.2 percent in fiscal 1994.
General and administrative expenses increased $731,800, or 17.1 percent, over fiscal 1994, and represented 16.3 percent of sales for both fiscal 1995 and 1994. The increase was due to increased professional fees, training costs and employee benefits.
Research and development expenses for fiscal 1995 increased $1,057,100, or 55.7 percent, from fiscal 1994 representing an increase to 9.6 percent of sales from 7.2 percent in fiscal 1994. The increase was due in part to cancellation of a license agreement for new ventilator technology with Adahan, Inc. The balance of the increase was due to the Company's commitment to increase funding for product development projects.
Other income increased by $225,500 from fiscal 1994 which was primarily the result of an increase in interest income on the Company's higher average cash balance. Interest expense decreased $2,100 from fiscal 1994 as a direct result of the decrease in long-term debt from fiscal 1994.
The effective tax rate for fiscal 1995 decreased to 39.0 percent from 44.5 percent for fiscal 1994. The decrease was due to the effect of non-deductible goodwill and the benefit of the Foreign Sales Corporation on the higher earnings for the year.
CAUTIONARY STATEMENTS
As provided for under the Private Securities Litigation Reform Act of 1995, the Company wishes to caution investors that the following important factors, among others, in some cases have affected and in the future could affect the Company's actual results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by or on behalf of the Company.
Competition. The medical device industry is highly competitive and characterized by rapid technological change. Many of the Company's competitors offer more products and have substantially greater financial resources than the Company. Moreover, the medical device industry is experiencing rapid consolidation, creating larger and financially stronger companies. There can be no assurance that the Company will be able to compete with any of these larger companies many of which have significantly greater technological, financial, manufacturing and marketing resources.
Government Regulation and Private Sector Initiatives. The Company's products are subject to the laws and regulations administered by the FDA. Additionally, government and private sector initiatives to limit the growth of health care are increasing, including price regulation and competitive pricing. Although the Company believes it can adapt to changes in government regulation and cost containment initiatives, there can be no assurance that the impact of these changes will not have a material adverse impact on the Company's financial results.
New Product Development. The future success of the Company is dependent on its ability to continually offer new products which are acceptable to the marketplace. Any inability of the Company to develop new products could have a material and adverse impact on future revenues.
Uncertainty of Market Acceptance of New or Acquired Products. The Company's ability to achieve acceptable revenue growth is dependent in large part on the market acceptance of recently introduced or acquired products. There is no assurance that the Company's recently introduced products will be accepted or that it will meet its revenue growth objectives.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Schedule listed below are included herein immediately following the signature page on the pages set forth:
Page
Report of Independent Auditors....................................F-1
Consolidated Balance Sheets -- April 30, 1996 and 1995............F-2
Consolidated Statements of Operations -- Years ended April 30, 1996, 1995 and 1994.....................................F-4
Consolidated Statements of Shareholders' Equity -- Years ended April 30, 1996, 1995 and 1994.........................F-5
Consolidated Statements of Cash Flows -- Years ended April 30, 1996, 1995 and 1994.....................................F-6
Notes to Consolidated Financial Statements -- April 30, 1996......F-7
Schedule of Valuation and Qualifying Accounts and Reserves........F-18
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10, 11, 12 and 13.
The information required by Item 10
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed or incorporated by reference as part of this Form 10-K
1. Financial Statements. The following financial statements are included in Part II, Item 8 of this report on Form 10-K:
Report of Independent Auditors
Consolidated Balance Sheets -- April 30, 1996 and 1995
Consolidated Statements of Operations -- Years ended April 30, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity -- Years ended April 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -- Years ended April 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements -- April 30, 1996
2. Financial Statement Schedules. The following financial statement schedule is included in Part II, Item 8 of this report on Form 10-K:
Schedule II -- Valuation and Qualifying Accounts and Reserves
All other schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.
3. Exhibits. The following exhibits are included in this report: See "Exhibit Index to Form 10-K" beginning at page E-1 immediately following the financial statements of this Form 10-K.
(b) Reports on Form 8-K
The Company did not file a Report on Form 8-K in its last fiscal quarter of 1996.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 29, 1996 AEQUITRON MEDICAL, INC. "Company"
/s/ James B. Hickey, Jr. James B. Hickey, Jr., President and Chief Executive Officer
/s/ William M. Milne William M. Milne, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company in the capacities and on the dates indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints JAMES B. HICKEY, JR. and WILLIAM M. MILNE as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Signature and Title Date
/s/ James B. Hickey, Jr. July 29, 1996 James B. Hickey, Jr., President, Chief Executive Officer and Director (Principal Executive Officer)
/s/ William M. Milne July 29, 1996 William M. Milne, Chief Financial Officer (Principal Financial Officer)
/s/ Lawrence A. Lehmkuhl July 29, 1996 Lawrence A. Lehmkuhl, Director
/s/ David B. Morse July 29, 1996 David B. Morse, Director
/s/ Gerald E. Rhodes July 29, 1996 Gerald E. Rhodes, Director
/s/ Ervin F. Kamm, Jr. July 29, 1996 Ervin F. Kamm, Jr., Director
Report of Independent Auditors
Board of Directors Aequitron Medical, Inc.
We have audited the accompanying consolidated balance sheets of Aequitron Medical, Inc. as of April 30, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended April 30, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial position of Aequitron Medical, Inc. at April 30, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 9, in 1994 the Company changed its method of accounting for income taxes.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota June 12, 1996
Aequitron Medical, Inc.
Consolidated Balance Sheets
Aequitron Medical, Inc.
Consolidated Statements of Income
Aequitron Medical, Inc.
Consolidated Statements of Shareholders' Equity
Aequitron Medical, Inc.
Consolidated Statements of Cash Flows
Aequitron Medical, Inc.
Notes to Consolidated Financial Statements
April 30, 1996
1. Business Activity
Aequitron Medical, Inc. designs, manufactures and markets electronic respiratory products for home healthcare, sub-acute care and hospital use and wheelchair lifts and automobile hand controls for people who face mobility challenges. The Company's principal markets are in the United States and Europe.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Aequitron Medical, Inc. and its wholly-owned subsidiary after elimination of intercompany accounts and transactions. Certain amounts for fiscal 1995 have been reclassified to conform with the fiscal 1996 financial statement presentation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Revenue Recognition
Revenues from sales are recognized when a product is shipped, from rentals as they accrue, and from service when performed.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Aequitron Medical, Inc.
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Inventories
Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out basis.
Demonstration, Evaluation and Rental Equipment
This equipment is held for sale and is amortized over an estimated useful life of 36 to 60 months.
Property and Equipment
Owned property and equipment are carried at cost. Property and equipment acquired under capital leases are stated at the lower of the present value of minimum lease payments or fair market value at the inception of the lease. The Company provides for depreciation using the straight line method at rates designed to amortize the cost of property and equipment over their estimated useful lives. Property and equipment under capital leases are amortized over the lease terms or the estimated useful lives of the assets, whichever is less. Maintenance, repairs and minor renewals are expensed as incurred.
Goodwill
Goodwill resulting from the fiscal 1987 acquisition of Life Products, Inc. is being amortized using the straight line method over fifteen years. Goodwill resulting from the current year acquisition of the Sleep diagnostics division of CNS, Inc. is being amortized using the straight-line method over ten years. The carrying value of goodwill will be reviewed if the facts and circumstances suggest that it may be impaired.
Warranties
Estimated product warranty costs are provided at the time of sale of the related products.
2. Summary of Significant Accounting Policies (continued)
Credit Risk
The Company is required by SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," to disclose significant concentrations of credit risk regardless of the degree of such risk. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. The Company requires no collateral from its customers. Historically, the Company has not incurred significant credit related losses and believes no significant credit risk exists at April 30, 1996.
During 1996, 1995 and 1994, sales to one customer aggregated $3.5 million, $2.8 million, and $4.3 million, respectively. At April 30, 1996 and 1995, amounts due from that customer included in trade accounts receivable were $542,500 and $301,100, respectively.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount.
Accounting for Stock Options
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (ABP 25), and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized.
2. Summary of Significant Accounting Policies (continued)
Net Income Per Share
Net income per share of Common Stock is computed by dividing net income by the weighted average number of shares outstanding during the periods, including the dilutive effect of shares issuable under the terms of stock options and warrants.
3. Acquisition
On June 1, 1995, the Company acquired certain assets, consisting primarily of inventory, fixed assets, receivables and certain intangibles of the sleep diagnostics division of CNS, Inc. The purchase price of $5.8 million included $2.3 million in cash, $3.1 million in notes payable to a bank and the assumption of $450,000 in liabilities. The results of operations of the acquired business are included in the accompanying financial statements since the date of acquisition.
Had the acquisition occurred May 1, 1994, the unaudited pro forma consolidated revenues, net income and net income per share would be as follows. The pro forma results do not purport to be indicative of the results of operations that would have occurred for the periods presented or of future results of operations.
Year ended April 30 1996 1995 --------------------------------
Revenues $38,727,800 $37,554,700 Net income 2,284,400 1,363,100 Net income per share $.43 $.27
4. Disposal of Oxygen Concentrator Line
In fiscal 1994, the Company recorded a $712,900 charge due to the disposal of the oxygen concentrator product line. This amount included write-offs of $311,600 for inventory, $38,300 for a covenant not to compete, and $6,900 for miscellaneous equipment. The remaining $356,100 of charges included $166,800 for severance pay, $37,300 for rework of inventory, and $152,000 for lease obligations. The charges reduced after tax earnings by $454,800 or $.10 per share. Cash payments of $48,000 and $242,300 were made on the remaining liabilities during fiscal 1995 and 1994, respectively. The remaining obligations totaling $65,800 at April 30, 1995, included in other liabilities, was paid during fiscal 1996.
5. Other Liabilities and Accrued Expenses
The significant components of other liabilities and accrued expenses are as follows:
April 30 1996 1995 ---------------------------
Accrued product liability and professional costs $ 118,500 $ 264,500 Accrued warranty 464,500 388,500 Other 663,400 422,000 --------------------------- $1,246,400 $1,075,000 ===========================
6. Inventories
The major classes of inventories consist of the following:
1996 1995 ---------------------------
Raw materials $2,600,300 $1,594,300 Work in progress 959,100 854,500 Finished goods 754,400 622,300 --------------------------- $4,313,800 $3,071,100 ===========================
7. Financing Arrangements
The Company has a working capital line of credit with a bank whereby it may borrow up to $2,000,000. Any amounts outstanding under the line of credit accrue interest at the bank's fixed rate cost of funds plus 2.75%. The line of credit matures on October 30, 1996. All borrowings under the line are secured by the Company's receivables, inventories, equipment and intangibles. There were no outstanding balances with the bank under the line of credit agreement at April 30, 1996 and 1995, respectively.
8. Long-Term Debt
Long-term debt consists of the following:
8. Long-Term Debt (continued)
Total interest paid on all short-term and long-term debt for the years ended April 30, 1996, 1995 and 1994 was $224,000, $24,800 and $26,900, respectively.
Maturities of long-term debt are as follows:
1997 $386,534 1998 378,036 1999 378,322 2000 378,618 2001 370,000 Thereafter 396,164
The carrying value of the Company's long-term debt approximates its fair market value.
9. Income Taxes
The Company adopted SFAS No. 109, "Accounting for Income Taxes", as of the beginning of fiscal 1994, changing its method of accounting for income taxes from the deferred method to the liability method. As permitted under the new rules, prior years' financial statements have not been restated. The cumulative effect of adopting SFAS No. 109 as of May 1, 1993, was to decrease net income by $92,600, or $.02 per share.
The components of the provision for income taxes attributable to income before the change in accounting principle were as follows:
1996 1995 ------------------------------------
Federal $1,361,100 $1,071,800 State 125,100 97,800 Deferred (111,200) 18,000 ------------------------------------ $1,375,000 $1,187,600 ====================================
9. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the deferred income tax liabilities and assets as of April 30, 1996 and 1995 were as follows:
The reconciliation of the statutory federal income tax rate to the Company's effective tax rate is as follows:
9. Income Taxes (continued)
Total income taxes paid during fiscal 1996, 1995 and 1994 were $1,479,300, $1,213,600 and $493,700, respectively.
10. Shareholders' Equity
The Company has stock option plans which permit the granting of incentive stock options or non-qualified options to key employees, outside directors, and members of the Scientific Advisory Board. Options are granted at 100% of market value at the date of grant. Under the terms of these plans, 1,800,000 shares have been reserved for grants. A total of 445,805 shares is available for future issuance under the plans at April 30, 1996.
The Company has an employee stock purchase plan under which eligible employees may purchase shares of the Company's Common Stock. At April 30, 1996, 241,017 shares remain available for issuance under the plan.
11. Leases
The Company leases equipment, warehouse, office and assembly facilities under noncancelable operating leases expiring in various years through fiscal 1998. These leases, some of which are subject to renewal options, require the Company to pay all maintenance costs, insurance and real estate taxes. The Company also entered into capital leases for a copier and its computer system during fiscal 1992 and 1990, respectively, for $58,600 and $367,500. These obligations are included in long-term debt.
At April 30, 1996, future minimum lease payments under noncancelable operating leases with initial or remaining terms of one year or more are as follows:
1997 $228,900 1998 2,800
Rent expense for the years ended April 30, 1996, 1995 and 1994 was $497,697, $502,400 and $670,000, respectively.
12. International Sales
The Company distributes its products to major home health care dealers outside of the United States. International (primarily Europe) sales for fiscal 1996, 1995 and 1994 were $5,751,200, $3,871,600 and $2,832,300, respectively.
13. Profit Sharing and 401(k) Plan
The Company sponsors a defined contribution benefit plan which covers virtually all employees. Under the plan, eligible employees can elect to contribute up to 15% of their annual compensation to the plan. The Company is permitted, but not required, to make a 50% matching contribution to the plan up to a maximum of 3% of each participating employee's annual compensation. The Company made matching contributions in 1996, 1995 and 1994 of $173,200, $137,000 and $114,800, respectively.
14. Commitments and Contingencies
The Company is engaged in certain legal proceedings and claims arising in the ordinary course of its business. The ultimate liabilities, if any, which may result from these or other pending or threatened legal actions against the Company cannot be determined at this time. However, it is the opinion of management that facts known at the present time do not indicate that there is a probability that such litigation will have a material effect on the financial position of the Company.
15. Related Party Transactions
During fiscal years 1996, 1995 and 1994, the Company paid $400,500, $246,400 and $224,000, respectively, in legal fees to a law firm of which a senior partner also serves on the Company's Board of Directors.
16. Quarterly Results of Operations (Unaudited)
Aequitron Medical, Inc.
Schedule II--Valuation and Qualifying Accounts and Reserves
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
AEQUITRON MEDICAL, INC.
EXHIBIT INDEX TO FORM 10-K
For the fiscal year ended April 30, 1996 Commission File Number 0-11571
Exhibit Description
3.1 Company's Restated Articles of Incorporation. Incorporated by reference to Exhibit 1 to October 31, 1987 Form 10-Q.
3.2 Company's Bylaws, as amended. Incorporated by reference to Exhibit 3.2 to 1989 Form 10-K.
10.1 Lease Agreement, dated June 17, 1987, between Realpro Limited Partnership and the Company relating to premises at 14800 28th Avenue North, Plymouth, Minnesota, First Amendment thereto dated July 17, 1987, Second Amendment thereto dated March 4, 1988, Third Amendment thereto dated February 27, 1989, and Fourth Amendment thereto dated June 29, 1990. Incorporated by reference to Exhibit 10.1 to 1995 Form 10-K.
10.2 Aequitron Medical, Inc. 1985 Incentive Stock Option Plan, as amended. Incorporated by reference to Exhibit 10.7 to the Company's 1990 Form 10-K. (1)
10.3 Aequitron Medical, Inc. Amended and Restated 1988 Stock Option Plan. (1)
10.4 Aequitron Medical, Inc. 1995 Employee Stock Purchase Plan. (1)
10.5 OEM Agreement between Aequitron Medical, Inc. and Dragerwerk Aktiengesellschaft regarding LP6 Volume Ventilator. Incorporated by reference from Exhibit 1 to March 3, 1988 Form 8-K.
10.6 Term Loan and Credit Agreement and related Term Note and Current Note with Norwest Bank Minnesota, National Association all dated December 28, 1990. Incorporated by reference to Exhibit 10.9 to the Company's 1991 Form 10-K.
10.7 First Amendment to Term and Credit Agreement with Norwest Bank Minnesota, National Association dated February 11, 1991. Incorporated by reference to Exhibit 10.10 to the Company's 1991 Form 10-K.
E-1
10.8 Second Amendment to Term Loan and Credit Agreement dated November 1, 1991 between Norwest Bank Minnesota, National Association and the Company. Incorporated by reference to Exhibit 10.11 to the Company's 1992 Form 10-K.
10.9 Fifth Amendment to Office/Warehouse Lease dated January 1, 1992 between Realpro Limited Partnership and the Company. Incorporated by reference to Exhibit 10.12 of 1993 Form 10-KSB.
10.10 Third Amendment to Term Loan and Credit Agreement dated November 27, 1992 between Norwest Bank Minnesota, National Association and the Company. Incorporated by reference to Exhibit 10.13 of 1993 Form 10-KSB.
10.11 Fourth Amendment to Term Loan and Credit Agreement dated August 19, 1993 between Norwest Bank Minnesota, National Association and the Company. Incorporated by reference to Exhibit 10.13 of 1994 Form 10-KSB.
10.12 Second Amendment to the OEM Agreement between Aequitron Medical, Inc. and Dragerwerk Aktiengesellschaft dated March 17, 1994. Incorporated by reference by Exhibit 10.14 of 1994 Form 10-KSB. (2)
10.13 Employment Agreement dated June 11, 1993 between Aequitron Medical, Inc. and Mr. James B. Hickey, Jr. Incorporated by reference to Exhibit 10.16 of 1994 Form 10-KSB. (1)
10.14 Employment Agreement dated September 9, 1993 between Aequitron Medical, Inc. and Mr. Jeffrey A. Blair. Incorporated by reference to Exhibit 10.17 of 1994 Form 10-KSB. (1)
10.15 Asset Purchase Agreement dated May 8, 1995 by and among Aequitron Medical, Inc. and CNS, Inc. Upon the request of the Commission, the Company agrees to furnish a copy of the exhibits and schedules to the Asset Purchase Agreement. Incorporated by reference to Exhibit 2.1 of Form 8-K dated June 1, 1995.
10.16 Non-Competition Agreement dated May 8, 1995 by and between Dan Cohen and Aequitron Medical, Inc. Incorporated by reference to Exhibit 2.2 of Form 8-K dated June 1, 1995.
10.17 Term Loan and Credit Agreement dated June 1, 1995 by and between Norwest Bank Minnesota, N. A. and Aequitron Medical, Inc. Incorporated by reference to Exhibit 2.3 of Form 8-K dated June 1, 1995.
10.18 Term Note from Aequitron Medical, Inc. to Norwest Bank Minnesota, N.A. dated June 1, 1995 in the amount of $2,500,000. Incorporated by reference to Exhibit 2.4 of Form 8-K dated June 1, 1995.
E-2
10.19 Security Agreement dated June 1, 1995 for Norwest Bank Minnesota, N.A. by Aequitron Medical, Inc. Incorporated by reference to Exhibit 2.5 of Form 8-K dated June 1, 1995.
10.20 Change in Control Employment Agreement dated December 9, 1994 between James B. Hickey, Jr. and Aequitron Medical, Inc. Incorporated by reference to Exhibit 10.21 of 1995 Form 10-K.(1)
10.21 Change in Control Employment Agreement dated December 9, 1994 between William M. Milne and Aequitron Medical, Inc. Incorporated by reference to Exhibit 10.22 of 1995 Form 10-K.(1)
10.22 Change in Control Employment Agreement dated December 9, 1994 between Jeffrey A. Blair and Aequitron Medical, Inc. Incorporated by reference to Exhibit 10.23 of 1995 Form 10-K.(1)
10.23 Change in Control Employment Agreement dated December 9, 1994 between Robert C. Samec and Aequitron Medical, Inc. Incorporated by reference to Exhibit 10.24 of 1995 Form 10-K.(1)
10.24 Change in Control Employment Agreement dated December 9, 1994 between Edson R. Weeks, III and Aequitron Medical, Inc. Incorporated by reference to Exhibit 10.25 of 1995 Form 10-K.(1)
10.25 Change in Control Employment Agreement dated December 30, 1994 between Patricia A. Hamm and Aequitron Medical, Inc. Incorporated by reference to Exhibit 10.26 of 1995 Form 10-K.(1)
10.26 Change in Control Employment Agreement dated July 1, 1996 between Earl H. Slee and Aequitron Medical, Inc. (1)
11 Net Income Per Share Computation.
21 List of Subsidiaries. Incorporated by reference to Exhibit 21 of 1995 Form 10-K.
23 Consent of Ernst & Young LLP
24 Power of Attorney appointing James B. Hickey, Jr. and William M. Milne as attorneys-in-fact for the remaining persons signing this Form 10-K to sign any amendment to this Form 10-K is contained on the signature page of this Form 10-K.
27 Financial Data Schedule (filed in electronic version only)
- ------------------ (1) Indicates a management contract.
(2) Confidential treatment was requested and received for certain portions of this document.
E-3