<PAGE> 1
CONFORMED COPY
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
_ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-10005
BIOCHEM INTERNATIONAL INC.
A Delaware Corporation I.R.S. Employer Identification
No. 39-1272816
Address Telephone Number
- ------- ----------------
W238 N1650 Rockwood Drive (414) 542-3100
Waukesha, Wisconsin 53188-1199
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.02 par value.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained in this form and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
--
The aggregate market value of the Common Stock of the Company held by
non-affiliates on August 29, 1997 was approximately $16,026,014, computed by
reference to the average ($5.375) of the bid and ask prices of the Common Stock
as reported by the National Quotation Bureau. For purposes of this calculation,
officers and directors of the registrant were considered affiliates of the
registrant.
The number of shares outstanding of the Company's Common Stock, par value $.02
per share, on August 31, 1997 was 13,041,284.
Exhibit Index on Page 46
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF THE BUSINESS
The Registrant, Biochem International Inc. (the "Company" or "BCI" or "BCI
International"), was incorporated in April, 1976 to acquire from the Medical
Systems Business Division of General Electric Company certain assets, patents
and technology associated with its blood gas chemistry business. This
acquisition was completed in January, 1978.
D.S. Medical Products Company
In July, 1984, D.S. Medical Products Company ("DS Medical"), was formed for the
exclusive purpose of acquiring up to an 80% interest in BCI for investment
purposes. At this time, its assets consist of its investment in BCI's
securities. Ken M. Davee and David H. Sanders, the principal shareholders of DS
Medical, are also directors and executive officers of the Company (see ITEM 10.
Directors and Executive Officers of the Registrant).
NARRATIVE DESCRIPTION OF BUSINESS
The Company's Products
BCI International is a designer, manufacturer and worldwide distributor of
comprehensive monitoring systems for reliable and cost-effective patient care.
BCI is committed to innovation, ongoing development of lower cost products,
excellence in customer service and quality manufacturing. BCI manufactures
primarily non-invasive real time patient monitoring equipment. BCI's products
are used to monitor respiration, blood gases, exhaled gases, anesthetic agent
gases, blood pressure and related cardiovascular/pulmonary functions.
Non-invasive monitoring is used in patient care in operating and emergency
rooms, intensive care units, critical care units and neonatal facilities.
Additionally, these monitoring techniques have applications in recovery,
radiology, respiratory therapy, out-patient care, veterinary and ambulatory as
well as home and sleep study situations.
BCI's product line includes monitoring devices for oxygen saturation, anesthetic
agents, ECG, both invasive and non-invasive blood
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pressure, temperature, respiration, carbon dioxide and nitrous oxide. BCI
engineers and technicians continue to expand the Company's technology base by
developing new products and combining existing ones in new ways to meet the
medical community's fast-growing and changing needs.
New product releases in fiscal 1997 include the Model 9004 Capnograph and the
Model 6004 Vital Signs monitor. Additionally, fiscal 1997 was the first full
year of sales of the Model 3304 Pulse Oximeter, approved by the FDA in August,
1996. The Model 9004 Capnograph, also known as the Capnocheck(R) Plus, is the
second in our Clarity(TM) series of monitors. The Capnocheck Plus is a compact,
lightweight monitor which provides for measurement of end tidal CO2, pulse
oximetry and inspired oxygen. It is well suited to monitoring of both intubated
and non-intubated patients in all types of environments. The Model 6004 monitor,
also known as the Mini-Torr(TM) Plus monitor, was released to the majority of
the international marketplace late in fiscal 1997. BCI is currently awaiting
510(k) approval from the FDA on this product, which will allow it to be sold in
the United States and in the balance of the international marketplace. The
Mini-Torr(TM) Plus is the third Clarity(TM) series monitor, which offers
cost-effective non-invasive monitoring of blood pressure and pulse oximetry. It
is a transportable monitor, allowing for use in hospital, transport and
emergency settings.
New products in fiscal 1996 include the Model 3303 Pulse Oximeter and the Model
3304 Pulse Oximeter. The Model 3303 oximeter is a handheld unit with alarms,
featuring an internal rechargeable battery. This unit can be used both as a
handheld, spot-check device and also as a bedside, long-term monitoring device.
The Model 3304 Pulse Oximeter, the first product released in our new Clarity(TM)
series of monitors, was released to the international market late in fiscal
1996. It features advanced digital signal processing, designed for demanding
clinical environments. BCI received 510(k) approval to ship the Model 3304 in
the United States in August, 1996.
In fiscal 1995, BCI introduced a combination temperature/oximeter monitor, the
Model 3301T, using its popular handheld oximeter released in 1993 as the base
oximeter unit, and adding a tympanic temperature feature to it. Additionally, a
new Vital Signs Monitor, Model 6200, was released in 1995 that offers a wide
variety of monitoring options, including pulse oximetry, ECG, non-invasive and
invasive blood pressures and temperature. In fiscal 1995 the Company also
developed a disposable sensor cover, called OxiLink(TM), to be used
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with reusable patient sensors. This will allow for a low cost alternative to
disposable sensors while providing the same benefits.
BCI's mission is to provide cost-effective, quality patient monitoring equipment
to meet the rapidly-growing and ever-changing needs of the world-wide health
care community. Consequently, management contemplates that new products will
continue to be added to its existing product lines.
Marketing and Distribution
BCI International monitoring systems are marketed in the United States directly
through twenty Company sales representatives and selectively through medical
distributors. Health care facilities, principally hospitals, are typically the
purchasers of the Company's systems. BCI also sells into alternate care markets,
such as emergency medical services, surgery centers and home health care. BCI's
increased targeting of the alternate care market will allow the Company to
benefit from the trend away from hospitals toward the more cost effective
alternate care setting. International sales, promoted through medical
distributors and manufacturers worldwide, account for approximately 49% of
revenues. BCI technologies are also marketed to original equipment manufacturers
(OEM's) as individual components or as finished, private label products, and are
in turn then sold to end users. Generally, the Company sells its products to OEM
customers based on long-term contracts, which, in certain cases, provide for the
purchase of minimum quantities of products at specified prices.
Competition
The Company is in a highly fragmented industry characterized by rapid
technological change. Price and product features such as accuracy, ease-of-use
and flexibility are the primary bases for competition. The Company has a number
of competitors in each of its product areas, many of which are larger and
financially stronger than BCI. Due to the high costs of product development,
long development cycles and high regulatory costs, the risk of new competitors
entering the industry is moderate to low.
Product pricing is the most significant competitive factor in the health care
industry. Competition continues to cause price reductions. The Company is
continually seeking manufacturing cost reductions, but there can be no assurance
that these cost reductions will offset the impact of potential price declines.
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Product quality is also a competitive factor, although the quality issue is
somewhat mitigated by the standards imposed by the Food and Drug Administration
("FDA").
Competition among international suppliers is generally based on the same set of
factors as in the U.S., with price as the primary factor. One of the
distinguishing characteristics of the international market is that many foreign
health care systems are state run. Thus, the government rather than a private
enterprise is often the customer. Additionally, each country has a different set
of regulatory standards and specifications which creates additional demands on
suppliers participating in the international market.
Manufacturing
The Company's products are manufactured and assembled in its Waukesha, Wisconsin
facility. The manufacture of the Company's products involves certain techniques
which, in the opinion of management, are proprietary.
Raw Materials
Raw materials utilized by the Company in its manufacturing process are generally
available from a number of domestic commercial sources. Since the Company has
historically experienced delivery delays and lead times as long as 22 to 24
weeks in acquiring certain electronic components, which is common in the
industry, it closely monitors and maintains higher inventory levels for such
components than for other raw materials.
Inventory
The Company maintains inventories of previously described materials and finished
goods at levels believed to be consistent with anticipated sales and at levels
required to respond quickly to customer needs. Inventories of demonstration
equipment are also maintained for use by BCI's salespeople. BCI also maintains
an inventory of finished goods to loan to customers at their request when the
Company is servicing their units. See "Service and Warranty" below in this ITEM
1.
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The Company will, in general, not accept returns except consistent with the
terms of its warranties.
To the best of the Company's knowledge, the foregoing practices are consistent
with the practices of the industry.
Service and Warranty
A two year warranty is extended on all BCI International monitoring equipment.
During this time, the Company warrants to the purchaser that the equipment is
free from defects in material and workmanship. Any repairs needed during this
time period will be made free of charge to the customer unless the repairs
required are due to intentional damage. Service in foreign countries is provided
primarily by the Company's foreign distributors.
In the event a monitor requires service, the Company's policy during the
warranty period is to provide a free replacement on loan at the customer's
request, which requires that the Company maintain an inventory of monitors for
this purpose. BCI services monitors principally in its Waukesha, Wisconsin
facility. The Company also employs a field service representative in the state
of Maryland. The Company believes that this approach generally permits the
customer to have a replacement system whenever needed and provides quality
repair service.
Backlog
The Company had approximately $3,600,000 in backlog orders believed to be firm
at August 31, 1997, as compared to approximately $5,018,000 at August 31, 1996.
The decline in the backlog is mainly due to a decrease in the backorder of
hand-held pulse oximeters. The Company's order activity is not seasonal in
nature. The Company usually manufactures and ships equipment ordered within 2 to
15 days following receipt of an order, unless the customer requests later
release dates.
Research and Development
The Company's research and development activities are dedicated to both product
enhancement and new product development. At the date of this report, the Company
employs twenty trained technicians and engineers, and utilizes outside
consultants in its research and
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development activities. For the three years ended June 30, 1997, the Company
incurred research and development expenses of $4,771,260, all of which were
Company sponsored. Of this amount, $1,983,817 was attributable to fiscal 1997,
$1,647,651 to fiscal 1996 and $1,139,792 to fiscal 1995.
Patents
The Company owns numerous domestic patents related to its products.
The electronic medical instruments industry is permeated with patented products
and processes and new patents are being issued regularly. Therefore, the Company
cannot be certain that its existing products, or those it expects to produce, do
not infringe on valid patents owned by others, or will not be subject to
technological obsolescence.
Government Regulation
The medical devices manufactured and marketed by BCI are subject to regulation
by the FDA, and, in many cases, by foreign governments and other regulatory
organizations (such as ISO and IEC). Under the Federal Food, Drug and Cosmetics
Act ("FDC Act"), as amended, manufacturers of medical devices must comply with
certain provisions and regulations promulgated by the FDA governing the testing,
manufacturing, packaging and marketing of medical devices. Under the FDC Act,
medical devices are subject to varying levels of review, the most comprehensive
of which requires that a device receive pre-market approval by the FDA for
commercial distribution in the United States.
As a manufacturer of medical devices, the Company is also subject to certain
other FDA regulations, such as general controls provisions which include
manufacturing process requirements. The Company's manufacturing processes and
facility are subject to a biannual inspection by the FDA. The FDA has the power
to order a limited detention of products and to exercise other remedies where it
finds the devices to be in violation of the FDC Act. BCI believes it is
generally in compliance with the FDA regulations. Federal and foreign
regulations regarding the manufacture and sale of medical devices are subject to
change. The Company cannot predict what impact, if any, such changes might have
on its business. The Company also seeks, where appropriate, to comply with
safety standards of Underwriters Laboratories, the Canadian Standards
Association, the European Community standards and the standards of other
countries in which it markets its products.
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<PAGE> 8
Compliance with international standards is an expanding factor in conducting
business in international markets. The Company has obtained ISO 9001/EN46001
certification and certification to Annex II of the Medical Device Directive. By
certification to these standards, the Company is permitted to place a "CE" mark
on its products which indicates product compliance as specifically required by
the European marketplace. To date, foreign regulations have not adversely
affected the Company's business. However, there can be no assurance that any
such regulations will not have a material adverse effect on the Company's
business and financial condition in the future.
Environmental Matters
The Company is engaged in only light manufacturing and its capital expenditures,
earnings or competitive position have not been, and are not expected to be,
materially affected by compliance with federal, state, or local provisions which
have been enacted or adopted regulating the discharge of materials into the
environment or otherwise relating to the protection of the environment.
Employees
As of August 31, 1997, the Company employed 107 persons, consisting of 29 in
production and 78 in sales, administration, engineering and research.
Financial Information About Export Sales
Export sales, which were principally in the Far East, Central and South America
and Western Europe were approximately $13,523,000, $14,872,000 and $11,736,000
in fiscal 1997, 1996 and 1995, respectively. The decrease in sales is a result
of many factors. Although BCI continues to expand its international sales
network and regions covered, some key regions experienced decreased sales due to
the weakness of the local currency as compared to the strength of the dollar.
Additionally, sales of the Company's handheld pulse oximeter decreased,
especially in the Company's international OEM market sector. All foreign sales
are denominated in U.S. Dollars, so the Company is not exposed to foreign
currency valuation fluctuations.
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<PAGE> 9
ITEM 2. PROPERTIES
The Company's executive offices and production facilities are located at W238
N1650 Rockwood Drive, Waukesha, Wisconsin. The building contains approximately
14,200 square feet, of which approximately 7,000 square feet constitutes
administrative office space, with the balance used for production and storage.
BCI purchased this facility on June 30, 1995. It was previously leased from a
related party (See Item 12, Related Party Information). Additionally, the
Company leases approximately 5,500 square feet of office space which is used for
engineering, research and development in a building adjacent to the production
facility. The Company leases a small amount of office space located several
miles from the main facility, which is used for additional engineering
personnel. The Company also leases space at an outside location for file storage
purposes only.
In April, 1996, BCI purchased approximately 3.3 acres of vacant land adjacent to
its production facility. This land was purchased with the intention of building
an addition to our current facility. Due to the decrease in sales in the current
year, this project was not undertaken. The Company anticipates the need for
additional space, and therefore is investigating its options as to whether it
would be best to build an addition, or lease or purchase different property.
Current cash balances and cash flows could adequately pay for either option. It
has not yet been determined, however, what financing method would be used.
The Company owns all of its machinery and manufacturing equipment, and leases
certain office equipment. The Company does not anticipate the need to purchase
any material amounts of capital equipment in the coming fiscal year other than
the building project discussed above.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended June 30, 1997, no matters
were submitted to a vote of security holders.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock ($.02 par value) is traded in the over-the-counter
market. Price quotations are recorded on The OTC Bulletin Board.
The following table sets forth the bid and asked quotations for the Company's
common stock for the quarterly periods indicated, as provided by the National
Quotation Bureau. These quotations reflect interdealer prices, without retail
markup, markdown or commissions, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Bid Asked
--- -----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C>
Fiscal year ended
June 30, 1997
1st Quarter 6 3/4 4 3/4 8 5 1/8
2nd Quarter 6 1/2 4 3/4 6 3/4 4 3/4
3rd Quarter 5 7/8 4 7/8 6 3/4 4 3/4
4th Quarter 5 3/4 5 6 5
Fiscal year ended
June 30, 1996
1st Quarter 4 1/2 3 1/2 5 1/2 3 3/4
2nd Quarter 4 3 1/2 5 4
3rd Quarter 5 1/2 3 3/4 6 1/2 4 1/2
4th Quarter 4 3/4 4 1/4 6 4 3/4
</TABLE>
The approximate number of record holders of the Company's common stock on August
31, 1997 was 694. BCI International has not paid dividends on its common stock.
The Company does not anticipate paying any such dividends, and further, is
restricted from declaring or paying dividends without the prior written consent
of the banking institution with which it currently has a lending facility.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended June 30
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
EARNINGS (IN THOUSANDS):
<S> <C> <C> <C> <C> <C>
Net Sales $ 27,006 $ 29,000 $ 25,056 $ 17,861 $ 12,857
Cost of sales 11,978 12,903 11,310 8,214 5,897
Gross profit 15,028 16,097 13,745 9,647 6,960
Earnings before income taxes and
cumulative effect of change in accounting
principle 7,179 8,471 6,735 3,504 1,855
Cumulative benefit from change in
accounting principle - - - 5,197 -
Income tax expense 2,539 3,102 2,475 1,309 46
Net income 4,640 5,370 4,260 7,392 1,808
COMMON STOCK:
Number of shareholders 694 750 793 850 900
Weighted average shares
outstanding 13,188,877 13,168,430 13,158,861 13,133,166 13,090,141
Earnings per share $ .35 $ .41 $ .32 $ .56 $ .14
Dividends per share - - - - -
FINANCIAL POSITION (IN THOUSANDS):
Working capital $ 16,347 $ 11,782 $ 8,388 3,248 $ 2,053
Capital expenditures 241 591 1,205 216 140
Total assets 22,760 18,429 12,336 12,767 5,094
Long-term debt - - - - 3,948
Shareholders' equity 19,945 15,485 10,113 5,851 (1,548)
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1997 versus Fiscal 1996
The Company realized income before income tax expense and cumulative effect of
accounting change of $7,179,312 in 1997, as compared to $8,471,494 in 1996. Net
income realized in fiscal 1997 and 1996 after income tax expense is $4,639,797
and $5,369,669. Based upon the weighted average number of common and common
equivalent shares outstanding, these translate into net income per share of $.35
and $.41, respectively, in 1997 and 1996. It is the opinion of management that
these amounts may be compared, and are attributable to the factors discussed
below.
Net sales in fiscal 1997 decreased by $1,994,028, or by 6.9% when compared to
fiscal 1996. The drop in sales was experienced both in the domestic and the
international marketplaces. The decreases were predominantly due to decreased
sales of our handheld products and our other oximetry products. Sales of the
Model 3300/3301 hand-held oximeter during this fiscal year were approximately
$7.5 million versus $9.7 million world-wide in fiscal 1996. The Company believes
that the industry-wide market demand for first generation hand-held pulse
oximeters is flattening in the institutional hospital market. The Company, like
its competitors, is now focusing on sales to alternate care markets, sales of
replacement equipment and sales of follow-on quantities of this product line to
initial purchasers. The challenge for the Company, which it is addressing
through product development and marketing activities, is to enhance its existing
product line by adding not only new products, but also new features,
functionality and product configuration to existing products.
Domestic BCI label sales decreased 9.5% from fiscal 1996. The decline was
primarily in the hand-held pulse oximeter as mentioned above, and in its sales
to the U.S. Government. In late fiscal 1997, however, the Company was awarded a
new contract with the Department of Defense, which should increase its
governmental sales in fiscal 1998. The award is for its Model 3303 Pulse
Oximeter, for use in aeromedical and other applications. Sales to hospitals
declined, but sales to the alternate care market (physicians' offices, clinics,
emergency medical and home health care companies) increased, due to the
Company's shift in marketing to these areas. Domestic OEM sales increased by
5.5% over fiscal 1996 sales, due to sales of our Model
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3301 and 3303 handheld pulse oximeters being sold into the home health care
market. International dealer sales of BCI-labeled products decreased by 9.1% and
international OEM sales decreased by 9.3% when compared to fiscal 1996 due to
decreased sales of oximetry products as well. Selling prices have not fluctuated
significantly during these time periods.
Cost of goods sold as a percentage of net sales decreased slightly in fiscal
1997 going from 44.5% in fiscal 1996 to 44.4% in fiscal 1997. The decrease is
primarily due to decreased raw material costs.
Selling, general and administrative expenses increased by approximately $182,000
when comparing 1997 to 1996. The increase is primarily attributable to continued
investment in the domestic sales and engineering departments. During fiscal
1996, BCI began focusing more on the alternate care markets, and increased the
amount spent on marketing to those areas. That spending continued in fiscal
1997. BCI feels these increases were needed to strengthen the domestic sales
efforts and position the Company for the future. Additional investments were
continued from fiscal 1996 in BCI's OEM sales efforts.
Research and development expenses increased by approximately $335,000 when
comparing fiscal 1997 to 1996. The engineering staff grew in fiscal 1997 to
twenty employees, who continued to focus their time and efforts on new product
releases. As a result, payroll and related expenses increased. Work continues on
several new product releases scheduled for fiscal 1998 and beyond.
Interest expense was not incurred in fiscal 1997 or fiscal 1996 due to the
long-term debt and related accrued interest being paid off in full during the
third quarter of fiscal 1995.
During fiscal 1996, BCI utilized the balance of the net operating loss
carryforwards and various federal credit carryforwards available. BCI
International set up a foreign sales corporation (FSC) subsidiary in fiscal 1996
in order to help defray the cost of income taxes on its foreign sales. Federal
and state income tax paid in fiscal 1997 amounted to approximately $2.6 million,
versus $1.7 million in fiscal 1996. BCI's effective tax rate is 35.4% in fiscal
1997 versus 36.6% in fiscal 1996. The drop is due to the Company enjoying a full
year of benefit from the FSC in fiscal 1997.
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<PAGE> 14
Fiscal 1996 versus Fiscal 1995
The Company realized net income before income tax expense and cumulative effect
of accounting change of $8,471,494 in 1996, as compared to net income of
$6,734,618 in 1995. Based upon the weighted average number of common and common
equivalent shares outstanding, these translate into net income per share of $.64
and $.51, respectively, in 1996 and 1995. Net income realized in fiscal 1996 and
1995 after income tax expense is $5,369,669 and $4,259,843. It is the opinion of
management that these amounts may be compared, and are attributable to the
factors discussed below.
Net sales in fiscal 1996 increased by $3,944,601, or by 15.7% when compared to
fiscal 1995. The growth in sales was primarily due to increased sales to our
international OEM customers, which amounted to $3.2 million, and sales of
BCI-labeled products to our domestic customers, amounting to $1.2 million.
Domestic OEM sales decreased $.5 million. Sales of BCI's low cost, high quality
hand-held pulse oximeter and its componentry continue to expand, accounting for
much of the domestic and international OEM sales increase in fiscal 1996. The
increased sales are due to growth in sales to alternate care markets, such as
physicians' offices, clinics, emergency medical and home health care companies.
Sales of our other handheld oximetry products increased due to increased brand
recognition and expansion into alternate care (non-hospital) markets. Selling
prices have not fluctuated significantly during these time periods.
Cost of goods sold as a percentage of net sales decreased slightly in fiscal
1996, going from 45.1% in fiscal 1995 to 44.5% in fiscal 1996. The decrease is
primarily due to decreased raw material costs.
Selling, general and administrative expenses increased by approximately $400,000
when comparing 1996 to 1995. The increase is primarily attributable to continued
investment in the domestic sales departments to support and improve on the sales
increase discussed above. During fiscal 1996, BCI began focusing more on the
alternate care markets, and increased the amount spent on marketing to those
areas. BCI feels these increases were needed to strengthen the domestic sales
efforts and position the Company for the future. Additional investments were
also made in BCI's OEM sales efforts, which included restructuring the OEM sales
efforts into two distinctive departments, one being domestic OEM and the other,
international OEM. BCI expects to increase its domestic OEM sales by focusing
more intently on that market. It should be noted, however, that selling, general
and administrative expenses decreased as a
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<PAGE> 15
percentage of sales in fiscal 1996 when compared to fiscal 1995, going from
23.6% in fiscal 1995 to 21.9% in fiscal 1996.
Research and development expenses increased by $500,000 when comparing fiscal
1996 to 1995. In late fiscal 1995 BCI hired several new engineers who were
employees for all of fiscal 1996. As a result, payroll and related expenses
increased. Additionally, several new products slated for release in fiscal 1997
and fiscal 1998 caused project expenses to increase over those of fiscal 1995.
Interest expense was not incurred in fiscal 1996 due to the long-term debt and
related accrued interest being paid off in full during the third quarter of
fiscal 1995.
The Company adopted Statement of Financial Accounting Standards Board (SFAS) No.
109, "Accounting for Income Taxes" in the first quarter of fiscal 1994. Under
this method, a deferred tax asset of $5,196,600 was recognized in fiscal 1994,
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Due to the taxable income earned in fiscal
1994, deferred income tax expense of $1,209,600 was recognized. In fiscal 1995,
BCI recognized $2,337,000 of deferred income tax expense.
During fiscal 1996, BCI utilized the balance of the net operating loss
carryforwards and various federal credit carryforwards available. BCI
International set up a foreign sales corporation (FSC) subsidiary in fiscal 1996
in order to help defray the cost of income taxes on its foreign sales. Federal
and state income tax paid in fiscal 1996 amounted to approximately $1.7 million.
It is management's opinion that the Company's future success is primarily a
function of its sales level. Management believes that it is not only necessary
to improve the sales of the Company's products which were available for sale
this year, but also to introduce other products to provide increased revenue.
Plans are in progress to achieve these results.
The rate of inflation continues to have a marginal impact on the operations of
the Company. While management routinely assesses the possible effects of
inflation with respect to the Company's future business plans, the rate of
inflation is not expected to have a material impact upon the growth of the
Company during Fiscal 1998. All export sales are denominated in U.S. currency
and therefore, the Company is not exposed to foreign currency risk.
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<PAGE> 16
Liquidity and Capital Resources
Net income recorded in the current year continued to improve the Company's
working capital position. The additional working capital provided by the income
helped to finance the growth in expenses discussed above. Additionally, the
Company increased its investment in cash and cash equivalents by $4.8 million
during the fiscal 1997 and $3.4 million in fiscal 1996. The Company intends to
use the cash and cash equivalents and funds generated in fiscal 1996 and 1997 to
support its growth into fiscal 1998 and beyond.
As a result of sales decreases experienced in fiscal 1997 versus 1996, the
accounts receivable balance decreased by approximately $800,000, or 16%.
Additionally, a $500,000 payment on a past due receivable was received in fiscal
1997 from a large customer which helped improve days sales outstanding. In
comparing the year end receivable balances in fiscal 1996 versus 1995, the
accounts receivable balance grew by approximately $1,200,000, or 32%. Due to
extended terms offered to three of its largest customers in fiscal 1996, the
balance grew more quickly than sales. Notwithstanding selective credit
extensions, the Company continues to place emphasis on tight credit monitoring
and collection procedures.
Inventory levels increased by $450,000 in fiscal 1997 versus fiscal 1996
primarily due to increased inventories of demonstration equipment used by the
sales force and increased inventories for new products being released in the
first half of fiscal 1997. Inventories increased by $610,000 when comparing 1996
to 1995 for the same reasons. No products were discontinued in fiscal 1997, and
two minor products were discontinued in fiscal 1996. It is expected that
inventory balances will remain at the current level during fiscal 1998.
The decrease in property, plant and equipment in fiscal 1997 from 1996 is
principally due to depreciation of underlying assets. No major purchases were
made in fiscal 1997. In fiscal 1996, PP&E increased by $274,000 largely due to
the purchase of vacant land adjacent to BCI's manufacturing facility. Due to
space constraints in its current facility, the Company is investigating its
options as to whether it would be best to build an addition on that land, or to
lease or purchase different property. Current cash balances and cash flows could
adequately pay for either option. It has not yet been determined, however, what
financing method would be used.
Page 16 of 55
<PAGE> 17
Trade accounts payable and accrued liabilities decreased by 3.65%, or
approximately $107,000 when comparing fiscal 1997 to 1996. This decrease is
primarily related to trade payables and the timing of the year end payment
cycle. Trade accounts payable and accrued liabilities increased by 33%, or
$730,000 when comparing fiscal 1996 to 1995. This increase is primarily related
to the increased inventory levels discussed above. Additionally, BCI accrued
$80,000 for the payment of income taxes relating to fiscal 1996. No accrual
existed at the end of fiscal 1995.
The Company continues to experience improved liquidity over the past fiscal
years. Operating activities of the Company have been the main source of this
liquidity. It is the belief of management that if operations continue at the
same level, funds generated from operations will be adequate to fund working
capital requirements, both in the short and long term. The bank line of credit
could provide additional funds if deemed necessary.
The Company currently has in place a bank loan and security agreement that
provides for demand borrowings under a line of credit not to exceed the lesser
of the borrowing base or $10,000,000. The borrowing base, as defined in the
agreement is the sum of 80% of eligible accounts receivable and 25% of eligible
inventory. Interest is calculated based on the LIBOR rate. The borrowing base
currently exceeds $10,000,000, and there is no loan balance outstanding at June
30, 1997, so the available credit is $10,000,000.
It is the belief of management that if continued success in the achievement of
the above-noted goals is experienced, funds generated from future operations and
borrowing potential under the bank line of credit will be adequate to fund the
Company's working capital requirements during 1998.
BCI does not anticipate paying dividends on its common stock.
Impact of Recently Issued Accounting Standards
In February, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" and SFAS No. 129, "Disclosure of Information About Capital Structure."
These statements will be adopted by the Company, as required, for the periods
ending after December 15, 1997. In June, 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related
Page 17 of 55
<PAGE> 18
Information." These statements will be adopted by the Company, as required, for
the periods beginning after December 15, 1997. Implementation of these standards
is not expected to have a material impact on the financial statements of the
Company.
Forward Looking Statements
Except for the historical information contained herein, this report contains
certain forward-looking statements that are subject to certain risks and
uncertainties that could cause actual future results and developments to differ
materially from those currently projected. Such risks and uncertainties include,
but are not limited to, the timing of new product introductions, the current
uncertainties surrounding the Company's principal market segments including the
effect of consolidation of hospital groups and the move toward managed care, and
general economic conditions affecting the Company's market segments.
Pae 18 of 55
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Biochem International Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Biochem
International Inc. and Subsidiary as of June 30, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Biochem International Inc. and
Subsidiary as of June 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
August 8, 1997
Page 19 of 55
<PAGE> 20
BIOCHEM INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,892,915 $ 6,034,286
Accounts receivable, net of allowance for
doubtful accounts of $125,000 and $140,000,
respectively 4,158,002 4,960,818
Inventories 3,747,955 3,296,635
Deferred income taxes 320,000 362,400
Prepaid expenses 43,376 49,593
------------ -----------
Total current assets 19,162,248 14,703,732
Investment 1,847,739 1,863,882
Property and equipment, net 1,599,679 1,711,920
Related party receivable 144,770 143,748
Other 5,987 5,483
------------ -----------
Total assets $ 22,760,423 $18,428,765
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 1,813,985 $ 1,959,992
Accrued liabilities:
Salaries, wages and commissions 754,165 677,968
Other 212,018 203,861
Income taxes 35,000 80,000
------------ -----------
Total current liabilities 2,815,168 2,921,821
Deferred income taxes - 22,400
Stockholders' equity:
Preferred stock, $1.00 par value,
authorized 1,000,000 shares; none issued - -
Common stock, $.02 par value, authorized
14,000,000 shares; 13,091,284 issued,
13,041,284 outstanding as of June 30, 1997,
and 13,086,784 shares issued and outstanding
as of June 30, 1996 261,826 261,736
Additional paid-in capital 11,707,975 11,699,651
Retained earnings 8,162,954 3,523,157
------------ -----------
20,132,756 15,484,544
------------ -----------
Less Treasury Stock at cost, 50,000 shares (187,500) -
------------ -----------
Total stockholders' equity 19,945,255 15,484,544
------------ -----------
Total liabilities and stockholders' equity $ 22,760,423 $18,428,765
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 20 of 55
<PAGE> 21
BIOCHEM INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Net sales $27,006,210 $29,000,238 $ 25,055,637
Cost of goods sold 11,977,951 12,903,308 11,310,236
----------- ----------- ------------
Gross profit 15,028,259 16,096,930 13,745,401
Selling, general and
administrative expenses 6,537,099 6,355,041 5,917,249
Research and development expenses 1,983,817 1,647,651 1,139,792
----------- ----------- ------------
Income from operations 6,507,343 8,094,238 6,688,360
Interest expense - - (105,379)
Other income, net 671,969 377,256 151,637
----------- ----------- ------------
Income before income tax expense 7,179,312 8,471,494 6,734,618
Provision for income taxes 2,539,515 3,101,825 2,474,775
----------- ----------- ------------
Net income $ 4,639,797 $ 5,369,669 $ 4,259,843
=========== =========== ============
Net income per common and common equivalent
share $ 0.36 $ 0.41 $ 0.32
======= =========== ============
Weighted average common stock
shares outstanding 13,188,877 13,168,430 13,158,861
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 21 of 55
<PAGE> 22
BIOCHEM INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Retained
Additional Earnings/ Total
Paid-in (Accumulated Stockholders
Shares Amount Capital Deficit) Shares Amount Equity
------ ------ ------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 13,073,284 $261,466 $11,695,873 $(6,106,355) - $ - $ 5,850,984
1994
Net income - - - 4,259,843 - - 4,259,843
Exercise of common
stock options at 10,000 200 2,300 - - - 2,500
$.25 per share
Balances, June 30, 13,083,284 261,666 11,698,173 (1,846,512) - - 10,113,327
1995
Net income - - - 5,369,669 - - 5,369,669
Exercise of common
stock options at
$.375 to $.625 per 3,500 70 1,478 - - - 1,548
share
Balances, June 30, 13,086,784 261,736 11,699,651 3,523,157 - - 15,484,544
1996
Net income - - - 4,639,797 - - 4,748,008
Exercise of common
stock options at
$.625 to $4.29 per 4,500 90 8,324 - - - 8,414
share
Purchase of treasury - - - - 50,000 (187,500) (187,500)
shares
Balances, June 30, 13,091,284 $261,826 $11,707,975 $ 8,162,945 50,000 $(187,500) $ 19,890,255
1997
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 22 of 55
<PAGE> 23
BIOCHEM INTERNATIONAL INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,639,797 $ 5,369,669 $ 4,259,843
Adjustments to reconcile to net cash provided
by operating activities:
Deferred income taxes 20,000 1,310,000 2,337,000
Amortization of U.S. Treasury Note premium 16,143 - -
Depreciation 353,442 316,776 198,380
Change in assets and liabilities:
Accounts receivable 615,316 (1,029,441) (1,029,200)
Inventories (451,320) (610,134) 1,026,017
Prepaid expenses and other 5,713 (721) 6,779
Accounts payable and accrued liabilities (106,653) 730,286 (568,238)
------------ ----------- -----------
Net cash provided by operating activities 5,092,438 5,906,435 6,230,581
------------ ----------- -----------
Cash flows from investing activities:
Property and equipment additions (241,201) (591,006) (1,204,905)
Investment in U.S. Treasury Notes - (1,869,216) -
------------ ----------- -----------
Net cash used in investing activities (241,201) (2,460,222) (1,204,905)
------------ ----------- -----------
Cash flows from financing activities:
Payments on long-term debt - - (4,156,309)
Loan to shareholder (1,022) (41,920) -
Proceeds from exercise of stock options 8,414 1,548 2,500
------------ ----------- -----------
Net cash used for financing activities 7,392 (40,372) (4,153,809)
------------ ----------- -----------
Net increase in cash and cash equivalents 4,858,629 3,405,841 871,867
Cash and cash equivalents:
Beginning of year 6,034,286 2,628,445 1,756,578
------------ ----------- -----------
End of year $ 10,892,915 $ 6,034,286 $ 2,628,445
============ =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ - $ 2,182,348
Cash paid for income taxes $ 2,564,515 $ 1,711,825 $ 146,025
</TABLE>
Non-cash activity:
The Company acquired 50,000 shares of its common stock owned by a major customer
in satisfaction of the customer's $187,500 outstanding accounts receivable
balance.
The accompanying notes are an integral part of these financial statements.
Page 23 of 55
<PAGE> 24
BIOCHEM INTERNATIONAL INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Biochem International Inc. (the Company) designs and manufactures medical
equipment used in the monitoring of respiration, blood gases, exhaled gases,
anesthetic agent gases and related cardiovascular functions. The following is a
summary of significant accounting policies of the Company:
A. REVENUE RECOGNITION: The Company recognizes revenue from product sales upon
shipment to the customer.
B. CONSOLIDATION PRINCIPLES: Effective January 2, 1996, the Company incorporated
a Foreign Sales Corporation (FSC). The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, BCI International
Foreign Sales Corporation. All intercompany transactions have been eliminated.
C. ESTIMATES: The Company prepares its consolidated financial statements in
conformity with generally accepted accounting principles, which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
D. CONCENTRATION OF CREDIT RISK: Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments and trade receivables. The Company places its temporary cash
investments with a high credit quality financial institution. The Company's
trade receivables subject it to credit risk as its customers are primarily
health care providers, both domestically and internationally. The Company's
international receivables are generally supported by letters of credit
denominated in U.S. dollars. The domestic receivables are generally not
collateralized.
E. CASH EQUIVALENTS: All highly liquid investments purchased with a maturity of
three months or less are considered cash equivalents.
F. INVENTORIES: Inventories are valued at the lower of cost (determined on a
first-in, first-out basis) or market. Loaner and demonstration equipment is
recorded at cost and included in inventory until sold.
G. INVESTMENT: Investment at June 30, 1997 represents a U.S. government security
which matures in August, 1997. The investment is classified as held-for-sale and
is stated at its amortized cost.
Page 24 of 55
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS, CONT.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
H. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation is provided on the straight-line method over the estimated useful
lives of these assets. The estimated useful lives are principally 3 to 10 years
for machinery and equipment. Leasehold improvements are amortized over the life
of the lease. Upon sale or retirement of depreciable assets, the related cost
and accumulated depreciation are removed from the accounts and any resultant
gain or loss is reflected in operations.
I. INCOME TAXES: Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
J. NET INCOME PER SHARE: Net income per common and common equivalent share is
computed based on the weighted average common shares outstanding, including
common stock equivalents.
K. RECLASSIFICATIONS: Certain items in the prior years' financial statements
have been reclassified to conform with the 1997 presentation.
L. OTHER INCOME: Other income is comprised primarily of interest received from
the Company's interest-bearing cash accounts.
M. RECENT ACCOUNTING PRONOUNCEMENTS: In February, 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" and SFAS No. 129, "Disclosure of
Information About Capital Structure." These statements will be adopted by the
Company, as required, for the periods ending after December 15, 1997. In June,
1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These statements will be adopted by the Company, as required, for the periods
beginning after December 15, 1997. Implementation of these standards is not
expected to have a material impact on the financial statements of the Company.
2. INVENTORIES:
Inventories are comprised of:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Finished goods $ 230,390 $ 286,067
Loaner and demonstration 920,734 951,472
Work-in-process 1,070,564 775,098
Purchased material 1,526,267 1,283,998
---------- ----------
$3,747,955 $3,296,635
========== ==========
</TABLE>
Page 25 of 55
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS, CONT.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Land $ 342,262 $ 342,262
Building 724,699 724,699
Leasehold improvements 126,841 126,841
Machinery and equipment 1,605,481 1,366,871
Office furniture and equipment 184,295 181,704
---------- ----------
2,983,578 2,742,377
Less accumulated depreciation 1,383,899 1,030,457
---------- ----------
$1,599,679 $1,711,920
========== ==========
</TABLE>
In April 1995, the Company purchased land and building for $812,899 from a
shareholder of DS Medical Products Co. (DS) who is also an officer and a
director of the Company. DS owns approximately 76% of the Company's common
stock. The Company had leased the land and building from the same party prior to
its purchase. The Company continued to lease a portion of another building from
a third party in fiscal year 1997. The Company incurred lease expense of
$25,542, $24,742 and $84,500 in 1997, 1996 and 1995, respectively.
4. INVESTMENT:
A U.S. government security is held in a restricted trust as part of a
compensation agreement entered into between the Company and its president in
January 1996. Under the terms of the agreement, the president will receive
earnings of the trust assets currently and, should he remain employed by the
Company for a period of one year following a change in control, the assets in
trust will become the property of the president. DS Medical Products Co., the
principal shareholder of the Company, has guaranteed the Company's obligation to
its president.
5. BORROWING ARRANGEMENT:
The Company has a bank loan and security agreement which, as amended January 16,
1996, provides for borrowings not to exceed $10,000,000 that are due on demand
under a revolving line of credit. Interest is at the London Interbank Offered
Rate (LIBOR) plus 1.75%. The bank has a security interest in all the assets of
the Company. Under the terms of the agreement, any borrowings under the line of
credit must be used for working capital or acquisition purposes. The terms of
the agreement also subject the Company to certain covenants including
restriction on paying dividends without prior written consent of the bank,
maintaining a minimum tangible net worth of $5,000,000 and restriction of
Company acquisitions to the medical products industry.
Page 26 of 55
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS, CONT.
6. COMMON STOCK AND STOCK OPTIONS:
Effective October 1, 1992, the Company adopted the 1992 Stock Program which
includes a Stock Option Plan and a Restricted Stock Rights Plan. This program
provides for the issuance of common stock options to officers, employees and
independent consultants. An aggregate of 250,000 shares were originally reserved
for issuance under the program. All options available for grant at June 30, 1997
relate to the 1992 stock program.
At June 30, 1997, the Company also had outstanding options to purchase 3,000
shares of common stock under a Stock Option Plan which was terminated in 1991.
Options granted under the Stock Option Plans are exercisable for a period of 10
years at a price equal to market value, as defined, on the date of grant.
Stock purchase rights granted under the Restricted Stock Rights Plan are
exercisable for a period of 30 days at a price equal to 10% of the stock's fair
market value at the date of grant. No rights had been granted at June 30, 1997
under this plan.
The following is a summary of the stock option shares and the weighted average
exercise price per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ----------------
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding and exercisable
beginning of year 181,000 $2.248 133,500 $1.557 96,000 $0.553
Granted 26,000 5.250 51,000 3.931 47,500 3.313
Exercised (4,500) 1.870 (3,500) 0.442 (10,000) 0.250
Purchased (30,500) 0.586 - - - -
Forfeited (500) 0.625 - - - -
-------- ------ ------- ------ -------- ------
Outstanding and exerciseable
end of year 171,500 3.013 181,000 2.248 133,500 1.557
======== ======= =======
Available for grant,
end of year 81,500 78,500 129,500
======== ======= =======
</TABLE>
Options outstanding and exercisable as of June 30, 1997:
<TABLE>
<CAPTION>
Weighted-Average
Range of Weighted-Average Exercise Price
Exercise Prices Remaining Life Per Share Shares
--------------- -------------- --------- ------
<S> <C> <C> <C>
$0.250 - 0.346 4.87 $0.334 23,500
$0.625 - 1.359 6.31 0.855 25,500
$3.313 - 5.250 8.46 3.976 122,500
-------
3.013 171,500
=======
</TABLE>
Page 27 of 55
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS, CONT.
6. COMMON STOCK AND STOCK OPTIONS, CONTINUED:
In March, 1997, the Company purchased from the president of the Company his
option rights to purchase 30,500 shares of the Company's stock. These rights
were granted to the president during the years 1989 through 1994. The value paid
for the options was $163,211, determined as the average between the prices bid
and asked for the stock on the date of the authorization to purchase ($5.9375
per share) less the aggregate underlying options exercise price of $17,883.
After this transaction, the president owned options to purchase up to 20,000
shares of the Company's stock at exercise prices ranging from $3.3125 to $4.29
per share.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" (the "standard"). The Company adopted the new standard in the
current fiscal year. The Company has continued to measure compensation expense
for its stock option incentive plan under APB 25; therefore, the new standard
has no effect on the Company's operating results.
Had the Company recognized compensation expense based on the fair value of the
grant for awards under the plan, consistent with the method prescribed by FASB
Statement No. 123, the Company's net income and net income per share for the
years ended June 30, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Net earnings as reported $ 4,639,797 $ 5,369,669
Net earnings pro forma $ 4,567,076 $ 5,263,669
Net earnings per share as reported $ 0.35 $ 0.41
Net earnings per share pro forma $ 0.35 $ 0.40
</TABLE>
The following assumptions were used to compute the fair market value of the
option grants for the year ended June 30, 1997 and 1996 using the Black-Sholes
option pricing model; a risk-free interest rate ranging from 5.88% to 6.43%;
stock volatility of 40%; dividend yield of 0% and expected option life of seven
years.
7. NET INCOME PER SHARE:
The computation of net income per common and common equivalent share assumes
that stock options are exercised and are reflected in weighted average common
shares outstanding net of treasury shares assumed to be purchased with the
exercise proceeds. There is no significant difference between primary and fully
diluted net income per share. The number of weighted average shares used for
computing primary net income per share was as follows:
1997 1996 1995
---- ----- ----
[S] [C] [C] [C]
Beginning shares outstanding 13,086,784 13,083,284 13,073,284
Equivalent shares:
Dilutive stock options based on
Treasury stock method using
average market price 102,093 85,146 85,577
---------- ---------- ----------
13,188,877 13,168,430 13,158,861
========== ========== ==========
Page 28 of 55
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS, CONT.
8. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 2,266,635 $1,763,623 $ 119,250
State 252,880 28,202 18,525
----------- ---------- ----------
Total current 2,519,515 1,791,825 137,775
----------- ---------- ----------
Deferred:
Federal 45,961 1,067,000 2,153,400
State (25,961) 243,000 183,600
----------- ---------- ----------
Total deferred 20,000 1,310,000 2,337,000
----------- ---------- ----------
$ 2,539,515 $3,101,825 $2,474,775
=========== ========== ==========
</TABLE>
The following reconciles the Federal statutory income tax rate with the
Company's effective tax rate:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
FSC benefit (1.7) (0.9) -
State income taxes, net of federal benefit 2.1 2.1 2.0
Nondeductible expenses and other 1.0 1.4 0.7
---- ---- ----
35.4% 36.6% 36.7%
==== ==== ====
</TABLE>
Deferred income taxes reflected in the balance sheet at June 30, 1997 and 1996
relate to the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Current:
Tax credit carryforwards $ - $ 90,000
Inventories and receivables 130,257 124,700
Accrued employee benefits 109,405 85,300
Other 80,338 62,400
-------- ---------
Current deferred tax assets 320,000 362,400
-------- ---------
Deferred tax liabilities - property
and equipment, noncurrent - (22,400)
-------- ---------
Total net deferred tax assets $320,000 $ 340,000
======== =========
</TABLE>
9. EXPORT SALES:
Export sales, principally to the Far East, Central and South America and Western
Europe, were $13,252,596, $14,871,510 and $11,736,000 in 1997, 1996 and 1995,
respectively. The Company's export sales are denominated in U.S. currency.
Page 29 of 55
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS, CONT.
10. EMPLOYEE BENEFIT PLAN:
The Company sponsors a defined contribution plan for all eligible employees of
the Company. Employees may contribute up to 12% of their compensation and the
Company provides a matching contribution of 50% of the employees' contributions
up to 6% of the employees' compensation. The Company's contributions to the Plan
were $139,384, $125,805 and $117,270 in 1997, 1996 and 1995, respectively.
The Company is not obligated to provide any postretirement medical or life
insurance benefits to employees.
11. RELATED PARTY TRANSACTIONS
The former president of the Company had an interest in the common stock of the
Company which is held by DS Medical Products Co. On August 1, 1993, the Company
paid $101,828 to the former president on behalf of DS Medical Products Co. in
exchange for those securities. As a result, the Company has a receivable due
from DS Medical Products Co. in the same amount at June 30, 1997 and 1996.
The Company paid approximately $40,000 in state taxes in March 1996 on behalf of
DS Medical Products Co., a related party. The Company has recorded this payment
as a related party receivable at June 30, 1996.
Page 30 of 55
<PAGE> 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and principal executive officers of the Company and their offices
are:
<TABLE>
<CAPTION>
Name Age Office
---- --- ------
<S> <C> <C>
Ken M. Davee (1) 89 Director - Class I, Vice Chairman of the Board of
Directors and Secretary
David H. Sanders (1) 66 Director - Class I, Chairman of the Board of Directors,
Chief Executive Officer, Treasurer and
Assistant Secretary
Lee J. Knirko 74 Director - Class II
Frank A. Katarow 37 President and Chief
Operating Officer
Keith R. Harper 48 Senior Vice President,
Sales
Ann M. Johnson 35 Vice President, Finance and Operations
Robert H. Wesel 38 Vice President,
International Sales
Mark S. Geisler 45 Vice President, Engineering
Donald Alexander 42 Vice President,
Regulatory Affairs
Michael T. Joyce (2) 46 Vice President,
Sales and Marketing
</TABLE>
(1) Member of the Executive Committee
(2) Resigned in July, 1997.
Page 31 of 55
<PAGE> 32
All directors are elected for two (2) year terms and serve until their
respective successors are duly elected and qualified. The terms for Classes I
and II expire as of the date set for the annual stockholders' meeting for fiscal
years ending June 30, 1998 and June 30, 1997, respectively. Officers are
appointed for a one (1) year term unless sooner replaced. Each of the above
individuals has served in the capacities indicated since September 14, 1984,
except as stated below.
MR. DAVEE holds a degree from Northwestern University Business School. Prior to
1936, he was employed in various market research capacities. In 1936, he founded
Davee, Kohnlein and Keating Company, a marketing research and consulting firm,
of which company he was a principal until its sale in 1969. Thereafter, he has
been self-employed as a private investor. In 1973, he, along with Mr. Sanders,
purchased an approximately 94% interest in Medical Engineering Corporation
("MEC"), a manufacturer of silicone rubber implants and other medical products
located in Racine, Wisconsin, which they operated from 1973 until its sale at
the end of 1982 to Bristol-Myers Company.
MR. SANDERS received an undergraduate degree and, in 1956, a Masters in Business
Administration from the University of Wisconsin. Prior to his employment in 1973
by MEC, Mr. Sanders was with Pfizer International for four (4) years, and
Sandoz, Inc., for fifteen (15) years, at which companies he was involved in
marketing and general management. In 1973, he became President and Chief
Executive Officer of MEC, a position he held through December of 1984. Mr.
Sanders served as President of the Company from September 4, 1984 to October 4,
1984 at which time he commenced serving as Chairman and Assistant Secretary.
MR. KNIRKO, a certified public accountant, is a former treasurer of the Dr.
Scholl Foundation, a non-profit organization. He is a former audit manager of
Peat, Marwick, Main & Co. (now KPMG Peat Marwick), an accounting firm.
MR. KATAROW has been employed by the Company since October, 1980 serving in
various capacities including Mechanical Designer, Manager of Product Design,
Manufacturing Manager, Director of Operations and was then promoted to Vice
President of Operations in June, 1990. Responsibility for OEM Sales was added in
January, 1991. He was promoted to Senior Vice President and General Manager on
March 1, 1992 and further promoted to Executive Vice President effective January
1, 1993. On November 1, 1993 he became President and Chief Operating Officer of
the Company.
Page 32 of 55
<PAGE> 33
MR. HARPER has been employed by the Company since October, 1981, serving in
various capacities including National Service Manager, General Manager-Quality
Assurance and Service, Director of Regulatory Affairs, Director of Operations,
and Vice President of Operations since December, 1986. In 1990 he became Vice
President of International Sales. On November 1, 1993 he commenced serving as
Senior Vice President, Sales.
MS. JOHNSON, a certified public accountant, received a Bachelor of Business
Administration degree in Accounting and in Risk Management and Insurance from
the University of Wisconsin in Madison. She received her Masters of Business
Administration degree in May, 1997 from the University of Wisconsin in
Milwaukee. Prior to her employment at BCI, she worked on the audit staff at
Deloitte, Haskins & Sells (now Deloitte & Touche) from 1984 to 1987 and at
Coopers & Lybrand from 1987 to 1990. She joined BCI in April, 1990 and has been
Vice President of Finance and Personnel since December, 1991. On November 1,
1993 she was promoted to Vice President of Finance and Operations.
MR. WESEL worked in the health care field for over ten years before starting at
BCI in January, 1991. He received an associates degree from Milwaukee Area
Technical College in Business Management and is also a certified cardiopulmonary
technologist and a pulmonary functions technologist. His most recent clinical
position was as Technical Director/Business Manager of Anesthesia at a 400 bed
hospital. Since coming to BCI, he has held several positions, including Manager
of Clinical Applications, Territory Sales Manager and Director of Marketing
Services. After a brief hiatus from the company in fiscal 1994, he became Vice
President of International Sales effective January 4, 1994.
MR. GEISLER came to BCI in November, 1994 as Vice President of Engineering from
Marquette Electronics. He worked at Marquette for 14 years at various positions
in the areas of Research and Development, most recently as Director of Research
and Development. He received his undergraduate degree in Electrical Engineering
from the University of Wisconsin in Madison and his masters degree in Electrical
Engineering from Marquette University. He is currently attending Marquette
University in pursuit of a Doctorate Degree in Electrical Engineering.
MR. ALEXANDER started at BCI in August, 1992 as Engineering Manager. In August,
1994 he transferred to the regulatory affairs department, becoming Regulatory
Affairs Manager, and was promoted to Vice President, Regulatory Affairs in May,
1995. Before coming to BCI, Mr. Alexander was a project leader at Life Fitness
Corp., an equipment
Page 33 of 55
<PAGE> 34
manufacturer in Illinois. He has a Bachelors Degree in Electrical Engineering
from the University of Maine.
MR. JOYCE earned a degree in Business Administration from the University of
Wisconsin - Whitewater. His experience includes over 20 years in sales and sales
management positions in the medical products industry. Prior to joining BCI, he
served as Regional Sales Manager for Nellcor, Inc.. He joined BCI in May, 1995
as National Field Sales Manager for the domestic sales group and was appointed
to the position of Vice President of Sales and Marketing in June, 1996. In July,
1997, Mr. Joyce resigned from his position with BCI International and is no
longer with the Company.
Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors and persons holding ten percent or
more of the Company's equity securities to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. Based solely on its
review of copies of such reports furnished to the Company, the Company believes
that all of its executive officers, directors and greater than ten percent
beneficial owners were in compliance with their Section 16 filing requirements.
Page 34 of 55
<PAGE> 35
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning all cash, cash-equivalent
and non-cash forms of remuneration for services to the Company for the past
three fiscal years for the Chief Executive Officer of the Company and each of
the Company's four other most highly compensated executive officers:
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
------------------- ------------
Stock All Other
Name and Capacity Year Salary Bonus Other(1) Options(#) Compensation(2)
- ----------------- ---- ------ ----- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
David H. Sanders 1997 $200,000 $-0- $-0- -0- $ 4,750
Chairman and CEO 1996 200,000 -0- -0- -0- 4,600
1995 180,000 -0- -0- -0- 4,550
Frank A. Katarow 1997 $169,308 $18,200 -0- 5,000 $115,450
President and COO 1996 153,134 30,050 -0- 10,000 10,218
1995 129,000 30,100 -0- 10,000 4,550
Keith R. Harper 1997 $125,973 $ -0- -0- 2,000 $3,869
Senior Vice President 1996 117,367 8,500 -0- 4,000 3,776
1995 117,500 -0- -0- 6,000 3,525
Robert H. Wesel 1997 $122,088 -0- -0- 2,000 $3,663
Vice President 1996 113,520 -0- -0- 4,000 3,406
1995 105,462 -0- -0- 6,000 3,164
Michael T. Joyce(3) 1997 $123,861 -0- -0- 2,000 $3,716
Vice President 1996 $116,060 -0- -0- 6,000 $3,482
1995 16,154 -0- -0- -0- 138
</TABLE>
(1) While the above named Executive Officers enjoy certain perquisites, for the
year ended June 30, 1997, these did not exceed $50,000 or ten percent of any
officer's salary and bonus.
(2) These figures represent the amount of the Company's contribution to its
401(k) Plan allocated to the officer. Additionally, the amount for the year
ended June 30, 1997 allocated to Mr. Katarow includes a $110,700 payment
representing interest earned on the funds held in trust relating to the
Compensation Agreement in effect for Mr. Katarow, as discussed below.
(3) Mr. Joyce began employment with the Company on May 1, 1995, and was promoted
to Vice President on June 1, 1996.
Directors receive no fees or expense reimbursement allowances.
Page 35 of 55
<PAGE> 36
STOCK OPTIONS
The following table shows, for the year ended June 30, 1997, individual grants
of stock options made during the year, to each of the executive officers and
directors:
<TABLE>
<CAPTION>
% of Total
Options
Options Granted to Exercise Expiration
Granted Employees Price Date
------- --------- -------- ---------
<S> <C> <C> <C> <C>
D.H. Sanders -0- N/A N/A N/A
K.M. Davee -0- N/A N/A N/A
L.J. Knirko -0- N/A N/A N/A
F.A. Katarow 5,000 19.20% $5.250 06/15/07
K.R. Harper 2,000 7.69% $5.250 06/15/07
A.M. Johnson 4,000 15.38% $5.250 06/15/07
R.H. Wesel 2,000 7.69% $5.250 06/15/07
M.S. Geisler 2,000 7.69% $5.250 06/15/07
D.J. Alexander 2,000 7.69% $5.250 06/15/07
M.T. Joyce 2,000 7.69% $5.250 06/15/07
</TABLE>
The following table shows the number and value of options exercised during
fiscal 1997 and the value of unexercised options on an aggregated basis at June
30, 1997 for each of the executive officers and directors:
<TABLE>
<CAPTION>
Shares Number of Value of
Acquired on Value Unexercised Unexercised
Exercise Realized Options at Options at
Fiscal 1997 Fiscal 1997 6/30/97 6/30/97 (1)
----------- ----------- ------- -----------
<S> <C> <C> <C> <C>
D.H. Sanders -0- -0- -0- N/A
K.M. Davee -0- -0- -0- N/A
L.J. Knirko -0- -0- -0- N/A
F.A. Katarow -0- -0- 25,000 $ 35,425
K.R. Harper -0- -0- 25,000 79,237
A.M. Johnson -0- -0- 34,500 110,269
R.H. Wesel -0- -0- 14,000 26,327
M.S. Geisler -0- -0- 14,000 22,420
D.J. Alexander -0- -0- 6,500 6,951
M.T. Joyce -0- -0- 8,000 10,085
</TABLE>
(1) Value of unexercised options is calculated by determining the difference
between the fair market value of the securities underlying the options and the
exercise price of the options at fiscal year end.
In March, 1997, the Company purchased from the president of the Company his
option rights to purchase 30,500 shares of the Company's stock. These rights
were granted to the president during the years 1989 through 1994. The value paid
for the options was $163,211, determined as the average between the prices bid
Page 36 of 55
<PAGE> 37
and asked for the stock on the date of the authorization to purchase ($5.9375
per share) less the aggregate underlying options exercise price of $17,883.
After this transaction, the president owned options to purchase up to 20,000
shares of the Company's stock at exercise prices ranging from $3.3125 to $4.29
per share.
On January 24, 1996, the Company entered into a Compensation Agreement with its
President, Frank A. Katarow ("Katarow"). Under the terms of that Compensation
Agreement, Katarow has undertaken to remain in the employ of the Company for a
period of at least one (1) year following a change of control of the Company
(defined as a change of control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A under the
Securities Exchange Act of 1934). The intention of the Agreement is to retain
Katarow's services in the event of a sale, transfer or other disposition of the
business or ownership of the Company, for the benefit of any acquiring party, in
order to provide for continuity of management of the Company, if so desired by
any such acquiror.
Under the terms of the Agreement, for the one (1) year period following a change
of control, Katarow would be entitled to receive base salary at a rate at least
equal to the rate in effect immediately prior to such a change of control,
together with an annual bonus equal to the average bonus paid in the three (3)
years preceding such change of control. In addition, at the end of the one (1)
year period (or sooner if Katarow's employment with the Company or its successor
is earlier terminated without cause, as defined), Katarow would be entitled to
receive an amount equal to the amount remaining in a trust fund concurrently
established to provide for payment under the Compensation Agreement. That trust
fund, established pursuant to a complementary Trust Agreement and funded with a
cash deposit of $1,870,200.00, is intended to constitute a grantor trust as
described in Section 671 et. seq. of the Internal Revenue Code of 1986, as
amended (the "Code"). As such, all income earned by the trust is attributable to
the Company. Nevertheless, the trust instrument provides for payment of earnings
of the trust to Katarow on an annual basis. This amount, attributable to the
Company as income and deductible by it as an employee salary expense, is to be
treated as earned income to Katarow, who is responsible for payment of
individual income tax on such amount. Payment of these annual earnings to
Katarow will constitute a material increase in Katarow's salary payments from
the Company on a current basis. While
Page 37 of 55
<PAGE> 38
earnings from the trust fund are payable to Katarow on an annual basis
commencing immediately, payment of the principal of the trust fund is payable
only upon his satisfaction of his continuing post-change of control employment
undertaking.
Until actually paid to Katarow, the assets of the trust are subject to
intervening claims of general creditors of the Company, including Katarow, whose
rights therein are no greater than those of other general creditors. Katarow may
not assign, anticipate, alienate or encumber his rights in the trust. David H.
Sanders, Chairman of the Board of the Company, has been designated as trustee
under the Trust Agreement.
Katarow concurrently entered into a similar Compensation Agreement with DS
Medical Products Co. ("DS Medical"), the principal shareholder of the Company.
Under the terms of the respective Compensation Agreements, to the extent that
payments otherwise due Katarow from the Company would be considered (I) "excess
parachute payments" under Section 280G or 4999 of the Code, or (ii) not
deductible by the Company by reason of Section 162(m) of the Code, such payments
become the obligation of DS Medical, and the Trustee is directed to return to
the Company the balance of the assets in the trust that would otherwise be
available to make those payments.
The intention of the foregoing arrangement with Katarow is to assure his
continuing service to the Company on a current basis, and his availability to
any potential acquiror of the Company or its business or assets into the future.
While the Company and its principals are not in discussions with parties
contemplating a current transfer of ownership of the business or assets of the
Company, the Company and its principals have in the past engaged in negotiations
for such a transaction (see Reports on Form 8-K, dated May 23, 1995 and July 25,
1995) and may encounter or entertain other similar discussions or initiatives in
the future. The Company, its management and principal shareholder have
determined that the existence of continuity of present management would be an
important aspect in the valuation of the Company by any potential acquiror, and
the Company, its Board of Directors, and its principal shareholder, deem it, in
their best business judgment, to be important to provide for retention of
management in order to enhance the value of the Company for the benefit of its
shareholders.
Page 38 of 55
<PAGE> 39
The ownership of a significant majority of the outstanding capital stock of the
Company by DS Medical, the Company's principal shareholder, which in turn, is
owned by David H. Sanders and Ken M. Davee (directors and officers of the
Company) and related parties, means that any discussions, negotiations and
transfer could be accomplished when, as and on terms deemed advantageous by that
principal shareholder. Nevertheless, management and ownership believe that
enhancement of the value of the Company, through a facility such as the
foregoing Compensation Agreements, will redound to the benefit of minority
shareholders as well.
The Company entered into employment contracts with four of its officers,
including Mssrs. Wesel and Harper, in April, 1995. The contracts have a three
year term, and are renewable for one year periods thereafter with agreement by
both parties. In the event employment is terminated without cause, the employee
shall be entitled to: severance pay for the greater of 12 months or one month
for each year of service, and continuation of employee benefits for the
severance period. The severance period terminates when the employee has found
other work if that occurs sooner than the predefined end of the severance
period. No other long term incentive plans or change-in-control arrangements are
currently in force at the Company.
Page 39 of 55
<PAGE> 40
COMPENSATION COMMITTEE REPORT
The objectives of the Company's compensation program are to attract and retain
the best available executives, to motivate these executives to achieve the
Company's goals, and to recognize individual contributions as well as overall
business results. To achieve these objectives, the Company reviews its
compensation program on a regular basis and attempts to tie a portion of each
executive's potential compensation to Company performance.
The key elements of the Company's executive compensation program consist of
fixed salary plus variable pay, taking the form of annual incentive compensation
directly tied to Company performance, and long-term compensation via stock
option awards. In determining each element of compensation to be awarded to each
executive, the Compensation Committee considers the executive's benefits
package, his/her responsibilities and experience, as well as the competitive
marketplace for executive talent. Whenever possible, a comparison to
compensation packages for executives with similar experience and
responsibilities was made when determining the packages at the Company.
In determining the compensation package for Mr. Sanders, the Company's Chairman
of the Board and Chief Executive Officer, the Committee took into consideration
both the compensation packages of CEOs at companies the Committee deemed
comparable, and the Committee's assessment of Mr. Sanders and the Company's
overall performance. Because of his substantial stock holdings, Mr. Sanders is
not eligible to participate in the stock option plan. Additionally, due to his
position, he is not eligible for any incentive compensation awards. Mr. Sanders
took no part in the determination of his compensation.
The Compensation Committee reviewed the proposed 1997 salaries and bonuses for
the executive officers. The Committee believed the proposed salary levels were
in line with or below the salary levels of executives in comparable positions of
responsibility. In an effort to tie a substantial portion of an executive's
compensation to Company performance, the Committee approved an incentive
compensation program in which all of the executive officers, other than Mr.
Sanders, Mr. Harper, Mr. Wesel and Mr. Joyce, are eligible to participate. The
program provides for a percentage of the participant's salary to be paid to that
officer if operating profits
Page 40 of 55
<PAGE> 41
are above specified levels. Mr. Harper, Mr. Wesel, and Mr. Joyce receive
commission based on the sales performance of their divisions. All executive
officers, other than Mr. Sanders as mentioned above, are eligible for
discretionary stock option awards. The committee believes that selective grants
of stock options, along with the performance-based cash compensation described
above promote a commonality of interest between the Company's officers and its
stockholders.
The Compensation Committee is of the opinion that the compensation levels for
the executive officers are reasonable when compared to similar positions of
responsibility and scope in similar sized companies and in similar industries,
and that an appropriate amount of total compensation is based on the performance
of the Company, and therefore provides sufficient incentive for these
individuals to attain improved results in the future.
Compensation Committee:
David H. Sanders
Ken M. Davee
<PAGE> 42
COMPANY STOCK PRICE PERFORMANCE
The following table tracks the value of $100 invested on June 30, 1992 in
Biochem International Inc. Common Stock as compared to the change in the
Standard & Poor's 500 Index and the Standard & Poor's Health Care Composite
Index. The table shows that $100 invested five years ago in the Company's stock
was worth $1720 at June 30, 1997, compared to $247 for the S&P 500 Index and
$231 for the Health Care Composite Index.
<TABLE>
<CAPTION>
MEASUREMENT HEALTH CARE
DATE BCI STOCK S & P 500 COMPOSITION
---- --------- --------- -----------
<S> <C> <C> <C>
6/30/92 $ 100 $100 $100
6/30/93 360 114 88
6/30/94 1261 115 88
6/30/95 1120 145 128
6/30/96 1580 183 178
6/30/97 1720 247 231
</TABLE>
The following graph depicts a five-year comparison of cumulative total
stockholder returns for the Company, the Standard & Poor's 500 Stock Index and
the Standard & Poor's Health Care Composite Index from June 30, 1992 through
June 30, 1997.
[LINE GRAPH]
PAGE 42 of 55
<PAGE> 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table shows the beneficial ownership of common stock, $.02 par
value, of the Company by each person who is known by the Company to be the
beneficial owner of five (5) percent or more of such stock as of August 31,
1997:
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (2)
---------------- -------------------- ---------
DS Medical Products Co. 10,040,000 shares, 76.99%
180 East Pearson owned of record
Chicago, Illinois 60611 and beneficially
Ken M. Davee (1) (1)
180 East Pearson
Chicago, Illinois 60611
David H. Sanders (1) (1)
BCI International
W238 N1650 Rockwood Drive
Waukesha, Wisconsin 53188
(1) Ken M. Davee and David H. Sanders own the majority of the stock of DS
Medical, with the balance being owned indirectly by Mr. Sanders through
family members. Therefore, for the purposes of Rule 13d-3 of the
Securities and Exchange Commission, they may be deemed to beneficially
own the BCI stock and rights owned by DS Medical. Such beneficial
ownership is disclaimed. The amounts of such stock ownership and rights
are not repeated in this table or in the following table to avoid
duplication.
(2) The percent of class calculations above are based on a total of
13,212,784 shares consisting of 13,041,284 shares outstanding, and
171,500 shares issuable upon exercise of options granted under the
Company's Incentive Stock Option Plans. See ITEM 8. Financial
Statements and Supplementary Data, Note 6, Common Stock and Stock
Options.
Page 43 of 55
<PAGE> 44
The following table shows the ownership of common stock of the Company held
beneficially by each director and officer holding shares, and by all directors
and officers of the Company as a group, as of August 31, 1997:
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class (3)
David H. Sanders 230,000 shares- 1.74%
230,000 beneficially (1)(2)
Frank A. Katarow 30,700 shares-5,700 of .24%
record and beneficially,
and 25,000 beneficially as
options
Keith R. Harper 36,000 shares-10,000 of .27%
record and beneficially,
and 25,000 beneficially
as options
Ann M. Johnson 34,500 shares-34,500 .27%
beneficially as options
Robert H. Wesel 18,000 shares-4,000 of .14%
record and beneficially,
and 14,000 beneficially
as options
Mark S. Geisler 14,000 shares-14,000 .11%
beneficially as options
Donald Alexander 6,500 shares-6,500 .05%
beneficially as options
Michael T. Joyce 8,000 shares-8,000 .07%
beneficially as options
All directors and 10,416,700 shares-10,059,700 78.84%
officers as a group of record and beneficially,
(8 persons) 230,000 beneficially, and
127,000 as options (1)(3)
(1) See footnote 1 to the preceding table.
(2) Held of record by the Sanders Family Benefit Trust.
(3) See footnote 2 to the preceding table.
The above beneficial ownership information is based on the information furnished
by the specified persons and has been determined in
Page 44 of 55
<PAGE> 45
accordance with Rule 13d-3. It is not intended to be an admission of beneficial
ownership for any other purpose and includes shares as to which beneficial
ownership has been disclaimed. BCI has not received any Schedule 13D or Schedule
13G statements indicating that any person is a beneficial owner of more than 5%
of its common stock except as disclosed above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As previously discussed, DS Medical, owner of approximately 76.99% of the
Company's outstanding common stock, is substantially owned by Ken M. Davee and
David H. Sanders. Mr. Davee is Vice Chairman of the Board of Directors and
Secretary of the Company. Mr. Sanders serves as Chairman of the Board of
Directors, Chief Executive Officer, Treasurer, and Assistant Secretary of the
Company.
Prior to June 30, 1995, Mr. Davee owned the building which the company occupies.
BCI purchased the building from Mr. Davee on that date, based upon an Option to
Purchase (the "Option") agreement relating to the property sold. Under the terms
of the Option, BCI had the right to purchase the leased property at any time
after the initial term of the Lease for $670,000 plus increases in the consumer
price index as defined in the agreement. The purchase price plus filing fee
costs was $812,899.
The former president of the Company had an interest in the common stock of the
Company which is held by DS Medical Products Co. On August 1, 1993, the Company
paid $101,828 to the former president on behalf of DS Medical Products Co. in
exchange for those securities. As a result, the Company has a receivable due
from DS Medical Products Co. in the same amount at June 30, 1997 and 1996.
The Company paid approximately $40,000 in state taxes in March 1996 on behalf of
DS Medical Products Co., a related party. The Company has recorded this payment
as a related party receivable at June 30, 1996.
Page 45 of 55
<PAGE> 46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Included in Part II of this report:
Report of Independent Accountants.......................................................................19
Consolidated Balance Sheets at June 30, 1997 and 1996...................................................20
Consolidated Statements of Income for the years
ended June 30, 1997, 1996 and 1995......................................................................21
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1997, 1996 and 1995.................................................22
Consolidated Statements of Cash Flows for the years
ended June 30, 1997, 1996 and 1995......................................................................23
Notes to Consolidated Financial Statements..............................................................24
2. Included in Part IV of this report:
Independent Accountants' Report on Financial Statement Schedule for the
years ended June 30, 1997, 1996 and 1995................................................................53
Schedule II - Valuation and Qualifying Accounts.........................................................54
</TABLE>
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in ITEM 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations, or in ITEM 8. Financial Statements and Supplementary Data.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K for the quarter ended June 30,
1997.
Page 46 of 55
<PAGE> 47
<TABLE>
<CAPTION>
(c) EXHIBITS FILED WITH THIS FORM 10-K: Page
<S> <C>
3(i)(a) Certificate of Incorporation of registrant
filed April 27, 1976..........................................................................(1)
3(i)(b) Amendment to Certificate of Incorporation
filed June 8, 1976............................................................................(1)
3(i)(c) Amendment to Certificate of Incorporation
filed June 30, 1977...........................................................................(1)
3(i)(d) Amendment to Certificate of Incorporation
filed July 31, 1979...........................................................................(1)
3(i)(e) Amendment to Certificate of Incorporation
filed October 22, 1980........................................................................(2)
3(i)(f) Amendment to Certificate of Incorporation
filed September 13, 1984......................................................................(3)
3(ii) By-Laws of Registrant as amended through
December 19, 1988............................................................................(12)
4.1 BCI Stock Purchase Warrant to purchase 8,000,000 shares of
common stock exercisable after 5:00 p.m., Chicago Time,
December 31, 1986, through December 31, 1992..................................................(4)
10.1 Mortgage Loan and Security Agreement dated as
of December 1, 1980, between Registrant and
Town of Pewaukee, Wisconsin...................................................................(5)
10.2 1981 Stock Program as amended through June 30,
1989.........................................................................................(13)
10.3 Loan Agreement dated July 18, 1984, by and
between Biochem International Inc. and
DS Medical Products Co........................................................................(6)
10.4 Amended 10% Debenture due April 1, 1990.......................................................(3)
10.5 Biochem 10% Debenture, face amount $1,500,000
dated September 14, 1984, and due December 31,
1992..........................................................................................(4)
</TABLE>
Page 47 of 55
<PAGE> 48
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10.6 Security Agreement by and between DS Medical and
Biochem dated September 14, 1984, assigning DS Medical a
security interest in Biochem's accounts, chattel paper,
contracts, contract rights, documents, equipment, fixtures,
general intangibles, goods, instruments, inventory,
trademarks, trade names, trade secrets and good-will products
thereof and certain other assets
described therein.............................................................................(4)
.........
10.7 Second Mortgage to BCI's principal offices and
manufacturing facility commonly known as W238
N1650 Rockwood Drive, Waukesha, Wisconsin.....................................................(4)
10.8 Assignment of Rents to BCI's principal offices and
manufacturing facility commonly known as W238 N1650
Rockwood Drive, Waukesha, Wisconsin, 53188-1199...............................................(4)
10.9 Patent Collateral Assignment dated September 18, 1984
between BCI and DS Medical with respect to all of BCI's
patent applications and patents...............................................................(4)
10.10 Trademark Collateral Assignment dated September 14, 1984
between BCI and DS Medical with respect to all of BCI's
trademark applications and trademarks.........................................................(4)
10.11 First Amendment to Mortgage, Loan and Security
Agreement, Biochem International Inc. and Town of
Pewaukee (or Pewaukee City), Wisconsin, dated as of
March 1, 1985.................................................................................(7)
10.12 First Supplemental Indenture of Trust, Town of Pewaukee
(or Pewaukee City), Wisconsin, and The Marine Trust
Company N.A., as Trustee, dated as of March 1, 1985...........................................(7)
10.13 Confirmation of Real Estate Mortgage Subordination
by DS Medical Products Company dated as of
March 1, 1985.................................................................................(7)
10.14 BCI 10% Debenture, Face Amount $500,000, dated
September 13, 1985, and due December 31, 1992.................................................(8)
</TABLE>
Page 48 of 55
<PAGE> 49
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
10.15 Waiver of Defaults by IDRB Bondholder.........................................................(8)
10.16 January 1986 Waiver of Default by IDRB Bondholder.............................................(9)
10.17 Promissory Notes, dated July 17, 1986, between
Ken M. Davee and David H. Sanders, and BCI...................................................(10)
10.18 Commercial Offer to Purchase, dated July 21, 1987............................................(11)
10.19 Lease, dated August 7, 1987..................................................................(11)
10.20 Option to Purchase, dated August 7, 1987.....................................................(11)
10.22 1992 Stock Option Program, dated October 1, 1992............................................ (14)
10.23 Compensation Agreement between Frank A. Katarow
and Biochem International Inc................................................................(15)
10.24 Compensation Agreement between Frank A. Katarow
and DS Medical Products Co...................................................................(15)
10.25 Trust Agreement for Katarow Employment Trust.................................................(15)
24.0 Consent of Independent Accountants with
respect to Company's Form S-8................................................................(*)
27.0 Financial Data Schedule......................................................................(*)
* Previously filed in Registrant's Form 10-K for period ended June 30, 1997.
</TABLE>
Page 49 of 55
<PAGE> 50
Footnotes to ITEM 14
(1) Previously filed as Exhibits 3(a) through 3(d) respectively to
Registrant's Registration Statement on Form S-1 No. 2-65273,
and incorporated herein by reference.
(2) Previously filed as Exhibit 20(a) to Registrant's Form 10-Q for the
quarter ended September 30, 1980, and incorporated herein by reference.
(3) Previously filed as Exhibits 3(f) and 10.34 respectively to
Registrant's Form 10-K for the period ended June 30, 1984, and
incorporated herein by reference.
(4) Previously filed as Exhibits 28.2, 28.1, 28.3, 28.4, 28.5, 28.7 and
28.8 respectively to Registrant's Form 8-K dated September 13, 1984,
and incorporated herein by reference.
(5) Previously filed as Exhibit 10(g) to Registrant's Registration
Statement on Form S-1 No. 2-70811, and incorporated herein by
reference.
(6) Previously filed as Exhibit 28.1 to Registrant's Form 8-K dated
July 18, 1984, and incorporated herein by reference.
(7) Previously filed as Exhibits 10.51, 10.52 and 10.53 respectively to
Registrant's Form 10-Q for the quarter ended March 31, 1985, and
incorporated herein by reference.
(8) Previously filed as Exhibits 10.45 and 10.47 respectively to
Registrant's Form 10-K for the period ended June 30, 1985, and
incorporated herein by reference.
(9) Previously filed as Exhibit 10.48 to Registrant's Form 10-Q for the
quarter ended December 31, 1985, and incorporated herein by reference.
(10) Previously filed as Exhibit 10.50 to Registrant's Form 10-K for the
period ended June 30, 1986, and incorporated herein by reference.
(11) Previously filed as Exhibits 10.1, 10.2 and 10.3 respectively to
Registrant's Form 8-K dated August 7, 1987, and incorporated herein by
reference.
(12) Previously filed as Exhibit 3(g) to Registrant's Form 10-Q for
the period ended December 31, 1988, and incorporated herein
Page 50 of 55
<PAGE> 51
by reference.
(13) Previously filed as Exhibit 10.2 to Registrant's Form 10-K for the
period ended June 30, 1989, and incorporated herein by reference.
(14) Previously filed as Exhibit 10.22 to Registrant's Form 10-K for the
period ended June 30, 1993, and incorporated herein by reference.
(15) Previously filed as Exhibit 10.23 through 10.25 to Registrant's
Form 10-Q for the period ended December 31, 1995, and incorporated by
reference.
Page 51 of 55
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIOCHEM INTERNATIONAL INC.
Dated: September 15, 1997. By: /s/ David H. Sanders
------------------------
David H. Sanders, Chairman
of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 15th day of September, 1997.
By: /s/ David H. Sanders By: /s/ Ken M. Davee
- ------------------------ --------------------------
David H. Sanders, Chairman Ken M. Davee, Vice
of the Board of Directors Chairman, Director and
and Chief Executive Officer Secretary
By: /s/ Lee J. Knirko By: /s/ Frank A. Katarow
- --------------------------- -----------------------------
Lee J. Knirko, Director Frank A. Katarow,
President and Chief
Operating Officer
By: /s/ Ann M. Johnson
- ---------------------------
Ann M. Johnson, Vice
President of Finance
and Operations
Page 52 of 55
<PAGE> 53
INDEPENDENT ACCOUNTANT'S REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Directors of
Biochem International Inc. and Subsidiary
Our report on the consolidated financial statements of Biochem International
Inc. and Subsidiary is included on page 19 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in the index on page 46 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
August 8, 1997
Page 53 of 55
<PAGE> 54
BIOCHEM INTERNATIONAL INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to
Beginning of Costs and (a) Balance at
Description Period Expenses Deductions End of Period
----------- ------ -------- ---------- -------------
1997
----
<S> <C> <C> <C> <C>
Allowance for doubtful accounts $140,000 $ (1,506) $ 13,494 $125,000
Allowance for inventory obsolescence 175,000 55,308 55,308 175,000
-------- --------- -------- --------
Total $315,000 $ 53,802 $ 68,802 $300,000
======== ========= ======== ========
1996
----
Allowance for doubtful accounts $100,000 $ 48,491 $ 8,491 $140,000
Allowance for inventory obsolescence 150,000 74,568 49,568 175,000
-------- --------- -------- --------
Total $250,000 $ 123,059 $ 58,059 $315,000
======== ========= ======== ========
1995
----
Allowance for doubtful accounts $140,000 $ 55,481 $ 30,481 $100,000
Allowance for inventory obsolescence 175,000 70,002 120,002 150,000
-------- --------- -------- --------
Total $315,000 $ 125,483 $114,488 $250,000
======== ========= ======== ========
</TABLE>
(a) Deductions consist solely of doubtful accounts and inventory written
off.
Page 54 of 55
