<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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Admendment No. 2
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission File Number: 0-11371
BIOSONICS, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2161932
-------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
260 New York Drive
Fort Washington, Pennsylvania 19034
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(Address of principal executive offices) (Zip Code)
(215) 646-7100
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(Registrant's telephone number including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based on the average of the closing bid and asking prices as reported in the
pink sheets on March 31, 1997, the aggregate market value of the Registrant's
Common Stock held by non-affiliates was approximately $8,312,885.
Indicate the number of shares outstanding of each of the issuers shares of
common stock, as of the latest practicable date: As of December 31st 1996, there
were outstanding 287,863,936 shares of the Registrant's Common Stock, $.0001 par
value.
Documents Incorporated by Reference: None
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Page 1 of 16 pages
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PART I
ITEM 1. BUSINESS AND PROPERTIES
General
Biosonics, Inc. was incorporated in Pennsylvania in November 1980 as a
subsidiary of International Management and Research Corporation ("IMRC"). Since
its inception, the Company has been involved in the development and marketing of
electrotherapeutic and diagnostic devices to manage and treat several
intractable medical conditions, including extreme dry mouth, nasal/sinus
congestion, urinary/fecal incontinence and impotence. The Company's
non-invasive, electrotherapeutic and diagnostic devices offer relief from and
improvement to such distressing disorders without drug related side effects or
the ultimate need for surgery. The Company has received six patents on its
devices. Furthermore, the Company has received FDA approval or clearance for
marketing the Salitron (dry mouth), Cystotron (urinary incontinence), Anotron
(fecal incontinence) and the BIDDs Glove (diagnostic tool).
The Company's initial focus was on the marketing of the Salitron, a device which
induces salivation in certain persons who otherwise do not salivate normally.
Recently, Biosonics has decided to concentrate its resources on marketing the
Cystotron device for urinary incontinence. In connection with this effort, Dr.
Kristene Whitmore, Chief of Urology at Graduate Hospital in Philadelphia, has
agreed to participate in market studies for the Cystotron device. These studies
would be conducted at assisted living environments and retirement communities.
There can be no assurances, however, that the Company will be able to conduct
such studies due to its limited financial resources.
Products
The Company has developed various electrotherapeutic devices, six of which have
been patented, and four of which have received FDA 510(k) clearance or PMA
approval for marketing. The electro-therapeutic technology developed by the
Company is based on the stimulation of nerves using the body's natural
resources, to create a positive response in malfunctioning body organs and
systems. All of the Company's developed devices are portable, battery-operated,
non-surgical and non-invasive, and the Company believes that to date such
devices have had no adverse side effect in any active user.
The Company has not manufactured any of its products during the past ten years
and has made sales during 1996 and 1997 from existing inventory.
Biosonics will require additional funds, estimated to be approximately $3.0
million in the immediate future to continue its operations and implement current
manufacturing and marketing plans as described below. Biosonics may receive a
portion of such funds from sales of the Salitron System and the Cystotron
Incontinence Control System. Biosonics is also considering obtaining funds
through venture capital or other private or public financing, joint venture or
merger transactions and research and development partnership financing. There
is no assurance, however, that the Company will be successful in obtaining
financing on terms favorable to the Company, or at all.
The Company has completed a tentative marketing plan for the Cystotron product.
This plan includes matters relating to the manufacturing and sales of the
devices as well as the production of a marketing study
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for the product. In connection with this tentative marketing plan, the Company
has recently added an engineer to its staff to review and implement a
manufacturing bid process for the product. It is intended that this engineer
will also review the Company's other products. The Company is also planning to
develop a strategy to market its products in the international market. In
addition, the Company is looking to hire a consultant to precede with bringing
the Salitron, Cystotron and Anotron devices to the international market. In
connection with such strategy, it plans to attend two international conferences
in late 1997.
The bid process in connection with the manufacturing of the Cystotron product is
expected to result in a bid being awarded in December 1997 or early in 1998. In
connection with the Company's marketing efforts in connection with the
Cystotron, the Company is planning to establish a medical board of advisors to
perform a six-month study of the Cystotron product. Depending on the Company's
ability to raise additional funds to commence and implement its marketing plan
for the Cystotron product and the establishment of the market study and a sales
team for the product of which there can be no assurance, the Company anticipates
that sales of the product will commence in the latter part of 1998.
The manufacturing of the Company's devices will be subject to regulatory
requirements as outlined in "Governmental Regulation" herein and also to the
availability of funds for such purposes. Biosonics warrants that its devices
will be free from malfunction caused by manufacturing defects for 12 months from
the date of purchase.
Salitron. This device induces salivation in certain persons who
otherwise do not salivate normally. Lack of normal salivation can be caused by
Sjogrens Syndrome (an autoimmune disease), other diseases, medication,
radiation, surgery or aging. U.S. Patent No. 4,519,400, covering the method for
stimulating salivation utilized by a prior concept for the Salitron System, was
issued to Biosonics on May 28, 1985. Biosonics believes, although there is no
assurance, that the current versions of the Salitron are protected by such
patent. U.S. Patent No. 4,637,405, covering the apparatus utilizing that prior
concept, was issued to Biosonics on January 20, 1987. Biosonics also was issued
parallel patents by seven foreign countries, although such foreign patents have
lapsed due to a lack of funds. FDA clearance for commercial sale was received
through a pre-market approval (PMA) application process in May 1988 for use in
treating patients with dry mouth secondary to Sjogrens Syndrome.
In 1988, Biosonics commenced marketing the Salitron through five "Dry Mouth
Centers" that were owned by independent third parties. Centers were opened in
Philadelphia, Pennsylvania; North Miami Beach, Florida; Baltimore, Maryland;
Fairfield, Connecticut; and Denver, Colorado, and a center controlled by
Biosonics was opened in Milwaukee, Wisconsin. The independent dry mouth centers
were granted the exclusive marketing and distribution rights in their respective
territories. In 1990, however, as a result of the failure of the dry mouth
centers to meet minimum purchase requirements, Biosonics decided to discontinue
the centers.
Biosonics has lacked the necessary funds to implement a marketing program for
any of its devices. Biosonics' initial marketing efforts were for the Salitron
and involved efforts to obtain Medicare reimbursement for the Salitron. On May
23, 1994, a proposed Notice was published in the Federal Register by the Federal
Healthcare Financing Administration ("HCFA") that it intended to disapprove
Biosonics' application for Medicare, although no final notice has yet been
published. In 1996, Biosonics met with HCFA officials to urge a reevaluation of
its intent to disapprove the Company's request for reimbursement approval. In
February of 1997, HCFA advised Biosonics that it had examined its previous
position and
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concluded that absent additional information, Medicare reimbursement for the
Salitron was not warranted under current law. As a result, the Company has
engaged a Washington DC law firm to explore with HCFA the extent of additional
information that HCFA will require. Approximately 35 private insurance carriers
have reimbursed Biosonics for patients' use of the Salitron and Medicaid
reimbursement approval has been obtained in four states. There is no assurance
that such reimbursement will continue to be available or will be at price levels
sufficient to realize an appropriate return to Biosonics. Further, Biosonics
cannot predict the effect, if any, on the reimbursement from the private plans
and Medicaid in the event that HCFA does publish a final notice of non-coverage
of the Salitron system for Medicare purposes, and there is a risk that some or
all of the Medicaid reimbursement could be discontinued in such event.
Biosonics has been directing the marketing of the Salitron to rheumotologists,
ear nose and throat specialists, and dentists. Under this program each physician
and dentist is supplied with a Salitron, training materials along with a video,
and asked to test their patients who suffer from dry mouth. This marketing
effort was put on hold as too many potential patients are Medicare age who
cannot afford to purchase the Salitron without Medicare coverage.
Cystotron and Anotron Systems. These devices counteract urinary
(Cystotron) and fecal (Anotron) incontinence. The Cystotron and Anotron have
been cleared for sale by the FDA under two separate 510(k) submissions (See
"Governmental Regulation," below). Biosonics has received a patent covering the
Cystotron and Anotron and the method of treatment of incontinence utilized by
these devices (U.S. Patent No. 5, 117,840).
Assuming funds are available, the Company intends to commence a two-phase market
study with respect to the Cystotron. This study will comprise of two phases,
assuming funds are available. Phase one will primarily be directed at the
retirement community. In 1996, Biosonics signed an agreement with Dr. Kristene
Whitmore, Chief of Urology at Graduate Hospital in Philadelphia, who will act as
Chief Investigator for phase one of the market study. Phase two will primarily
be directed to those in the post-birth delivery age group. The purpose of this
market study will be to confirm the safety and effectiveness of the Cystotron
for advertising purposes and to promote recognition and acceptance in the
medical community.
BIDDS Glove. This diagnostic tool is a modified surgical grade latex
glove on which is imprinted specialized electronic circuitry. The BIDDS Glove is
intended to be utilized in connection with certain of Biosonics' therapeutic
devices as a means of delivering or receiving electrical energy to or from the
patient. The market for the BIDDS Glove is, therefore, largely co-extensive with
the markets for the Company's other products. Biosonics was issued a United
States patent (U.S. Patent No. 4,510,939) covering a prototype version of the
BIDDS Glove on April 16, 1985 and was issued a United States patent (U.S. Patent
No. 4765343) covering the current version of the BIDDS Glove on August 23, 1988.
The modified version is referred to as the BIDDS Glove II. Although several
foreign patents in favor of the BIDDS Glove were issued, Biosonics has allowed
them to lapse due to lack of funds.
Subject to the availability of funding, the company intends to market the BIDDS
Glove as a diagnostic tool for the physicians use in testing the patients. This
test is designed to help the physician determine whether the patient has the
ability to respond positively to the Company's therapeutic devices, such as the
Cystotron, Anotron and MEGS. The Company also intends to use the BIDDS Glove in
the studies outlined above regarding the Cystotron and Anotron Systems.
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MEGS. The MEGS(TM) (Male Electronic Genital Stimulator) is a device
designed to counteract male impotence. On September 24, 1985, Biosonics was
issued a United States patent (U.S. Patent No. 4,542,753) covering the method
and apparatus for stimulating erections utilized by the MEGS Stimulator.
Although several foreign patents were obtained, Biosonics allowed them to lapse
due to lack of funds. Biosonics has also received a patent (U.S. Patent No.
4,663,102) covering methods for making certain components of the MEGS
Stimulator. Further clinical studies are necessary before this device can be
submitted to the FDA for marketing clearance or approval.
Nasotron. The Nasotron(TM) is a self-contained non-surgical device
intended to clear obstructed nasal-sinus passages, thereby countering pollen
responses and other allergies and postnasal problems without the use of drugs.
Biosonics has received United States Patent No. 4,590,942 with respect to the
Nasotron. Although several foreign patents were obtained, these patents have
lapsed due to lack of funds. Subject to the availability of additional funding,
Biosonics plans to commence dosage studies for the Nasotron on patients to
determine the optimal intensity and duration of the electronic impulse. After
completion of the dosage study, assuming funds are available, it is intended
that a double blind clinical study performed under protocols acceptable to the
FDA be conducted and submitted to the FDA for approval prior to the commercial
sale of the Nasotron.
Other Devices. In addition to the products outlined above, Biosonics
has begun development or may in the future begin the development of other
medical devices. Additional funds will be required to further the development,
patent and submission for FDA approval of these devices. Biosonics is developing
the Vagitron(TM), which is a device designed to stimulate vaginal secretions in
women with vaginal secretory deficiencies and to aid normal sexual function. The
Immunotron(TM) is a device designed to influence the cerebral nervous system to
activate the body's immune system. Other devices in development stages are
intended to reduce cancerous cells in certain tumors in conjunction with
chemotherapy and a device intended to accelerate wound healing by stimulating
cell migration.
Biosonics believes that it will be required to raise substantial additional
capital through the issuance of equity and/or debt securities in order to
finance continuing research and development, regulatory approval, marketing,
manufacturing and other activities related to the successful marketing and sale
of the devices described above. There is no assurance that such additional
financing will be available on terms acceptable to it in the future. No
substantial development of any additional devices has occurred to date and there
is no assurance that any such development will be commenced or, if commenced,
will be successfully completed.
Governmental Regulation
Biosonics' products are subject to extensive government regulation in the United
States and in other countries. In order to test, produce and market products for
use in the treatment of humans, Biosonics must first comply with mandatory
procedures and safety standards established by the U.S. Food and Drug
Administration (the "FDA") and comparable state and foreign regulatory agencies.
The Food, Drug and Cosmetic Act (the "FDC Act") requires premarket clearance or
premarket approval by the FDA prior to commercialization of medical devices.
Pursuant to the FDC Act, the FDA regulates the manufacture, distribution and
production of medical devices in the United States.
Before a new device can be introduced into the market, the manufacturer
generally must obtain FDA
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clearance through either a 510(k) premarket notification or a premarket approval
application ("PMA"). A 510(k) clearance is only available for devices which are
"substantially equivalent" to devices that have been previously approved by the
FDA. The principal purpose of the 510(k) procedure is to avoid costly and
time-consuming clinical tests of devices that have already been proven safe and
effective by others. Applicants under the 510(k) procedure must prove that the
device for which approval is sought is substantially equivalent to a device on
the market prior to the Medical Device Amendments of 1976, or a device approved
thereafter pursuant to the 510(k) procedure.
A PMA must be filed if the proposed device does not satisfy the foregoing
conditions relating to the 510(k) procedure. The PMA procedure is more complex,
time-consuming and costly than the 510(k) procedure. In general, the PMA
procedure requires extensive clinical testing to determine the safety, efficacy
and potential hazards of the medical device. In order to obtain permission to
conduct human clinical studies under the PMA procedure, the manufacturer is
required to obtain an Investigational Device Exemption ("IDE") from the FDA. If
the IDE application is approved, human clinical trials may begin at a specific
number of investigational sites with a minimum specific number of patients, as
approved by the FDA. The clinical trials must be conducted under the auspices of
an independent Institutional Review Board ("IRB") established pursuant to FDA
regulations. Upon the completion of all required testing under the IDE,
substantial proof of safety and efficacy must be submitted to the FDA before the
final PMA will be granted. The PMA process can be expensive, uncertain and
lengthy, frequently requiring from one to several years from the date the PMA is
accepted by the FDA. If granted, the PMA approval may include significant
limitations on the indicated uses for which a product may be marketed and may
require inspection of the manufacturing facility to ensure compliance with the
FDA's requirements.
Biosonics' clinical testing of its Salitron System was conducted pursuant to
IDEs obtained through IRBs. In May 1988, Biosonics received FDA approval for the
sale of the Salitron System. Biosonics received approval from the FDA in
November 1986 to sell the Anotron and Cystotron Incontinence Control System
under separate 510(k) notification submissions.
Biosonics has not obtained 510(k) clearance or PMA for any of its other devices.
Delays or the failure to receive such clearance or approval of such devices
could have an adverse impact on Biosonics.
Devices which have been developed by Biosonics, but which have not been approved
for commercial distribution in the United States, may be exported if the FDA
approves a request from Biosonics for permission for export. The FDA requires
that Biosonics obtain approval from the foreign country to which the device will
be exported and comply with the laws of the foreign country. Nonetheless, the
FDA could still deny permission to export if it determines that export is
contrary to public health and safety. Biosonics has not submitted such a request
to the FDA for the export of its products, and no decision has yet been made
whether it will do so in the near future.
Biosonics is also required to register with the FDA as a device manufacturer. In
addition, the Company is required to comply with the FDA's Good Manufacturing
Practices regulations. The FDA has authority to conduct detailed inspections of
manufacturing plants, to establish "good manufacturing practices" which must be
followed in the manufacture of medical devices, to require periodic reporting of
product defects to the FDA, to take regulatory actions against devices that are
adulterated and/or misbranded, and to pursue actions in federal court against
companies or individuals that violate the FDC Act. The medical device reporting
regulations require the Company to provide information to the FDA whenever there
is evidence
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to reasonably suggest that one of its devices may have caused to contributed to
death or serious injury, or that there has occurred a malfunction that would be
likely to cause or contribute to death or serious injury
if the malfunction were to recur.
The Safe Medical Device Act of 1990 (the "SMD Act") affects medical device
manufacturers in several areas, including post-market surveillance and device
tracking procedures. The SMD Act gives the FDA expanded emergency recall
authority, requires the submission of a summary of the safety and effectiveness
in the 510(k) process and adds design validation as a requirement of good
manufacturing practices. The SMD Act also requires all manufacturers to conduct
post-market surveillance on devices that potentially present a serious risk to
human health, and requires manufacturers of certain devices to adopt device
tracking methods to enable patients to receive required notices pertaining to
such devices they receive. Management does not believe that the SMD Act will
have a material impact on Biosonics or its operations.
Federal law preempts states or their political subdivisions from regulating
medical devices. Upon application, the FDA may permit state or local regulation
of medical devices which is either more stringent than federal regulations or is
required because of compelling local conditions. Biosonics does not anticipate
that any state or local requirements which may be exempted from preemption will
have a materially adverse effect on Biosonics financial condition or operations.
However, there is no assurance that, in the future, state or local requirements
may not have a substantial effect on Biosonics. If Biosonics seeks to market its
devices outside of the United States, Biosonics may also be subject to
regulation by foreign governments.
Health care reform is an area of national attention. If reform measures are
adopted, they could adversely affect the pricing of diagnostic and therapeutic
devices in the United States or the amount of reimbursement available from
third-party insurers. The impact of these measures upon Biosonics cannot be
predicted.
Third Party Reimbursement
The Company believes that the overall escalating cost of medical products and
services has led and will continue to lead to increased pressures upon the
health care industry to reduce the cost of certain products and services, which
may include those of the Company. These cost pressures are leading to increased
emphasis on the price and cost-effectiveness of any treatment regimen and
medical device. In addition, third party payors, such as governmental programs,
private insurance plans and managed care plans that are billed by hospitals for
such health care services, are increasingly negotiating the prices charged for
medical products and services and may deny reimbursement if they determine that
a device was not used in accordance with cost-effective treatment methods as
determined by the payor, was experimental or was used for an unapproved
indication. Although approximately 35 private insurance carriers have reimbursed
Biosonics for the use of the Salitron system and Medicaid reimbursement approval
has been obtained in four states, there is uncertainty as to whether third party
payors will approve or continue to reimburse Biosonics for the devices and
whether reimbursement, if approved or continued, will be sufficient for
purchasers of the Company's products. On May 23, 1994, a proposed notice was
published in the Federal Register by the Federal Health Care Financing
Administration ("HCFA") that it intended to disapprove Biosonics' application
for Medicare reimbursement for the Salitron System, although no final notice has
yet been published. In 1996, Biosonics met with HCFA officials to urge a
reevaluation of its intent to disapprove the Company's request for reimbursement
approval. In February 1997, HCFA advised Biosonics that it had examined its
previous position and concluded that absent additional information, Medicare
reimbursement for the Salitron was not warranted under current law. As a result,
the Company has engaged a Washington,
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DC law firm to explore with HCFA the extent of additional information that HCFA
will require in order to approve Medicare reimbursement for the Salitron System.
HCFA has requested that the Company provide additional data to establish the
clinical utility of electrostimulation to evaluate the long-term effectiveness
of electrostimulation and to identify the types of patients who would benefit
from the procedure. In late October 1997, the Company submitted additional data
to HCFA and is currently waiting for a response from HCFA. Biosonics cannot
predict the effect, if any, on the reimbursement from private insurance carriers
and Medicaid in the event that HCFA does publish a final notice of non-coverage
of the Salitron System for Medicare purposes, and there is a risk that some or
all of the Medicaid reimbursement approvals that the Company has obtained would
be discontinued in such event. Sales of the Company's devices may be adversely
affected by the difficulty of purchasers' obtaining sufficient reimbursement
from third party payors. There can be no assurance that the availability of
third party reimbursements will continue and that changes in levels of such
reimbursement will not adversely affect the profitability of the Company's
products.
Competition.
Biosonics is unaware of any other company which is currently developing devices
similar to the Salitron System, although there are other companies engaged in
research and development using electro-therapeutic devices. The Company is aware
of at least three companies that have developed products similar to the
Company's products, including one company that has developed a product similar
to the Cystotron Incontinence System. Biosonics is not aware of any device that
would be in direct competition to the BIDDS Glove. Biosonics is not aware of any
developed diagnostic tools that would be considered direct competition for the
BIDDS Glove. It is possible that the Company's products could be rendered
obsolete or uneconomical by technological advances by one or more of the
Company's future competitors. There are other companies engaged in research and
development in the medical field, many of which are well established and have
greater financial and marketing resources then the Company. One or more
companies might develop products that address the same or similar medical
problems as those being developed by Biosonics, and be in the position to market
them more successfully than Biosonics.
Employees
As of June 30, 1997, Biosonics had seven employees, of which five are full-time,
consisting of the Chief Executive Officer, an operations manager, a products
specialist, a registered nurse and a secretary and two who are part-time
bookkeeping and clerical personnel. In September 1997, the Company added a
product engineer to its staff, who was hired to develop a manufacturing plan for
the Cystotron.
Product Liability and Insurance
Since Biosonics' devices are intended for use in the treatment of human diseases
and conditions, Biosonics faces an inherent risk of exposure to product
liability claims in the event that the use of its devices results in
unanticipated personal injury. Although Biosonics carries products liability
insurance, there can be no assurance that it will be able to maintain such
insurance with the limits of liability necessary and at premiums that are
acceptable to it, that such coverage will be available on commercially
reasonable terms, if at all, or that liability will not exceed the insured
amount. At the present time, the Company's products liability coverage is
$1,000,000 per occurrence with a $5,000 deductible. If a substantial claim for
damages were to arise at a time when Biosonics did not have adequate insurance
or its coverage was insufficient to
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cover the claim, payment of such a claim would have a material adverse impact on
the financial condition of Biosonics and on its ability to continue its business
activities. In addition, the legal fees and related costs of defending or
settling a products liability action and the negative publicity likely to arise
therefrom would likely have a material adverse impact on Biosonics, even if it
ultimately prevailed in any such action.
Salitron Medical Advisory Board
Biosonics Salitron Medical Advisory Board (the "Advisory Board") consists of
individuals with expertise in the field related to Sjogren's Syndrome. It is
anticipated that the Advisory Board will consult informally with Biosonics on an
as-needed basis. Biosonics agreed to pay the Chairman of the Advisory Board
$25,000 for his first year of service and grant him 100,000 shares of Common
Stock. The other members of the Advisory Board will each receive 50,000 shares
of Common Stock. The issuance of the shares is conditioned upon the Advisory
Board member serving for a minimum of two years. Except for Elaine Harris, who
is the founder of the Sjogren's Syndrome Foundation, all of the members of the
Advisory Board are employed by or retired from academic institutions or are
practicing physicians. Each of the members has other commitments to other
entities that may limit their availability to Biosonics. Members of the Advisory
Board are not expected to devote more than a small portion of their time to
Biosonics.
Although the Advisory Board did not formally meet in 1996, its members assisted
the Company in 1996 in the form of interviews published in various magazine
articles and broadcast radio shows regarding the Salitron System.
The names of the persons serving on the Advisory Board and their respective
institutional affiliation or former affiliation or occupation are as follows:
<TABLE>
<CAPTION>
Name Institutional Affiliation or Occupation
- --------------------------------- ---------------------------------------
<S> <C>
Norman Talal, M.D. Retired, The University of Texas
Norman Gaylis, M.D. Rheumatologist, Private Practice
Jonathon Ferguson, M.D. Rheumatologist, Private Practice
Elaine Harris Founder, Sjogren's Syndrome Foundation
James Quinn, D.D.S. Retired, Louisiana State University, School of Dentistry
</TABLE>
ITEM 2. PROPERTIES OF THE COMPANY
Biosonics leases approximately 2,500 square feet of office space in Fort
Washington, Pennsylvania pursuant to a lease that terminates in September 1998.
Lease payments are currently $3,336 per month.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
1996
----
<S> <C> <C>
First Quarter $ .08 $ .025
Second Quarter .12 .055
Third Quarter .195 .065
Fourth Quarter .12 .04
1995
----
First Quarter .055 .01
Second Quarter .065 .02
Third Quarter .05 .01
Fourth Quarter .042 .01
</TABLE>
The quotations set forth above reflect inter-dealer prices without mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.
As of December 31, 1996, there were approximately 10,500 record holders of the
Company's Common Stock. The Company has not, since its inception, declared any
dividends.
Biosonics' Common Stock was issued in an aggregate of 75,000 shares for interest
on loans received, and 200,000 shares were issued for funds received by the
Company. Additional funds were received and loaned to the Company without any
stock issuances.
In February 1995, the Company granted non-employees common stock options for
10,000,000 shares, exercisable at $.01 per share. In January and February 1996,
the Company granted common stock options to non-employees for 6,000,000 shares,
exercisable at $.02 per share. These options were issued in exchange for various
services performed on the Company's behalf. Transfer of the shares issued upon
the exercise of the options will be restricted subject to registration
requirements of the Securities Act of 1933 or an exemption from such
requirements such as Rule 144 of the SEC.
In May 1996, the Company issued a stock option to an employee for 250,000
shares, exercisable at $.05 per share. Transfer of the shares issued upon the
exercise of the options will be restricted subject to registration requirements
of the Securities Act of 1933 or an exemption from such requirements such as
Rule 144 of the SEC.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------
Statement of Loss Data: 1996 1995 1994 1993 1992
- ----------------------- ---- ---- ---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Sales $ 40,774 $ 62,506 $ 21,939 $ 30,578 $ 26,687
Cost of sales 30,208 41,980 17,817 45,461 30,432
--------- --------- --------- --------- ---------
Gross profit (loss) $ 10,566 $ 20,526 $ 4,122 $(14,883) $ (3,745)
Development stage expenses:
Research and development costs $ 21,500 $ 20,117 $ 5,160 $ 8,669 $ 8,866
Professional fees 130,050 54,697 49,507 101,750 77,448
Other development stage expenses 636,488 560,476 338,102 271,048 294,088
--------- --------- --------- --------- ---------
Total development stage expenses $788,038 $635,290 $426,713 $329,224 $404,624
Less: Revenue from cost recovery program - - - - -
--------- --------- --------- --------- ---------
Net development stage expenses $788,038 $635,290 $426,713 $329,224 $404,624
Other income
Investment income $ - $ 5,279 $ - $ - $ -
Miscellaneous income 75 - - - -
Gain on sale of equipment - - - 75 2,778
--------- --------- --------- --------- ---------
$ 75 $ 5,279 $ - $ 75 $ 2,778
--------- --------- --------- --------- ---------
Net loss ($777,397) ($609,485) ($422,591) ($344,107) ($408,294)
Loss per common share ($.00) ($.00) ($.00) ($.00) ($.00)
<CAPTION>
As of December 31,
-------------------------------------------------------------------------
Balance Sheet Data: 1996 1995 1994 1993 1992
- ------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit) ($2,150,027) ($2,709,883) ($2,477,004) ($2,059,248) ($1,723,651)
Total Assets $ 174,187 $ 133,650 $ 119,445 $ 125,009 $ 160,803
Total Liabilities $2,300,776 $2,810,091 $2,574,151 $2,157,124 $1,848,811
Shareholders' Deficit ($2,126,589) ($2,676,441) ($2,454,706) ($2,032,115) ($1,688,008)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.
Liquidity and Capital Resources
Biosonics' primary sources of funds to date have been proceeds from the sale of
its securities and investment income on such proceeds including loans and
advances for securit purchases through offerings.
Recent Capital Transactions
In July 1996, the Company amended its Articles of Corporation pursuant to which
the Company increased the authorized number of shares of Common Stock from
250,000,000 shares to 750,000,000 shares. On July 30, 1996, all stock that had
been previously purchased but unissued due to the unavailability of shares of
authorized Common Stock of the Company were issued. The total number of shares
issued was 14,200,000 shares. In addition, all holders of Preferred Stock,
including Series A, Series B and Series D, converted their shares of Preferred
Stock into Common Stock of the Company pursuant to the formula set forth in
their respective Preferred Stock Agreements. The Series D Preferred Stock terms
were amended in May 1996
11
<PAGE> 12
to increase the available Prefered Stock from 5,000 shares to 10,000 shares. The
Series B Preferred Stock, terms were amended in April 1996 to allow the holders
of Series B to convert their stock. The total number of shares of Common Stock
issued as a result of the conversion of all the Preferred Stock was 28,725,000
shares, including 7,000,000 shares to IMRCH and 4,375,000 shares issued to Jack
Paller pursuant to the conversion of their respective shares of Series B
Preferred Stock.
In addition to the foregoing issuances and conversions, in July 1996 (i) the
Company issued an aggregate of 300,000 Common Stock shares to the Salitron
Advisory Board, and (ii) an aggregate of 280,000 shares of Common Stock were
issued to three doctors for medical consulting services rendered. Also, an
aggregate of 750,000 shares of Common Stock were issued in August and September
1996 to three outside consultants in connection with financial planning and
consulting services provided tot he Company. In August 1996, IMRCH transferred
550,000 shares of the Company's Common Stock held by it to two outside
consultants for certain advertising and public relations services.
The Company also issued 15,368,820 shares of Common Stock in August 1996 to
approximately 25 individuals in conversion of loans. These loans were originally
to IMRC, which then loaned the money to the Company to use for working capital.
None of the individuals making the loans were officers, directors or affiliates
of the Company. The terms of the loans allowed the loans to be converted into
Common Stock of Biosonics, Inc. held by IMRCH. In consideration of the Company's
assuming the obligations under the loans, including the obligation to issue
stock upon conversion of the loans, IMRCH, transferred to the Company 15,368,820
shares of Biosonics Common Stock owned by IMRCH and canceled the indebtedness
owed from the Company to IMRC. In recent years, IMRC has acted as the receiving
and disbursing agent for all cash receipts and disbursements for the Company.
The resulting receivable or payable is reflected in the Company's balance sheets
and cash flow statements as advances to or from affiliates. The Company expects
to continue this arrangement through at least early 1998.
The Company, as of December 31, 1996, owes an aggregate of $150,000 in interest
bearing loans, $115,000 of which is payable to Jack Paller, and an aggregate of
$138,000 in non-interest bearing loans. In 1989, Biosonics offered to its
shareholders the right to subscribe for 11-1/2% convertible subordinated
debentures, which offering was terminated by Biosonics prior to completion. The
debentures were never issued and, due to a lack of funds, except for $4,000
which was reimbursed to investors in 1990, the proceeds raised were never
returned to the investors. In 1990, Biosonics offered the investors the right to
convert their debentures into Common Stock, and investors who purchased an
aggregate of $16,000 of the debentures converted their debentures into 1,180,000
shares of Common Stock.
In February 1995, the Company granted non-employees common stock options for
10,000,000 shares, exercisable at $.01 per share. In January and February 1996,
the Company granted common stock options to non-employees for 6,000,000 shares,
exercisable at $.02 per share. These options were issued in exchange for various
services performed on the Company's behalf. Transfer of the shares issued upon
the exercise of the options will be restricted subject to registration
requirements of the Securities Act of 1933 or an exemption from such
requirements such as Rule 144 of the SEC.
During the quarter ended March 31, 1997, Biosonics issued Common Stock shares as
follows: (I) 310,000 shares at $.05 per share for payment of financial
consulting services, (ii) 12,000 shares at $.05 per share for payments to Dr.
Talal as final payment for his services on the Salitron Advisory Board, (iii)
10,000 shares at $.05 per share for interest payment on one loan established in
1991; and (iv) 5,000,000 shares at $.01 per
12
<PAGE> 13
share plus 1,000,000 shares at $.02 per share were issued to two investors,
respectively, in exercise of stock options, for which the Company received
promissory notes in the aggregate principal amount of the purchase price of
$70,000 and for which such shares are being held as collateral. All shares
issued and explained above are restricted and may not be sold except in
accordance with the registration requirements under the Act or an exemption from
such requirements such as Rule 144.
Plan of Operation for the Remainder of 1997 and 1998
Biosonics will require additional funds estimated to be approximately $3.0
million in the immediate future to continue its operations and implement current
manufacturing and marketing plans as described below. Biosonics may receive a
portion of such funds from sales of the Salitron System and the Cystotron
Incontinence Control System. Biosonics is also considering obtaining funds
through venture capital or other private or public financing, joint venture or
merger transactions and research and development partnership financing. There
is no assurance, however, that the Company will be successful in obtaining
financing or terms favorable to the Company, or at all.
The Company has completed a tentative marketing plan for the Cystotron product.
This plan includes matters relating to the manufacturing and sales of the
devices as well as the production of a marketing study for the product. In
connection with this tentative marketing plan, the Company has recently added an
engineer to its staff to review and implement a manufacturing bid process for
the product. It is intended that this engineer will also review the Company's
other products. The Company is also planning to develop a strategy to market its
products in the international market. For example, the Company is looking to
hire a consultant to proceed with bringing the Salitron, Cystotron and Anotron
devices to the international conferences in late 1997.
The bid process in connection with the manufacturing of the Cystotron product is
expected to result in a bid being awarded in December 1997 or early in 1998. In
connection with the Company's marketing efforts in connection with the
Cystotron, the Company is planning to establish a medical board of advisors to
perform a six-month study of the Cystotron product. Depending on the Company's
ability to raise additional funds to commence and implement its marketing plan
for the Cystotron product and the establishment of the market study and a sales
team for the product, of which there can be no assurance, the Company
anticipates that sales of the product will commence in the latter part of 1998.
Biosonics does not have any material commitments for capital expenditures,
although management is considering making capital expenditures during 1997 and
1998 in connection with the manufacturing of the Cystotron System, if funds
become available, as described above. The extent of the development or testing,
if any, of Biosonics' other devices will depend on the availability of funds,
and there is no assurance that development or testing of the devices will occur
or be successful.
Results of Operations
Biosonics' net development stage expenses increased, $152,748 or 24%, in 1996 as
compared to 1995 primarily due to arrangements with consultants for the Company
in the areas of public relations and as medical advisors, and one-time expenses
incurred in connection with the Company's special shareholders meeting.
Professional fees were increased due to the special shareholders meeting, and a
retainer was paid to the new attorneys hired as counsel to the Company with
respect to securities-related issues.
13
<PAGE> 14
Product sales decreased to $40,774 in 1996 as compared to $62,506 in 1995 as a
result of the discontinuance of the marketing program of the Salitron system due
to lack of funds.
The lack of investment income during 1996 and 1994 reflects the absence of funds
available for investment, and the increase in 1995 as compared to 1996 and 1994
was due to Biosonics' private offering of its Preferred Stock in 1995. During
1996 and 1995, Biosonics concentrated its efforts and resources on obtaining
Medicare approval of the Salitron System, which was not obtained.
Biosonics' professional fees consist primarily of legal, accounting and
consulting fees. Other development stage expenses include primarily salaries,
rent, supplies, transfer agent fees, manufacturing, marketing, public relations
and travel expenses.
Net development-stage expenses for the six and three months ended June 30, 1997
of $420,133 and $219,825, respectively, were higher than those for the
comparable periods of 1996 of $257,728 and $140879, respectively, due to funds
spent on consulting services, expenses relating to Biosonics' participation in
the Medical Device Industry conference, expenses in connection with the
preparation of Cystotron devices and consulting fees paid to the engineer hired
to prepare Biosonics for manufacturing the Cystotron devices. Other development
stage expenses include primarily salaries, rent, supplies, transfer agent fees,
manufacturing, marketing, public relations and travel expenses.
The Company's professional fees for the six and three months ended June 30, 1997
of $132,588 and $77,448, respectively, were higher than the professional fees of
$37,000 and $18,044, respectively, for the same periods of 1996 due to legal,
accounting and $60,000 of consulting expenses incurred in connection with the
Company's efforts to enhance its processes in connection with its reporting and
registration matters under federal securities laws and its application for
Medicare reimbursement with HCFA. The Company's sales for the six and three
months ended June 30, 1997 were $13,550 and $7,925, respectively, as compared to
$29,125 and $11,609, respectively, for the same periods on 1996. The decrease in
sales resulted primarily from not having available funds to continue the
marketing program for its Salitron System.
Jack Paller, President and CEO of the Company, has loaned money to fund certain
of the Company's operations from time to time. The principal amount of a secured
note payable to Mr. Paller is currently $90,000 bearing interest at the prime
rate plus 1.5% per annum. This note is secured by the Company's assets,
including, but not limited to, the Company's patents. See "Certain
Transactions." Also, other vendors of the Company have recorded judgements or
liens against the Company in the aggregate amount of $257,526, which filings the
Company believes have lapsed.
The Company believes there will be no significant adverse impact from inflation
and changing prices on the Company's operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of Biosonics are set forth in this report beginning on
page F-1.
14
<PAGE> 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information about the sole director and officer
of Biosonics.
Jack Paller, age 69, is currently the sole officer and director of the company.
Mr. Paller has been Treasurer and a director of the Company since its inception
in 1980. In January 1987, he became Chairman and Chief Executive Officer of
Biosonics. He also served as President of the Company from its inception until
January 1987, from October 1987 to December 1987 and since May 1990 to the
present. Currently, Mr. Paller also serves as President and a director of IMRCH
and serves as President, Treasurer and director of IMRC, the sole shareholder of
IMRCH.
Directors of Biosonics hold office for the ensuing year and until their
respective successors have been duly elected and qualified.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires Biosonics'
officers and directors, and persons who own more than ten percent (10%) of
Biosonics' Common Stock, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Such persons are required to
furnish Biosonics with copies of all Section 16(a) forms they file.
Biosonics notes that IMRC Holdings, Inc. may have been required to file, and has
not filed, Forms 4 reporting certain of the transactions in Biosonics' Common
Stock. In addition, Mr. Paller did not file Forms 4 or 5 reflecting gifts
aggregating approximately 3,800,000 of shares of Biosonics Common Stock during
1992 and 1993.
ITEM 11. EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
------------------------------------------
Name & Salary Bonus
Principal Position Year $ $
------------------ ---- --------- -----
<S> <C> <C> <C>
Jack Paller, 1996 103,000(1) --
Chairman, President, 1995 103,000(1) --
Treasurer and Secretary 1994 103,000(1) --
</TABLE>
- ----------
(1) Mr. Paller, the Company's sole director and executive officer,
has deferred the receipt of his salary every year from the
year ended December 31, 1990 through December 31, 1996, and
Mr. Paller did not receive or defer any other benefits or
compensation for serving as an
15
<PAGE> 16
executive officer of Biosonics during those years. Such salary
deferrals are included in the Company's current debt as
accrued payroll, and Mr. Paller and the Company have orally
agreed that Mr. Paller's deferred salary will not be paid
until the Company has sufficient available resources and the
payment of any such deferred salary will not disrupt or
jeopardize the Company's cash flow. In his capacity as an
executive officer of IMRC, Mr. Paller deferred his salary from
IMRC for the years ended December 31, 1989 through 1996,
including $42,000 of deferred salary per year for the years
ended December 31, 1994, 1995 and 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table lists the number of shares of Biosonics' Common Stock
beneficially owned by all persons known to Biosonics to be beneficial owners of
more than 5% of Biosonics' Common Stock and by the sole director and officer of
Biosonics and the percentage of all outstanding shares held by such person:
<TABLE>
<CAPTION>
Name of Beneficial Owner No. of Shares Percentage
------------------------ ------------- ----------
<S> <C> <C>
Jack Paller 11,467,300 4.0%
260 New York Drive
Fort Washington, Pennsylvania 19034
IMRC Holdings, Inc.(1) 110,138,930 38.26%
106 Quigley Boulevard
New Castle, Delaware 19720
</TABLE>
- ----------------------------------------
(1) IMRC Holdings, Inc. is a wholly owned subsidiary of IMRC. As
of June 30, 1997 Jack Paller owned 40.2% of the outstanding
shares of IMRC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
All of the shares of common stock of Biosonics owned by IMRCH and Jack Paller
are subject to a securities restriction agreement which prevents any sales by
them of the Common Stock of Biosonics at less than $.05 per share.
During 1989, Mr. Paller and his late spouse loaned $250,000 to Biosonics at an
interest rate of 1.5% over the prime rate charged by CoreStates Bank, not to
exceed an annual rate of 18%. The loan is payable on demand and is secured by
all of Biosonics' assets. During 1989, 1,250 shares of Biosonics' Series B
Preferred Stock were issued to Mr. Paller and his spouse in satisfaction of the
principal amount of $125,000 of their loan. During 1991, Mr. Paller loaned
Biosonics an additional $10,000. The highest principal amount outstanding under
these loans during 1996 was $135,000. Mr. Paller has also loaned $11,000 to
IMRC. During 1996, Mr. Paller converted his shares of Series B Preferred Stock
to Biosonics Common Stock, and loan payments were made to Mr. Paller which
reduced the total outstanding principal balance to $115,000. This note is
secured by the Company's assets, including, but not limited to, the Company's
patents.
The Company also issued 15,368,820 shares of Common Stock to approximately 25
individuals in conversion of loans during 1996. These loans were originally
obligations of IMRC, which then loaned the
16
<PAGE> 17
money to the Company to use for working capital. None of the individuals making
the loans were officers, directors or affiliates of the Company. The terms of
the loans allowed the loans to be converted into Common Stock of Biosonics held
by IMRCH. In consideration of the Company's assuming the obligations under the
loans, including the obligation to issue stock upon conversion of the loans,
IMRCH, transferred to the Company 15,368,820 shares of Biosonics Common Stock
owned by IMRCH and canceled the indebtedness from the Company to IMRC. In recent
years, IMRC has acted as the receiving and disbursement agent for all cash
receipts and disbursements for the Company. The resulting receivable or payable,
as the case may be, is reflected in the Company's balance sheets and cash flow
statements as advance to or from affiliates. The Company expects to continue
this arrangement through at least early 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON
FORM 8-K.
(A) Financial Statements & Exhibits
<TABLE>
<S> <C> <C>
1. Financial Statements Page
----
Auditors' Report F-1
Balance Sheets at December 31, 1995 and 1996 F-3
Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1996 and the period from
November 13, 1980 (Inception) to December 31, 1996 F-5
Statements of Changes in Shareholders' Equity (Deficiency)
for the Period from November 13, 1980 (Inception) to
December 31, 1996 F-6
Statements of Cash Flows for each of the Three Years in the
Period ended December 31, 1996 and the period from
November 13, 1980 (Inception) to December 31, 1996 F-14
Notes to Financial Statements F-16
</TABLE>
2. All schedules have been omitted because they are not
applicable or the required information is show in the
consolidated financial statements or notes therein.
3. Exhibits
*3.1 Articles of Incorporation as ammended (Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996)
*3.5 By-laws of Registrant, as amended. (Exhibit to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1983 ["1983 Form 10-K"]).
*3.6 Amended and Restated Article VlI of the Registrant's
Bylaws as adopted on May 7, 1987. (Exhibit to 1988
Form 10-K) .
17
<PAGE> 18
*3.7 Amendment to Registrant's By-Laws (Exhibit 3.7 to
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 ["1994 Form 10-K"]).
*10.1 Agreement between Registrant and IMRC with respect to
opportunities in the field of medical technology.
(Exhibit to 1981 Form 10-K).
10.2 Lease dated October 1, 1996, between Biosonics and
New York Drive Associates L.L.C.
*10.6 Securities Restriction Agreement dated September 30,
1987 between Registrant and International Management
& Research Corporation, Jack and Sarah Paller, and
Henry S. Brenman. (Exhibit to 1987 Form 10-K).
*10.16 Note in the amount of $250,000, dated June 27, 1989,
of Biosonics, Security Agreement, dated June 27,
1989, between Biosonics and Jack and Sarah Paller and
Assignment of Patent as Collateral Security, dated
June 27, 1989, of Biosonics. (Exhibit 10. 16 to Form
10-K).
*21. Subsidiaries. (Exhibit 21 to 1994 Form 10-K).
27. Financial Data Schedule
(B) Reports on 8-k
The Registrant did not file any reports on Form 8-K during the quarter
ended December 31, 1996.
- ------------------------
* Incorporated by reference.
18
<PAGE> 19
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIOSONICS, INC.
By: /s/Jack Paller
-----------------------------------------
Jack Paller, President, Chairman & CEO
Date: November 21, 1997
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 and on the dates indicated.
By: /s/Jack Paller
--------------------------------------------
Jack Paller, President, Chairman (Principal
Executive Officer), Treasurer (Principal
Financial Officer and Principal Accounting
Officer) and Director
Date: November 21, 1997
19
<PAGE> 20
BIOSONICS, INC.
(A Development Stage Enterprise)
* * *
December 31, 1996, 1995 and 1994
<PAGE> 21
BIOSONICS, INC.
(A Development Stage Enterprise)
CONTENTS
December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Page number
<S> <C>
Auditors' Report F-1 & F-2
Financial Statements:
Balance Sheets (Restated) at December 31, 1996
and 1995 F-3 & F-4
Statements of Operations (Restated) for Each of the Three Years in the Period
Ended December 31, 1996 and the Period from November
13, 1980(Inception) to December 31, 1996 F-5
Statements of Changes in Shareholders' Equity
(Deficiency) (Restated) for the Period from
November 13, 1980 (Inception) to December
31, 1996 F-6 through F-13
Statements of Cash Flows (Restated) for Each of the Three Years in the Period
Ended December 31, 1996 and the Period from November 13, 1980
(Inception) to December 31, 1996 F-14 & F-15
Notes to Financial Statements F-16 through F-31
</TABLE>
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
Board of Directors
Biosonics, Inc.
(A Development Stage Enterprise)
We have audited the accompanying balance sheets of Biosonics, Inc. (a
development stage enterprise) as of December 31, 1996 and 1995, and the related
statements of operations, changes in shareholders' equity (deficiency) and cash
flows for each of the three years in the period ended December 31, 1996. Such
financial statements have been restated as described in Note 3 to the financial
statements. 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 Biosonics, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
F-1
<PAGE> 23
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company has suffered recurring losses from operations
and has a net shareholders' deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 4. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3 to the financial statements, certain errors
resulting from the Company's not recording stock options issued in 1996 and 1995
were subsequently discovered by management. Accordingly, the Company has
restated its 1996 and 1995 financial statements to conform with generally
accepted accounting principles.
Also, in our opinion, the amounts shown in the statements of operations
and cash flows under the caption "Period from November 13, 1980 (Inception) to
December 31, 1996" have been properly compiled from financial statements which
were audited by us for each of the years ended December 31, 1986 through
December 31, 1996 and from the financial statements for the period from November
13, 1980 (Inception) to December 31, 1985 which were audited by other auditors
whose reports dated February 4, 1982 and March 14, 1986 expressed an unqualified
opinion and a qualified opinion, respectively, on those financial statements.
Philadelphia, Pennsylvania
February 21, 1997
(except for Notes 3 and 10, as to which
the date is July 18, 1997)
F-2
<PAGE> 24
BIOSONICS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS (RESTATED)
December 31, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current assets
Cash $ 260 $ 260
Accounts receivable (net of
allowance for doubtful
accounts of $2,000 in 1996
and $6,000 in 1995) 8,196 21,013
Inventories 64,271 70,084
Advances to affiliate 77,997
Prepaid expenses and other
current assets 25 8,851
-------- --------
Total current assets 150,749 100,208
Equipment, furniture and leaseholds,
net of accumulated depreciation
and amortization 15,007 25,011
Deposits 8,431 8,431
-------- --------
Total assets $174,187 $133,650
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 25
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current liabilities
Notes payable
Officer and affiliate $ 115,000 $ 532,444
Other 173,000 128,000
Accrued payroll, officer 669,500 566,500
Accrued interest
Officer and affiliate 55,905 103,606
Other 173,131 147,838
Accounts payable and other
accrued expenses 824,790 849,132
Advances from affiliates 62,450 24,571
Payments received for unissued
debentures 187,000 187,000
Payments received for unissued
securities 40,000 271,000
------------ ------------
Total current liabilities 2,300,776 2,810,091
------------ ------------
Commitments and contingencies (Note 12)
Shareholders' deficiency
Preferred stock - authorized
10,000,000 shares (inclusive
of Series A, B, C and D) at
$1 par value
Series A, authorized 1,000 shares,
issued and outstanding 1,000 shares
in 1995 1,000
Series B, authorized 10,000 shares,
issued and outstanding 3,250
shares in 1995 3,250
Series D, authorized 10,000 shares
in 1996, 5,000 shares in 1995, issued
and outstanding 3,000 shares in 1995 3,000
Common stock - $.0001 par value;
authorized 750,000,000 shares in
1996, 250,000,000 shares in 1995,
issued and outstanding 287,863,936
shares in 1996, 243,333,936 shares
in 1995 28,787 24,333
Capital in excess of par value 11,763,002 10,432,957
Deficit accumulated during
development stage (13,918,378) (13,140,981)
------------ ------------
Shareholders' deficiency (2,126,589) (2,676,441)
------------ ------------
Total liabilities and
shareholders' deficiency $ 174,187 $ 133,650
============ ============
</TABLE>
F-4
<PAGE> 26
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS (RESTATED)
<TABLE>
<CAPTION>
Period from
November 13,
1980
(Inception)
Year Ended December 31, to
------------------------------------- December 31,
1996 1995 1994 1996
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Sales $ 40,774 $ 62,506 $ 21,939 $ 837,377
Cost of sales 30,208 41,980 17,817 544,985
--------- --------- --------- ------------
Gross profit 10,566 20,526 4,122 292,392
--------- --------- --------- ------------
Development stage
expenses
Research and
development costs 21,500 20,117 5,160 4,166,053
Professional fees 130,050 54,697 83,451 2,752,487
Other development
stage expenses 636,488 560,476 338,102 8,165,558
--------- --------- --------- ------------
Total development
stage expenses 788,038 635,290 426,713 15,084,098
Less - Revenue from
cost recovery program 118,082
--------- --------- --------- ------------
Net development
stage expenses 788,038 635,290 426,713 14,966,016
--------- --------- --------- ------------
Other income
Investment and
other income 75 5,279 727,626
Management fees 20,000
Gain on sale of
equipment 7,620
--------- --------- --------- ------------
75 5,279 755,246
--------- --------- --------- ------------
Net loss ($777,397) ($609,485) ($422,591) ($13,918,378)
========= ========= ========= ============
Loss per common
share ($ .00) ($ .00) ($ .00) ($ .06)
========= ========= ========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 27
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)
Period from November 13, 1980 (Inception) to December 31, 1996
<TABLE>
<CAPTION>
Common Stock
------------------------
Shares Amount
------------ --------
<S> <C> <C>
Capital subscriptions received
Net loss for the period from
November 13, 1980 (Inception) to
December 31, 1980
Balance, December 31, 1980
Common stock issued January 1981
($.0001 per share) 125,010,000 $12,501
Common stock issued January 1981
($.0001 per share) 24,990,000 2,499
Common stock issued January 1981
($.025 per share) 4,400,000 440
Common stock issued January 1981
($.025 per share) 200,000 20
Common stock issued March 1981
($.025 per share) 200,000 20
Common stock issued October 1981
($.05 per share) 20,000,000 2,000
Offering expenses
Warrants to purchase 1,000,000
shares of common stock at $.06
per share issued October 1981
($.0001 per share)
Net loss for the year ended
December 31, 1981
----------- -------
Balance, December 31, 1981 174,800,000 17,480
Common stock issued November 1982
($.40 per share) 20,000 2
Common stock issued November 1982
($.20 per share) 97,500 10
Common stock issued pursuant to
exercise of warrants December
1982 ($.06 per share) 1,000,000 100
Adjustment of offering expenses
Net loss for the year ended
December 31, 1982
----------- -------
Balance, December 31, 1982 175,917,500 17,592
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
Preferred Stock
Series A, B and D Deficit Shareholders'
- ----------------- Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------ ------ ----------------- ------------------ -------------
<S> <C> <C> <C> <C>
$ 65,000 $ 65,000
($ 50) (50)
---------- ---------- ----------
65,000 (50) 64,950
12,501 (1)
1 2,500 (3)
44,560 45,000 (3)
4,980 5,000 (2)
4,980 5,000 (2)
998,000 1,000,000 (3)
(277,766) (277,766)
100 100
(150,446) (150,446)
---------- ---------- ----------
839,855 (150,496) 706,839
7,998 8,000 (2)
19,490 19,500 (2)
59,900 60,000 (3)
1,500 1,500
(428,634) (428,634)
---------- ---------- ----------
928,743 (579,130) 367,205
</TABLE>
F-6
<PAGE> 29
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1996
<TABLE>
<CAPTION>
Common Stock
---------------------
Shares Amount
----------- ------
<S> <C> <C>
Balance forward at December 31, 1982 175,917,500 17,592
Common stock issued January 1983
($.20 per share) 22,500 2
Common stock issued March 1983
($.020 per share) 30,000 3
Common stock issued pursuant to
exercise of stock options April
1983 ($.235 to $.305 per share) 100,000 10
Common stock issued June 1983
($.50 per share) 20,000 2
Common stock issued November 1983
($.50 per share) 6,500,000 650
Offering expenses
Common stock issued December 1983
($.50 per share) 800,000 80
Net loss for the year ended
December 31, 1983
----------- ------
Balance, December 31, 1983 183,390,000 18,339
Common stock issued pursuant to
exercise of Series A warrants
March 1984 to December 1984 ($.50
per share) 5,948 1
Common stock issued pursuant to
exercise of Series B warrants
March 1984 to October 1984 ($1.00
per share) 390
Common stock issued May 1984 to
December 1984 ($.25 per share) 76,500 8
Common stock issued May 1984 and
September 1984 ($.375 per share) 3,000
Common stock issued December 1984
($.20 per share) 350,000 35
Adjustment of offering expenses
Net loss for the year ended
December 31, 1984
----------- ------
Balance, December 31, 1984 183,825,838 18,383
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
Preferred Stock
Series A, B and D Deficit Shareholders'
- ----------------- Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------ ------ ----------------- ------------------ -------------
<S> <C> <C> <C>
928,743 (579,130) 367,205
4,498 4,500 (2)
5,997 6,000 (2)
28,740 28,750 (4)
9,998 10,000 (2)
3,249,350 3,250,000 (3)
(94,685) (94,685)
399,920 400,000 (3)
(702,429) (702,429)
---------- ---------- ----------
4,532,561 (1,281,559) 3,269,341
2,973 2,974 (3)
390 390 (3)
19,117 19,125 (2)
1,125 1,125 (2)
69,965 70,000 (2)
(8,129) (8,129)
(1,071,417) (1,071,417)
---------- ---------- ----------
4,618,002 (2,352,976) 2,283,409
</TABLE>
F-7
<PAGE> 31
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1996
<TABLE>
<CAPTION>
Common Stock
---------------------
Shares Amount
----------- ------
<S> <C> <C>
Balance forward at December 31, 1984 183,825,838 18,383
Common stock issued January 1985 to
October 1985 ($.28 per share) 26,500 3
Common stock issued March 1985 ($.34
per share) 5,000
Common stock issued March 1985 ($.25
per share) 20,000 2
Common stock issued pursuant to exercise
of Series A ($.50 per share) and
Series B ($1.00 per share) warrants 550
Common stock issued August 1985
($.375 per share) 2,000
Common stock issued November 1985
($.156 per share) 7,500 1
Net loss for the year ended
December 31, 1985
----------- ------
Balance, December 31, 1985 183,887,388 18,389
Common stock issued January 1986 to
October 1986 ($.19 per share) 85,000 8
Common stock issued February 1986
($.28 per share) 11,650 1
Common stock issued March 1986 ($.22
per share) 100,000 10
Common stock issued March 1986 ($.18
per share) 10,665,000 1,067
Offering expense
Common stock issued April 1986 to
September 1986 ($.16 per share) 202,000 20
Common stock issued November 1986 and
December 1986 ($.31 per share) 70,000 7
Common stock issued pursuant to
exercise of Series A ($.50 per
share) and Series B ($1.00 per
share) warrants 6,882 1
Common stock issued pursuant to
exercise of Series A and Series B
($.20 per share) warrants 134,855 13
Net loss for the year ended
December 31, 1986
----------- ------
Balance, December 31, 1986 195,162,775 19,516
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
Preferred Stock
Series A, B and D Deficit Shareholders'
- ----------------- Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------ ------ ----------------- ------------------ -------------
<S> <C> <C> <C>
4,618,002 (2,352,976) 2,283,409
7,450 7,453 (2)
1,719 1,719 (2)
4,998 5,000 (2)
300 300 (3)
750 750 (2)
1,171 1,172
(1,649,361) (1,649,361)
---------- ---------- ----------
4,634,390 (4,002,337) 650,442
15,929 15,937 (2)
3,244 3,245 (2)
21,865 21,875 (2)
1,928,670 1,929,737 (5)
(94,415) (94,415)
31,542 31,562 (2)
21,868 21,875 (2)
3,472 3,473 (3)
26,958 26,971 (3)
(1,790,003) (1,790,003)
---------- ---------- ----------
6,593,523 (5,792,340) 820,699
</TABLE>
F-8
<PAGE> 33
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1996
<TABLE>
<CAPTION>
Common Stock
---------------------
Shares Amount
----------- ------
<S> <C> <C>
Balance forward at December 31, 1986 195,162,775 19,516
Common stock issued January 1987
($.33 per share) 263,430 26
Common stock issued May and June 1987
($.25 per share) 145,500 14
Common stock issued July 1987
($.14 per share) 7,000 1
Common stock issued August 1987
($.24 per share) 67,180 7
Common stock issued October 1987
($.31 per share) 15,000 2
Common stock issued October 1987
($.20 per share) 240,000 24
Common stock issued December 1987
($.22 per share) 100,000 10
Common stock issued pursuant to
exercise of Series A and Series B
warrants ($.20 per share) 7,613,551 761
Net loss for the year ended
December 31, 1987
----------- ------
Balance, December 31, 1987 203,614,436 20,361
Common stock issued January 1988
($.25 per share) 125,000 12
Common stock issued January 1988
($.22 per share) 2,500 1
Common stock issued March 1988
($.20 per share) 10,000 1
Common stock issued March 1988
($.25 per share) 100,000 10
Common stock issued June 1988
($.20 per share) 4,227,000 423
Common stock issued September 1988
($.16 per share) 25,000 2
Common stock issued December 1988
($.01 per share) 11,000 1
Preferred stock-Series A issued
December 1988 ($100.00 per share)
Net loss for the year ended
December 31, 1988
----------- ------
Balance, December 31, 1988 208,114,936 20,811
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
Preferred Stock
Series A, B and D Deficit Shareholders'
- ----------------- Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------ ------ ----------------- ------------------ ------------
<S> <C> <C> <C> <C>
6,593,523 (5,792,340) 820,699
87,657 87,683 (4)
36,723 36,737 (4)
999 1,000 (3)
16,163 16,170 (4)
4,686 4,688 (4)
47,976 48,000 (3)
21,865 21,875 (4)
1,521,949 1,522,710 (3)
(1,655,959) (1,655,959)
----------- ----------- ----------
8,331,541 (7,448,299) 903,603
31,238 31,250 (2)
546 547 (2)
1,999 2,000 (3)
24,990 25,000 (3)
844,977 845,400 (3)
3,904 3,906 (2)
142 143 (2)
1,000 $1,000 99,000 100,000 (3)
(1,372,913) (1,372,913)
- ----- ------ ----------- ----------- ----------
1,000 1,000 9,338,337 (8,821,212) 538,936
</TABLE>
F-9
<PAGE> 35
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1996
<TABLE>
<CAPTION>
Common Stock
---------------------
Shares Amount
----------- ------
<S> <C> <C>
Balance forward December 31, 1988 208,114,936 20,811
Common stock issued March 1989 and
May 1989 ($.08 per share) 500,000 50
Common stock issued May 1989 ($.09
per share) 3,000
Preferred stock-Series B issued
June 1989 and September 1989
($100.00 per share)
Net loss for the year ended
December 31, 1989
----------- ------
Balance, December 31, 1989 208,617,936 20,861
Common stock issued January 1990
($.01 per share) 25,000 3
Common stock issued July 1990
($.01 per share) 20,311,000 2,031
Common stock issued December 1990
($.01 per share) 10,500,000 1,050
Net loss for the year ended
December 31, 1990
----------- ------
Balance, December 31, 1990 239,453,936 23,945
Common stock issued January 1991
($.01 per share) 1,200,000 120
Common stock issued January 1991
($.0625 per share) 48,000 5
Common stock issued April 1991
($.01 per share) 1,500,000 150
Common stock issued April 1991
($.01 per share) 600,000 60
Common stock issued April 1991
($.0625 per share) 32,000 3
Common stock issued June 1991
($.01 per share) 500,000 50
Net loss for the year ended
December 31, 1991
----------- ------
Balance, December 31, 1991 243,333,936 24,333
Net loss for the year ended
December 31, 1992
----------- ------
Balance, December 31, 1992 243,333,936 24,333
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
Preferred Stock
Series A, B and D Deficit Shareholders'
- ----------------- Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------ ------ ----------------- ------------------ ------------
<S> <C> <C> <C> <C>
1,000 1,000 9,338,337 (8,821,212) 538,936
39,950 40,000 (3)
281 281 (2)
3,250 3,250 321,750 325,000 (6)
(1,116,882) (1,116,882)
- ----- ------ ----------- ----------- ----------
4,250 4,250 9,700,318 (9,938,094) (212,665)
247 250 (2)
201,080 203,111 (3)
103,950 105,000 (3)
(1,046,939) (1,046,939)
- ----- ------ ----------- ----------- ----------
4,250 4,250 10,005,595 (10,985,033) (951,243)
11,880 12,000 (4)
2,995 3,000 (7)
14,850 15,000 (4)
5,940 6,000 (7)
1,997 2,000 (7)
4,950 5,000 (7)
(371,471) (371,471)
- ----- ------ ----------- ----------- ----------
4,250 4,250 10,048,207 (11,356,504) (1,279,714)
(408,294) (408,294)
- ----- ------ ----------- ----------- ----------
4,250 4,250 10,048,207 (11,764,798) (1,688,008)
</TABLE>
F-10
<PAGE> 37
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1996
<TABLE>
<CAPTION>
Common Stock
-----------------------
Shares Amount
----------- ------
<S> <C> <C>
Balance forward December 31, 1992 243,333,936 24,333
Net loss for the year ended
December 31, 1993
----------- ------
Balance, December 31, 1993 243,333,936 24,333
Net loss for the year ended
December 31, 1994
----------- ------
Balance, December 31, 1994 243,333,936 24,333
Stock options granted February
1995
Preferred stock-Series D issued
between June 1995 and December
1995 ($100.00 per share)
Net loss for the year ended
December 31, 1995
----------- ------
Balance, December 31, 1995 243,333,936 24,333
Stock options granted January
and February 1996
Preferred stock-Series D issued
January 1996 to July 1996
Common stock issued pursuant to
the conversion of preferred
stock, July 1996 Series A ($.08
per share), Series B ($.0286 per
share) and Series D ($.05 per share) 28,725,000 2,873
Common stock contributed to the
Company by IMRCH August 1996 (15,368,820) (1,537)
Common stock issued July 1996
($.01 per share) 1,300,000 130
Common stock issued July 1996
($.02 per share) 12,900,000 1,290
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
Preferred Stock
Series A, B and D Deficit Shareholders'
- ------------------ Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
------ ------ ----------------- ------------------ ------------
<S> <C> <C> <C> <C>
4,250 4,250 10,048,207 (11,764,798) (1,688,008)
(344,107) (344,107)
----- ------ ----------- ----------- ----------
4,250 4,250 10,048,207 (12,108,905) (2,032,115)
(422,591) (422,591)
----- ------ ----------- ----------- ----------
4,250 4,250 10,048,207 (12,531,496) (2,454,706)
87,750 87,750
3,000 3,000 297,000 300,000 (3)
(609,485) (609,485)
----- ------ ----------- ----------- ----------
7,250 7,250 10,432,957 (13,140,981) (2,676,441)
75,530 75,530
5,050 5,050 499,950 505,000 (3)
(12,300) (12,300) 9,427 -0-
1,537 -0- (11)
12,870 13,000 (3)
256,710 258,000 (3)
</TABLE>
F-11
<PAGE> 39
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1996
<TABLE>
<CAPTION>
Common Stock
----------------------
Shares Amount
---------- ------
<S> <C> <C>
Common stock issued August 1996
($.02 per share) 11,150,000 1,115
Common stock issued August 1996
($.0238 per share) 420,000 42
Common stock issued August 1996
($.0258 per share) 350,000 35
Common stock issued July 1996
($.03 per share) 300,000 30
Common stock issued August 1996
($.035 per share) 428,600 43
Common stock issued August 1996
($.0345 per share) 1,695,000 170
Common stock issued August 1996
($.04 per share) 250,000 25
Common stock issued November 1996
($.04 per share) 75,000 7
Common stock issued July 1996
($.05 per share) 280,000 28
Common stock issued August 1996
($.05 per share) 1,075,220 108
Common stock issued November 1996
($.05 per share) 200,000 20
Common stock issued September 1996
($.065 per share) 100,000 10
Common stock issued July 1996
($.08 per share) 400,000 40
Common stock issued September 1996
($.085 per share) 250,000 25
Net loss for the year
ended December 31, 1996
----------- -------
287,863,936 $28,787
=========== =======
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
Preferred Stock
Series A, B and D Deficit Shareholders'
- ----------------- Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------ ------ ----------------- ------------------ ------------
<S> <C> <C> <C> <C>
221,885 223,000 (10)
9,958 10,000 (10)
8,997 9,032 (10)
8,970 9,000 (2)
14,957 15,000 (10)
59,005 59,175 (10)
9,975 10,000 (10)
2,993 3,000 (9)
13,972 14,000 (2)
53,654 53,762 (10)
9,980 10,000 (3)
6,490 6,500 (2)
31,960 32,000 (2)
21,225 21,250 (2)
(777,397) (777,397)
- ------ -------- ----------- ----------- ----------
-0- $ -0- $11,763,002 ($13,918,378) ($2,126,589)
====== ======== =========== =========== ==========
</TABLE>
F-12
<PAGE> 41
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1996
(1) Shares were issued to International Management & Research
Corporation in consideration for all rights to develop certain
products. The rights were valued at the par value of the shares
issued.
(2) Shares were issued in consideration for services rendered at
various dates. The services were valued at the market price of
the stock on the date of the transaction.
(3) Shares were issued for cash.
(4) Shares were issued for cash and services.
(5) Shares were issued for cash and surrendering of warrants
as a credit against the March 1986 offering.
(6) Shares were issued for cash and repayment of a note
payable in the amount of $125,000.
(7) Shares were issued as repayment of funds received for
convertible debentures, which were never issued.
(8) Shares were issued as repayment of notes payable.
(9) Shares were issued as payment of interest on loans.
(10) Shares were issued as payment for liabilities of IMRC,
assumed by Biosonics, Inc.
(11) Shares of Biosonics, Inc. contributed by IMRCH as a
capital contribution.
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE> 42
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS (RESTATED)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from
operating activities
Net loss ($777,397) ($609,485) ($422,591)
--------- --------- ---------
Adjustments to reconcile
net loss to net cash
used in operating activities
Depreciation and amortization 10,004 20,117 4,835
Increase (decrease) in
allowance for doubtful
accounts (4,000) (7,000)
Increase (decrease)in reserve
for inventory obsolescence (13,000)
Loss on lease abandonment
Gain on sale of equipment
Common stock issued
for services 85,750
Common stock options
issued for services 75,530 87,750
Common stock issued for
product rights
Changes in operating assets
and liabilities
Accounts receivable 16,817 (16,543) 10,161
Inventories 18,813 15,603 3,687
Prepaid expenses and other
current assets 8,828 (2,121) (6,119)
Accrued payroll, officer 103,000 103,000 103,000
Accrued interest
Officer and affiliate 26,502 41,771 26,541
Other 25,293 24,842 25,588
Accounts payable and
accrued expenses (24,342) 16,309 65,661
Advances from (to)
affiliates 83,202 40,018 (44,307)
--------- --------- ---------
412,397 330,746 182,047
--------- --------- ---------
Net cash used in operating
activities (365,000) (278,739) (240,544)
--------- --------- ---------
</TABLE>
<PAGE> 43
Period from
November 13,
1980
(Inception) to
December 31,
1996
- ---------------
($13,918,378)
378,687
2,000
27,000
19,550
(7,620)
543,959
163,280
12,501
(10,196)
(91,271)
(25)
669,500
130,108
173,131
892,792
107,773
3,011,169
(10,907,209)
F-14
<PAGE> 44
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS (RESTATED)
(Continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from
investing activities
Capital expenditures (31,261)
Proceeds from sale of equipment
Issuance of note receivable
Increase in deposits
Decrease in note receivable
Patent expenditures
--------
Net cash used in investing
activities (31,261)
--------
Cash flows from financing
activities
Payments received for unissued
debentures and securities 40,000
Principal payments of note
payable (235,000)
Proceeds from issuance of
notes payable 45,000 10,000 240,544
Increase in capitalized
organization costs
Proceeds from issuance of
preferred stock 505,000 300,000
Proceeds from issuance of
common stock 10,000
--------- -------- --------
Net cash provided by
financing activities 365,000 310,000 240,544
--------- -------- --------
Net increase in cash
Cash, beginning 260 260 260
--------- -------- --------
Cash, ending $ 260 $ 260 $ 260
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 45
Period from
November 13,
1980
(Inception) to
December 31,
1996
-----------
(363,305)
10,825
(30,000)
(8,431)
30,000
(45,690)
-----------
(406,601)
-----------
498,000
(307,000)
834,444
(7,453)
1,105,000
9,191,079
-----------
11,314,070
-----------
260
-----------
$ 260
===========
F-15
<PAGE> 46
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
1. Organization
Since November 1980, Biosonics, Inc. has pursued the development of
medical devices. Since the Company has not significantly commenced the
production and sale of the medical devices, it is classified as a
development stage enterprise in accordance with Statement of Financial
Accounting Standard No.
7.
IMRC Holdings, Inc. (IMRCH) owned 38% and 50% of the Company's common
stock at December 31, 1996 and 1995, respectively. IMRCH is a
wholly-owned subsidiary of International Management & Research
Corporation (IMRC). The Company's president owns approximately 4% of the
common stock of the Company and also owns approximately 40% of the common
stock of IMRC.
2. Summary of significant accounting policies
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash transactions
During 1996, 1995 and 1994, IMRC acted as the receiving and disbursing
agent for all cash receipts and disbursements for the Company. The
resulting receivable or payable is reflected in the accompanying balance
sheets as advances to or from affiliates.
Inventories
Inventories consist primarily of finished products and are stated at the
lower of cost or market. Cost is determined by use of the first-in,
first-out method. The Company provides a reserve for inventories which
may become obsolete.
Equipment, furniture and leaseholds
Equipment, furniture and leaseholds are recorded at cost. Depreciation
for financial and income tax reporting purposes is provided over the
estimated useful lives of the assets using the straight-line and double
declining-balance methods.
F-16
<PAGE> 47
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
2. Summary of significant accounting policies (Continued)
Loss per share
Loss per share was calculated based on the weighted average number of
shares outstanding of 261,976,354 in 1996 and 243,333,936 in 1995 and
1994. Common stock equivalents, including convertible preferred stock and
common stock options outstanding, are not included in the calculation of
loss per share amounts for each period because they would be
anti-dilutive.
Deferred income taxes
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax bases of the Company's assets
and liabilities.
Stock based compensation
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," which
encourages, but does not require companies to record compensation cost
for stock-based employee compensation plans at fair value. The Company
has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued To Employees," and the related
interpretations. Accordingly, compensation cost is measured as the excess
of the quoted market price of the Company's stock on the grant date over
the price which the employee must pay to acquire the stock. Also in
accordance with SFAS No. 123, the Company records an expense for the fair
value of stock options issued in exchange for services provided by
non-employees.
3. Restatement of financial statements
The Company has restated its financial statements for the years ended
December 31, 1996 and 1995. This was necessary because the Company had
granted stock options to non-employees in 1996 and 1995 in exchange for
various services provided to the Company. The value of these options and
the related services received were not previously reflected in the
Company's 1996 and 1995 financial statements.
The effect on the Company's financial statements as originally reported
is as follows:
F-17
<PAGE> 48
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
3. Restatement of financial information (Continued)
<TABLE>
<CAPTION>
1996 1995
------------------------------- -------------------------------
As reported As restated As reported As restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Other development
stage expenses $ 560,958 $ 636,488 $ 472,726 $ 560,476
Net loss (701,867) (777,397) (521,735) (609,485)
Loss per common
share ($ .00) ($ .00) ($ .00) ($ .00)
Capital in excess
of par value 11,599,722 11,763,002 10,345,207 10,432,957
Accumulated
deficit, ending (13,755,098) (13,918,378) (13,053,231) (13,140,981)
</TABLE>
4. Results of operations
The Company incurred net losses of $777,397, $609,485 and $422,591 for
the years ended December 31, 1996, 1995 and 1994, respectively, and at
December 31, 1996, the Company had a shareholders' deficiency of
$2,126,589.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered
recurring losses from operations and has a net shareholders' deficiency
that raise substantial doubt about its ability to continue as a going
concern.
Management plans to meet its financial requirements necessary to continue
in operations by seeking additional equity and debt financing through
private placement or public offerings, joint venture arrangements and
product sales. Management believes that the steps it has taken in
revising its operating and financial requirements provides the Company
with the ability to continue in existence. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
5. Inventories
Inventories at December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Raw material $ 20,166 $ 36,803
Finished goods 71,105 73,281
-------- --------
91,271 110,084
Less reserve for obsolescence 27,000 40,000
-------- --------
$ 64,271 $ 70,084
======== ========
</TABLE>
F-18
<PAGE> 49
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
6. Equipment, furniture and leaseholds
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Leasehold improvements $ 3,100 $ 3,100
Machinery and equipment 48,745 48,745
Office equipment 64,325 64,325
Furniture and fixtures 138,636 138,636
-------- --------
254,806 254,806
Less accumulated depreciation
and amortization 239,799 229,795
-------- --------
$ 15,007 $ 25,011
======== ========
</TABLE>
Depreciation expense was $10,004 in 1996, $20,117 in 1995 and $4,835 in
1994.
7. Advances to/from affiliates
At December 31, 1996, the Company had advances to IMRC of $77,997 and
advances from IMRCH of $62,450. At December 31, 1995, advances from
affiliates consisted of $17,121 from IMRC and $7,450 from IMRCH.
8. Notes payable
Notes payable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes payable on demand to an
officer of the Company, secured by
Company assets, bearing interest at
prime plus 1.5% per annum (effective
rate of 8.25% at December 31, 1996) $115,000 $135,000
Unsecured notes payable on demand,
bearing interest at 12% per annum on
$10,000 and 11 1/2% per annum on
$25,000 35,000 35,000
Unsecured, non-interest bearing
notes payable on demand 138,000 93,000
Unsecured notes payable on demand to
IMRC, bearing interest at 7% per
annum 397,444
-------- --------
$288,000 $660,444
======== ========
</TABLE>
See also Note 12 - "Unissued Securities".
F-19
<PAGE> 50
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
9. Payments received for unissued debentures and securities
Payments received for unissued debentures and securities at December 31
are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
In October 1989, the Company offered
to its shareholders the right to
subscribe to 11.5% convertible
debentures. Interest is accrued at
11.5% on these funds (See Note 12) $187,000 $187,000
Cash received for stock, not yet
issued (See Notes 10 & 12) 40,000 271,000
-------- --------
$227,000 $458,000
======== ========
</TABLE>
10. Shareholders' equity
IMRCH and the Company's current officers and directors held in the
aggregate, approximately 42% of the Company's outstanding common stock
at December 31, 1996 and 59% at December 31, 1995. Certain of these
shares held by officers and directors have been gifted to various
entities and individuals. These shares are subject to a securities
restriction agreement which provides that such shareholders will not
sell any of their shares of the Company's common stock for less than
$.05 per share.
In July 1996, the Company amended its articles of incorporation to
increase the number of shares of authorized common stock from
250,000,000 to 750,000,000. The Company then issued a total of 1,300,000
shares to various entities who performed consulting services for the
Company. The Company also issued 14,200,000 shares to individuals who
had given the Company a total of $271,000 for common and preferred stock
in prior years, when the Company did not have enough shares authorized
to issue them.
The Company received 15,368,820 shares of its common stock in July 1996
from IMRCH and then issued these shares to various individuals to settle
liabilities of IMRC (See Note 12).
F-20
<PAGE> 51
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
10. Shareholders' equity (Continued)
In 1987, the Company issued 591,110 shares of common stock to
individuals as compensation for services rendered.
During the year ended December 31, 1983, the Company issued 7,300,000
warrants to purchase Company common stock at $.50 per share until
November 23, 1984 ("Series A warrants") and 3,650,000 warrants to
purchase Company common stock at $1.00 per share until April 23, 1985
("Series B warrants") in connection with the sale to its shareholders of
3,650,000 units, consisting of two shares of common stock, two Series A
warrants and one Series B warrant, at $1.00 per unit. On October 15,
1984, the Company extended the expiration date for the Series A warrants
and Series B warrants to November 23, 1985 and April 23, 1986,
respectively.
On March 31, 1986, the Company extended the expiration date of the
Series A and B warrants to April 23, 1987 and the exercise price of such
warrants was reduced to $.20 per share. As a result, the terms of the
Series A and B warrants were identical. There were 9,446,286 Series A
and B warrants outstanding at December 31, 1986. In 1987, 7,613,551
Series A and Series B warrants were exercised. As a result, the Company
issued 7,613,551 shares of common stock and received $1,522,710 of
additional equity. The remaining 1,832,735 of Series A and Series B
warrants expired on April 23, 1987.
During the year ended December 31, 1983, the shareholders approved an
incentive stock option plan for the Company's employees. Two million
shares of common stock were reserved for issuance under the plan. Under
the plan, options may be granted to purchase shares of the Company's
stock at a price equal to at least the average of the closing bid and
asked prices of the Company's stock on the date of grant. The options
generally become exercisable upon the achievement of certain milestones
in the development of the Company's products. The options terminate
after ten years from the date of grant or after termination of the
individual's services to the Company, whichever comes first. No charge
to income will result from the grant or exercise of the options. As of
December 31, 1996 and 1995, there were no options outstanding under the
employee incentive stock option plan.
F-21
<PAGE> 52
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
10. Shareholders' equity (Continued)
In December 1988, the Company sold 1,000 shares of its preferred
stock-Series A for $100,000 ($100 per share). Each share of preferred
stock-Series A is convertible, upon the option of the holder, into 1,250
shares of common stock. In addition, the holders of the preferred
stock-Series A shall have the right to vote on all matters as to which
holders of common stock have a right to vote, and such voting rights
shall be exercised on an as-converted basis.
In June 1989, the Company sold 2,000 shares of its preferred
stock-Series B for $200,000 ($100 per share). The preferred stock-Series
B is non-voting and does not participate in dividends. Each share of the
preferred stock-Series B is entitled to a liquidation preference of
$100. These shares are redeemable for cash at the option of the Company
at $105 per share.
In September 1989, the Company issued 1,250 shares of its preferred
stock-Series B to an officer in exchange for $125,000 of a demand note
payable. In April, 1996 the Company amended its resolution of June 1989,
which authorized preferred stock, Series B, to allow shares to be
convertible, upon the option of the holder, into 3,500 shares of common
stock.
The Company has authorized 1,000 shares of preferred stock-Series C,
none of which was issued at December 31, 1995 and 1994. Each share of
preferred stock-Series C is convertible, upon the option of the holder,
into 10,000 shares of common stock and does not participate in
dividends. In addition, the holders of the preferred stock-Series C
shall have the right to vote on all matters as to which holders of
common stock have a right to vote, and such voting rights shall be
exercised on an as-converted basis.
Between June and December, 1995, the Company authorized 5,000 and issued
3,000 shares of its preferred stock-Series D for $300,000 ($100 per
share). Between January and July 1996, the Company authorized an
additional 5,000 shares and issued an additional 5,050 shares of its
preferred stock-Series D for $505,000 ($100 per share). Each share of
preferred stock-Series D is convertible, upon the option of the holder,
into 2,000 shares of common stock. Each share of the preferred
stock-Series D is entitled to a liquidation preference of $100. These
shares are redeemable for cash at the option of the Company at $120 per
share any time on or after May 1, 1997. In addition,
F-22
<PAGE> 53
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
10. Shareholders' equity (Continued)
the holders of the preferred stock-Series D shall have the right to vote
on all matters as to which holders of common stock have a right to vote,
and such voting rights shall be exercised on an as-converted basis.
In July 1996, all holders of preferred stock - Series A, B and D
converted their shares of preferred stock into common stock of the
Company, pursuant to the formulas in the respective preferred stock
agreements. The total number of shares of common stock issued as a
result of these conversions was 28,725,000, including 7,000,000 to IMRC
and 4,375,000 to the Company's president.
In February 1995, the Company granted to non-employees common stock
options for 10,000,000 shares, exercisable at .01 per share. In January
and February 1996, the Company granted common stock options to
non-employees for 6,000,000 shares, exercisable at .02 per share. These
options were issued in exchange for various services performed on the
Company's behalf. Transfer of the shares, issued upon the exercise of
the options, will be restricted subject to registration requirements of
the Securities Act of 1933 or an exemption from such requirements such
as Rule 144 of the SEC. The fair value of these options was estimated on
the grant dates using the Black-Scholes option-pricing model with the
following assumptions used for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 125%-132% 138%
Risk-free interest rate 6% 6%
Expected life 2 years 2-4 years
Discount for lack of marketability 35% 35%
Estimated fair value $75,530 $87,750
</TABLE>
The estimated fair value of these options is included in other
development stage expenses in the accompanying financial statements.
In May 1996, the Company issued a stock option to an employee for
250,000 shares, exercisable at .05 per share. Transfer of the shares,
issued upon the exercise of the options, will be restricted subject to
registration requirements of the Securities Act of 1933 or an exemption
from such requirements such as Rule 144 of the SEC. The Company has
adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation."
F-23
<PAGE> 54
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
10. Shareholders' equity (Continued)
Accordingly, no compensation cost has been recognized for this option.
Had compensation costs been recognized for this option, the Company's
1996 net loss would have been increased by $10,644 and there would have
been no effect on the Company's loss per common share. This estimated
fair value was also based on the Black-Scholes option-pricing model with
the following assumptions: Dividend yield of 0%; expected volatility of
128%; risk-free interest rate of 6%; expected life of 2 years; discount
for lack of marketability of 35%.
Stock options granted by the Company during 1995 and 1996 vested upon
issuance and expire in two to four years from the date of grant.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Stock options, beginning of year 10,000,000 0
Options issued 6,250,000 10,000,000
Options terminated or expired 0 0
---------- ----------
Stock options, end of year 16,250,000 10,000,000
========== ==========
</TABLE>
11. Income taxes
The Company has available at December 31, 1996, unused operating loss
carryforwards and tax credits, which may provide future tax benefits
expiring as follows:
<TABLE>
<CAPTION>
Year of expiration Carryforwards Credits
------------------ ------------- --------
<S> <C> <C>
1997 $ 384,000 $224,000
1998 766,000
1999 1,055,000 7,000
2000 1,642,000 2,000
2001 1,781,000
2002 1,617,000
2003 1,364,000
2004 1,105,000
2005 788,000
2006 434,000
2007 278,000
2008 250,000
2009 308,000
2010 401,000
2011 643,000
----------- --------
$12,816,000 $233,000
=========== ========
</TABLE>
F-24
<PAGE> 55
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
11. Income taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax
assets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Net operating loss carryforwards $4,357,000 $4,220,000
Tax credits 79,000 79,000
Accrued payroll, officer 228,000 193,000
Stock options outstanding 55,000 30,000
Other temporary differences 14,000
---------- ----------
4,733,000 4,522,000
Less valuation allowance 4,733,000 4,522,000
---------- ----------
Net deferred tax asset $ -0- $ -0-
========== ==========
</TABLE>
SFAS No. 109 requires that the Company record a valuation allowance when
it is "more likely than not that some portion or all of the deferred tax
assets will not be realized." It further states that "forming a
conclusion that a valuation allowance is not needed is difficult when
there is negative evidence such as cumulative losses in recent years."
As the ultimate utilization of net operating loss carryforwards and tax
credits depends on the Company's ability to generate sufficient taxable
income in the future, the losses in recent years and the Company's
desire to be conservative make it appropriate to record a valuation
allowance.
12. Commitments and contingencies
Lease
The Company leases its executive offices under a noncancellable
operating lease which expires in September 1998. The minimum future
rental payments required under this lease are $40,035 in 1997 and
$30,026 in 1998.
Rent expense was $39,333, $33,861 and $31,206 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Liens
Included in accounts and notes payable are liabilities totalling
$372,526 (1996) and $392,526 (1995), for which certain vendors and
officers have secured liens against the all of Company's assets
totalling $174,187 (1996) and $133,650 (1995).
F-25
<PAGE> 56
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
12. Commitments and contingencies (Continued)
Consulting arrangement
The Company formed a Salitron Medical Advisory Board whose chairman is
entitled to receive compensation in the amount of $25,000 at December
31, 1995. In addition, upon serving a minimum of two years, board
members are entitled to certain shares of the Company's common stock. In
1996, 300,000 shares valued at $9,000 were issued under this
arrangement.
Legal matters
Convertible debenture offering
In 1989 Biosonics, Inc. raised $207,000 through a public offering of its
11.5% convertible debentures. The Company terminated the offering prior
to completion, as the Company was unable to raise the minimum specified
in the offering document. Debentures were not issued and amounts were
not returned to the investors with the exception of $4,000.
Subsequently, $16,000 of said amount was converted into 1,180,000 shares
of common stock. The Company has accrued interest on these funds
totalling $153,599 and $132,094 at December 31, 1996 and 1995,
respectively. The Company plans to repay the investors, with interest,
when there is sufficient cash flow to permit such repayments.
Unissued securities
In 1996, Biosonics, Inc. received $40,000 from two individuals for
800,000 shares of common stock which were issued upon the initial
closing of the Company's private placement in April 1997. In 1990 and
1992 Biosonics raised $271,000 for common and convertible preferred
shares. The shares were unissued since the Company's number of
authorized shares would have been exceeded. In 1996, with the approval
of shareholders, the authorized number of shares was increased and these
shares were issued.
F-26
<PAGE> 57
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
12. Commitments and contingencies (Continued)
Legal matters (Continued)
Unissued Securities (Continued)
During 1993 and 1994, IMRC borrowed an aggregate of $335,000, $120,000
of which was pursuant to loans that were convertible into Biosonics
common stock owned by IMRCH, at $.01 and $.02 per share. With respect to
$215,000 of the loans, IMRCH agreed to issue to the lenders 3,000,000
shares of Biosonics common stock owned by IMRCH. These shares were
issued by IMRCH in 1996. In addition, during 1994, IMRCH raised $190,161
through the sale of Biosonics common stock owned by IMRCH at a range of
$.02 to $.05 per share. In 1996, Biosonics assumed the obligations of
the IMRC loans totaling $335,000. In addition, Biosonics assumed IMRC's
obligation in connection with the $190,161 raised by IMRC for the sale
of Biosonics stock. Biosonics also assumed $68,207 in loans and accrued
interest owed to family members of the Company's president by IMRC.
These obligations were then settled by Biosonics through the conversion
of these liabilities into 15,368,820 shares of Biosonics common stock.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires officers,
directors and entities owning more than ten per cent of a Company's
common stock to file reports of changes in ownership with the SEC and to
provide the Company with copies of such forms.
The Company has noted that IMRCH may have been required to file and has
not filed required forms reporting the transactions described in the
preceding paragraph. In addition, the Company's president did not file
required forms reflecting gifts aggregating approximately 3,800,000
shares of the Company's stock in 1992, 1993 and 1996, and the
conversions of preferred stock to common stock in 1996.
F-27
<PAGE> 58
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
12. Commitments and contingencies (Continued)
Legal matters (Continued)
Other
The Company and its president were parties to a lawsuit filed by a
shareholder in March 1996 in connection with certain of the Company's
common stock restricted under Rule 144 of the Securities Exchange Act.
The suit alleged that the Company and its President failed to provide
documentation to the shareholder for release of the Rule 144
restriction. The shareholder sought damages in excess of $50,000. The
lawsuit was settled and voluntarily terminated by the shareholder in May
1996. Neither the Company or its president incurred any liability in
connection with resolution of the matter.
13. Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
Period from
November 13,
Year Ended December 31, 1980 (Inception)
------------------------------------- to December 31,
1996 1995 1994 1996
---- ---- ---- ----------------
<S> <C> <C> <C> <C>
Cash paid for
Interest $-0- $128 $-0- $33,031
==== ==== ==== =======
</TABLE>
F-28
<PAGE> 59
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
13. Supplemental disclosure of cash flow information (Continued)
Supplemental schedule of noncash financing activities
The Company issued the following amounts of common stock for noncash
consideration:
<TABLE>
<CAPTION>
Period from
November 13,
Year Ended December 31, 1980 (Inception)
------------------------------------ to December 31,
1996 1995 1994 1996
-------- --------- ---- ----------------
<S> <C> <C> <C> <C>
Common stock not
previously
issued $271,000 $ 271,000
Employee
compensation,
consulting
services 82,750 536,959
Services provided
in exchange for
stock options 75,530 87,750 163,280
Loan origination
fee 4,000
Acquisition of
product rights 12,501
Repayment of
accrued expenses
to IMRC 197,524 197,524
Interest expense 3,000 3,000
Repayment of
notes payable
to IMRC 182,444 182,444
-------- ------- ----- ----------
$812,248 $87,750 $ -0- $1,370,708
======== ======= ===== ==========
</TABLE>
In September 1989, preferred stock-Series B was issued upon the
conversion of $125,000 of demand note payable.
In 1993, the Company converted accounts payable to a note payable on
demand for $68,000.
14. Interest expense
Interest expense for the years ended December 31, 1996, 1995, and 1994
was $55,608, $66,742 and $52,129, respectively.
F-29
<PAGE> 60
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
14. Interest expense (Continued)
Included in interest expense is $11,917, $13,591 and $11,872 for loans
from the Company's president for the years ended December 31, 1996, 1995
and 1994, respectively.
Also included in interest expense is $14,595, $27,646 and $15,193 for a
loan from IMRC for the years ended December 31, 1996, 1995 and 1994,
respectively.
15. Other development stage expenses
Other development stage expenses consist primarily of salaries, rent and
utilities, interest and marketing costs.
16. Quarterly results, as restated (Unaudited)
<TABLE>
<CAPTION>
Gross
Profit Net Loss
Sales (Loss) Net Loss Per Share
------- -------- --------- -----------
<S> <C> <C> <C> <C>
1996 - 1st Quarter $17,516 $ 8,918 ($177,353) ($ .00)
2nd Quarter 11,609 3,855 (142,381) (.00)
3rd Quarter 5,786 (1,164) (324,708) (.00)
4th Quarter 5,863 (1,043) (132,955) (.00)
------- -------- --------- -----------
Total $40,774 $ 10,566 ($777,397) ($ .00)
======= ======== ========= ===========
1995 - 1st Quarter $ 10,595 $ 3,618 ($244,453) ($ .00)
2nd Quarter 11,931 3,833 (158,632) (.00)
3rd Quarter 23,190 5,168 (114,027) (.00)
4th Quarter 16,790 7,907 (92,373) (.00)
------- -------- --------- -----------
Total $62,506 $ 20,526 ($609,485) ($ .00)
======= ======== ========= ===========
1994 - 1st Quarter $ 4,636 $ 4,592 ($ 66,160) ($ .00)
2nd Quarter 6,680 (581) (72,732) (.00)
3rd Quarter 5,248 (1,979) (85,605) (.00)
4th Quarter 5,375 2,090 (198,094) (.00)
------- -------- --------- -----------
Total $21,939 $ 4,122 ($422,591) ($ .00)
======= ======== ========= ===========
</TABLE>
F-30
<PAGE> 61
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
16. Quarterly results, as restated (Unaudited)(Continued)
The following is a reconciliation of 1996 quarterly results (unaudited) as
originally reported in the Company's 1996 Form 10-Q filings adjusted for
reclassifications of costs of goods sold and an overstatement of interest
expense for the quarter ended September 30, 1996:
<TABLE>
<CAPTION>
Gross profit
(loss) as Gross profit
originally (loss) as
reported Adjustment Adjusted
--------- --------- ---------
<S> <C> <C> <C>
1996 - 1st Quarter $ 14,461 ($ 5,543) $ 8,918
2nd Quarter (1,502) 5,357 3,855
3rd Quarter (1,164) (1,164)
4th Quarter (1,229) 186 (1,043)
--------- --------- ---------
$ 10,566 $ -0- $ 10,566
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Net loss as Net loss
originally (Restated)
reported Adjustment as adjusted
--------- --------- ---------
<S> <C> <C> <C>
1996 - 1st Quarter ($101,823) ($ 75,530) ($177,353)
2nd Quarter (142,381) (142,381)
3rd Quarter (354,708) 30,000 (324,708)
4th Quarter (132,955) (132,955)
--------- --------- ---------
($731,867) ($ 45,530) ($777,397)
========= ========= =========
</TABLE>
The Company filed an amended Form 10-Q for the quarter ended September
30, 1996 concurrent with its annual Form 10-K filing for the year ended
December 31, 1996.
F-31
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<RESTATED> Yes
<CIK> 0000352715
<NAME> BIOSONICS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE RATE> 1
<CASH> 260
<SECURITIES> 0
<RECEIVABLES> 10,196
<ALLOWANCES> 2,000
<INVENTORY> 64,271
<CURRENT-ASSETS> 150,749
<PP&E> 254,806
<DEPRECIATION> 239,799
<TOTAL-ASSETS> 174,187
<CURRENT-LIABILITIES> 2,300,776
<BONDS> 187,000
0
0
<COMMON> 28,787
<OTHER-SE> (2,126,589)
<TOTAL-LIABILITY-AND-EQUITY> 174,187
<SALES> 40,774
<TOTAL-REVENUES> 40,849
<CGS> 30,208
<TOTAL-COSTS> 788,038
<OTHER-EXPENSES> 636,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54,796
<INCOME-PRETAX> (777,397)
<INCOME-TAX> 0
<INCOME-CONTINUING> (777,397)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (777,397)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
