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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
REGISTRATION NO. 333-34211
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
FORM S-1
(INITIAL FILING MADE ON FORM SB-2)
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BIOSONICS, INC.
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(Name of small business issuer in its charter)
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Pennsylvania 3845 23-2161932
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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260 New York Drive
Fort Washington, Pennsylvania 19034
(215) 646-7100
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(Address and telephone number of principal executive offices)
260 New York Drive
Fort Washington, Pennsylvania 19034
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(Address of principal place of business or intended principal place of business)
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Jack Paller, Chairman
Biosonics, Inc.
260 New York Drive
Fort Washington, Pennsylvania 19034
(215) 646-7100
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(Name, address and telephone number
of agent for service)
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Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box.[X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ] ___________.
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If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ] ___________.
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ] ___________.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[ ]
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Registration Fee was paid with the initial filing of this registration
statement on August 22, 1997.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS
51,074,420 Shares
BIOSONICS, INC.
Common Stock
($.0001 par value)
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This Prospectus relates to 51,074,420 shares of Common Stock, $.0001
par value, of Biosonics, Inc. (the "Company" or "Biosonics") that were acquired
by certain shareholders of the Company (the "Selling Shareholders") in private
transactions. See "Selling Shareholders." Some or all of the shares of Common
Stock to which this Prospectus relates may be sold from time to time by the
Selling Shareholders, or by pledgees, donees, transferees or other successors in
interest to the Selling Shareholders, at public or private sale at prevailing
market prices, prices related to prevailing market prices, negotiated prices or
fixed prices (and, in the case of sales through brokers, upon payment of normal
brokerage commissions). The Company will not receive any proceeds from the sale
of the shares of Common Stock offered hereby by the Selling Shareholders.
The Common Stock of the Company is quoted on the OTC Bulletin Board of
the National Association of Securities Dealers, Inc. under the symbol "BISN."
The last bid price of the Common Stock on the OTC Bulletin Board on February 9,
1998 was $.06 per share.
THE SHARES OF COMMON STOCK OF THE COMPANY OFFERED HEREBY INVOLVE A HIGH
DEGREE OF RISK. SEE "RISK FACTORS."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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This Prospectus does not constitute an offer to sell securities in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
No person has been authorized by the Company to give any information or
to make any representations, other than as contained in this Prospectus, and,
if given or made, such information or representations must not be relied upon.
Neither delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has been no change in
the affairs of the Company since the date hereof.
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The date of this Prospectus is February 12, 1998.
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TABLE OF CONTENTS
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PAGE NO.
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Available Information...........................................................................2
Risk Factors....................................................................................3
The Company.....................................................................................9
Selling Shareholders............................................................................9
Plan of Distribution...........................................................................11
Use of Proceeds................................................................................11
Market for Company's Common Stock and Related Shareholder Matters..............................12
Dividend Policy................................................................................12
Capitalization.................................................................................13
Selected Financial Data........................................................................13
Management's Discussion and Analysis of Financial Condition and Results of Operations..........15
Business and Properties........................................................................20
Legal Proceedings..............................................................................28
Management.....................................................................................29
Certain Transactions...........................................................................29
Beneficial Ownership of the Company's Securities...............................................31
Description of the Company's Securities........................................................31
Shares Eligible for Future Sale................................................................32
Disclosure of Commission Position on Indemnification for Securities Act Liabilities............33
Legal Matters..................................................................................33
Experts........................................................................................33
Index to Financial Statements..................................................................34
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AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the offices of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549, as well as at the following regional offices of the
Commission: Seven World Trade Center, Suite 1300, New York, New York 10048; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, the Commission maintains a Web site that contains such
materials at http://www.sec.gov.
The Company has filed with the Commission in Washington, DC a
registration statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933 (the "Act") with respect to the securities covered by
this Prospectus. As permitted by the rules and regulations of the Commission,
this Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the securities offered hereby, reference is made to the Registration Statement,
including the exhibits filed or incorporated as a part thereof. Statements
contained herein concerning the provisions of documents filed with, or
incorporated by reference in, the Registration Statement as exhibits are
necessarily summaries of such documents and each such statement is qualified in
its entirety by reference to the copy of the applicable documents filed with the
Commission.
The Company will provide without charge to each person to whom a
Prospectus is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents incorporated by reference herein, other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference herein. Such requests should be addressed to Jack Paller, Chairman,
Biosonics, Inc., 260 New York Drive, Fort Washington, Pennsylvania 19034.
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RISK FACTORS
Prospective investors should carefully consider the following factors,
in addition to the other information in the Prospectus, before purchasing shares
of Common Stock offered by this Prospectus.
DEVELOPMENT STAGE COMPANY; SUBSTANTIAL LOSSES TO DATE; GOING CONCERN
EMPHASIS IN FINANCIAL STATEMENTS. The Company, which was incorporated in 1980,
is still in the development stage and has had no substantial sales and no
earnings from operations. The Company had a shareholders' deficiency of
$2,108,207 as of September 30, 1997, and its net loss from inception to
September 30, 1997 equaled $14,512,023. The Company had a net loss for the year
ended December 31, 1996 of $777,397 and a net loss for the three months and nine
months ended September 30, 1997 of $180,981 and $593,645, respectively. The
report of independent auditors on the Company's financial statements for the
year ended December 31, 1996 included herein contains an explanatory paragraph
concerning the Company's ability to continue as a going concern. The Company
expects to incur additional losses unless and until the development, marketing
and sale of its products is successful, as to which no assurance is given. The
likelihood of the success of the Company must be considered in the light of the
problems, expenses, difficulties, complications and delays it has encountered in
connection with the development of its technology and the competitive and
regulatory environment in which the Company operates, and there can be no
assurance that the Company will ever achieve profitability.
NEED FOR ADDITIONAL FUNDS TO CONTINUE OPERATIONS, PAY EXPENSES AND
DEVELOP PRODUCTS; NO ASSURANCE OF AVAILABILITY OF ADDITIONAL FUNDS. At September
30, 1997, the Company had a significant working capital deficiency. The Company
needs additional working capital to continue its operations and pay associated
expenses, including salary, rent and lease payments, to pay accrued expenses and
accounts payable, to develop, test, obtain approvals for and market its
products, including the manufacturing and marketing of the Cystotron(TM) and
Anotron(R) Incontinence Control Systems. The Company has no commitments for any
additional financing, and no assurance exists that any such financing can be
obtained on favorable terms, if at all. Any such financing may result in
dilution to purchasers of the shares that are offered by this Prospectus and may
entail restrictions on the Company's right to declare dividends or on the manner
in which the Company conducts its business. If any necessary financing is not
obtained, the shareholders of the Company may lose their entire investment.
POTENTIAL FUTURE DELAYS IN PRODUCT MARKETING DUE TO STRINGENT
GOVERNMENT REGULATION. The Company's products are subject to extensive
regulation by the U.S. Food and Drug Administration (the "FDA") and, in some
jurisdictions, by state and foreign governmental authorities. In particular, the
Company must obtain specific clearance or approval from the FDA before it can
market new products or certain modified products in the U.S. To date, the
Company has obtained FDA marketing clearance through the 510(k) premarket
notification process for its Anotron and Cystotron Incontinence Control Systems
and has received premarket approval ("PMA") for marketing of its Salitron(R)
System. The Company's ability to market such products is subject to the
availability of funds. Certain other products, modified existing products and
future product applications, however, will require approval or clearance by the
FDA. The testing on humans of the Company's devices, and the sale of such
devices, are subject to federal and possibly other regulation. Such regulatory
processes may be expected to result in delay and additional expense in the
future in connection with testing and sale of products for which the Company has
not received PMA or 510(k) premarket clearance, modifying existing products and
developing future product applications. There is no assurance that all required
clearances or approvals for sale of the Company's devices in the U.S. (other
than the Salitron System and the initial version of the Anotron and Cystotron
Incontinence Control Systems for which PMA approval and 510(k) clearance,
respectively, have already been obtained) will be obtained. The process of
obtaining 510(k) clearances or PMA can be time
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consuming and expensive, and there can be no assurance that all clearances or
approvals sought by the Company will be granted or that FDA review will not
involve delays that would adversely affect the marketing and sale of the
Company's products. The Company is required to adhere to applicable regulations
setting forth current Good Manufacturing Practices, which require that the
Company manufacture its products and maintain its records in a prescribed manner
with respect to manufacturing, testing and control activities. In addition, the
Company is required to comply with FDA requirements for labeling and promotion
of its products. Failure to comply with applicable federal, state or foreign
laws or regulations could subject the Company to enforcement action, including
product seizures, recalls, withdrawal of clearances or approvals, and civil and
criminal penalties, any one or more of which would have a material adverse
effect on the Company. Medical device laws and regulations with similar
substantive and enforcement provisions are also in effect in many of the foreign
countries where the Company may eventually do business. Federal, state and
foreign laws and regulations regarding the manufacture and sale of medical
devices are subject to future changes. No assurance can be given that such
changes will not have a material adverse effect on the Company. See "Business --
Government Regulation."
NO ASSURANCE OF SUCCESS OF DEVELOPMENT AND MARKETING OF PRODUCTS. There
is no assurance that any of the Company's devices will be successfully marketed.
None of the Company's systems, including the Salitron System and the Cystotron
and Anotron Incontinence Control Systems (or any other products subsequently
marketed by the Company) may be accepted or recommended by the medical
profession or gain market acceptance. The public may not be interested in the
products. There can be no assurance, therefore, that the Company will be able to
continue to successfully develop new products, enhance existing products,
manufacture these products in a commercially viable manner, obtain required
regulatory approvals or gain satisfactory market acceptance for such products.
REIMBURSEMENT FROM THIRD PARTY PAYORS; LACK OF MEDICARE REIMBURSEMENT
APPROVAL FOR SALITRON SYSTEM TO DATE. 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. Medicaid approvals have been obtained in Kentucky, New
Hampshire, New Jersey and Pennsylvania. Medicaid reimbursements, however, have
been minimal, resulting in only $2,500 in revenues during 1994, 1995 and 1996.
The Company seeks to obtain Medicaid approvals in those states in which sales
are made and will be generally denied Medicaid coverage unless it can show that
a resident of the state has a specific need for the product. Also, at least one
state has denied Medicaid coverage because the Company's product did not meet
the lowest cost item or service criteria. 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
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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 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.
RISK OF MATERIAL ADVERSE EFFECT OF ANY PRODUCT LIABILITY CLAIMS.
Although the Company carries product liability insurance, there is no assurance
that the Company will not be subjected to substantial claims based upon alleged
injurious effects from the use of its devices and that its product liability
insurance will be maintained, will be available on commercially reasonable rates
or in adequate amounts, if at all, or will be adequate to cover any claim made.
If the Company does not or cannot maintain its existing or comparable liability
insurance, its ability to market its products may be significantly impaired.
Product liability claims or product recalls in the future, regardless of their
ultimate outcome, could result in costly litigation and could have a material
adverse effect on the Company's business or reputation or on its ability to
attract and retain customers for its products. See "Business -- Product
Liability and Insurance."
PATENT RIGHTS; NO ASSURANCE OF PROTECTION OF COMPANY'S PROPRIETARY
TECHNOLOGY. Although the Company has obtained certain U.S. patents, there is no
assurance that the Company's patent rights will adequately protect the Company's
proprietary technology. See "Business -- Patents and Trademarks." The Company
also obtained foreign patents for its products that have lapsed due to a lack of
funds. Litigation, which could be costly and time-consuming, may be necessary to
protect the Company's patents, and the invalidation of patents owned by the
Company could permit increased competition with potential adverse effects on the
Company and its business prospects. Also, there can be no assurance that the
Company's products will not infringe patents or proprietary rights of others, or
that licensees that might be required for the Company's products would be
available on commercially reasonable terms, if at all. Furthermore, no assurance
exists that others may not develop or acquire know-how similar to that of the
Company. There has been substantial litigation regarding patent and other
intellectual property rights in the medical devices industry. Future litigation
may be necessary to enforce patent rights belonging to the Company, to protect
trade secrets or know-how owned by the Company or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of the Company and others. Any such
litigation could result in substantial cost to and diversion of effort by the
Company. Adverse determinations in any such litigation could subject the Company
to significant liabilities to third parties, could require the Company to seek
licenses from third parties and could prevent the Company from manufacturing,
selling or using certain of its products, any of which could have a material
adverse effect on the Company.
COMPETITION. The medical devices market is highly competitive.
Furthermore, the medical devices market is characterized by rapid product
development and technological changes. The Company believes that the Salitron
System, used to relieve symptoms associated with Xerostomia, or dry mouth, a
condition
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of Sjogren Syndrome, is the only product that stimulates salivary glands and
produces saliva through a natural response of the glands from
electrostimulation. The Company is aware of at least three companies that have
developed products similar to the Company's products used to treat incontinence,
including one company that has developed a product similar to the Cystotron
Incontinence Control System. The Company believes that its Cystotron
Incontinence Control System will compete effectively with other products due to
its portability and its personal use-at-home features. Also, the Company
believes that its diagnostic tools and procedures used in conjunction with the
Cystotron will enable the product to compete effectively in the market.
Biosonics is not aware of any device that would be in direct competition to 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 current or future competitors. There are other companies engaged in
research and development in the medical field, many of which are well
established with greater financial and marketing resources than the Company.
Some of these companies offer products that address the same or similar medical
problems as those addressed by certain of the Company's products. For example,
the Company's Cystotron Incontinence Control System competes with products that
are intended to maintain incontinence, such as diapers, menstrual pads, drugs
and insertable plugs, and other non-electrostimulation products such as
retraining devices, muscle exercisers and biofeedback devices. The Company's
Salitron System also competes with palliative products such as drugs, hard candy
and chewing gum, which may provide temporary relief of, but not treatment for,
dry mouth symptoms. One or more companies in the medical device industry might
develop products in the future similar to those being developed by the Company
and be in the position to market them more successfully than the Company.
EFFECTIVE CONTROL BY SIGNIFICANT SHAREHOLDERS. Jack Paller, Chairman
and Chief Executive Officer of the Company, and International Management &
Research Corporation ("IMRC") through its wholly-owned subsidiary IMRC Holdings,
Inc. ("IMRCH") own an aggregate of approximately 42% of the Company's
outstanding Common Stock. Mr. Paller is also the President, director and major
shareholder of IMRC. Accordingly, it is likely that IMRC and Mr. Paller would be
able to elect most if not all of the Board of Directors of the Company and have
the legal ability to cause the Company to declare or refrain from declaring
dividends, to increase the Company's authorized capital, to issue more capital
stock and generally to direct the affairs of the Company and control all matters
requiring approval by the shareholders of the Company. Also, 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, as the case
may be, is reflected in the Company's balance sheet and cash flow statements as
advances to or from affiliates. See the Company's Financial Statements and Notes
thereto.
DEPENDENCE UPON JACK PALLER. At present, the Company is entirely
dependent upon Jack Paller, the Chief Executive Officer and the sole officer and
director of the Company, and currently has two vacancies on its Board of
Directors. The Company has no employment agreement with Mr. Paller and does not
carry a key-man life insurance policy with respect to Mr. Paller, who is 69
years old. The Company's future operations will depend, in part, upon its
ability to attract and retain highly qualified scientific and management
personnel. No assurance exists that the Company will be successful in hiring or
retaining qualified scientific or management personnel on acceptable terms.
SHARES ELIGIBLE FOR FUTURE SALE. Of the 306,364,536 shares of the
Company's Common Stock outstanding as of September 30, 1997, approximately
133,183,886 shares, including shares eligible to be sold under Rule 144(k) under
the Act, are freely tradeable without restriction or further registration under
the Act, unless purchased by "affiliates" of the Company as that term is defined
in Rule 144 under the Act. The approximately 173,180,650 remaining shares are
restricted securities (the "Restricted Shares"). Of these Restricted Shares,
121,706,230 Restricted Shares are currently eligible to be sold publicly in
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accordance with Rule 144 under the Act. Of the remaining 51,474,420 Restricted
Shares, 51,074,420 Restricted Shares will become eligible for public sale
following the effectiveness of this Registration Statement, 100,000 Restricted
Shares became eligible for sale in September 1997, and 300,000 Restricted Shares
will become eligible for sale in March 1998. Unaffiliated shareholders may, as a
general rule, sell their unregistered Common Stock under Rule 144 without
limitation on volume after holding such stock for two years under Rule 144(k).
IMRCH and Mr. Paller currently own in the aggregate approximately 121,606,230
Restricted Shares that have not been registered under the Act. The Restricted
Shares held by IMRCH and Mr. Paller are subject to a securities restriction
agreement with the Pennsylvania Securities Commission (the "Securities
Restriction Agreement"), which prevents any sales of the Company's Common Stock
by either of them at a price of less than $.05 per share. All of the stock
subject to the Securities Restriction Agreement has been held for more than one
year and, therefore, except as restricted by the Securities Restriction
Agreement, may be sold without registration, subject to the volume, current
public information and other limitations of Rule 144 under the Act. The Company
is unable to estimate the number of Restricted Shares that will be sold under
Rule 144 since this will depend in part on the market price of the Common Stock,
the personal circumstances of the sellers and other factors. Sales of
substantial amounts of the currently unregistered shares could adversely affect
the market value of the Company's Common Stock. See "Shares Eligible for Future
Sale."
As of September 30, 1997, the Company had outstanding options to
purchase 5,000,000 shares of Common Stock at per share exercise price of $.01,
options to purchase 5,000,000 shares of Common Stock at a per share exercise
price of $.02 and an option to purchase 250,000 shares of Common Stock at a per
share exercise price of $.05. The shares subject to these options, if exercised,
would be restricted from resale unless registered under the Act or unless sold
under an exemption from the registration requirements of the Act, such as Rule
144.
RISK OF "PENNY STOCK" REGULATIONS. The Commission has adopted
regulations which define a "penny stock" to be an equity security that has a
market price (as defined in such regulations) of less than $5.00 per share,
subject to certain exceptions. Because the Company's Common Stock may be deemed
to be "penny stock" as defined by the Exchange Act and the rules and regulations
promulgated thereunder, the rules require the delivery by a broker-dealer prior
to the transaction involving "penny stock," unless exempt, of disclosures
required by the Commission relating to the "penny stock" market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, information on the limited market in "penny stock" and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealers' presumed control over the market. In addition, the
broker-dealer must obtain a written acknowledgment from the customer that such
disclosure information was provided and must retain such acknowledgment from the
customer for at least three years. Further, monthly statements must be sent to
the customer disclosing current price information for the "penny stock" held in
the account.
The above-described rules may materially adversely affect the liquidity
for the market of the Company's securities. Such rules may also affect the
ability of broker-dealers to sell the Company's securities and may impede the
ability of holders (including, specifically, purchasers under this prospectus)
of the Common Stock to sell such securities in the secondary market.
UNISSUED DEBENTURES. During the period from October 1989 to January
1990, 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 lack of funds
the $207,000 proceeds of the offering, except for $4,000, were not returned to
investors. The sale of the debentures and the issuance of the debentures were
not consummated because the total amount that
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was raised in the offering was not sufficient to justify the Company's having to
bear the restrictions under the debentures that would have been imposed upon the
Company in future capital raising efforts. In February 1990, the Company
informed each of the investors that it would seek to repay the amounts to them
as soon as funds became available. In 1990, investors who purchased an aggregate
of $16,000 of the debentures converted such amounts into 1,180,000 shares of
Common Stock in accordance with the terms of the debentures. As of September 30,
1997 the outstanding principal balance owed by the Company to approximately 50
investors in connection with such debentures is $187,000, of which amount
$100,000 is owed to one person, and the total interest owed is $169,728. While
the Company intends to repay the principal balance and interest thereon if funds
for such purpose become available, the Company is also considering the
possibility in the future of offering shares of Common Stock to such investors
in exchange for such debt, subject to compliance with state and federal
securities laws. There is no assurance that the Company will be able to
successfully complete such transaction. If the Company were to remain obligated
to pay cash to these investors to reimburse a substantial portion of such
amounts, such payments would have an adverse impact on the Company's cash flows,
its ability to apply resources to the marketing and production of its products
and its financial condition.
DEBT OWED TO IMRCH AND JACK PALLER. IMRCH and Mr. Paller have loaned
money to the Company to fund certain of the Company's operations from time to
time pursuant to promissory notes providing for interest at various rates. The
principal outstanding amount of the debt owed to Mr. Paller is $90,000, which
debt is secured by the Company's assets, including but not limited to the
Company's patents. In addition to the debt owed to Mr. Paller described above,
the Company is indebted to Mr. Paller for deferred salary in the aggregate
amount of $669,500 for the periods through December 31, 1996. See "Management --
Executive Compensation."
NO DIVIDENDS. The Company has not paid any cash dividends on its Common
Stock in the past and does not anticipate paying any dividends in the
foreseeable future. See "Dividend Policy."
LIMITED TRADING MARKET. The Company's Common Stock is currently quoted
on the OTC Bulletin Board and trades regularly in such market. There is no
assurance that an active trading market will continue to develop in the future
or be sustained, that the Company's Common Stock will be traded on a recognized
exchange or will continue to be traded on the OTC Bulletin Board or that
shareholders will be able to liquidate their investment in the shares at some
future time.
FORWARD-LOOKING STATEMENTS. All statements contained in this Prospectus
that are not historical facts, including but not limited to the Company's plans
for product development and marketing, are based on current expectations. These
statements are forward-looking (as defined in the U.S. Private Securities
Litigation Reform Act of 1995 and the Act) in nature and involve a number of
risks and uncertainties. Such statements can be identified by the use of
forward-looking terminology such as "may," "will," "should," "expect,"
"anticipate," "believe," "estimate" or "continue," or the negative thereof or
other variations thereon or comparable terminology. Actual results may vary
materially, as discussed in this "Risk Factors" section. The factors that could
cause actual results to vary materially include: The availability of capital to
finance the Company's operations on terms satisfactory to the Company; the
availability of clearances or approvals of the Company's products by federal,
state and foreign governmental authorities; the market acceptance of the
Company's products; the availability of reimbursement by third party payors,
including Medicare reimbursement; product liability claims; the availability of
protection of the Company's patents and future litigation relating to protection
of its patent, trade secrets and know-how; the Company's dependence on Jack
Paller; general business and economic conditions and competition from products
that address the same or similar medical problems as those addressed by the
Company's products; and other risks that may be described from time to time in
the reports that the Company will
-8-
<PAGE> 12
be required to file with the Commission. The Company cautions potential
investors not to place undue reliance on any such forward-looking statements.
THE COMPANY
The Company has developed electrodiagnostic/therapeutic devices to
manage and treat several intractable medical conditions, including nasal/sinus
congestion, urinary incontinence and impotence. It has also developed and
marketed a product for use in treating extreme dry mouth. The Company's
non-invasive, electrodiagnostic/therapeutic systems offer relief and improvement
to such distressing disorders without drug-related side effects or the ultimate
need for surgery. None of the shares of the Company's Common Stock covered by
this Prospectus are being sold by the Company.
The Company is a Pennsylvania corporation formed in November 1980, and
is still a development-stage company. Its principal executive offices are
located at 260 New York Drive, Fort Washington, Pennsylvania 19034, and its
telephone number is (215) 646-7100.
SELLING SHAREHOLDERS
The shares of the Company's Common Stock covered by this Prospectus
(the "Shares") are, or may be, offered by the Selling Shareholders. The names of
the Selling Shareholders are set forth in the table below. Except as otherwise
indicated, each Selling Shareholder has sole investment and voting power with
respect to the Shares listed below.
<TABLE>
<CAPTION>
COMMON STOCK TO
BE BENEFICIALLY
COMMON STOCK SHARES THAT MAY OWNED IF ALL SHARES
BENEFICIALLY OWNED BE OFFERED THAT MAY BE OFFERED
ON SEPTEMBER 30, 1997 HEREUNDER HEREUNDER ARE SOLD
-------------------------- --------------- ------------------------
NAME SHARES PERCENT SHARES PERCENT
- ---- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Rafael Amor 200,000 * 200,000 0 *
Kenneth Baskin 100,000 * 100,000 0 *
William Batoff, IRA 100,000 * 100,000 0 *
Robert and Lori Beckman 440,000 * 200,000 240,000 *
Jack Birnholz 500,000 * 500,000 0 *
David Brent 1,090,000 * 300,000 790,000 *
Sara Bruckel 2,500,000 * 2,500,000 0 *
Joseph Cali 3,300,000 1.1% 3,300,000 0 *
Edward Catton 400,000 * 400,000 0 *
Lauri Cornell 1,600,000 * 1,600,000 0 *
Robert Dorsey 200,000 * 200,000 0 *
Thomas Downs 360,000 * 250,000 0 *
Kurt Eisenschmid 500,000 * 500,000 0 *
Yaffan Eliach 300,000 * 300,000 0 *
Yotau Eliach 180,700 * 175,220 5,480 *
Joseph Emmanuele 1,000,000 * 1,000,000 0 *
Jonathan Ferguson 50,000 * 50,000 0 *
</TABLE>
-9-
<PAGE> 13
<TABLE>
<S> <C> <C> <C> <C> <C>
Norman Gaylis 1,275,500 * 1,250,000 25,500 *
James Gottesman 130,500 * 30,000 100,500 *
Alan & Lynn Gottleib 400,000 * 250,000 150,000 *
Richard S. Gottleib 200,000 * 200,000 0 *
Richard Habrukowich 1,411,111 * 1,398,222 12,889 *
Mark Haltzman 760,000 * 500,000 260,000 *
Elaine Harris 52,500 * 50,000 2,500 *
Steven and Wendy Hart 250,000 * 250,000 0 *
Edward Hoffman 628,600 * 628,600 0 *
Lori Hughett 40,000 * 40,000 0 *
William Kardas 250,000 * 250,000 0 *
Charles William Lackey 600,000 * 600,000 0 *
LBC Capital Resources 300,000 * 200,000 100,000 *
Edwin Lee 4,200,600 1.4% 3,940,600 260,000 *
Ezra Levy 305,667 * 200,000 105,667 *
Todd Liebesfeld 7,575,000 2.57% 6,075,000 1,500,000 *
Judy McCannon 210,000 * 210,000 0 *
David Murkenhirn 8,750,000 2.9% 7,250,000 1,500,000 *
Minna Mukamal 150,000 * 150,000 0 *
Daniel Murray 2,400,000 * 2,400,000 0 *
Robert Paller 2,986,018 * 1,695,000 1,291,018 *
Judy Podwil 200,000 * 200,000 0 *
James Quinn 120,000 * 100,000 20,000 *
SB Stocks USA Inc. 250,000 * 250,000 0 *
Edward & Carolyn
Schmauder 500,000 * 500,000 0 *
Benno Silberman 150,000 * 150,000 0 *
Ray Simonetti 1,040,000 * 1,040,000 0 *
Gilbert Smigrod 2,000,000 * 2,000,000 0 *
Jaffa Smigrod 2,000,000 * 2,000,000 0 *
Evelyn Strongin 250,000 * 100,000 150,000 *
Kenneth Strongin 350,000 * 350,000 0 *
Norman Talal 522,000 * 340,000 182,500 *
Anthony Vicendese 850,000 * 850,000 0 *
Thomas Villano 551,778 * 551,778 0 *
James Wayes 500,000 * 500,000 0 *
Arthur Weiss 2,500,000 * 1,200,000 1,300,000 *
Donald Whitney 1,200,110 * 1,200,000 110 *
Robert Wolstenholm 1,000,000 * 500,000 500,000 *
Total 59,680,584 19.5% 51,074,420 8,606,164 2.8%
</TABLE>
- ------------------
*Less than 1%.
None of the Selling Shareholders listed above have held any positions
with the Company or have had a material relationship with the Company within the
past three years, except that Mark Haltzman has
-10-
<PAGE> 14
provided legal services to the Company since 1993 and Norman Talal, Norman
Gaylis, Jonathon Ferguson, Elaine Harris and James Quinn have served on the
Company's Salitron Medical Advisory Board. See "Business - Salitron Medical
Advisory Board." Also, Robert Paller, who is an assistant secretary of the
Company, is the son of Jack Paller, the Chairman and CEO of the Company. Any
pledgees, donees or transferees of or other successors in interest to the
Selling Shareholders will be identified in a supplement to this Prospectus. If
the number of Shares transferred is material, the new holders of the Shares
transferred will also be identified in a post-effective amendment to the
Registration Statement.
PLAN OF DISTRIBUTION
The Company has been advised that the distribution of the Shares by the
Selling Shareholders, or by pledgees, donees or transferees of or other
successors in interest to the Selling Shareholders, may be effected from time to
time in one or more transactions (which may involve block transactions) on the
OTC Bulletin Board or such other exchange or market in which the Common Stock
may from time to time be trading, in negotiated transactions or in a combination
of any such transactions. Such transactions may be effected by the Selling
Shareholders at market prices prevailing at the time of sale, at prices related
to such prevailing market prices, at negotiated prices or at fixed prices. The
Selling Shareholders may effect such transactions by selling Shares to or
through broker-dealers, including purchases by a broker-dealer as principal and
resale by such broker-dealer for its account pursuant to this Prospectus. Such
broker-dealers will receive compensation in the form of discounts or commissions
from the Selling Shareholders and may receive commissions from the purchasers of
Shares for whom such broker-dealers may act as agents (which discounts or
commissions from the Selling Shareholders or such purchasers, if in excess of
those customary for the types of transactions involved, will be disclosed in a
supplemental prospectus).
Any broker-dealer that participates with the Selling Shareholders in
the distribution of Common Stock may be deemed to be an "underwriter" within the
meaning of the Act, and any commissions or discounts received by such
broker-dealer and any profit on the resale of Shares by such broker-dealer may
be deemed to be underwriting discounts and commissions under the Act.
The costs and expenses of the registration of the Shares will be paid
by the Company. These costs and expenses borne by the Company will include,
without limitation, all registration and filing fees, blue sky fees, printing
expenses and costs of special audits incident to or required by the registration
of the Shares.
As an alternative to the proposed plan of distribution described above,
the Selling Shareholders may also sell their respective shares under Rule 144
under the Securities Act, assuming compliance with all of the conditions of Rule
144 by such persons, including the applicable holding period.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
shares of Common Stock offered hereunder by the Selling Shareholders.
-11-
<PAGE> 15
MARKET FOR COMPANY'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
1997
----
First Quarter .075 .045
Second Quarter .13 .045
Third Quarter .115 .065
Fourth Quarter .08 .0475
1996
----
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 Company's Common Stock is quoted on the OTC Bulletin Board under
the symbol "BISN," and has been traded regularly in recent periods. The
quotations set forth above reflect inter-dealer prices without mark-up,
mark-down or commissions, and may not necessarily represent actual transactions
on the OTC Bulletin Board. The Company has not, since its inception, declared
any dividends.
As of September 30, 1997, there were approximately 5,700 record holders
of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does
not anticipate paying cash dividends in the foreseeable future. The declaration
and payment of future dividends is in the sole discretion of the Board of
Directors and their amount, if any, depends upon the earnings, financial
condition and capital needs of the Company and certain other factors, including
provisions of the Pennsylvania Business Corporation Law of 1988.
-12-
<PAGE> 16
CAPITALIZATION
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
------------------
<S> <C>
Shareholders Deficiency:
Common stock: authorized, 750,000,000
shares, $.0001 par value;
issued and outstanding
306,364,536 shares..................... $ 30,636
Preferred Stock: authorized,
10,000,000 shares, no shares
issued and outstanding................. --
Capital in excess of par value................... 12,468,180
Notes receivable from sale of stock.............. (95,000)
Deficit accumulated during
development stage...................... (14,512,023)
Total Shareholders' Deficit.............................. (2,108,207)
</TABLE>
SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial
statements of the Company. The financial statements for each of the three years
in the period ended December 31, 1996, as restated, have been audited by Morris
J. Cohen & Co., P.C., independent auditors. The balance sheet data as of
September 30, 1997 and the statement of loss data for the three months and nine
months ended September 30, 1997 and 1996 are derived from unaudited financial
statements. The unaudited statements include all adjustments, consisting of
normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the three-month and six-month periods are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1997. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's Financial Statements and Notes thereto, and other
financial information included elsewhere herein.
-13-
<PAGE> 17
<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 .................................. $ - $ - $ - $ - $ -
Miscellaneous income ............................... 75 - - - -
Gain on sale of equipment .......................... - - - 75 2,778
--------- --------- --------- --------- ---------
Total other income .............................. $ 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)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- ------------------
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
------------------ ------------------ ------------------ ------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales ....................................... $ 18,679 $ 34,911 $ 5,129 $ 5,786
Cost of sales ............................... 12,459 23,116 4,162 6,950
--------- --------- --------- ---------
Gross profit (loss) ......................... $ 6,220 $ 11,795 $ 967 $ (1,164)
Development stage expenses:
Research and development costs ..... $ 0 $ 0 $ 0 $ 0
Professional fees .................. 187,329 109,691 54,740 72,691
Other development stages
expenses ......................... 416,824 471,091 129,279 250,853
--------- --------- --------- ---------
Net development-stage expenses ..... $ 604,153 $ 580,782 $ 184,019 $ 323,544
Other income:
Investment income and other
income ........................... $ 4,288 $ 75 $ 2,071 --
Gain on sale of fixed assets ....... -- -- -- --
--------- --------- --------- ---------
Total other income ................. $ 4,288 $ 75 $ 2,071 --
Net loss ........................... ($593,645) ($568,912) ($180,981) ($324,708)
========= ========= ========= =========
Loss per common share .............. ($.00) ($.00) ($.00) ($.00)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
As of As of December 31,
September 30, ----------------------------------------------------------------------------
Balance Sheet Data: 1997 1996 1995 1994 1993 1992
------------- ----------------------------------------------------------------------------
(unaudited) (restated) (restated)
<S> <C> <C> <C> <C> <C> <C>
Working Capital (Deficit) ($2,127,142) ($2,150,027) ($2,709,883) ($2,477,004) ($2,059,248) ($1,723,651)
Total Assets 234,300 174,187 133,650 119,445 125,009 160,803
Total Liabilities 2,342,507 2,300,776 2,810,091 2,574,151 2,157,124 1,848,811
Shareholders' Deficit (2,108,207) (2,126,589) (2,676,441) (2,454,706) (2,032,115) (1,688,008)
</TABLE>
-14-
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 securities purchases through offerings. The Company's financial
problems have been long standing. The Company had promoted its Salitron System
during the late 1980's and early 1990's, including promotion of the product
through independent "dry mouth centers," with the goal of generating enough
revenues to assist it with developing marketing programs for the Company's other
products. The inability to obtain Medicare approval, however, made it difficult
for the Company to receive reimbursement from private insurance carriers and
Medicare, although some payments from private insurance carriers and Medicare
have been received. The difficulties in obtaining Medicare reimbursement existed
both prior and subsequent to HCFA's notice on May 23, 1994 of its intention to
disapprove the Company's application for Medicare reimbursement for the Salitron
System. See "Business and Properties -- Government Regulation." Of the Company's
$40,774 in sales revenues in 1996 and $62,506 in sales revenues in 1995, $5,450
and $6,250, respectively, were received from Medicare and $15,500 and $26,750,
respectively, were received from private insurance carriers during those years.
Also, revenues from Medicaid in 1996 were only $2,500, and no revenues from
Medicaid were received in 1995. Because most of the patients who could use the
Salitron System for relief of dry mouth condition are within the Medicare age
group, the Company has lost the interest of patients and their physicians in the
Salitron System, who have been unwilling to wait during the long process of
reimbursement, which in some cases can be as long as one year. Reimbursements
from Medicare are processed on a case-by-case basis in which the Company usually
is required to go through a lengthy appeals process. The Company's operations,
therefore, have been dependent upon sales of its securities, loans and advances,
and the Company has had to shift to a marketing strategy for the Cystotron
Incontinence Control System, as outlined below under "Plan of Operation for
1998." There can be no assurance, however, that this strategy will be successful
or that it can solve the Company's financial problems.
Although financial information with respect to 1997 is not available as
of the date of this Prospectus, the Company believes that its total product
sales revenue will be approximately 30% lower than in 1996. No Medicaid payments
were received in 1997 and only $1,250 in revenues were received from Medicare in
1997.
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 to increase the available Preferred 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
issued to IMRCH and 4,375,000 shares issued to Jack Paller pursuant to the
conversion of their respective shares of Series B Preferred Stock.
-15-
<PAGE> 19
In addition to the foregoing issuances and conversions, in July 1996
(i) the Company issued an aggregate of 300,000 shares of Common Stock 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 to the 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 an aggregate 15,368,820 shares of Common Stock
in August 1996 to approximately 25 individuals in conversion of loans. These
loans were originally made 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 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. As of September 30, 1997, the outstanding principal
balance of such debt was $187,000 and the accrued interest thereon was $169,728.
In February 1995, the Company granted to two non-employees options to
purchase an aggregate of 10,000,000 shares of Common Stock at an exercise price
of $.01 per share. In January and February 1996, the Company granted options to
purchase an aggregate of 6,000,000 shares of Common Stock to two non-employees
at a purchase price of $.02 per share. These options were issued for services
performed on the Company's behalf. In May 1996, the Company granted an option to
an employee to purchase 250,000 shares to an employee at an exercise price of
$.05 per share. In March 1997, the Company granted options to purchase 500,000
shares of Common Stock to an individual at an exercise price of $.05 per share
for services performed on the Company's behalf. Transfer of the shares issuable
upon exercise of the options is subject to the registration requirements of the
Act or an exemption from such requirements such as Rule 144 under the Act.
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 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. In June
-16-
<PAGE> 20
1997, the Company completed a private offering of 11,130,600 shares of Common
Stock at $.05 per share to a limited number of accredited investors for which
the Company received an aggregate of $556,530, of which $536,530 was received in
cash and $20,000 of which was received in the form of promissory notes. These
promissory notes were paid by the accredited investors during the first half of
July 1997. Also in June 1997, one person exercised an option to purchase 500,000
shares of Common Stock at a purchase price of $.05 per share, for which the
Company received a promissory note in the aggregate principal amount of $25,000
and for which such shares are being held as collateral, and one person was
issued 40,200 shares of Common Stock at $.05 per share in payment for services.
All shares issued during the quarters ended March 31, 1997 and June 30, 1997 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.
Except for 500,000 shares, all of the shares issued by the Company from
September 1996 through June 1997 are being registered for such persons as
Selling Shareholders under this Prospectus.
In 1996, the Company had net positive cash flow from financing
activities of $365,000. This consisted of $515,000 from the issuance of
preferred and common stock, $40,000 received as subscriptions for stock to be
issued in a private placement, $45,000 raised from the issuance of notes payable
which were subsequently repaid. The repayment of IMRC notes payable totaling
$235,000 offset these receipts. The Company had negative cash flow from
operating activities of $365,000.
In 1995, the Company had positive cash flow from financing activities
of $310,000, consisting of $300,000 received from the sale of preferred stock
and $10,000 from the issuance of a note, payable to IMRC. The Company expended
$31,261 for capital expenditures in connection with computer and telephone
equipment and had negative cash flow from operating activities of $278,739.
In 1994, the Company received $240,544 from the proceeds of notes
payable to IMRC. The Company had negative cash flows from operations of
$240,544.
PLAN OF OPERATION FOR 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. 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
six-month marketing study for the product. The purpose of the study is to
provide further data for physicians to assist them in deciding whether to
prescribe the Cystotron System for their patients. 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 in
connection with the possible updating of the technology associated with such
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 market. In connection with such strategy, the
Company attended an international conference 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 early in 1998. The
"manufacturing bid process" consists of the Company's generating a "request for
proposal" document, which sets forth the manufacturing, quality assurance and
other particulars regarding the Cystotron and the completion of turnkey
manufacturing, i.e., full assembly, packaging and labeling of the product. The
Company will also supply drawings for the bidder to review.
-17-
<PAGE> 21
The Company is in the process of completing the "request for proposal"
documentation. Once bid packages are distributed to potential bidders, each
prospective manufacturer of the Cystotron will be requested to bid on the
project by a specified date. The Company will review the bids based upon the
price, service and qualifications of the respective manufacturers and award the
project to the manufacturer selected by the Company as a result of this process.
The manufacturer will then have the responsibility to produce the product within
the outlined time frame, in accordance with the specifications provided by the
Company in compliance with applicable regulations. 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 the above-described
six-month study of the Cystotron product.
The Company's anticipated funding needs in connection with the
implementation of the marketing plan result from the following breakdown:
<TABLE>
<CAPTION>
Allocation Item Funds Required
--------------- --------------
<S> <C>
Operating costs $750,000
Manufacturing costs for 1,000 units (with accessories) 450,000
Finder's fees for approximately $2.0 million international 100,000
distributorship arrangement (does not include any
fees and expenses to be negotiated with distributor)
Cystotron Advisory Board fees 60,000
Marketing study with 500 women 1,000,000
Marketing and advertising costs for Cystotron 375,000
Seminar for physicians (post study) 250,000
----------
Total $2,985,000
</TABLE>
The above numbers are estimated based on certain compilations of
expenses. Operating costs are estimated based on certain staff, office space,
equipment and professional fees required for administrating the Company in 1998
in connection with its proposed plan of operation. Manufacturing costs are based
on estimated costs from manufacturers to produce the Cystotron System and
accessories, for services required for the marketing study and for sales in
1998. The finder's fee is the anticipated cost of paying the Company's
consultant to generate a $2 million arrangement for European distribution. These
costs do not include any additional expenses that may be incurred in connection
with exporting and acquiring the European CE Mark required for importing to
Europe, and the Company believes that these additional fees will be negotiated
as part of the distributor contract. The Cystotron Advisory Board fee is based
upon an estimate provided by the proposed head of such board. The $1.0 million
estimated for the marketing study includes fees to the physicians for their
study of patients as well as nursing staff, biostatisticians and laboratory
costs to be incurred to produce the results of the study. Marketing and
advertising costs for the Cystotron are estimated amounts derived in connection
with publication advertising and TV/cable/radio advertising, for introducing the
product to the public. The seminar/symposium for the physicians at the end of
the study will be the Company's method of verifying the product's efficacy to
the medical community, inasmuch as the Company's products must be prescribed by
a physician prior to sale. These estimated costs are for printing expenses,
location and media required for the symposium. The foregoing analysis was
prepared based on Management's estimates. There is no assurance that the
estimated expenses will not exceed these amounts or that the Company will be
able to successfully implement the marketing plan.
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
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<PAGE> 22
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 Company believes that the amount of revenue that could be generated
from sales of its existing inventory is approximately $375,000. The Company has
current inventory for the Salitron System, but none for the Cystotron System.
The Company believes that this existing inventory is not obsolete and that the
Company can sell and ship such units after testing the equipment. Therefore, the
bulk of the additional funds to arrive at the $3.0 million to continue its
operations and implement the manufacturing and marketing plan will need to be
derived from other sources, including the following: (i) private or public
offering of securities in early 1998; (ii) sales from off-shore marketing
arrangements of the Company's Cystotron Incontinence Control System to be
negotiated and (iii) other joint ventures or domestic distribution of product.
If the Company cannot obtain the approximately $3.0 million it believes
will be necessary to implement the proposed Cystotron marketing plan, the
Company will need to find other sources for funds, such as other joint ventures
or strategic partnerships or the sale of the rights, including patent rights, to
one or two of its products (e.g., the Salitron System).
Biosonics does not have any material commitments for capital
expenditures, although management is considering making capital expenditures
during 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.
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 has not been obtained.
See "Business - Third-Party Reimbursement."
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 nine and three months ended
September 30, 1997 of $604,153 and $184,019, respectively, were slightly higher
than those for the comparable nine-month period of 1996 of $580,782, but lower
than those for the comparable three-month period of 1996 of $323,544 due to
funds spent in the comparable 1996 period relating to the Company's
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<PAGE> 23
special shareholders meeting held in July 1996. 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 nine months ended September 30,
1997 of $187,329 were higher than the professional fees of $109,691 for the same
period in 1996 due to increased legal, accounting and consulting expenses
incurred in connection with the preparation and filing of the Company's
registration statement under the federal securities laws and its continued
efforts to gain approval of its application for Medicare reimbursement with
HCFA. The Company's professional fees for the three months ended September 30,
1997 of $54,740 were lower compared to professional fees for the three months
ended September 30, 1996 of $72,691 due to extra accounting and legal expenses
incurred in connection with the Company's special shareholders meeting in July
1996. The Company's sales for the nine and three months ended September 30, 1997
were $18,679 and $5,129, respectively, as compared to $34,911 and $5,786,
respectively, for the same periods of 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 is 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 judgments or
liens against the Company in the aggregate amount of $257,526.
The Company believes there will be no significant adverse impact from
inflation and changing prices on the Company's operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 will be effective for years ending
after December 15, 1997, and will require companies to report basic earnings per
share, as well as diluted earnings per share. As the Company has incurred
operating losses since its inception, the Company will not be required to
compute diluted earnings per share, and there will be no impact on the Company's
financial statements from this pronouncement.
INFORMATION ABOUT CAPITAL STRUCTURE
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 129, "Disclosure of Information about Capital Structure." SFAS No. 129 will
be effective for years ending after December 15, 1997, and will require certain
disclosures regarding companies' capital structures. As these disclosures were
already required for companies whose securities were publicly traded, this
pronouncement will have no effect on the Company's financial statements.
BUSINESS AND PROPERTIES
GENERAL
Biosonics was incorporated in Pennsylvania in November 1980 as a
subsidiary of 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,
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<PAGE> 24
nasal/sinus congestion, urinary/fecal incontinence and impotence. The Company's
non-evasive, 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.
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,
consisting of Salitron System units and accessories. The Company believes it can
sell and ship Salitron System units from this inventory after testing the
equipment, and it believes that such sales could generate approximately $375,000
in revenue, although there can be no assurance that the Company will be able to
effect such sales.
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. For a description of such plans, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Plan of Operation for 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 PMA approval application process in May 1988 for use in treating
patients with dry mouth secondary to Sjogrens Syndrome.
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<PAGE> 25
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 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 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
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, however, because 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).
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. 4,765,343) 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.
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<PAGE> 26
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 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.
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.
PATENTS AND TRADEMARKS
The Company has a number of patents and trademarks with respect to its
devices, although there is no assurance that such rights will be adequate to
protect the Company's proprietary technology. See"Risk Factors -- Patent Rights,
No Assurance of Protection of Company's Proprietary Technology." The following
is a description of the Company's patent rights in their relative order of
importance:
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<PAGE> 27
<TABLE>
<CAPTION>
PATENT NO. DESCRIPTION EXPIRATION DATE
---------- ----------- ---------------
<S> <C> <C>
4,519,400 Method for stimulating 2002
salivation used in connection
with Salitron System
4,637,405 Application for stimulating 2004
salivation used in connection
with the Salitron System
5,117,840 Sphincter Training System used 2009
in connection with the Anotron
and Cystotron Incontinence
Control System
4,765,343 Application for transferring 2005
electric energy to/from living
tissue used in connection with
the BIDDS Glove diagnostic
tool
4,542,753 Application and method for 2002
stimulating penile erectile
tissue used in connection with the
Company's MEGS device
4,663,102 Method of making a body 2004
member for use in genital
stimulation used in connection
with the Company's MEGS device
4,590,942 Application and Method for
inhibiting nasal secretions 2003
</TABLE>
The Company's registered trademarks are "Anotron," "Biosonics" and
"Salitron," which expire in 2007, 2008 and 2009, respectively.
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 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 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
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<PAGE> 28
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 to reasonably suggest that one of its
devices may have caused or 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
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<PAGE> 29
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.
As stated previously, on May 23, 1994, a proposed Notice was published
in the Federal Register by 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 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 DC law firm to explore with HCFA the extent of additional information
that HCFA will require. Approximately 35 private carriers have reimbursed
Biosonics for patients' use of the Salitron System and Medicaid reimbursement
approval has been obtained in four states. The Company seeks to obtain Medicaid
approvals in those states in which sales are made. Medicaid approvals have been
obtained in Kentucky, New Hampshire, New Jersey and Pennsylvania. Medicaid
reimbursements, however, have been minimal, resulting in only $2,500 in revenues
during 1994, 1995 and 1996. The Company seeks to obtain Medicaid approvals in
those states in which sales are made and will be generally denied Medicaid
coverage unless it can show that a resident of the state has a specific need for
the product. Also, at least one state has denied Medicaid coverage because the
Company's product did not meet the lowest cost item or service criteria. 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
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<PAGE> 30
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.
COMPETITION
The medical devices market is highly competitive. Furthermore, the
medical devices market is characterized by rapid product development and
technological changes. The Company believes that the Salitron System, used to
relieve symptoms associated with Xerostomia, or dry mouth, a condition of
Sjogren Syndrome, is the only product that stimulates salivary glands and
produces saliva through a natural response of the glands from
electrostimulation. The Company is aware of at least three companies that have
developed products similar to the Company's products used to treat incontinence,
including one company that has developed a product similar to the Cystotron
Incontinence Control System. The Company believes that its Cystotron
Incontinence Control System will compete effectively with other products due to
its portability and its personal use-at-home features. Also, the Company
believes that its diagnostic tools and procedures used in conjunction with the
Cystotron will enable the product to compete effectively in the market.
Biosonics is not aware of any device that would be in direct competition to 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 current or future competitors. There are other companies engaged in
research and development in the medical field, many of which are well
established with greater financial and marketing resources than the Company.
Some of these companies offer products that address the same or similar medical
problems as those addressed by certain of the Company's products. For example,
the Company's Cystotron Incontinence Control System competes with products that
are intended to maintain incontinence, such as diapers, menstrual pads, drugs
and insertable plugs, and other non-electrostimulation products such as
retraining devices, muscle exercisers and biofeedback devices. The Company's
Salitron System also competes with palliative products such as drugs, hard candy
and chewing gum, which may provide temporary relief of, but not treatment for,
dry mouth symptoms. One or more companies in the medical device industry might
develop products in the future similar to those being developed by the Company
and be in the position to market them more successfully than the Company.
EMPLOYEES
As of September 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 are part-time,
consisting of 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
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<PAGE> 31
to 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 Sjogrens
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 Sjogrens Syndrome Foundation, all of
the members of the Advisory Board are employed by or retired from academic
institutions or are practicing physicians. Each member has other commitments to
other entities that may limit his or her 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
Jonathan Ferguson, M.D. Rheumatologist, Private Practice
Elaine Harris Founder, Sjogrens Syndrome Foundation
James Quinn, D.D.S. Retired, Louisiana State University, School of
Dentistry
</TABLE>
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 $3,336 per month.
LEGAL PROCEEDINGS
-28-
<PAGE> 32
The Company is not a party to any material pending legal proceedings.
MANAGEMENT
SOLE OFFICER AND DIRECTOR
Jack Paller, age 69, is currently the sole officer and director of the
Company. Mr. Paller has been Treasurer and a director of the Company since its
inception in 1980. In January 1987, he became Chairman and Chief Executive
Officer of Biosonics. He also served as President of the Company from its
inception until January 1987, from October 1987 to December 1987 and since May
1990 to the present. Currently, Mr. Paller also serves as President and a
director of IMRCH and serves as President, Treasurer and director of IMRC, the
sole shareholder of IMRCH.
MANAGEMENT COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and -------------------
Principal Position Year Salary ($) (1) Bonus (1)
- ------------------ ---- -------------- ---------
<S> <C> <C> <C>
Jack Paller, 1996 $103,000 --
Chairman, President, 1995 103,000 --
Treasurer and Secretary 1994 103,000 --
</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
executive officer of Biosonics during those years. Mr. Paller's
compensation from the Company of $103,000 in 1997 was also deferred in
the same manner. 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.
Since 1990, Directors have received no fees for their services in that
capacity. See "Biosonics - Salitron Medical Advisory Board."
CERTAIN TRANSACTIONS
During 1989, Mr. Paller and his late spouse loaned $250,000 to
Biosonics at an interest rate of 1 1/2 % 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
-29-
<PAGE> 33
$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.
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 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.
-30-
<PAGE> 34
BENEFICIAL OWNERSHIP OF THE COMPANY'S SECURITIES
The following table lists the number of shares of the Company's Common
Stock beneficially owned as of September 30, 1997 by all persons known to the
Company to be beneficial owners of more than 5% of the Company's Common Stock
and by the sole director and officer of Biosonics and the percentage of all
outstanding shares held by such person:
<TABLE>
<CAPTION>
Number of Shares Percent
Beneficially Owned Beneficially Owned
------------------ ------------------
Name of Beneficial Owner
- ------------------------
<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 38.3%
106 Quigley Boulevard
New Castle, Delaware 19720
</TABLE>
- ----------------------
(1) IMRC Holdings, Inc. is a wholly owned subsidiary of IMRC. As of
September 30, 1997 Jack Paller owned 40.2% of the outstanding shares of
IMRC.
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.
DESCRIPTION OF THE COMPANY'S SECURITIES
COMMON STOCK OF THE COMPANY
The authorized capital stock consists of 750,000,000 shares of Common
Stock, $.0001 par value, and 10,000,000 shares of Preferred Stock, par value
$1.00 per share. As of September 30, 1997, 306,364,536 shares of Common Stock
held by approximately 5,700 holders of record were issued and outstanding and no
shares of Preferred Stock were issued and outstanding. The transfer agent for
the Company's Common Stock is American Stock Transfer & Trust Co., 99 Wall
Street, New York, New York.
Each outstanding share of Common Stock is entitled to one vote on all
matters submitted to a vote of shareholders of the Company, including the
election of directors. The holders of Common Stock do not have cumulative voting
rights or preemptive rights. Dividends may be paid to holders of Common Stock
when and if declared by the Board of Directors from funds legally available for
dividends. The Company has never paid cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future. See
"Dividend Policy."
Of the 10,000,000 shares of Preferred Stock authorized, (i) 1,000
shares of Series A Preferred Stock were authorized, all of which were previously
issued and subsequently converted into Common Stock, (ii) 10,000 shares of
Series B Preferred Stock were authorized, of which 3,250 shares were previously
issued and subsequently converted into Common Stock; and (iii) 10,000 shares of
Series D Preferred Stock were authorized, of which 8,050 shares were previously
issued and subsequently converted into Common Stock. Although authorized but
unissued shares of Series A, Series B, Series C and Series D remain designated
under the Company's Articles of Incorporation, no shares of Preferred Stock are
currently outstanding, and
-31-
<PAGE> 35
the Company has no current plans to issue more shares of Series A, Series B,
Series C and Series D Preferred Stock. The Board of Directors, however, has the
authority to issue 9,979,000 shares of the Company's Preferred Stock in one or
more series and to determine the designations, relative rights, preferences and
limitations of each series, without obtaining approval of the Company's
shareholders.
The issuance of Preferred Stock, while providing flexibility in
connection with possible financings, acquisitions and other corporate purposes,
could, among other things, adversely affect the voting power of the holders of
Common Stock and, under certain circumstances, make it more difficult for a
third party to gain control of the Company, deny shareholders the receipt of a
premium on their shares of capital stock and have a dilutive effect on the
market price thereof. Management of the Company is not aware of any such
threatened transactions to obtain control of the Company.
OUTSTANDING STOCK OPTIONS
As of September 30, 1997, the Company had outstanding (i) options to
purchase an aggregate of 5,000,000 shares of Common Stock at an exercise price
of $.01 per share granted to one non-employee, (ii) options to purchase an
aggregate of 5,000,000 shares of Common Stock at an exercise price of $.02 per
share granted to two non-employees and (iii) an option to purchase 250,000
shares of Common Stock at a purchase price of $.05 per share granted to one
employee. The transfer of the shares issuable upon exercise of the options will
be subject to the registration requirements of the Act or an exemption from such
requirements such as Rule 144 under the Act.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 306,364,536 shares of the Company's Common Stock outstanding as
of September 30, 1997, approximately 133,183,886 shares, including shares
eligible to be sold under Rule 144(k) under the Act, are freely tradeable
without restriction or further registration under the Act, unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the Act.
The approximately 173,180,650 remaining shares are Restricted Shares. Of these
Restricted Shares, 121,706,230 Restricted Shares are currently eligible to be
sold publicly in accordance with Rule 144 under the Act. Of the remaining
51,474,420 Restricted Shares, 51,074,420 Restricted Shares will become eligible
for public sale following the effectiveness of this Registration Statement,
100,000 Restricted Shares became eligible for sale in September 1997, and
300,000 Restricted Shares will become eligible for sale in March 1998.
Unaffiliated shareholders may, as a general rule, sell their unregistered Common
Stock under Rule 144 without limitation on volume after holding such stock for
two years under Rule 144(k). IMRCH and Mr. Paller currently own in the aggregate
approximately 121,606,230 Restricted Shares that have not been registered under
the Act. The Restricted Shares held by IMRCH and Mr. Paller are subject to a
Securities Restriction Agreement with the Pennsylvania Securities Commission,
which prevents any sales of the Company's Common Stock by either of them at a
price of less than $.05 per share. All of the stock subject to the Securities
Restriction Agreement has been held for more than one year and, therefore,
except as restricted by the Securities Restriction Agreement, may be sold
without registration, subject to the volume, current public information and
other limitations of Rule 144 under the Act. The Company is unable to estimate
the number of Restricted Shares that will be sold under Rule 144 since this will
depend in part on the market price of the Common Stock, the personal
circumstances of the sellers and other factors. Sales of substantial amounts of
the currently unregistered shares could adversely affect the market value of the
Company's Common Stock.
As of September 30, 1997, the Company had outstanding options to
purchase 5,000,000 shares of Common Stock at per share exercise price of $.01,
options to purchase 5,000,000 shares of Common Stock at a per share exercise
price of $.02 and an option to purchase 250,000 shares of Common Stock
-32-
<PAGE> 36
at a per share exercise price of $.05. The shares subject to these options, if
exercised, would be restricted from resale unless registered under the Act or
unless sold under an exemption from the registration requirements of the Act,
such as Rule 144.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
As permitted by the provisions for indemnification of directors and
officers in the Pennsylvania Business Corporation Law, the Company's Bylaws
provide for indemnification of directors and officers for all expenses,
liability and loss (including attorneys' fees, judgments, fines, taxes,
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such persons in legal proceedings unless the act or failure to act
giving rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness. Such right to indemnification
includes the right to have expenses incurred by an indemnitee is defending any
proceeding paid by the Company in advance of final disposition thereof, provided
that the indemnitee must provide an understanding to repay all amounts advanced
without interest if it is ultimately determined that such person is not entitled
to indemnification under the Bylaws or otherwise. The Bylaws of the Company also
avail directors of the Pennsylvania law limiting directors' liability for money
damages except in those cases where they have breached their fiduciary duty and
such breach constitutes self-dealing, willful misconduct or recklessness.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the above-described provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
LEGAL MATTERS
The validity of the issuance of the Shares to be sold by the Selling
Shareholders hereunder has been passed upon for the Company by Mark S. Haltzman
& Associates. Mark S. Haltzman & Associates has performed legal services for the
Company since 1993. In 1997, Mr. Haltzman was granted an option to purchase
500,000 shares of Common Stock at a purchase price of $.05 per share. This
option has been exercised and the shares purchased under the option are
registered for sale under this Prospectus.
EXPERTS
The balance sheets of the Company as of December 31, 1996 and 1995 and
the related statements of operations, changes in shareholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31, 1996
appearing in this Prospectus and in the Registration Statement have been audited
by Morris J. Cohen & Co., P.C., independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
-33-
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
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
Balance Sheets at September 30, 1997 (Unaudited) and
December 31, 1996 F-32
Statement of Loss for the Three and Nine Months Ended
September 30, 1997 and 1996 and the Period from November 13,
1980 (Inception) to September 30, 1997
(unaudited) F-33
Statements of Deficit Accumulated for the Nine Months Ended
September 30, 1997 and 1996 and the Period from November 13,
1980 (Inception) to September 30, 1997
(unaudited) F-34
Statements of Cash Flows for the Nine Months ended September
30, 1997 and 1996 and for the Period from November 13, 1980
(Inception) to September 30, 1997
(unaudited) F-35 & F-36
Statements of Changes in Shareholders' Equity
(Deficiency)-Paid-in-Capital November 30, 1980 (Inception) to
September 30, 1997
(unaudited) F-37 through F-40
Notes to Unaudited Financial Statements F-41
</TABLE>
-34-
<PAGE> 38
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 and for
the period from November 13, 1980 (Inception) to 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. The amounts shown in the statements of
operations and cash flows under the caption "Period from November 13, 1980
(Inception) to December 31, 1996" include the period from November 13, 1980
(Inception) to December 31, 1985 which we did not audit. Those financial
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts for the period
November 13, 1980 (Inception) to December 31, 1985, is based solely on the
reports of the other auditors.
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 and the reports of the other auditors provide a
reasonable basis for our opinion.
F-1
<PAGE> 39
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 and for the
period from November 13, 1980 (Inception) to December 31, 1996 in conformity
with generally accepted accounting principles.
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.
/s/ Morris J. Cohen & Co., P.C.
MORRIS J. COHEN & CO., P.C.
Philadelphia, Pennsylvania
February 21, 1997
(except for Notes 3 and 10, as to which
the date is July 18, 1997)
F-2
<PAGE> 40
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> 41
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> 42
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> 43
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> 44
<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> 45
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> 46
<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> 47
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> 48
<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> 49
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> 50
<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 $1,000 99,000 100,000 (3)
(1,372,913) (1,372,913)
- ----- ------ ----------- ----------- ----------
1,000 1,000 9,338,337 (8,821,212) 538,936
</TABLE>
F-9
<PAGE> 51
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(RESTATED)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1996
<TABLE>
<CAPTION>
Common Stock
---------------------
Shares Amount
----------- ------
<S> <C> <C>
Balance forward December 31, 1988 208,114,936 20,811
Common stock issued March 1989 and
May 1989 ($.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> 52
<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> 53
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> 54
<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> 55
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> 56
<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> 57
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> 58
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> 59
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> 60
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> 61
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> 62
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> 63
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> 64
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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> 71
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> 72
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> 73
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> 74
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> 75
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> 76
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> 77
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 and 1995 quarterly results
(unaudited) as originally reported in the Company's Form 10-Q filings
adjusted for reclassifications of costs of goods sold, previously
unrecorded non-employee stock options in the quarters ended March 31,
1996 and 1995, 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
========= ========= =========
Net loss as Net loss
originally (Restated)
reported Adjustment as adjusted
------------ ----------- ----------
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)
========= ========= =========
Net loss as Net loss
originally (Restated)
reported Adjustment as adjusted
------------ ----------- ---------
1995 - 1st Quarter $(156,703) $( 87,750) $(244,453)
2nd Quarter (158,632) (158,632)
3rd Quarter (114,027) (114,027)
4th Quarter (92,373) (92,373)
--------- --------- ---------
$(521,735) $( 87,750) $(609,485)
========= ========= =========
</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
<PAGE> 78
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------
ASSETS
<TABLE>
<CAPTION>
Unaudited DECEMBER
SEPTEMBER 31, 1996
30, 1997
------------ ------------
<S> <C> <C>
Current Assets
Cash (including interest bearing deposits of $10 in 1997 $ 260 $ 260
and 1996)
Accounts receivable (net of allowance for doubtful 5,827 8,196
accounts of $2,000 in 1997 and 1996)
Advances from IMRC 125,012 77,997
Loan Receivables 15,000 --
Inventory 62,695 64,271
Prepaid expenses and other current assets 6,571 25
------------ ------------
Total current assets 215,365 150,749
Equipment, furniture and leaseholds, net of accumulated
depreciation 10,504 15,007
Deposits 8,431 8,431
------------ ------------
Total assets $ 234,300 $ 174,187
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Notes payable, officer and affiliate $ 99,000 $ 115,000
Notes payable, other 128,000 173,000
Accrued payroll, officer 746,750 669,500
Accrued interest, officer and affiliate 64,130 55,905
Accrued interest, other 192,129 173,131
Accounts payable and other accrued expenses 863,048 824,790
Advances from affiliates 62,450 62,450
Payments received from unissued debentures 187,000 187,000
Proceeds from unissued securities 0 40,000
------------ ------------
Total current Liabilities 2,342,507 2,300,776
------------ ------------
Shareholders' deficit
Common stock - authorized 750,000,000 shares at .0001 30,636 28,787
par value; issued and outstanding 306,364,536 and
287,863,936 shares at September 30, 1997 and
December 31, 1996 respectively
Capital in excess of par value 12,468,180 11,763,002
Notes receivable from sale of stock (95,000) --
Deficit accumulated during development stage (14,512,023) (13,918,378)
------------ ------------
Total shareholders' deficit (2,108,207) (2,126,589)
------------ ------------
Total liabilities and shareholders, deficit $ 234,300 $ 174,187
============ ============
</TABLE>
- -------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-32
<PAGE> 79
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE
STATEMENTS OF LOSS (UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED THREE MONTHS ENDED 11/13/80 (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 18,679 $ 34,911 $ 5,129 $ 5,786 $ 856,056 $ 831,514
Cost of sales 12,459 23,116 4,162 6,950 557,444 537,893
--------- --------- --------- --------- ------------ ------------
Gross Profit 6,220 11,795 967 (1,164) 298,612 293,621
--------- --------- --------- --------- ------------ ------------
Development stage expenses
Research and development costs 0 0 0 0 4,166,054 4,144,553
Professional fees 187,329 109,691 54,740 72,691 2,939,816 2,732,128
Other development stage expenses 416,824 471,091 129,279 250,853 8,582,383 7,912,411
--------- --------- --------- --------- ------------ ------------
Total development stage expenses 604,153 580,782 184,019 323,544 15,688,253 14,789,092
Less: Revenue from cost recovery
program -- -- -- -- 118,085 118,082
--------- --------- --------- --------- ------------ ------------
Net development stage expenses 604,153 580,782 184,019 323,544 15,570,168 14,671,010
Other income
Investment and other income 4,288 75 2,071 -- 731,913 727,626
Management fees 20,000 20,000
Gain on sale of equipment -- -- -- -- 7,620 7,620
--------- --------- --------- --------- ------------ ------------
Total other income 4,288 75 2,071 -- 759,533 755,246
--------- --------- --------- --------- ------------ ------------
Net loss $(593,645) $(568,912) $(180,981) $(324,708) $(14,512,023) $(13,622,143)
========= ========= ========= ========= ============ ============
Loss per common share ($ .00) ($ .00) ($ .00) ($ .00) ($ .05) ($ .06)
========= ========= ========= ========= ============ ============
</TABLE>
- -------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-33
<PAGE> 80
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED 11/13/80 (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning balance $(13,918,378) $(13,053,231) $ -- $ --
Net Loss (593,645) (568,912) (14,512,023) (13,622,143)
------------ ------------ ------------ ------------
Ending Balance $(14,512,023) $(13,622,143) $(14,512,023) $(13,622,143)
============ ============ ============ ============
</TABLE>
- -------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-34
<PAGE> 81
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED 11/13/80 (INCEPTION) TO
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows used in operating activities
Net loss $(593,645) $(568,912) $(14,512,023) $(13,622,143)
--------- --------- ------------ ------------
Adjustments to reconcile net loss to net cash used
Depreciation and amortization 4,503 4,005 383,190 372,688
Increase (decrease) in allowance for doubtful accounts -- -- 2,000 6,000
Increase (decrease) in reserve for inventory obsolescence -- -- 27,000 40,000
Loss on lease abandonment -- -- 19,550 19,550
Gain on sale of fixed assets -- -- (7,620) (7,620)
Common stock issued for services 29,500 167,750 573,459 625,959
Common stock options issued for services 14,398 -- 177,678 --
Common stock issued for interest 10,000 -- 10,000 --
Common stock issued for product rights -- -- 12,501 12,501
Change in
Accounts receivable 2,369 15,331 (7,827) (11,682)
Inventory 1,576 5,004 (89,695) (105,080)
Prepaid expenses and other current assets (6,546) 3,998 (6,571) (4,853)
Accrued payroll, officer 77,250 77,250 746,750 643,750
Accrued interest, officer and affiliates 8,225 24,024 138,333 127,630
Accrued interest, other 18,998 18,976 192,129 166,814
Accounts payable and accrued expenses 38,258 (21,297) 931,049 895,835
Advances from (to) affiliates (47,015) 3,871 60,759 28,442
--------- --------- ------------ ------------
Total adjustments 151,516 298,912 3,162,685 2,809,934
--------- --------- ------------ ------------
Net cash used in operating activities (442,129) (270,000) (11,349,338) (10,812,209)
--------- --------- ------------ ------------
Cash flows from investing activities
Sale of fixed assets $ -- $ -- $ 10,825 $ 10,825
Capital expenditures -- -- (363,305) (363,305)
Issuance of note receivable (15,000) -- (45,000) (30,000)
(Increase) decrease in deposits -- -- (8,431) (8,431)
Decrease in note receivable -- -- 30,000 30,000
Decrease in capitalized patents -- -- (45,690) (45,690)
--------- --------- ------------ ------------
Net cash used in investing activities (15,000) -- (421,601) (406,601)
--------- --------- ------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-35
<PAGE> 82
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED 11/13/80 (INCEPTION) TO
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from financing activities
Proceeds for bonds unissued $ -- $ -- $ 190,000 $ 190,000
Repayments for bonds unissued -- -- (3,000) (3,000)
Proceeds for common stock unissued -- -- 311,000 271,000
Principal payments of note payable (61,000) (235,000) (368,000) (307,000)
Proceeds from issuance of note payable -- -- 834,444 789,444
Increase in capitalized organization costs -- -- (7,453) (7,453)
Proceeds from issuance of preferred stock -- 505,000 1,105,000 1,105,000
Proceeds from issuance of common stock 556,530 -- 9,709,208 9,181,079
--------- ----------- ------------ ------------
Net cash provided by financing activities 495,530 270,000 11,771,199 11,219,070
--------- ----------- ------------ ------------
Net increase decrease in cash and cash equivalents -- -- 260 260
Cash and cash equivalents, beginning 260 260 -- --
--------- ----------- ------------ ------------
Cash and cash equivalents, ending $ 260 $ 260 $ 260 $ 260
========= =========== ============ ============
Schedule of noncash financing transactions:
Issuance of common stock for non cash consideration:
Common stock unissued $ -- $ 271,000 $ 271,000 $ 271,000
From Loan Receivable 95,000 -- 95,000 --
Repayment of notes payable to IMRC -- 182,444 182,444 182,444
Repayment of accrued expenses to IMRC 1,600 197,524 197,524 197,524
Employee compensation, consulting services 12,000 82,750 536,959 536,959
Services provided in exchange for stock options 17,500 75,530 163,280 163,280
Interest Expense 10,000 3,000 3,000 3,000
Loan origination fee -- -- 4,000 4,000
Acquisition of product rights -- -- 12,501 12,501
--------- ----------- ------------ ------------
$ 136,100 $ 812,248 $ 1,465,708 $ 1,370,708
========= =========== ============ ============
</TABLE>
- ------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-36
<PAGE> 83
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY - PAID-IN CAPITAL
NOVEMBER 13, 1980 (INCEPTION) TO SEPTEMBER 30, 1997
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DATE STOCK PRICE PER
ISSUED NUMBER OF SHARES SHARE AMOUNT RECEIVED NOTES
------ ---------------- ----- --------------- -----
<S> <C> <C> <C> <C>
1/13/81 150,000,000 $ .0001 $ 15,001 (A)
1/31/81 4,400,000 .025 110,000 (B)
1981 400,000 .025 10,000 (C)
1981 20,000,000 .05 1,000,000 (B)
1982 20,000 .40 8,000 (C)
1982 97,500 .20 19,500 (C)
1982 1,000,000 .06 60,100 (D)
1983 52,500 .20 10,500 (C)
1983 75,000 .305 22,875 (E)
1983 25,000 .235 5,875 (E)
1983 20,000 .50 10,000 (C)
12/29/83 7,300,000 .50 3,650,000 (F)
1984 390 1.00 390 (G)
1984 5,948 .50 2,975 (G)
1984 1,000 .375 375 (C)
1984 72,500 .25 18,125 (C)
1984 2,000 .375 750 (H)
1984 4,000 .25 1,000 (C)
1984 350,000 .20 70,000 (C)
1985 26,500 .281 7,453 (C)
1985 20,000 .25 5,000 (H)
1985 500 .50 250 (G)
1985 5,000 .344 1,719 (C)
1985 50 1.00 50 (G)
1985 2,000 .375 750 (H)
1985 7,500 .156 1,172 (C)
1986 6,882 .50 3,472 (G)
1986 85,000 .1875 15,938 (H)
1986 11,650 .281 3,276 (H)
1986 100,000 .219 21,875 (H)
1986 10,665,000 .181 1,929,737 (I)
1986 202,000 .156 31,562 (H)
1986 70,000 .313 21,875 (H)
1986 134,855 .20 26,939 (H)
1987 7,613,551 .20 1,522,710 (G)
1987 476,110 .295 140,478 (H)
1987 7,000 .159 1,113 (B)
1987 15,000 .312 4,687 (C)
1987 240,000 .20 48,000 (B)
1987 100,000 .218 21,875 (C)
1988 125,000 .25 31,250 (C)
1988 2,500 .218 547 (H)
1988 10,000 .20 2,000 (G)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-37
<PAGE> 84
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY - PAID-IN CAPITAL
NOVEMBER 13, 1980 (INCEPTION) TO SEPTEMBER 30, 1997
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DATE STOCK PRICE PER
ISSUED NUMBER OF SHARES SHARE AMOUNT RECEIVED NOTES
------ ---------------- ----- --------------- -----
<S> <C> <C> <C> <C>
1988 100,000 .25 25,000 (B)
1988 4,227,000 .20 845,400 (B)
1988 25,000 .156 3,906 (C)
1988 11,000 .013 143 (H)
1989 400,000 .080 32,000 (B)
1989 3,000 .0938 282 (H)
1989 100,000 .080 8,000 (B)
1990 25,000 .010 250 (H)
1990 20,311,000 .010 203,110 (B)
1990 10,500,000 .010 105,000 (B)
1991 1,100,000 .010 11,000 (B)
1991 100,000 .010 1,000 (H)
1991 48,000 .0625 3,000 (J)
1991 32,000 .0625 2,000 (J)
1991 1,100,000 .010 11,000 (J)
1991 1,100,000 .010 11,000 (B)
1991 400,000 .010 4,000 (C)
1995 -- 87,750 (Q)
1996 1,250,000 .08 100,000 (K)
1996 11,375,000 .0286 325,000 (K)
1996 16,100,000 .05 805,000 (K)
1996 1,300,000 .01 13,000 (L)
1996 12,900,000 .02 258,000 (L)
1996 300,000 .03 9,000 (M)
1996 280,000 .05 14,000 (M)
1996 400,000 .08 32,000 (M)
1996 100,000 .065 6,500 (M)
1996 250,000 .085 21,250 (M)
1996 (15,368,820) -0- (N)
1996 420,000 0.0238 10,000 (L)
1996 11,150,000 0.02 223,000 (L)
1996 428,600 .035 15,000 (L)
1996 250,000 .04 10,000 (L)
1996 1,075,220 .05 53,761 (L)
1996 350,000 .0258 9,032 (J)
1996 1,695,000 .0345 59,175 (J)
1996 75,000 0.04 3,000 (O)
1996 200,000 0.05 10,000 (B)
1996 -- 75,530 (Q)
1997 550,000 0.05 27,500 (M)
1997 200,000 0.05 10,000 (O)
</TABLE>
- -------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-38
<PAGE> 85
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY - PAID-IN CAPITAL
NOVEMBER 13, 1980 (INCEPTION) TO SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
DATE STOCK PRICE PER
ISSUED NUMBER OF SHARES SHARE AMOUNT RECEIVED NOTES
------ ---------------- ----- --------------- -----
<S> <C> <C> <C> <C>
1997 5,000,000 0.01 50,000 (P)
1997 1,000,000 0.02 20,000 (P)
1997 - 14,398 (Q)
1997 11,130,600 0.05 556,530 (R)
1997 500,000 0.05 25,000 (P)
1997 40,000 0.05 2,000 (M)
1997 80,000 0.02 1,600 (L)
TOTAL SHARES - COMMON STOCK 306,364,536
=============
TOTAL PAID-IN CAPITAL $ 12,972,311
LESS: Notes Receivable for Stock Purchase 95,000
LESS: Offering Expenses 473,495
-------------
NET PAID-IN CAPITAL - COMMON STOCK $ 12,403,816
=============
</TABLE>
- -------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-39
<PAGE> 86
BIOSONICS, INC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF SHAREHOLDERS' EQUITY - PAID-IN CAPITAL
NOVEMBER 13, 1980 (INCEPTION) TO SEPTEMBER 30, 1997
(UNAUDITED)
- -------------------------------------------------------------------------------
NOTES
(A) $1 additional was paid on stock certificate #3.
(B) Cash Purchases.
(C) Represents stock issued in consideration for services rendered. The value
assigned was based on the fair market value of the stock on the date the
transaction was authorized.
(D) 1,000,000 common stock warrants were issued to the underwriter, Monarch
Funding Corporation, at par value ($.0001). On November 15, 1982, these
warrants were exercised at $.06 per share.
(E) Represents stock issued in consideration for services rendered and $7,500
cash. The value assigned was based on the fair market value of the stock
on the date the transaction was authorized.
(F) Stock issued as part of unit offering. Each unit consisted of 2 shares
common stock, 2 Series "A" warrants and 1 Series "B" warrant. No separate
value was assigned to the warrants.
(G) Issued pursuant to the exercise of warrants described in (F).
(H) Issued pursuant to the employee incentive stock bonus plan.
(I) Issued as part of an offering completed March 26, 1986 for cash and
redemption of warrants described in (F).
(J) Liabilities converted to common stock.
(K) Preferred Stock transferred to Common Stock as per agreement.
(L) Issued stock for monies received during time when common stock was not
able to be issued.
(M) Issued stock as payment for services rendered.
(N) Shares contributed by IMRCH.
(O) Issued stock as payment for services rendered.
(P) Issued pursuant to exercising stock purchase option.
(Q) Stock Options granted.
(R) Issued pursuant to a private offering.
- -------------------------------------------------------------------------------
The accompanying note is an integral part of these financial statements.
F-40
<PAGE> 87
BIOSONICS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTE TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
NOTE 1 The unaudited financial statements presented herein have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. These statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's Form 10-K annual report for the year ended
December 31, 1996. In the opinion of management, these financial
statements include all adjustments, consisting only of normal
recurring adjustments, necessary to summarize fairly the Company's
financial position and results of operations. The results of
operations for the nine-month period ended September 30, 1997 may
not be indicative of the results that may be expected for the year
ending December 31, 1997.
- -------------------------------------------------------------------------------
F-41
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the provisions for indemnification of directors and
officers in the Pennsylvania Business Corporation Law, the Company's Bylaws
provide for indemnification of directors and officers for all expenses,
liability and loss (including attorneys' fees, judgments, fines, taxes,
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such persons in legal proceedings unless the act or failure to act
giving rise to the claim for indemnification is determined by a court to have
constituted willful misconduct or recklessness. Such right to indemnification
includes the right to have expenses incurred by an indemnitee is defending any
proceeding paid by the Company in advance of final disposition thereof, provided
that the indemnitee must provide an understanding to repay all amounts advanced
without interest if it is ultimately determined that such person is not entitled
to indemnification under the Bylaws or otherwise. The Bylaws of the Company also
avail directors of the Pennsylvania law limiting directors' liability for money
damages except in those cases where they have breached their fiduciary duty and
such breach constitutes self-dealing, willful misconduct or recklessness.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the above-described provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration fee......................... $ 1,393
Blue sky fees............................ $ 4,000*
Legal fees and expenses.................. $ 22,200*
Accountants' fees and expenses........... $ 6,000*
Miscellaneous............................ $ 407*
======
Total.................. $ 34,000*
======
</TABLE>
- ---------------
*Estimated.
The Company will bear all of the foregoing expenses.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
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 to increase the available Preferred 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.
II-1
<PAGE> 89
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
issued 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 shares of Common Stock 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 to the 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 an aggregate 15,368,820 shares of Common Stock
in August 1996 to approximately 25 individuals in conversion of loans. These
loans were originally made 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 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 February 1995, the Company granted to two non-employees options to
purchase an aggregate of 10,000,000 shares of Common Stock at an exercise price
of $.01 per share. In January and February 1996, the Company granted options to
purchase an aggregate of 6,000,000 shares of Common Stock to two non-employees
at a purchase price of $.02 per share. These options were issued for services
performed on the Company's behalf. In May 1996, the Company granted an option to
an employee to purchase 250,000 shares to an employee at an exercise price of
$.05 per share. In March 1997, the Company granted options to purchase 500,000
shares of Common Stock to an individual at an exercise price of $.05 per share
for services performed on the Company's behalf. Transfer of the shares issuable
upon exercise of the options is subject to the registration requirements of the
Act or an exemption from such requirements such as Rule 144 under the Act.
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 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. In June 1997, the Company completed a private offering
of 11,130,600 shares of Common Stock at $.05 per share to a limited number of
accredited investors for which the Company received an aggregate of $556,530, of
which $536,530 was received in cash and $20,000 of which was received in the
form of promissory notes. These promissory notes were paid by the accredited
investors during the first half of July 1997. Also in June 1997, one person
exercised an option to purchase 500,000 shares of Common Stock at a purchase
price of $.05 per share, for which the Company received a promissory note in the
aggregate principal amount of $25,000 and for which such shares are being held
as collateral, and one person was issued 40,200 shares of Common Stock at $.05
per share in payment for services.
II-2
<PAGE> 90
The Company believes that all shares issued during 1996 and the
quarters ended March 31, 1997 and June 30, 1997 were issued in accordance with
the exemption from registration under Section 4(2) of the Act by virtue of the
fact that such shares were sold to a limited number of purchasers and 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.
Except for 500,000 shares, all of the shares issued by the Company from
September 1996 through June 1997 are being registered for such persons as
Selling Shareholders under this Prospectus.
During the quarter ended December 31, 1997, the Company sold an
aggregate of 1,600,000 shares to four investors at a purchase price of $.05 per
share for an aggregate purchase price of $80,000. In January 1998, the Company
sold 200,000 shares to one investor at a purchase price of $10,000 or $.05 per
share. The Company believes that all shares issued during the quarter ended
December 31, 1997 and in January 1998 were issued in accordance with the
exemption from registration under Section 4(2) of the Act by virtue of the fact
that such shares were sold to a limited number of purchasers and 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. None of
these shares are being registered for resale under this Registration Statement.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
<S> <C>
*3.1 Articles of Incorporation as amended. (Incorporated by reference to Exhibit 3.1 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
*3.2 By-laws of Registrant, as amended. (Incorporated by reference to Exhibit 3.2 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
**5.1 Opinion of Mark S. Haltzman & Associates.
*10.1 Agreement between Registrant and IMRC with respect to opportunities in the field of medical
technology. (Incorporated by reference to Exhibit 10 of Registrant's Annual Report on Form 10-K
for the year ended December 31, 1981).
*10.2 Lease dated October 1, 1996, between Biosonics and New York Drive Associates L.L.C.
(Incorporated by reference to Exhibit 10.2 of Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.)
*10.6 Securities Restriction Agreement dated September 30, 1987 between Registrant and International
Management & Research Corporation, Jack and Sarah Paller, and Henry S. Brenman.
(Incorporated by reference to Exhibit 10-f of Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
*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. (Incorporated by reference to
Exhibit 10.16 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
</TABLE>
II-3
<PAGE> 91
<TABLE>
<S> <C>
*21 Subsidiaries. (Incorporated by reference to Exhibit 21 of Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).
**23.1 Consent of Mark S. Haltzman & Associates (included in its opinion filed as Exhibit 5.1).
23.2 Consent of Morris J. Cohen & Co., P.C.
</TABLE>
- -----------------
* Incorporated by reference as indicated.
**Previously filed with this registration statement.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(b) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby further undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant, the registrant has been advised that in the opinion
II-4
<PAGE> 92
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 93
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Fort Washington,
Pennsylvania on February 9, 1998.
BIOSONICS, INC.
By:/s/ Jack Paller
----------------------------------------
Jack Paller, President, Chairman and CEO
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the date stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Jack Paller President, Chairman (principal executive February 9, 1998
- ------------------ officer, principal financial
Jack Paller officer and principal accounting
officer) and Director
</TABLE>
II-6
<PAGE> 94
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT DESCRIPTION
<S> <C>
*3.1 Articles of Incorporation as amended. (Incorporated by reference to Exhibit 3.1 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.)
*3.2 By-laws of Registrant, as amended. (Incorporated by reference to Exhibit 3.2 of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
**5.1 Opinion of Mark S. Haltzman & Associates.
*10.1 Agreement between Registrant and IMRC with respect to opportunities in the field of medical
technology. (Incorporated by reference to Exhibit 10 of Registrant's Annual Report on Form 10-K
for the year ended December 31, 1981).
*10.2 Lease dated October 1, 1996, between Biosonics and New York Drive Associates L.L.C.
(Incorporated by reference to Exhibit 10.2 of Registrant's Annual Report on Form 10-K for the
year ended December 31, 1996.)
*10.6 Securities Restriction Agreement dated September 30, 1987 between Registrant and International
Management & Research Corporation, Jack and Sarah Paller, and Henry S. Brenman. (Incorporated
by reference to Exhibit 10-f of Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987).
*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. (Incorporated by reference to Exhibit 10.16 of
Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
*21 Subsidiaries. (Incorporated by reference to Exhibit 21 of Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994).
**23.1 Consent of Mark S. Haltzman & Associates (included in its opinion filed as Exhibit 5.1).
23.2 Consent of Morris J. Cohen & Co., P.C.
</TABLE>
- ---------------
* Incorporated by reference as indicated.
** Previously filed with this registration statement.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Biosonics, Inc.
We hereby consent to the inclusion in this Prospectus and Registration
Statement on Form S-1 of our report dated February 21, 1997 (except for Notes 3
and 10 as to which the date is July 18,1997), on the financial statements
included in the Biosonics, Inc. Form 10-K/A for the year ended December 31,
1996. We also consent to the reference to our Firm under the caption,
"Experts".
/s/ MORRIS J. COHEN & CO., P.C.
-------------------------------
MORRIS J. COHEN & CO., P.C.
Philadelphia, Pennsylvania
February 9, 1998
