<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______.
Commission File Number: 0-11371
BIOSONICS, INC.
-----------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2161932
-------------------------------- ------------------------
(State or other jurisdiction of IRS Employer
Identification incorporation or organization)
No.)
260 New York Drive
Fort Washington, Pennsylvania 19034
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(Address of principal executive offices) (Zip Code)
(215) 646-7100
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(Registrant's telephone number including area code)
N/A
-----------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. /X/Yes / /No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Based on the average of the closing bid and asking prices as reported in the
pink sheets on February 28, 1998 the aggregate market value of the
Registrant's Common Stock held by non-affiliates was approximately $8,386,124.
Indicate the number of shares outstanding of each of the issuers shares of
common stock, as of the latest practicable date: As of December 31, 1997,
there were outstanding 307,964,536 shares of the Registrant's Common Stock,
$.0001 par value.
Documents Incorporated by Reference: None
<PAGE> 2
PART I
ITEM 1. BUSINESS AND PROPERTIES
General
Biosonics, Inc. was incorporated in Pennsylvania in November 1980 as a
subsidiary of International Management and Research Corporation ("IMRC").
Since its inception, the Company has been involved in the development and
marketing of electrotherapeutic and diagnostic devices to manage and treat
several intractable medical conditions, including extreme dry mouth,
nasal/sinus congestion, urinary/fecal incontinence and impotence. The
Company's non-invasive, electrotherapeutic and diagnostic devices offer
relief from and improvement to such distressing disorders without drug related
side effects or the ultimate need for surgery. The Company has received six
patents on its devices. Furthermore, the Company has received FDA approval or
clearance for marketing the Salitron(R) (dry mouth), Cystotron(TM) (urinary
incontinence), Anotron(TM) (fecal incontinence) and the BIDDS(TM) Glove
(diagnostic tool).
The Company's initial focus was on the marketing of the Salitron, a device
which induces salivation in certain persons who otherwise do not salivate
normally. Recently, Biosonics has decided to concentrate its resources on
marketing the Cystotron device for urinary incontinence. In connection with
this effort, Dr. Kristene Whitmore, Chief of Urology at Graduate Hospital in
Philadelphia, has agreed to participate in market studies for the Cystotron
device. There can be no assurances, however, that the Company will be
able to conduct such studies due to its limited financial resources.
Products
The Company has developed various electrotherapeutic devices, six of which
have been patented, and four of which have received FDA 510(k) clearance or
PMA approval for marketing. The electrotherapeutic 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 Sjogren
Syndrome (an autoimmune disease), other diseases, medication, radiation,
surgery or aging. U.S. Patent No. 4,519,400, covering the method for
<PAGE> 3
stimulating salivation utilized by a prior concept for the Salitron System,
was issued to Biosonics on May 28, 1985. Biosonics believes, although there
is no assurance, that the current versions of the Salitron are protected by
such patent. U.S. Patent No. 4,637,405, covering the apparatus utilizing that
prior concept, was issued to Biosonics on January 20, 1987. Biosonics also was
issued parallel patents by seven foreign countries, although such foreign
patents have lapsed due to a lack of funds. FDA clearance for commercial sale
was received through a pre-market approval (PMA) application process in May
1988 for use in treating patients with dry mouth secondary to Sjogren
Syndrome.
In 1988, Biosonics commenced marketing the Salitron through five "Dry Mouth
Centers" that were owned by independent third parties. Centers were opened in
Philadelphia, Pennsylvania; North Miami Beach, Florida; Baltimore, Maryland;
Fairfield, Connecticut; and Denver, Colorado, and a center controlled by
Biosonics was opened in Milwaukee, Wisconsin. The independent dry mouth
centers were granted the exclusive marketing and distribution rights in their
respective territories. In 1990, however, as a result of the failure of the
dry mouth centers to meet minimum purchase requirements, Biosonics decided to
discontinue the centers.
Biosonics has lacked the necessary funds to implement a marketing program for
any of its devices. Biosonics' initial marketing efforts were for the
Salitron and involved efforts to obtain Medicare reimbursement for the
Salitron. On May 23, 1994, a proposed Notice was published in the Federal
Register by the Federal Healthcare Financing Administration ("HCFA") that it
intended to disapprove Biosonics' application for Medicare, although no final
notice has yet been published. In 1996, Biosonics met with HCFA officials to
urge a reevaluation of its intent to disapprove the Company's request for
reimbursement approval. In February of 1997, HCFA advised Biosonics that it
had examined its previous position and 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.
On March 10, 1998 during a Senate Appropriations Subcommittee on Labor, Health
and Human Services, and Education, a HCFA representative stated her intention
to withdraw the May 23, 1994 Federal Register notice. A final decision on
coverage of the Salitron remains under review by HCFA. Approximately 40
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 not publish any notice of coverage of the Salitron System for
Medicare purposes.
Biosonics has been directing the marketing of the Salitron to rheumotologists,
ear nose and throat specialists, and dentists. Under this program each
physician and dentist is supplied with a Salitron, training materials along
with a video, and asked to test their patients who suffer from dry mouth.
This marketing effort was put on hold as too many potential patients are
Medicare age who cannot afford to purchase the Salitron without Medicare
coverage. In light of the recent developments with HCFA withdrawal of the
previous "non-coverage" statement from the Federal Register, the Company is
generating a marketing plan to increase sale of its' existing Salitron
systems, and proceeding with a bid for manufacturing of additional systems.
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
<PAGE> 4
devices (U.S. Patent No. 5, 117,840).
Subject to the availability of funds, Biosonics is developing a marketing
plan for the Cystotron device that will include a six-month study. Please
refer to "Plan of Operation for 1998" for further information.
BIDDS Glove. This diagnostic tool is a modified surgical grade latex glove
on which is imprinted specialized electronic circuitry. The BIDDS Glove is
intended to be utilized in connection with certain of Biosonics' therapeutic
devices as a means of delivering or receiving electrical energy to or from the
patient. The market for the BIDDS Glove is, therefore, largely co-extensive
with the markets for the Company's other products. Biosonics was issued a
United States patent (U.S. Patent No. 4,510,939) covering a prototype version
of the BIDDS Glove on April 16, 1985 and was issued a United States patent
(U.S. Patent No. 4765343) covering the current version of the BIDDS Glove on
August 23, 1988. The modified version is referred to as the BIDDS Glove II.
Although several foreign patents in favor of the BIDDS Glove were issued,
Biosonics has allowed them to lapse due to lack of funds.
Subject to the availability of funding, the company intends to market the
BIDDS Glove as a diagnostic tool for the physicians use in testing the
patients. This test is designed to help the physician determine whether the
patient has the ability to respond positively to the Company's therapeutic
devices, such as the Cystotron, Anotron and MEGS. The Company also intends to
use the BIDDS Glove in the studies outlined above regarding the Cystotron and
Anotron Systems.
MEGS(TM). The MEGS (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(TM). The Nasotron 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 , which is a device designed to stimulate vaginal secretions in women
with vaginal secretory deficiencies and to aid normal sexual function. The
Immunotron 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
<PAGE> 5
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. The following is a description
of the Company's patent rights in their relative order of importance:
<TABLE>
<CAPTION>
Patent No. Description Expiration Date
<S> <C> <C> <C>
4,519,400 Method for stimulating salivation 2002
used in connection with Salitron System
4,637,405 Application for stimulating Salivation 2004
used in connection with the Salitron System
5,117,840 Sphincter Training System used in connection 2009
with the Anotron and Cystotron Incontinence
Control System
4,765,343 Application for transferring electric energy 2005
to/from living tissue used in connection with
the BIDDS Glove diagnostic tool
4,542,753 Application and method for stimulating penile 2002
erectile tissue used in connection with the
Company's MEGS device
4,663,102 Method of making a body member for use in 2004
genital stimulation used in connection with
the Company's MEGS device
4,590,942 Application and Method for inhibiting nasal 2003
secretions
</TABLE>
The Company's registered trademarks are "Anotron," "Biosonics," and
"Salitron," which expire in 2007, 2008 and 2009, respectively.
<PAGE> 6
Governmental Regulation
Biosonics' products are subject to extensive government regulation in the
United States and in other countries. In order to test, produce and market
products for use in the treatment of humans, Biosonics must first comply with
mandatory procedures and safety standards established by the U.S. Food and
Drug Administration (the "FDA") and comparable state and foreign regulatory
agencies. The Food, Drug and Cosmetic Act (the "FDC Act") requires premarket
clearance or premarket approval by the FDA prior to commercialization of
medical devices. Pursuant to the FDC Act, the FDA regulates the manufacture,
distribution and production of medical devices in the United States.
Before a new device can be introduced into the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval application ("PMA"). A 510(k) clearance
is only available for devices which are "substantially equivalent" to devices
that have been previously approved by the FDA. The principal purpose of the
510(k) procedure is to avoid costly and time-consuming clinical tests of
devices that have already been proven safe and effective by others. Applicants
under the 510(k) procedure must prove that the device for which approval is
sought is substantially equivalent to a device on the market prior to the
Medical Device Amendments of 1976, or a device approved thereafter pursuant to
the 510(k) procedure.
A PMA must be filed if the proposed device does not satisfy the foregoing
conditions relating to the 510(k) procedure. The PMA procedure is more
complex, time-consuming and costly than the 510(k) procedure. In general, the
PMA procedure requires extensive clinical testing to determine the safety,
efficacy and potential hazards of the medical device. In order to obtain
permission to conduct human clinical studies under the PMA procedure, the
manufacturer is required to obtain an Investigational Device Exemption ("IDE")
from the FDA. If the IDE application is approved, human clinical trials may
begin at a specific number of investigational sites with a minimum specific
number of patients, as approved by the FDA. The clinical trials must be
conducted under the auspices of an independent Institutional Review Board
("IRB") established pursuant to FDA regulations. Upon the completion of all
required testing under the IDE, substantial proof of safety and efficacy must
be submitted to the FDA before the final PMA will be granted. The PMA process
can be expensive, uncertain and lengthy, frequently requiring from one to
several years from the date the PMA is accepted by the FDA. If granted, the
PMA approval may include significant limitations on the indicated uses for
which a product may be marketed and may require inspection of the
manufacturing facility to ensure compliance with the FDA's requirements.
Biosonics' clinical testing of its Salitron System was conducted pursuant to
IDEs obtained through IRBs. In May 1988, Biosonics received FDA approval for
the sale of the Salitron System. Biosonics received approval from the FDA in
November 1986 to sell the Anotron and Cystotron Incontinence Control System
under separate 510(k) notification submissions.
Biosonics has not obtained 510(k) clearance or PMA for any of its other
devices. Delays or the failure to receive such clearance or approval of such
devices could have an adverse impact on Biosonics.
Devices which have been developed by Biosonics, but which have not been
approved for commercial distribution in the United States, may be exported if
the FDA approves a request from Biosonics for permission for export. The FDA
requires that Biosonics obtain approval from the foreign country to which the
device will be exported and comply with the laws of the foreign country.
Nonetheless, the FDA could still deny permission to export if it determines
that export is contrary to public health and safety. Biosonics has not
submitted such a request to the FDA for the export of its products, and no
decision has yet been made whether it will do so in the near future.
<PAGE> 7
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 to contributed to death or serious injury,
or that there has occurred a malfunction that would be likely to cause or
contribute to death or serious injury if the malfunction were to recur.
The Safe Medical Device Act of 1990 (the "SMD Act") affects medical device
manufacturers in several areas, including post-market surveillance and device
tracking procedures. The SMD Act gives the FDA expanded emergency recall
authority, requires the submission of a summary of the safety and
effectiveness in the 510(k) process and adds design validation as a
requirement of good manufacturing practices. The SMD Act also requires all
manufacturers to conduct post-market surveillance on devices that potentially
present a serious risk to human health, and requires manufacturers of certain
devices to adopt device tracking methods to enable patients to receive
required notices pertaining to such devices they receive. Management does not
believe that the SMD Act will have a material impact on Biosonics or its
operations.
Federal law preempts states or their political subdivisions from regulating
medical devices. Upon application, the FDA may permit state or local
regulation of medical devices which is either more stringent than federal
regulations or is required because of compelling local conditions.
Biosonics does not anticipate that any state or local requirements which may
be exempted from preemption will have a materially adverse effect on Biosonics
financial condition or operations. However, there is no assurance that, in
the future, state or local requirements may not have a substantial effect on
Biosonics. If Biosonics seeks to market its devices outside of the United
States, Biosonics may also be subject to regulation by foreign governments.
Health care reform is an area of national attention. If reform measures are
adopted, they could adversely affect the pricing of diagnostic and therapeutic
devices in the United States or the amount of reimbursement available from
third-party insurers. The impact of these measures upon Biosonics cannot be
predicted.
Third Party Reimbursement
The Company believes that the overall escalating cost of medical products and
services has led and will continue to lead to increased pressures upon the
health care industry to reduce the cost of certain products and services,
which may include those of the Company. These cost pressures are leading to
increased emphasis on the price and cost-effectiveness of any treatment
regimen and medical device. In addition, third party payers, 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 payer, was experimental
or was used for an unapproved indication. Although approximately 40 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 payers will approve or continue
to reimburse Biosonics for the devices and whether reimbursement, if approved
<PAGE> 8
or continued, will be sufficient for purchasers of the Company's products. On
May 23, 1994, a proposed notice was published in the Federal Register by the
HCFA that it intended to disapprove Biosonics' application for Medicare
reimbursement for the Salitron System, although no final notice has yet been
published. In 1996, Biosonics met with HCFA officials to urge a reevaluation
of its intent to disapprove the Company's request for reimbursement approval.
In February 1997, HCFA advised Biosonics that it had examined its previous
position and concluded that absent additional information, Medicare
reimbursement for the Salitron was not warranted under current law. As a
result, the Company has engaged a Washington, 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. On March 10,
1998 during a Senate Appropriations Subcommittee on Labor, Health and Human
Services, and Education, a HCFA representative stated her intention to
withdraw the May 23, 1994 Federal Register notice. A final decision on
coverage of the Salitron remains under review by the Agency. Further,
Biosonics cannot predict the effect, if any, on the reimbursement from the
private plans and Medicaid in the event that HCFA does not publish any notice
of coverage of the Salitron System for Medicare purposes. Sales of the
Company's devices may be adversely affected by the difficulty of purchasers'
obtaining sufficient reimbursement from third party payers. There can be no
assurance that the availability of third party reimbursements will continue
and that changes in levels of such reimbursement will not adversely affect the
profitability of the Company's products.
Competition.
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 electrostimualtion.
Recently a drug called Salagen has recently been marketed for the treatment
of dry mouth resulting from Sjogren's Syndrome. The Company believes that
the Salitron which has no reported side effects, could still compete in this
market.
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 insertion 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
<PAGE> 9
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 December 31, 1997, Biosonics had seven employees, of which five are
full-time, consisting of the Chief Executive Officer, an operations manager, a
products specialist, a registered nurse and a secretary and two who are
part-time bookkeeping and clerical personnel. In September 1997, the Company
added a product engineer to its staff, who was hired to develop a
manufacturing plan for the Cystotron.
Product Liability and Insurance
Since Biosonics' devices are intended for use in the treatment of human
diseases and conditions, Biosonics faces an inherent risk of exposure to
product liability claims in the event that the use of its devices results in
unanticipated personal injury. Although Biosonics carries products liability
insurance, there can be no assurance that it will be able to maintain such
insurance with the limits of liability necessary and at premiums that are
acceptable to it, that such coverage will be available on commercially
reasonable terms, if at all, or that liability will not exceed the insured
amount. At the present time, the Company's products liability coverage is
$1,000,000 per occurrence with a $5,000 deductible. If a substantial claim
for damages were to arise at a time when Biosonics did not have adequate
insurance or its coverage was insufficient to cover the claim, payment of such
a claim would have a material adverse impact on the financial condition of
Biosonics and on its ability to continue its business activities. In addition,
the legal fees and related costs of defending or settling a products liability
action and the negative publicity likely to arise therefrom would likely have
a material adverse impact on Biosonics, even if it ultimately prevailed in any
such action.
Salitron Medical Advisory Board
Biosonics Salitron Medical Advisory Board (the "Advisory Board") consists of
individuals with expertise in the field related to Sjogren's Syndrome. It is
anticipated that the Advisory Board will consult informally with Biosonics on
an as-needed basis. Biosonics agreed to pay the Chairman of the Advisory Board
$25,000 for his first year of service and grant him 100,000 shares of Common
Stock. Dr. Talal received 240,000 shares in 1997 in lieu of the $25,000. The
other members of the Advisory Board received 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. All of the above mentioned shares were
issued in the latter part of 1996. Except for Elaine Harris, who is the
founder of the Sjogren's Syndrome Foundation, all of the members of the
Advisory Board are employed by or retired from academic institutions or are
practicing physicians. Each of the members has other commitments to other
entities that may limit their availability to Biosonics. Members of the
Advisory Board are not expected to devote more than a small portion of their
time to Biosonics. Although the Advisory Board did not formally meet in 1997.
The names of the persons serving on the Advisory Board and their respective
institutional affiliation or former affiliation or occupation are as
follows:
<PAGE> 10
<TABLE>
<CAPTION>
Name Institutional Affiliation or Occupation
- -------------------------- ----------------------------------------
<S> <C>
Norman Talal, M.D. Retired, The University of Texas
Norman Gaylis, M.D. Rheumotologists, Private Practice
Jonathon Ferguson, M.D. Rheumotologists, Private Practice
Elaine Harris Founder, Sjogren's Syndrome Foundation
James Quinn, D.D.S. Retired, Louisiana State University, School
of Dentistry
</TABLE>
ITEM 2. PROPERTIES OF THE COMPANY
Biosonics leases approximately 2,500 square feet of office space in Fort
Washington, Pennsylvania pursuant to a lease that terminates in September
1998. Lease payments are currently $3,336 per month.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
1997
----
<S> <C> <C>
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
</TABLE>
The quotations set forth above reflect inter-dealer prices without mark-up,
mark-down or commissions, and may not necessarily represent actual
transactions. As of December 31, 1997, there were approximately 10,500 record
holders of the Company's Common Stock. The Company has not, since its
inception, declared any dividends.
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31
- ----------------------------------------------
Statement of Loss Data: 1997 1996 1995
1994 1993
- ----------------------- ---- ---- ----
- ---- ----
<S> <C> <C> <C>
<C> <C>
Sales $ 26,763 $ 40,774 $ 62,506
$21,939 $ 30,578
Cost of sales 22,639 30,208 41,980
17,817 45,461
-------- -------- --------
- -------- --------
Gross profit (loss) $ 4,124 $ 10,566 $ 20,526 $
4,122 $(14,883)
Development stage expenses:
Research and development costs $ 614 $ 21,500 $ 20,117 $
5,160 $ 8,669
Professional fees 244,931 130,050 54,697
49,507 101,750
Other development stage expenses 631,476 636,488 560,476 338,10
2 271,048
-------- -------- --------
- -------- --------
Net development stage expenses $877,021 $788,038 $635,290
$426,713 $329,224
Other income
Investment income $ 6,443 $ - $ 5,279 $
- - $ -
Miscellaneous income - 75 -
- - -
Gain on sale of equipment - - -
- - 75
-------- -------- --------
- -------- --------
$ 6,443 $ 75 $ 5,279 $
- - $ 75
-------- -------- --------
- -------- --------
Net loss
($866,454)($777,397)($609,485)($422,591)($344,107)
Loss per common share ($.00) ($.00) ($.00)
($.00) ($.00)
As of December 31,
- -----------------------------------------------------
Balance Sheet Data: 1997 1996 1995
1994 1993
- ------------------------------- ---- ---- ----
- ---- ----
<S> <C> <C> <C>
<C> <C>
Working Capital (Deficit) ($2,323,266) ($2,150,027) ($2,709,883)
($2,477,004) ($2,059,248)
Total Assets $ 155,123 $ 174,187 $ 133,650 $
119,445 $ 125,009
Total Liabilities $2,456,138 $2,300,776 $2,810,091
$2,574,151 $2,157,124
Shareholders' Deficit ($2,301,015) ($2,126,589) ($2,676,441)
($2,454,706) ($2,032,115)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
Liquidity and Capital Resources
Biosonics' primary sources of funds to date have been proceeds from the sale
of its securities including loans and advances for security 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 $27,500 in Salitron System sales revenues in 1997, $1,079 was
received from Medicare, $12,157 was received from private insurance carriers
and no revenues were received from Medicaid. In addition, $9,537 was received
<PAGE> 12
from Medicare and $1,646 was received from private insurance carriers for
reimbursement of previous period sales. Approximately $5,000 in Medicare
claims and $1,250 in private insurance carrier claims were still pending as
of December 31, 1997. 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.
Forward Looking Statements
All statements contained in this report 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 herein. 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 part 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 secrete 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 be required
to file with the Commission. The Company cautions potential investors not to
place undue reliance on any such forward-looking statements.
Recent Capital Transactions
The Company, as of December 31, 1997, owes an aggregate of $154,000 in
interest bearing loans, $99,000 of which is payable to Jack Paller, and an
aggregate of $93,000 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 December 31,
1997 the outstanding principal balance of such debt was $187,000 and the
accrued interest thereon was $175,104.
During the year ended December 31, 1997, Biosonics issued Common Stock shares
as follows: (i) 310,000 shares at $.05 per share for payment of financial
consulting services, (ii) 40,000 shares at $.05 per shares for payment of
marketing consulting services, (iii) 240,000 shares at $.05 per share for
<PAGE> 13
payments to Dr. Talal as final payment for his services on the Salitron
Advisory Board, (iv) 80,000 shares at $.02 per share were issued as a
correction to previous issuance (v) 200,000 shares at $.05 per share for
interest payment on one loan established in 1991; (vi) 12,730,600 shares at
$.05 per share to twenty investors for participation in a private placement
(vii) 5,000,000 shares at $.01 per share plus 1,000,000 shares at $.02 per
share plus 500,000 shares at $.05 per share were issued to three investors,
respectively, in exercise of stock options, for which the Company received
promissory notes in the aggregate principal amount of the purchase price of
$95,000 and for which such shares are being used as collateral. All shares
issued and explained above are restricted and may not be sold except in
accordance with the registration requirements under the Act or an exemption
from such requirements such as Rule 144.
In 1997, the Company had net positive cash flow from financing activities of
$555,530. This consisted of $586,530 from the issuance of common stock. The
repayment of notes payable totaling $31,000 offset these receipts. The Company
expended $6,021 for computer equipment and $15,000 to an individual for a note
receivable. The Company had a negative cash flow from operations of
$534,509.
In 1996, the Company had net positive cash flow from financing activities of
$356,000. 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.
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. The Company has
initiated contact with various companies in the European market and in India.
The Company's anticipated funding needs result from the following breakdown:
<PAGE> 14
<TABLE>
<CAPTION>
Allocation Item Funds Required
<S> <C>
Operating costs $ 750,000
Manufacturing costs for 1,000 units (with accessories) 450,000
Finders 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 manufacturing 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 further expenses for 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 the board. The $1 million 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 publications
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 bid process in connection with the manufacturing of the Cystotron product
is expected to result in a bid being awarded in early 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, ie., full assembly, packaging and labeling of the product. The
Company will also supply drawings for the bidder to review. Each prospective
manufacturer of the Cystotron must 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.
Depending on the Company's ability to raise additional funds to commence and
implement its marketing plan for the Cystotron product and the establishment
of the market study and a sales team for the product, of which there can be no
assurance, the Company anticipates that sales of the Cystotron product will
commence in the latter part of 1998 or early 1999.
<PAGE> 15
The Company is also working on a marketing plan for the Salitron device. At
this time, the Company plans to initiate this marketing plan upon acceptance
of insurance reimbursement from Medicare. The Company does have current
inventory for the Salitron, and believes that this existing inventory is not
obsolete and that the Company can sell and ship such units after testing the
equipment. The Company believes that the amount of revenue that could be
generated from such sales is approximately $375,000. The engineer is
therefore also preparing to administer the "manufacturing bid process", as
stated above, for the Salitron Device. The manufacturing of the Salitron is
contingent on available funds at the time that the Salitron Inventory is
depleted.
Therefore, the bulk of the additional funds to arrive at the $3.0 million 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 $88,983 or 11.29% in 1997
as compared to 1996 ($877,021 and $788,038 respectively) primarily due to an
increase in professional fees with respect to securities-related issues.
Product sales decreased to $26,763 in 1997 as compared to $40,774 in 1996 as a
result of the discontinuance of the marketing program of the Salitron System
due to lack of funds.
The increase of investment income during 1997 was due to Biosonics' issuance
of Notes Receivables upon exercising stock options. These funds were used for
operations of the Company which concentrated its efforts and resources on
obtaining Medicare approval of the Salitron System.
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.
Jack Paller, President and chief executive officer 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 $99,000
bearing interest at the prime rate plus 1.5% per annum. This note is secured
by the Company's assets, including, but not limited to, the Company's
patents. Also, other vendors of the Company have recorded judgements or liens
against the Company in the aggregate amount of $194,132.
The Company believes there will be no significant adverse impact from
inflation and changing prices on the Company's operations.
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of Biosonics are set forth in this report beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information about the sole director and
officer of Biosonics.
Jack Paller, age 69, is currently the sole officer and director of the
company. Mr. Paller has been Treasurer and a director of the Company since
its inception in 1980. In January 1987, he became Chairman and Chief
Executive Officer of Biosonics. He also served as President of the Company
from its inception until January 1987, from October 1987 to December 1987 and
since May 1990 to the present. Currently, Mr. Paller also serves as President
and a director of IMRCH and serves as President, Treasurer and director of
IMRC, the sole shareholder of IMRCH.
Directors of Biosonics hold office for the ensuing year and until their
respective successors have been duly elected and qualified.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires Biosonics'
officers and directors, and persons who own more than ten percent (10%) of
Biosonics' Common Stock, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Such persons are required to
furnish Biosonics with copies of all Section 16(a) forms they file.
Biosonics notes that IMRC Holdings, Inc. may have been required to file, and
has not filed, Forms 4 reporting certain of the transactions in Biosonics'
Common Stock. In addition, Mr. Paller has filed four Form 5 reports late to
report four transactions for gifts and one other Preferred Stock conversion
transaction.
ITEM 11. EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
----------------------------------
Name & Salary Bonus
Principal Position Year $ $
-------------------- ------ ----------- ---------
<S> <C> <C> <C>
Jack Paller, 1997 103,000(1) --
Chairman, President, 1996 103,000(1) --
Treasurer and Secretary 1995 103,000(1) --
</TABLE>
- ----------------------------
(1) Mr. Paller, the Company's sole director and executive officer, has
deferred the receipt of his salary every year from the year ended December 31,
1990 through December 31, 1997, and Mr. Paller did not receive or defer any
other benefits or compensation for serving as an executive officer of
Biosonics during those years. Such salary deferrals are included in the
Company's current debt as accrued payroll, and Mr. Paller and the Company have
orally agreed that Mr. Paller's deferred salary will not be paid until the
<PAGE> 17
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 1997, including $42,000 of
deferred salary per year for the years ended December 31, 1995, 1996 and 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table lists the number of shares of Biosonics' Common Stock
beneficially owned by all persons known to Biosonics to be beneficial owners
of more than 5% of Biosonics' Common Stock and by the sole director and
officer of Biosonics and the percentage of all outstanding shares held by such
person:
<TABLE>
<CAPTION>
Name of Beneficial Owner No. of Shares Percentage
-------------------------- ------------- ----------
<S> <C> <C>
Jack Paller 11,467,300 4.0%
260 New York Drive
Fort Washington, Pennsylvania 19034
IMRC Holdings, Inc.(1) 110,138,930 38.26%
106 Quigley Boulevard
New Castle, Delaware 19720
</TABLE>
- ----------------------------------
(1) IMRC Holdings, Inc. is a wholly owned subsidiary of IMRC. As of
December 31, 1997 Jack Paller owned 40.2% of the outstanding shares of
IMRC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
All of the shares of common stock of Biosonics owned by IMRCH and Jack Paller
are subject to a securities restriction agreement which prevents any sales by
them of the Common Stock of Biosonics at less than $.05 per share.
During 1989, Mr. Paller and his late spouse loaned $250,000 to Biosonics at an
interest rate of 1.5% over the prime rate charged by CoreStates Bank, not to
exceed an annual rate of 18%. The loan is payable on demand and is secured by
all of Biosonics' assets. During 1989, 1,250 shares of Biosonics' Series B
Preferred Stock were issued to Mr. Paller and his spouse in satisfaction of
the principal amount of $125,000 of their loan. During 1991, Mr. Paller
loaned Biosonics an additional $10,000. The highest principal amount
outstanding under these loans during 1997 was $99,000. Mr. Paller has also
loaned $11,000 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. As of December
1997, the Company provided a $50,000 allowance for estimated uncollectible
amounts against these advances. The Company expects to continue this
arrangement through at least the late part of 1998.
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.
(A) Financial Statements & Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
1. Financial Statements Page
Auditors' Report F-1
Balance Sheets at December 31, 1996 and 1997 F-3
Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1997
and the period from November 13, 1980
(Inception) to December 31, 1997 F-5
Statements of Changes in Shareholders' Equity
(Deficiency)for the Period from November 13,
1980 (Inception) to December 31, 1997 F-6
Statements of Cash Flows for each of the Three
Years in the Period ended December 31, 1997
and the period from November 13, 1980
(Inception) to December 31, 1997 F-15
Notes to Financial Statements F-17
</TABLE>
2. All schedules have been omitted because they are not applicable or
the required information is shown in the consolidated financial statements or
notes therein.
3. Exhibits
*3.1 Articles of Incorporation as amended (Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996).
*3.5 By-laws of Registrant, as amended. (Exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1983 ["1983 Form
10-K"]).
*3.6 Amended and Restated Article VII of the Registrant's Bylaws as
adopted on May 7, 1987. (Exhibit to 1988 Form 10-K).
*3.7 Amendment to Registrant's By-Laws (Exhibit 3.7 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994 ["1994 Form
10-K"]).
*10.1 Agreement between Registrant and IMRC with respect to
opportunities in the field of medical technology. (Exhibit to 1981 Form
10-K).
*10.2 Lease dated October 1, 1996, between Biosonics and New York
Drive Associates L.L.C. (Exhibit to 1996 Form 10-K).
*10.6 Securities Restriction Agreement dated September 30, 1987
between Registrant and International Management & Research Corporation, Jack
and Sarah Paller, and Henry S. Brenman. (Exhibit to 1987 Form 10-K).
*10.16 Note in the amount of $250,000, dated June 27, 1989, of
Biosonics, Security Agreement, dated June 27, 1989, between Biosonics and Jack
and Sarah Paller and Assignment of Patent as Collateral Security, dated June
27, 1989, of Biosonics. (Exhibit 10.16 to Form 10-K).
*21. Subsidiaries. (Exhibit 21 to 1994 Form 10-K).
<PAGE> 19
27. Financial Data Schedule
(B) Reports on 8-k
The Registrant did not file any reports on Form 8-K during the quarter
ended December 31,
1997.
- --------------------------------
* Incorporated by reference.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIOSONICS, INC.
By:_____________________________________
Jack Paller, President, Chairman
&
Chief Executive Officer
Date: April 3, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:_____________________________________
Jack Paller, President, Chairman
(Principal Executive Officer),
Treasurer (Principal Financial Officer
and Principal Accounting Officer) and
Director
Date: April 3, 1998.
<PAGE> 20
BIOSONICS, INC.
(A Development Stage Enterprise)
* * *
December 31, 1997, 1996 and 1995
<PAGE> 21
BIOSONICS, INC.
(A Development Stage Enterprise)
CONTENTS
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Page number
<S> <C>
Auditors' Report F-1 & F-2
Financial Statements:
Balance Sheets at December 31, 1997 and 1996 F-3 & F-4
Statements of Operations for Each of the Three Years
in the Period Ended December 31, 1997 and the Period
from November 13, 1980 (Inception)to December 31, 1997 F-5
Statements of Changes in Shareholders' Equity (Deficiency)
for the Period from November 13, 1980 (Inception) to
December 31, 1997 F-6 through F-14
Statements of Cash Flows for Each of the Three Years in
the Period Ended December 31, 1997 and the Period from
November 13, 1980 (Inception) to December 31, 1997 F-15 & F-16
Notes to Financial Statements F-17 through F-31
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
Board of Directors
Biosonics, Inc.
(A Development Stage Enterprise)
We have audited the accompanying balance sheets of Biosonics, Inc. (a
development stage enterprise) as of December 31, 1997 and 1996, 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,
1997 and for the period from November 13, 1980 (Inception) to December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The amounts shown in the statements of
operations and cash flows under the caption "Period from November 13, 1980
(Inception) to December 31, 1997" 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.
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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 and
for the period from November 13, 1980 (Inception) to December 31, 1997 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 3 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 3. The financial
statements do not include any adjustments to the financial statements that
might result from the outcome of this uncertainty.
/s/ Morris J. Cohen & Co., P.C.
MORRIS J. COHEN & CO., P.C.
Philadelphia, Pennsylvania
February 24, 1998
<PAGE> 23
BIOSONICS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
</TABLE>
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Current assets
Cash $ 260 $ 260
Accounts receivable (net of allowance
for doubtful accounts of $2,000 in 1997
and 1996) 2,630 8,196
Interest receivable 3,259
Inventories 42,117 64,271
Note receivable 15,000
Advances to affiliate 66,606 77,997
Prepaid expenses and other current assets 3,000 25
--------- ---------
Total current assets 132,872 150,749
Equipment, furniture and leaseholds,
net of accumulated depreciation
and amortization 13,820 15,007
Deposits 8,431 8,431
--------- ---------
Total assets $155,123 $174,187
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 24
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current liabilities
Notes payable
Officer and affiliate $ 99,000 $ 115,000
Other 148,000 173,000
Accrued payroll, officer 772,500 669,500
Accrued interest
Officer and affiliate 66,357 55,905
Other 198,738 173,131
Accounts payable and other
accrued expenses 922,093 824,790
Advances from affiliates 62,450 62,450
Payments received for unissued debentures 187,000 187,000
Payments received for unissued securities 40,000
------------ ------------
Total current liabilities 2,456,138 2,300,776
Commitments and contingencies (Note 11)
Shareholders' deficiency
Preferred stock - authorized
10,000,000 shares (inclusive of Series
A, B, C and D) at $1 par value, no shares
issued and outstanding
Common stock - $.0001 par value; authorized
750,000,000 shares issued and outstanding
307,964,536 shares in 1997, 287,863,936
shares in 1996 30,797 28,787
Capital in excess of par value 12,548,020 11,763,002
Notes receivable from sale of stock ( 95,000)
Deficit accumulated during
development stage ( 14,784,832) ( 13,918,378)
-------------- -------------
Shareholders' deficiency ( 2,301,015) ( 2,126,589)
Total liabilities and
shareholders' deficiency $ 155,123 $ 174,187
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 25
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
November 13,
1980
(Inception)
Year Ended December 31, to
--------------------------- December 31,
1997 1996 1995
1997
<S> <C> <C> <C> <C>
Sales $ 26,763 $ 40,774 $ 62,506 $ 864,140
Cost of sales 22,639 30,208 41,980 567,624
-------- -------- --------- -----------
Gross profit 4,124 10,566 20,526 296,516
-------- -------- --------- -----------
Development stage
expenses
Research and
development costs 614 21,500 20,117 4,166,667
Professional fees 244,931 130,050 54,697 2,997,418
Other development
stage expenses 631,476 636,488 560,476 8,797,034
-------- -------- ------- -----------
Total development
stage expenses 877,021 788,038 635,290 15,961,119
Less - Revenue from
cost recovery program 118,082
-------- -------- -------- -----------
Net development
stage expenses 877,021 788,038 635,290 15,843,037
-------- -------- --------- -----------
Other income
Investment and
other income 6,443 75 5,279 734,069
Management fees 20,000
Gain on sale of
equipment 7,620
---------- ---------- ---------- ------------
6,443 75 5,279 761,689
---------- ---------- ---------- ------------
Net loss ($866,454) ($777,397) ($609,485) ($14,784,832)
========== ========== ========== ============
Loss per common share ($.00) ($.00) ($.00) ($.05)
========== ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 26
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)
Period from November 13, 1980 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Notes
Shares Amount Receivable
--------- --------- ----------
<S> <C> <C> <C>
Capital subscriptions received
Net loss for the period from
November 13, 1980 (Inception) to
December 31, 1980
Balance, December 31, 1980
Common stock issued January 1981
($.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> 27
<TABLE>
<CAPTION>
Preferred Stock Deficit Shareholders'
Series A, B and D 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> 28
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Notes
Shares Amount Receivable
---------- ------ ------------
<S> <C> <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> 29
<TABLE>
<CAPTION>
Preferred Stock Deficit Shareholders'
Series A, B and D Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------- -------- ----------------- ------------------ ------------
<S> <C> <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> 30
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Notes
Shares Amount Receivable
-------- -------- -----------
<S> <C> <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> 31
<TABLE>
<CAPTION>
Preferred Stock Deficit Shareholders'
Series A, B and D Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------- -------- ----------------- ------------------ ------------
<S> <C> <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> 32
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Notes
Shares Amount Receivable
----------- ------- ----------
<S> <C> <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> 33
<TABLE>
<CAPTION>
Preferred Stock Deficit Shareholders'
Series A, B and D 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 $1,000 99,000 100,000 (3)
( 1,372,913) ( 1,372,913)
- ------ ------- --------- ------------- ------------
1,000 1,000 9,338,337 ( 8,821,212) 538,936
</TABLE>
F-9
<PAGE> 34
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Notes
Shares Amount Receivable
-------- --------- ------------
<S> <C> <C> <C>
Balance forward December 31, 1988 208,114,936 20,811
Common stock issued March 1989 and
May 1989 ($.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> 35
<TABLE>
<CAPTION>
Preferred Stock Deficit Shareholders'
Series A, B and D 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> 36
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Notes
Shares Amount Receivable
----------- ------- ----------
<S> <C> <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> 37
<TABLE>
<CAPTION>
Preferred Stock Deficit Shareholders'
Series A, B and D 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> 38
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Notes
Shares Amount Receivable
--------- -------- ------------
<S> <C> <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> 39
<TABLE>
<CAPTION>
Preferred Stock Deficit Shareholders'
Series A, B and D 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> 40
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY)(Continued)
Period from November 13, 1980 (Inception) to December 31, 1997
<TABLE>
<CAPTION>
Common Stock Notes
Shares Amount Receivable
-------- -------- -----------
<S> <C> <C> <C>
Common stock issued January 1997
($.02 per share) 80,000 8
Common stock issued January 1997
($.01 per share) 5,000,000 500 (50,000)
Common stock issued February, March
and May 1997 ($.05 per share) 590,000 59
Common stock issued March 1997
($.05 per share) 200,000 20
Stock option granted March, 1997
Common stock issued March 1997
($.02 per share) 1,000,000 100 (20,000)
Common stock issued May 1997
($.05 per share) 500,000 50 (25,000)
Common stock issued May 1997
($.05 per share) 10,930,600 1,093
Common stock issued May 1997
($.05 per share) 200,000 20
Common stock issued December 1997
($.05 per share) 1,600,000 160
Net loss for the year
ended December 31, 1997
----------- ------- ---------
307,964,536 $30,797 ($95,000)
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
Preferred Stock Deficit Shareholders'
Series A, B and D Capital in Excess Accumulated During Equity
Shares Amount of Par Value Development Stage (Deficiency)
- ------- -------- ----------------- ------------------ ------------
<S> <C> <C> <C> <C>
1,592 1,600 (10)
49,500 -0- (12)
29,441 29,500 ( 2)
9,980 10,000 ( 9)
14,398 14,398
19,900 -0- (12)
24,950 -0- (12)
545,437 546,530 ( 3)
9,980 10,000 ( 8)
79,840 80,000 ( 3)
( 866,454) ( 866,454)
- ------- ------- ------------ ------------- ------------
-0- $ -0- $12,548,020 ($14,784,832) ($2,301,015)
</TABLE>
F-13
<PAGE> 42
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (DEFICIENCY) (Continued)
Period from November 13, 1980 (Inception) to December 31, 1997
(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 IMRC as a capital contribution.
(12) Shares issued upon exercise of stock options.
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE> 43
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from
operating activities
Net loss ($866,454) ($777,397) ($609,485)
---------- ---------- ----------
Adjustments to reconcile
net loss to net cash
used in operating activities
Depreciation and amortization 7,208 10,004 20,117
Increase (decrease) in
allowance for doubtful
accounts 50,000 ( 4,000)
Increase (decrease)in reserve
for inventory obsolescence ( 13,000)
Loss on lease abandonment
Gain on sale of equipment
Common stock issued
for services 41,100 85,750
Common stock options
issued for services 14,398 75,530 87,750
Common stock issued for
product rights
Changes in operating assets
and liabilities
Accounts receivable 5,566 16,817 ( 16,543)
Inventories 22,154 18,813 15,603
Interest receivable ( 3,259)
Prepaid expenses and other
current assets ( 2,975) 8,828 ( 2,121)
Accrued payroll, officer 103,000 103,000 103,000
Accrued interest
Officer and affiliate 10,452 26,502 41,771
Other 25,607 25,293 24,842
Accounts payable and
accrued expenses 97,303 ( 24,342) 16,309
Advances from (to)
affiliates ( 38,609) 83,202 40,018
---------- --------- ---------
331,945 412,397 330,746
---------- --------- ---------
Net cash used in operating
activities ( 534,509) ( 365,000) ( 278,739)
---------- --------- ---------
</TABLE
<PAGE> 44
Period from
November 13,
1980
(Inception) to
December 31,
1997
- ---------------
($14,784,832)
- ---------------
385,895
52,000
27,000
19,550
( 7,620)
585,059
177,678
12,501
( 4,630)
( 69,117)
( 3,259)
( 3,000)
772,500
140,560
198,738
990,095
69,164
- -------------
3,343,114
- -------------
( 11,441,718)
- --------------
F-15
<PAGE> 45
BIOSONICS, INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
(Continued)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from
investing activities
Capital expenditures ( 6,021) ( 31,261)
Proceeds from sale of equipment
Issuance of note receivable ( 15,000)
Increase in deposits
Decrease in note receivable
Patent
expenditures
--------- ----------
Net cash used in investing
activities ( 21,021) (
31,261)
--------- ----------
Cash flows from financing
activities
Payments received for unissued
debentures and securities 40,000
Principal payments of note
payable ( 31,000) (235,000)
Proceeds from issuance of
notes payable 45,000 10,000
Increase in capitalized
organization costs
Proceeds from issuance of
preferred stock 505,000 300,000
Proceeds from issuance of
common stock 586,530 10,000
--------- ---------
- ---------
Net cash provided by
financing activities 555,530 365,000 310,000
--------- --------- ---------
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> 46
Period from
November 13,
1980
(Inception) to
December 31,
1997
- ---------------
( 369,326)
10,825
( 45,000)
( 8,431)
30,000
( 45,690)
- ---------------
( 427,622)
- ---------------
498,000
( 338,000)
834,444
( 7,453)
1,105,000
9,777,609
- --------------
11,869,600
- --------------
260
- --------------
$ 260
==============
F-16
<PAGE> 47
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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 36% and 38% of the Company's common stock at
December 31, 1997 and 1996, 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 1997, 1996 and 1995, 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-17
<PAGE> 48
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
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 301,423,494 in 1997, 261,976,354 in 1996 and 243,333,936 in
1995. 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. Results of operations
The Company incurred net losses of $866,454, $777,397 and $609,485 for the
years ended December 31, 1997, 1996 and 1995, respectively, and at December
31, 1997, the Company had a shareholders' deficiency of $2,301,015.
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.
F-18
<PAGE> 49
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
3. Results of operations (Continued)
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 to the
financial statements that might result from the outcome of this uncertainty.
4. Inventories
Inventories at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Raw material $20,166
Finished goods $42,117 71,105
--------- --------
42,117 91,271
Less reserve for obsolescence -0- 27,000
--------- --------
$42,117 $64,271
</TABLE>
5. Equipment, furniture and leaseholds
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Leasehold improvements $ 3,100
Machinery and equipment $ 48,745 48,745
Office equipment 37,282 64,325
Furniture and fixtures 142,028 138,636
-------- --------
228,055 254,806
Less accumulated depreciation
and amortization 214,235 239,799
-------- -------
$ 13,820 $ 15,007
======== ========
</TABLE>
Depreciation expense was $7,208 in 1997, $10,004 in 1996 and $20,117 in 1995.
6. Advances to/from affiliates
At December 31, 1997, the Company had advances to IMRC of $66,606 (net of
allowance for doubtful account of $50,000) and advances from IMRCH of $62,450.
At December 31, 1996, the Company had advances to IMRC of $77,997 and advances
from IMRCH of $62,450.
F-19
<PAGE> 50
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
7. Notes payable
Notes payable at December 31 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Officer and affiliate
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 7.54%
at December 31, 1997) $ 99,000 $115,000
======== ========
Other
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 note payable on demand,
bearing interest at 7% per annum. 20,000
Unsecured, non-interest bearing notes
payable on demand, $68,000 of which is
secured by the Company's assets. 93,000 138,000
-------- --------
$148,000 $173,000
======== ========
</TABLE>
See also Note 11 - "Unissued Securities".
8. Payments received for unissued debentures and securities
Payments received for unissued debentures and securities at December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------- --------
<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 11). $187,000 $187,000
======== ========
Cash received for stock, not yet
issued (See Notes 9 & 11). $ 40,000
========
</TABLE>
F-20
<PAGE> 51
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
9. Shareholders' equity
IMRCH and the Company's current officers and directors held in the aggregate,
approximately 40% of the Company's outstanding common stock at December 31,
1997 and 42% at December 31, 1996. 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 11).
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.
F-21
<PAGE> 52
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
9. Shareholders' equity (Continued)
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, 1997 and 1996, there were no
options outstanding under the employee incentive stock option plan.
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.
F-22
<PAGE> 53
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
9. Shareholders' equity (Continued)
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, 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.
F-23
<PAGE> 54
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
9. Shareholders' equity (Continued)
In March 1997, the Company granted common stock options for 500,000 shares,
exercisable at $.05 per share, to its general counsel, a non-employee. In
January and February 1996, the Company granted common stock options to
non-employees for 6,000,000 shares, exercisable at $.02 per share. In
February 1995, the Company granted to non-employees common stock options for
10,000,000 shares, exercisable at $.01 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-Scholey
option-pricing model with the following assumptions used for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 105% 125%-132%
Risk-free interest rate 6% 6%
Expected life 3 years 2 years
Discount for lack of marketability 35% 35%
Estimated fair value $14,398 $75,530
</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."
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-Scholey 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%.
F-24
<PAGE> 55
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
9. Shareholders' equity (Continued)
Stock options granted by the Company during 1997, 1996, and 1995 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>
1997 1996
------------- ------------
<S> <C> <C>
Stock options, beginning of year 16,250,000 10,000,000
Options issued 500,000 6,250,000
Options exercised (6,500,000) -0-
Options terminated or expired -0- -0-
------------- ------------
Stock options, end of year 10,250,000 16,250,000
============= ============
</TABLE>
10. Income taxes
The Company has available at December 31, 1997, unused operating loss
carry forwards and tax credits, which may provide future tax benefits expiring
as follows:
<TABLE>
<CAPTION>
Year of expiration Carry forwards Credits
- ---------------------- --------------- ----------
<S> <C> <C>
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
2012 781,000
----------- --------
$13,213,000 $9,000
</TABLE>
F-25
<PAGE> 56
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
10. Income taxes (Continued)
The tax effects of temporary differences that give rise to deferred tax assets
at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Federal State Federal State
1997 1997 1996 1996
---------- -------- --------- -------
<S> <C> <C> <C> <C>
Net operating loss
carry forwards $4,474,000 $115,000 $4,357,000
$158,000
Tax credits 3,000 79,000
Accrued payroll,
officer 263,000 77,000 228,000 60,000
Stock options
outstanding 46,000 14,000 55,000 15,000
Other temporary
differences 14,000 5,000 14,000
---------- -------- ---------- -------
4,800,000 211,000 4,733,000 233,000
Less valuation
allowance 4,800,000 211,000 4,733,000 233,000
---------- -------- ---------- -------
Net deferred
tax asset $ -0- $ -0- $ -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 carry forwards 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.
11. 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 $30,026 in 1998.
Rent expense was $40,035, $39,333 and $33,861 for the years ended December 31,
1997, 1996 and 1995, respectively.
F-26
<PAGE> 57
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
11. Commitments and contingencies (Continued)
Liens
Included in accounts payable are liabilities for which certain vendors and
officers have secured liens against all of the Company's assets totaling
$126,142 in 1997 and 1996.
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. $100,000 of these
liabilities are secured by essentially all of the Company's assets. The
Company has accrued interest on these funds totaling $175,014 and $153,599 at
December 31, 1997 and 1996, 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-27
<PAGE> 58
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
11. 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.
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.
Payroll taxes
At December 31, 1997, the Company was in arrears in the payment of federal and
state payroll taxes and had not made related tax filings.
F-28
<PAGE> 59
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
12. Supplemental disclosure of cash flow information
<TABLE>
<CAPTION>
Period from
November 13,
1980 (Inception)
Year Ended December 31, to December 31,
1997 1996 1995 1997
-------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Cash paid for
Interest $-0- $-0- $128 $33,031
===== ===== ====== =========
</TABLE>
Supplemental schedule of noncash financing activities
The Company issued the following amounts of common stock for noncash
consideration:
<TABLE>
<CAPTION>
Period from
November 13,
1980(Inception)
Year Ended December 31, to December 31,
1997 1996 1995 1997
------ ------- ------- ----------------
<S> <C> <C> <C> <C>
Common stock not
previously issued $ 40,000 $271,000 $ 311,000
Employee
compensation,
consulting
services 29,500 82,750 566,459
Notes receivable 95,000 95,000
Services provided
in exchange for
stock options 14,398 75,530 $87,750 177,678
Loan origination
fee 4,000
Acquisition of
product rights 12,501
repayment of
accrued expenses
to IMRC 1,600 197,524 199,124
Interest expense 10,000 3,000 13,000
Repayment of
notes payable
IMRC 182,444 182,444
Other 10,000 10,000
-------- ------- -------- -----------
$200,498 $812,248 $87,750 $1,571,206
======== ======== ======== ===========
</TABLE>
In September 1989, preferred stock-Series B was issued upon the conversion of
$125,000 of demand note payable.
F-29
<PAGE> 60
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
12. Supplemental disclosure of cash flow information (Continued)
In 1993, the Company converted accounts payable to a note payable on demand
for $68,000.
13. Interest expense
Interest expense for the years ended December 31, 1997, 1996, and 1995 was
$46,059, $55,608 and $66,742, respectively.
Included in interest expense is $10,453, $11,917 and $13,591 for loans from
the Company's president for the years ended December 31, 1997, 1996 and 1995,
respectively.
Also included in interest expense is $14,595 and $27,646 for a loan from IMRC
for the years ended December 31, 1996 and 1995, respectively.
14. Other development stage expenses
Other development stage expenses consist primarily of salaries, rent and
utilities, interest and marketing costs.
15. Quarterly results, (Unaudited)
<TABLE>
<CAPTION>
Gross
Profit Net Loss
Sales (Loss) Net Loss Per Share
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
1997 - 1st Quarter $ 5,625 $ 2,221 ($197,095) ($.00)
2nd Quarter 7,925 3,032 ( 215,569) ( .00)
3rd Quarter 5,129 967 ( 180,981) ( .00)
4th Quarter 8,084 ( 2,096) ( 272,809) ( .00)
------- ------- ---------- ------
Total $26,763 $ 4,124 ($866,454) ($.00)
======= ======= ========== ======
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)
======= ======= ========== ======
</TABLE>
F-30
<PAGE> 61
BIOSONICS, INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
15. Quarterly results,(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
========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Net loss as Net loss
originally (restated)
reported Adjustment as adjusted
----------- ---------- -----------
<S> <C> <C> <C>
1996 - 1st Quarter ($101,823) ($75,530) ($177,353)
2nd Quarter ( 142,381) ( 142,381)
3rd Quarter ( 354,708) 30,000 ( 324,708)
4th Quarter ( 132,955) ( 132,955)
---------- -------- ----------
($731,867) ($45,530) ($777,397)
========== ========= ==========
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
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000352715
<NAME> BIOSONICS, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 260
<SECURITIES> 0
<RECEIVABLES> 20,889
<ALLOWANCES> 2,000
<INVENTORY> 42,117
<CURRENT-ASSETS> 132,872
<PP&E> 228,054
<DEPRECIATION> (214,234)
<TOTAL-ASSETS> 155,123
<CURRENT-LIABILITIES> 2,456,138
<BONDS> 187,000
0
0
<COMMON> 30,797
<OTHER-SE> (2,301,015)
<TOTAL-LIABILITY-AND-EQUITY> 155,123
<SALES> 26,763
<TOTAL-REVENUES> 33,206
<CGS> 22,639
<TOTAL-COSTS> 877,021
<OTHER-EXPENSES> 631,476
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,059
<INCOME-PRETAX> (866,454)
<INCOME-TAX> 0
<INCOME-CONTINUING> (866,454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (866,454)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
