UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
_X_ ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required] For the fiscal year ended MAY 31, 1996
___ TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required] For the transition period from ___ to ___
COMMISSION FILE NUMBER 0-11408
BIOSENSOR CORPORATION
- - --------------------------------------------------------------------------------
Minnesota 41-1427114
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
13755 First Avenue North,
Plymouth, MN 55441
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (612) 449-9100
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock $.05 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. _X_
The issuer's revenues for its most recent fiscal year were $2,424,000
The aggregate market value of the voting stock held by non-affiliates as of
August 5, 1996 (based upon the mean between the closing bid and asked price as
reported in the local over-the-counter market) was approximately $1,255,000.
The number of shares outstanding of the registrant's common stock, $.05 par
value, as of August 5, 1996 is 2,823,055.
DOCUMENTS INCORPORATED BY REFERENCE: None
This Form 10-KSB report consists of 26 pages, (including exhibits): the index to
the Exhibits is set forth on page 13.
PART I
ITEM 1. BUSINESS
General
Biosensor Corporation (the "Company" or "Biosensor") designs, manufactures and
markets diagnostic equipment for physicians' offices, clinics and hospitals. The
Biosensor ambulatory ECG ("Holter") monitoring system consists of a patient-worn
microcomputer based unit, called the patient recorder, which monitors and
records cardiac events. Patient recorder data is transferred in a three to five
minute procedure to the central station, located at the physician's office or
healthcare facility. The central station's computer presents cardiac performance
data on a CRT or prints a hard copy for analysis by the physician. The central
computer is capable of running many IBM and other computer programs for office
management. The Biosensor spirometry system uses software developed by the
Company in conjunction with OEM hardware. The Company sells three other OEM PC
compatible products, an ambulatory blood pressure system, an ECG system, and an
ECG stress system. In 1994 the Company acquired a product line of Marcom, Inc.
and began manufacturing telemetry equipment and cardiac monitors for medical
equipment manufacturers. The Company's products are distributed in the United
States through independent manufactures' representatives. Internationally, the
products are marketed through independent distributors.
Products
A. Holter Systems
In the event a 30 second ECG (aka EKG) is unable to tell the physician
information needed about a potential cardiac condition, the physician may order
a 24 hour patient worn ECG, called a Holter, ambulatory ECG, or long term ECG.
The 24 hour Holter is used primarily to evaluate potential cardiac patient
symptoms, to look for episodes where the blood supply to the heart may be
compromised (ischemia), to evaluate cardiac risk in patients with suspected or
overt cardiac disease, and to determine whether cardiac drugs and therapies used
to reduce heart rhythm problems are performing properly. Approximately 2.5
million such procedures are ordered annually in the United States. The Company
estimates approximately an equal number are ordered annually in international
markets. In the United States, the physician will typically charge $150 per
test. International reimbursement can be next to nothing up to approximately $80
per test. A physician or health care facility can financially justify a small
Holter system. The Company believes its Holter systems have significant benefits
over competitive offerings, including real time analysis technology using FLASH
memory components, an easy to use IBM PC compatible program, an attractive
recorder size, documented accuracy, and an affordable price.
The Company's four versions of full disclosure monitoring systems are comprised
of a patient recorder using the Argus ECG analysis algorithm and a central
computer system and three software variations for report viewing and printing.
The full disclosure feature allows for storage and review of all 24 hours of the
ECG. The Company's method of full disclosure ECG storage uses real time digital
means, rather than the more traditional tape storage means.
Optional superimposition allows the operator to view the ECG data via screen
display of one beat over its predecessor at high speeds, allowing 24 hours of
data to be reviewed in 30 minutes or less.
B. Spirometry System
The Company's spirometry system is used by physicians to measure lung capacity
and function. It uses IBM, compatible software developed by the Company to
function in conjunction with hardware supplied by an outside vendor. The package
allows physicians to expand patient care by performing comprehensive pulmonary
function tests from their office or clinic. The spirometry system includes a
unique feature set comprised of a patented, completely disposable sensor, which
eliminates cleaning, chemical contamination, labor and the risk of spreading
disease; a sailboat race "game" providing patient stimulation and involvement in
testing; patient trending which allows physicians to see the patient progress
over time; and built in help manuals to make operation easy.
C. Telemetry and Cardiac Monitors
Biosensor sells a telemetry transmitter and receiver to other medical equipment
vendors, used for monitoring the ECG of patients in cardiac rehabilitation.
Telemetry is the process of radio transmitting, receiving, and displaying
physiologic signals including ECG from one or more remote patients to a nurses'
station. The Company also designs, manufactures and markets cardiac monitors
which display physiologic signals. These monitors are marketed to other medical
equipment manufacturers who use them as OEM components in their product line.
D. OEM Distribution
The Company sells other diagnostic equipment to physicians, clinics and
hospitals. Such equipment includes stress testing equipment, ECG, and ambulatory
blood pressure equipment. This equipment is acquired from others and re-sold.
Research and Development
Since its formation, the Company's research and development activities have been
focused on developing computerized cardiac monitoring system capable of
providing patient-worn heart monitoring, analysis, and reporting. These products
are currently on the market. The Company's research and development efforts are
focused upon enhancing and improving existing systems and developing compatible
diagnostic products such as the spirometry software and the ambulatory blood
pressure software. The Company currently employs three people in R&D, and
engages outside consultants for specific projects. The Company expended
$169,000, $241,000, $212,000 for research, development, and engineering
activities in fiscal 1996, 1995, and 1994, respectively, which consisted
principally of the salaries of its employees and consultants.
Manufacturing and Sources of Supply
The components which are included in the Company's monitoring systems are
presently purchased from outside vendors, tested and incorporated into the
system by Company personnel. Components are available from multiple sources. If
the Company were unable to obtain certain components from one or more of its
suppliers, the Company would be forced to seek comparable components from other
suppliers. The Company believes it would be able to acquire hardware components
from alternate OEM suppliers should it become necessary.
Marketing and Distribution
Healthcare reform in the United States, Germany, and in some Asian markets has
influenced the buying patterns of end-users. With this evolution, products used
in this environment need to be lower in price and more cost effective to operate
while remaining feature rich. The Company believes this trend will continue, and
that its products are well suited to the new environment.
Currently, the Company markets its products through manufacturers sales
representatives in the United States and distributors overseas. Biosensor
believes that its sales representatives will be effective in reaching the
physicians office, clinics, and small to mid-sized hospitals; have specific
knowledge of and contacts in particular markets; and enhance the quality and
scope of the Company's sales and marketing efforts. Pursuant to agreements with
sales representatives and distributors, the sales force is prohibited from
engaging in the promotion or sale of products that compete with the Company's
products.
The Company has one employee sales manager and approximately 12 independent
sales organizations covering the United States. In addition, it has one employee
sales manager supporting distribution activities in approximately 35
international markets. The Company employs two full-time sales and marketing
personnel at its headquarters. These employees work directly and in conjunction
with sales representatives and distributors in marketing and selling to doctors,
clinics, and hospitals. The Company's marketing staff prepares advertising copy,
full color sales brochures, sales bulletins, and reimbursement documentation.
Financial Information about Major Customers and Export Sales
See Note 6 to the Financial Statements for information concerning major
customers and export sales.
Competition
Holter Systems
Ambulatory monitoring competition is divided into two segments of approximately
equal size based upon target customers and price considerations:
1) Larger hospitals, clinic, and service companies. These groups
predominantly purchase 24 hour tape scanning and analysis equipment dependent
upon technician operation. Equipment for such users is priced in the $30,000 to
$80,000 range, where volume justifies a significant capital outlay. Del Mar
Avionics Inc., Marquette Electronics, Inc., Zymed, Inc.. and Spacelabs, Inc. are
the principal domestic suppliers to this market segment. Historically, these
companies have represented more than half of industry sales revenues. End-users
in this market have demonstrated a willingness to consider more cost-effective
systems.
2) Physician office and small hospital systems. Physicians and small
hospitals have a tendency to purchase more limited Holter systems in a price
range of $6,000 to $25,000. Diagnostic Monitoring, Q-Med, Advanced Medical
Products, Inc., Burdick, and Custo are among the companies that compete with
Biosensor selling Holter systems in offices and small hospitals. Principally
price, marketing coverage, ease-of-use and product features are the key
attributes of the sales process. In the United States, diminishing demand for
equipment in the face of a transition into managed care has occurred in the
physician office market. This change may be temporary or permanent. The
physician office diagnostic equipment market is also characterized by intense
competition. The competing organizations, most of which are well established,
have established reputations for success in the development, sale, and service
of products.
Spirometry
There are a number of companies producing spirometry systems for the office and
clinic market including Multi-Spiro Inc., Tamarack Systems, Advanced Medical
Systems, SpiroMetrics, QRS, and others. Many of these companies make devices
which perform only one function, while others make use of a multi-purpose
personal computer. Biosensor's sales principally make use of the personal
computer. The Company's spirometry systems sell for between $2,000 and $4,000.
Telemetry and Cardiac Monitors
Telemetry and cardiac monitoring products sold to medical equipment
manufacturers (OEM), face little if any competition. The market is shifting to
digital technology generally developed by the equipment manufacturers. The
Company believes there are unique niches for the analog technology which will
take a long time to be replaced by digital approaches. A matched pair including
a telemetry transmitter and receiver sell for $1,300 per pair.
Backlog
The Company fills orders as they are received and has had no significant order
backlogs. Accordingly, the Company has experienced and expects to continue to
experience periodic fluctuations in the net sales, and believes that it may
experience periods in which low unit volume could result in periodic quarterly
operating losses. Such fluctuations may diminish if the Company is able to
increase its sales volume.
Government Regulation
The diagnostic products sold by the Company are "devices" as defined in the
Federal Food, Drug and Cosmetic Act (the "Act), and are subject to the FDA
regulatory authority over the manufacturing, performance standards, patient
registries, labeling and advertising thereof. Under the Act, the FDA must
determine the extent of control necessary to assure the safety and effectiveness
of devices and must define those control levels by the promulgation of
regulations and standards. Under Section 510(k) of the Act, a medical device can
be marketed if the FDA determines that the device is substantially equivalent to
similar devices marketed prior to May 28, 1976. Action by the FDA does not,
however, constitute approval by the FDA of the Company's products or pass upon
their safety and effectiveness.
While the Company believes that regulatory clearance for certain diagnostic
devices which are substantially equivalent to a device currently in commercial
distribution, including products which the Company may in the future develop and
market, may be obtained in less time and at a lower cost than certain other
medical devices, there can be no assurance that regulatory agencies may not
require lengthy clinical testing or other procedures that will involve time and
substantial cost. There can be no assurance that, even after such time and
expenditures, regulatory clearance will be obtained. A marketed product is
subject to continual review, and later discovery of previously unknown problems
may result in restrictions on a product's marketing or withdrawal of the product
from the market.
Trade Secrets
Biosensor Corporation exclusively licenses its Argus ECG analysis algorithms
used in the Holter monitor from CNS, Inc. for all medical applications except
sleep applications. With the exception of the Argus algorithms, the Company's
software programs and systems are not protected by patents or registered
copyrights, but instead the Company relies upon the law of trade secrets and the
confidentiality provisions of its employment agreements. The Argus algorithms
are subject to copyright protection claimed by Washington University. There are
no patents or registered copyrights owned by Biosensor on its spirometry or
ambulatory blood pressure software, but the products are covered by general US
and foreign copyright laws. The OEM hardware vendor has a patent which protects
the disposable sensor, though the relationship with Biosensor is non-exclusive.
The Company believes that protection of its systems by patents or registered
copyrights is less important than the knowledge, experience and creativity of
the Company's product development and marketing staff in an industry
characterized by rapid technological change. There can be no assurance that
competitors could not successfully duplicate the Company's proprietary software
or the Argus algorithms.
Healthcare Reform
As a result of concerns about changes to the United States system of healthcare
payments, a reduction in purchase levels by physicians has occurred. These
shifts are occurring in varying degrees in other parts of the world as well. The
Company believes that its competitors are also being affected by these factors.
Employees
As of May 31, 1996, the Company had 18 employees 15 of which were full-time. No
employees are represented by labor organizations and there are no collective
bargaining agreements. Employee relations are believed to be good.
ITEM 2. PROPERTIES
The Company's offices are located at 13755 First Avenue North, Plymouth,
Minnesota 55441. The facility consists of approximately 7,500 square feet of
office, manufacturing and warehouse space and is held under an operating lease
expiring in March, 1997. The annual rent for the space currently occupied is
approximately $52,000 plus a share of operating expenses and taxes.
ITEM 3. LEGAL PROCEEDINGS
On January 25, 1995, Cardiosoft, Inc. filed a complaint in the State of
Missouri, District Court, claiming breach of contract with respect to a software
licensing agreement with the Company, entered into in 1988 which was amended in
1991. The Agreement provided for minimum annual royalty payments and royalty
amounts payable for computer systems sold by the Company utilizing certain
Cardiosoft software. The Agreement was modified in 1991 to provide that the
Company's obligation to make royalty payments would be completed once Biosensor
had paid a defined amount. After paying the defined amount, Biosensor stopped
making license payments per the amended Agreement. Cardiosoft advised the
Company of its view that Biosensor continued to be obligated to make royalty
payments. The matter is scheduled for trial in September, 1996. While
Biosensor's legal counsel has advised of its view that, under Missouri law, the
1988 Agreement was concluded in 1991 and that Biosensor has no continuing
license obligation to Cardiosoft, no assurance can be given that legal
proceedings will not materialize or that the Company will prevail.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Minneapolis Local Over-The Counter
market. The high and low bid prices for the common stock by fiscal quarter as
reported by local market makers are presented below. The bid quotations
represent prices between broker-dealers and do not include retail mark-ups,
mark-downs, or commissions and do not necessarily represent actual transactions.
1996 1995
QUARTER HIGH LOW HIGH LOW
- - ------- ---- --- ---- ---
First Quarter $0.156 $0.141 $0.594 $0.25
Second Quarter $0.159 $0.125 $0.469 $0.25
Third Quarter $0.281 $0.125 $0.437 $0.141
Fourth Quarter $0.594 $0.219 $0.265 $0.124
At August 5, 1996, the Company had approximately 400 shareholders on record.
The Company has not paid any cash dividends on its common stock. The Company
intends to retain any earnings it may generate to finance the development of its
business and, accordingly, does not anticipate payment of any dividends in the
foreseeable future. In addition, the Company's current line of credit agreement
prohibits payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Biosensor Corporation's net sales totaled $2,424,000 in fiscal 1996, compared
with $2,430,000 in fiscal 1995. Sales were unchanged from 1995 to 1996 and
decreased 14% from 1994 to 1995. Sales in 1996 increased $313,000 in
international markets, and were offset by a corresponding decrease in OEM and
telemetry markets as the Company emphasized its core product offerings. The
decrease in sales in 1995 is attributable to a 57% decrease in sales of
diagnostic equipment in the United States offset by increased sales of $250,000
of OEM telemetry and cardiac monitoring systems which the Company began selling
in the fourth quarter of 1994.
Decreases in US diagnostic equipment sales activity in 1996 and 1995 was caused
by a competitive US medical diagnostic equipment marketplace created by an
ongoing change toward managed care. This change has had the effect of decreasing
the overall market size for medical diagnostic equipment. During the second and
third quarters of 1995, the Company responded to operating losses in the US with
a reorganization of its US sales force. The Company moved from a sales force
comprised of employee and independent sales representatives to the use of
independent sales representatives exclusively. This reorganization resulted in a
decrease in US sales activity. The Company feels that additional marketing
programs, with the support of experienced independent representatives, will be
more effective in reaching customers and generating more profitable sales. In
addition, a sales force of independent sales representatives enables the Company
to decrease sales and marketing overhead costs, thereby increasing the Company's
opportunities to operate profitably. Net sales to one foreign distributor
accounted for $360,000 and $279,000 of total net sales in 1996 and 1995,
respectively, with the remaining sales to distributors, medical centers, and
physicians. See Note 6 to the financial statements.
Cost of products sold as a percentage of net sales was 39% in fiscal 1996, and
41% in 1995 and 1994. With the sales reorganization in 1995 the Company
increased its emphasis on the profitability versus the volume of sales in the
United States, resulting in lower sales volume but more profitable sales in the
US market.
Research, development and engineering expenses for fiscal year 1996 decreased
$72,000 compared to fiscal 1995 and increased $29,000 in fiscal 1995 compared to
1994. The decrease in 1996 is due to decreases in personnel expenditures. The
increase in 1995 is due to increased expenditures relating to development of a
new Holter monitor system, released in 1996.
Sales and marketing expenses decreased $178,000 in 1996 compared to 1995 and
decreased $61,000 in 1995 compared to 1994. The decrease in 1996 and 1995
resulted from lower sales expenditures as a result of the conversion from a
direct to an independent sales representative organization during 1995. These
decreases were partially offset by increased personnel costs in the
international sales area.
General and administrative expenses were $438,000 in 1996 compared to $486,000
in 1995 and $466,000 in 1994. The decrease in 1996 is primarily the result of
the retirement of the chief executive relating to the March 1994 acquisition of
the rights to manufacture and sell cardiac monitors and telemetry products and
other personnel reductions. The general and administrative expenditures did not
substantially change in 1995 compared to 1994.
Liquidity and Capital Resources
The Company generated cash in operating activities of $237,000, resulting
primarily from net income of $172,000, decreases in inventories of $124,000, and
increases in current liabilities of $118,000, partially offset by an increase in
receivables of $210,000. Inventories decreased as a result of the obsolescence
of one Holter patient recorder which had been replaced by a more current model,
and by reductions in inventory of the telemetry product line. Receivables
increased because of increased sales levels at year end and because a greater
proportion of those sales are from international markets with longer payment
terms. This increase is not expected to continue. The Company used cash in
investing activities of $60,000 to purchase property and equipment and for the
final payment on the product line purchased in 1994. The Company expects
purchases of property and equipment in 1997 to decrease from 1996 levels.
At May 31, 1996 the Company had working capital of $760,000. The Company also
has a $150,000 line of credit available due September 30, 1996, with interest at
2 percent over prime (8.25 percent at May 31, 1996). There was no balance
outstanding on the line at May 31, 1996. Advances are limited to a percentage of
receivables and are secured by substantially all the assets of the Company. In
addition, advances will be made only if the Company is in compliance with
certain financial and other covenants at the time the advance is requested.
These covenants include certain current ratio and tangible net worth
requirements and prohibits the payment of dividends.
Management believes that these sources along with cash flows from operations
will be sufficient to fund operations and capital expenditures for fiscal 1997
and beyond.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are filed as part of this Annual Report on form 10-KSB
on pages 15 through 26.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names and ages of the Company's directors and executive officers, and their
principal occupations are set forth below.
Director
Name and Age Principal Occupation Since
- - ------------ -------------------- -----
B. Steven Springrose President, CEO and CFO 1982
(47)
Stephen L. Zuckerman President of M-T 1986
(53) Venture Capital, Inc.,
Minneapolis, MN
and a practicing internal medicine
physician
Other Information Regarding the Board
Business Experience
Mr. Springrose has been President of the Company since its inception in 1982.
Mr. Springrose had spent several years in the design , development, manufacture
and marketing of medical products before joining the Company. He developed new
product concepts as a biomedical engineer at Medtronic, Inc. (1973-1974), and
subsequently held operations, management and product development engineering
positions at Minntech Corporation (1974-1976). Mr. Springrose worked at Cardiac
Pacemakers, Inc. from 1976 through 1982 in various marketing capacities prior to
founding the Company.
Dr. Zuckerman is a practicing physician and President of M-T Venture Capital
Fund, Inc. He is a co-general partner of Aries Investors Fund Limited
Partnership.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the indicated compensation paid and/or accrued to
the Company's Chief Executive Officer for the years indicated. No other
executive officer of the Company received salary and bonus in excess of $100,000
during the fiscal year ended May 31, 1996.
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------
Annual Compensation Awards Payouts
--------------------------- ------------------- -------------
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation Award(s) Options Payouts sation
Position Year ($) ($) ($) ($) SARs(#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
B. Steven
Springrose 1996 $99,000 $27,000 - - - - -
CEO and 1995 $90,000 $ 8,000 - - - - -
CFO 1994 $90,000 $20,000 - - - - -
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Following table presents information provided to the Company as to the
beneficial ownership of the Company's common stock as of August 5, 1996 by (i)
persons holding 5% or more of such stock; and (ii) all officers and directors as
a group:
Common Stock Percent of
Beneficial Owner Beneficially Owned Outstanding Shares
- - ---------------- ------------------ ------------------
B. Steven Springrose 896,000(1) 31.7%
Minneapolis, MN
Officers and Directors as a Group 1,006,576(2) 35.6%
(2 persons)
(1) Includes 35,000 shares owned jointly with Mr. Springrose's spouse
and 6,000 shares held for the benefit of Mr. Springrose's children,
as to which shares he disclaims beneficial interest.
(2) Includes 70,576 shares held by a partnership in which Dr. Zuckerman
is a general partner and currently holds a .5% interest, and 7,000
shares which may be acquired within 60 days of the date hereof
pursuant to the exercise of stock options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Page No. or
Exhibit Incorporation by
No. Description Reference to
- - ------- ----------- ----------------
3.1 Restated Articles of Incorporation *
3.2 Amended Bylaws *
10.1 Agreement between the Company and *
Washington University
(this agreement expired March 1993)
10.4 Stock purchase agreement between *
the Company and Norwest Growth Fund, Inc.
10.5 Biosensor Corporation Incentive *
Stock Option Plan
10.9 License agreement with CNS, Inc. **
10.1 Line of Credit agreement with First Bank
National Association dated May 6, 1994 ***
10.11 Agreement with Marcom Inc. ***
10.12 Line of Credit Agreement with First Bank ****
National Association dated May 25, 1995
as amended August 2, 1995.
* Incorporated by reference to the corresponding exhibit in the Company's
Form S-18 Registration Statement (No. 2-86322C).
** Incorporated by reference to the corresponding exhibit in the Company's
Form 10K filed on August 29, 1989.
*** Incorporated by reference to the corresponding exhibit in the Company's
Form 10K-SB filed on August 26, 1994
**** Incorporated by reference to the corresponding exhibit in the Company's
Form 10K-SB filed on August 26, 1995
Form 8K
There were no filings on form 8K in the fourth quarter of 1996.
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and
Board of Directors
Biosensor Corporation
Minneapolis, Minnesota
We have audited the accompanying balance sheets of Biosensor Corporation as of
May 31, 1996 and 1995, and the related statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended May 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Biosensor Corporation as of May
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended May 31, 1996, in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
July 15, 1996
BIOSENSOR CORPORATION
BALANCE SHEETS
MAY 31, 1996 AND 1995
ASSETS (Note 2) 1996 1995
- - --------------- ---- ----
Current Assets
Cash and cash equivalents $ 163,422 $ 4,750
Accounts receivable, less allowance for doubtful
accounts of $12,000 in 1996 and 1995 (Note 6) 605,536 395,309
Inventories:
Raw materials and component parts 183,957 197,046
Work-in-process 55,747 57,238
Finished goods 68,672 178,202
Prepaid expenses and other 17,163 22,032
---------- ----------
TOTAL CURRENT ASSETS 1,094,497 854,577
---------- ----------
Deposits 11,204 9,643
---------- ----------
Property and Equipment, at cost
Machinery and equipment 205,727 195,580
Office furniture and equipment 146,397 129,242
---------- ----------
352,124 324,822
Less accumulated depreciation 277,713 259,488
---------- ----------
74,411 65,334
---------- ----------
$1,180,112 $ 929,554
========== ==========
See Notes to Financial Statements.
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----- -----
<S> <C> <C>
Current Liabilities
Note payable to bank (Note 2) $ -- $ 20,000
Accounts payable:
Trade 166,058 96,120
Other (Note 3) -- 20,000
Customer deposits 9,186 18,436
Accrued expenses:
Commissions 55,280 22,350
Compensation 55,481 43,333
Warranty 30,657 22,467
Other 18,162 8,746
----------- -----------
TOTAL CURRENT LIABILITIES 334,824 251,452
----------- -----------
Deferred Rent -- 5,195
----------- -----------
Commitments and Contingencies (Notes 7 and 8)
Stockholders' Equity (Notes 2 and 5)
Common stock, $.05 par value; authorized 5,000,000
shares; issued and outstanding 2,808,055 shares
in 1996 and 2,800,555 shares in 1995 140,403 140,028
Additional paid-in capital 2,940,447 2,939,947
Accumulated deficit (2,235,562) (2,407,068)
----------- -----------
845,288 672,907
----------- -----------
$ 1,180,112 $ 929,554
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
BIOSENSOR CORPORATION
STATEMENTS OF INCOME
YEARS ENDED MAY 31, 1996, 1995, AND 1994
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales (Note 6) $ 2,424,478 $ 2,429,662 $ 2,818,510
----------- ----------- -----------
Costs and Expenses
Cost of products sold 943,554 997,696 1,168,609
Research, development and engineering 168,859 241,272 212,517
Sales and marketing 701,661 879,612 940,180
General and administrative 437,849 485,759 465,683
----------- ----------- -----------
2,251,923 2,604,339 2,786,989
----------- ----------- -----------
OPERATING INCOME (LOSS) 172,555 (174,677) 31,521
Nonoperating Income (Expense)
Interest expense (1,504) (2,396) --
Other income (expense) (1,441) (5,953) 13,484
Interest income 1,896 5,680 5,664
----------- ----------- -----------
NET INCOME (LOSS) $ 171,506 $ (177,346) $ 50,669
=========== =========== ===========
Earnings (Loss) Per Common and Common
Equivalent Share $ 0.06 $ (0.06) $ 0.02
=========== =========== ===========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 2,803,678 2,798,089 2,778,799
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
BIOSENSOR CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1996, 1995, AND 1994
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, May 31, 1993 $ 113,528 $ 2,939,947 $(2,280,391) $ 773,084
Issuance of 500,000 shares upon
exercise of stock option 25,000 -- -- 25,000
Net income -- -- 50,669 50,669
----------- ----------- ----------- -----------
Balance, May 31, 1994 138,528 2,939,947 (2,229,722) 848,753
Issuance of 30,000 shares upon
exercise of stock option 1,500 -- -- 1,500
Net loss -- -- (177,346) (177,346)
----------- ----------- ----------- -----------
Balance, May 31, 1995 140,028 2,939,947 (2,407,068) 672,907
Issuance of 7,500 shares upon
exercise of stock option 375 500 -- 875
Net income -- -- 171,506 171,506
----------- ----------- ----------- -----------
Balance, May 31, 1996 $ 140,403 $ 2,940,447 $(2,235,562) $ 845,288
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
BIOSENSOR CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1996, 1995, AND 1994
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 171,506 $(177,346) $ 50,669
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation 29,829 25,117 46,455
Loss on sale of property and equipment 730 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (210,227) 258,753 (122,092
Inventories 124,110 (35,714) (42,332)
Prepaid expenses and other 4,869 3,929 (6,612)
Deposits (1,561) (977) --
Increase (decrease) in:
Accounts payable 69,938 (83,757) 63,335
Customer deposits (9,250) (30,749) 49,185
Accrued expenses 57,489 (36,323) 2,656
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 237,433 (77,067) 41,264
--------- --------- ---------
Cash Flows from Investing Activities
Payment for purchase of product line (Note 3) (20,000) (50,000) (30,000)
Purchase of property and equipment (40,636) (15,491) (18,421)
Proceeds from the sale of property and equipment 1,000 600 1,393
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (59,636) (64,891) (47,028)
--------- --------- ---------
Cash Flows from Financing Activities
Borrowings from note payable to bank 110,000 471,000 --
Payments on note payable to bank (130,000) (451,000) --
Net proceeds from issuance of common stock 875 1,500 25,000
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (19,125) 21,500 25,000
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 158,672 (120,458) 19,236
Cash and cash equivalents:
Beginning of year 4,750 125,208 105,972
--------- --------- ---------
Ending of year $ 163,422 $ 4,750 $ 125,208
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash paid for interest $ 1,208 $ 2,396 $ --
========= ========= =========
</TABLE>
See Notes to Financial Statements.
BIOSENSOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Biosensor Corporation (the Company) is engaged in the
development, manufacture and marketing of diagnostic equipment for physicians'
offices, clinics and hospitals throughout the U.S., Europe, and Asia. The
24-hour ambulatory cardiac monitoring, EKG telemetry, pulmonary function, EKG
and ambulatory blood pressure systems operate independently or in unison on an
IBM compatible office computer. The Company also manufactures cardiac monitors
for OEM distributors.
A SUMMARY OF THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
CASH AND CASH EQUIVALENTS: For purposes of reporting the statement of cash
flows, the Company considers any highly liquid debt instruments purchased with
an original maturity date of three months or less to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS: At May 31, 1996, the Company adopted FASB
Statement No 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The
following methods and assumptions were used to estimate the fair value of each
class of financial instrument:
CASH AND CASH EQUIVALENTS: The carrying value approximates market.
INVENTORIES: Inventories are carried at the lower of cost or market determined
under the first-in, first-out (FIFO) method.
DEPRECIATION: Depreciation of property and equipment is computed using
straight-line and accelerated methods over the following useful lives:
Years
- - ----------------------------------------------------------------------
Machinery and equipment 3 - 5
Office furniture and equipment 5 - 7
INCOME RECOGNITION: Revenues and expenses are recorded using the accrual basis
of accounting for both financial reporting and income tax purposes. However,
revenues are not accrued if collection thereof is not reasonably assured or the
customer has an unconditional right of return.
EARNINGS (LOSS) PER COMMON SHARE: Earnings (loss) per common share is computed
by dividing net income (loss) by the weighted average number of common shares
and common share equivalents outstanding during each period. Common share
equivalents include stock options. In 1995, the common equivalent shares were
not included in the computation as their effect would have been anti-dilutive.
Earnings per share assuming full dilution were the same as primary earnings per
share, as the difference between the two computations was not material.
INCOME TAXES: Deferred taxes are provided on a liability method, whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
ACCRUED WARRANTY: The products manufactured by the Company are sold with a
one-year warranty. The Company accrues warranty costs based upon historical
experiences and current conditions. The Company also offers an extended warranty
to its customers, under which revenues are initially deferred and recognized on
a straight-line basis to match the related costs incurred over the extended
warranty period. Expense for work performed under the extended warranties are
recognized as incurred. As of May 31, 1996 and 1995, the amount of accrued
warranty costs were $5,766 and $10,000, respectively, and deferred warranty
revenue was $24,891 and $12,467, respectively.
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
disclosures 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.
ISSUED BUT NOT YET ADOPTED STANDARD: In October, 1995, the FASB issued Statement
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Statement No. 123 establishes
financial accounting and reporting standards for stock-based compensation plans.
Statement No. 123 encourages the adoption of a FAIR VALUE BASED METHOD of
accounting for stock-based compensation plans, but also allows entities to
continue to measure compensation cost using the INTRINSIC VALUE BASED METHOD of
accounting prescribed by APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Entities electing to remain with the accounting in Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method had been applied.
Statement No. 123 is effective for the year ending May 31, 1997. The Company
does not intend to adopt Statement No. 123 in measuring expense, however it will
present the pro forma disclosures and those pro forma amounts will likely be
less than the amounts shown in future statements of income.
NOTE 2. NOTE PAYABLE TO BANK
The Company has a $150,000 line of credit available due September 30, 1996, with
interest at 2% over prime (10.25% at May 31, 1996). Advances are limited to a
percentage of receivables and are secured by substantially all the assets of
the Company. In addition, advances will be made only if the Company is in
compliance with certain financial and other covenants at the time the advance is
requested. These covenants include certain current ratio and tangible net worth
requirements and prohibit the payment of dividends. As of May 31, 1996, there
was no outstanding balance on the line of credit.
NOTE 3. ACQUISITION OF PRODUCT LINE
In March, 1994, the Company acquired the rights to manufacture and sell
telemetry products and cardiac monitors. In addition, the Company also purchased
related inventory and equipment. The total purchase price was $100,000, which
has been paid in full as of May 31, 1996. Payments were due based upon the sale
of the purchased inventory with all payments due by September, 1995.
NOTE 4. INCOME TAXES
A reconciliation of federal statutory income taxes to the Company's effective
tax provision is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" federal tax expense
(benefit) at statutory rates $ 60,000 $(62,000) $ 16,500
State income taxes, net of federal benefit 9,000 2,500 2,100
Federal surtax exemption (6,300) 3,000 (9,200)
Utilization of net operating loss carryforwards (69,000) -- (9,400)
Change in valuation allowance 6,300 56,500 --
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
Net deferred taxes included the following at May 31, 1996 and 1995:
1996 1995
--------- ---------
Deferred tax assets $ 809,400 $ 872,100
Valuation allowance for deferred tax assets (809,400) (872,100)
--------- ---------
NET $ -- $ --
========= =========
Deferred tax assets are comprised of the following at May 31, 1996 and 1995:
1996 1995
--------- ---------
Loss carryforwards $ 685,700 $ 754,700
Tax credit carryforwards 85,000 85,000
Accrued compensation 18,300 14,300
Warranty accrual 10,400 7,600
Allowance for doubtful accounts 4,100 4,100
Deferred rent 1,800 3,800
Other, net 4,100 2,600
--------- ---------
SUBTOTAL 809,400 872,100
Valuation allowance for deferred tax assets (809,400) (872,100)
--------- ---------
$ -- $ --
========= =========
At May 31, 1996, the Company has approximately $2,024,000 of net operating loss
carryforwards available to offset future taxable income and approximately
$85,000 of tax credit carryforwards to offset future federal income tax
liabilities. Theses carryforwards expire as follows:
Net
Operating Tax
Years ending May 31, Loss Credit
---------- ---------
1998 $ -- $ 26,000
1999 -- 48,000
2000 845,000 11,000
2001 516,000 --
2002 236,000 --
2003 113,000 --
2004 128,000 --
2010 186,000 --
----------- ---------
$2,024,000 $ 85,000
=========== =========
NOTE 5. STOCK OPTIONS
The Company has a stock option plan that permits the granting of incentive stock
options meeting the requirements of Section 422 of the Internal Revenue Code of
1986, as amended, and non-qualified options which do not meet the requirements
of Section 422. The plan has 250,000 shares available for grant. Other pertinent
information related to the plan is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Options outstanding, beginning of year 100,000 70,000 50,000
Granted 90,000 60,000 20,000
Canceled (77,500) -- --
Exercised (7,500) (30,000) --
-------- -------- --------
Options outstanding, end of year 105,000 100,000 70,000
======== ======== ========
Options exercisable, end of year 53,250 45,000 50,000
======== ======== ========
Exercise price per share $.05-.125 $.05-.25 $.05-.25
======== ======== ========
</TABLE>
All stock options have been granted at fair market value and, accordingly, no
compensation expense has been recorded for all periods presented.
In addition, non-qualified options for the purchase of 500,000 shares of common
stock were issued outside of the plan in 1993 and were exercised in 1994.
NOTE 6. MAJOR CUSTOMERS AND EXPORT SALES
The Company's customers which account for 10% or more of sales in any of the
three years ended May 31, 1996 were:
<TABLE>
<CAPTION>
Sales Percentage Trade Receivable Balance
--------------------------------- -------------------------
Company 1996 1995 1994 1996 1995
------- ----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
A (Foreign customer) 14.8% 11.5% * $104,851 $135,777
B (Foreign customer) * * 12 * *
===== ===== ===== ======== ========
</TABLE>
* Sales to this customer were less than 10% in these years.
The Company's export sales are principally to Europe and Asia and totaled
approximately 46%, 40%, and 25% of net sales for the years ended May 31, 1996,
1995, and 1994, respectively.
NOTE 7. LEASES
The Company leases its office facility under an operating lease expiring in
March, 1997. The lease provides that the Company pay a pro rata share of
building operating expenses. Total rent expense for years ended May 31, 1996,
1995 and 1994 was $73,000, $75,326, and $77,042, respectively.
Approximate future minimum lease payments under the noncancelable office
facility lease as of May 31, 1996 are $43,000.
NOTE 8. CONTINGENCIES
On January 25, 1995, a former vendor filed a complaint claiming breach of
contract with respect to a software licensing agreement with the Company,
entered into in 1988 and amended in 1991. The Agreement provided for minimum
annual royalty payments and royalty amounts payable for systems sold by the
Company utilizing certain vendor software. The Agreement was modified in 1991 to
provide that the Company's obligation to make royalty payments would be
completed once the Company had paid a defined amount. After paying the defined
amount, the Company stopped making license payments per the amended Agreement.
The vendor advised the Company of its view that the Company continued to be
obligated to make royalty payments. The case is scheduled to go to trial in
September, 1996. The Company's legal counsel has advised of its view that the
1988 Agreement was concluded in 1991 and the Company has no continuing license
obligation to the vendor. While it is not feasible to determine the outcome if
any of this case, it is the opinion of management that the outcome will not have
a material adverse effect on the financial position or operations of the
Company.
NOTE 9. EMPLOYEE BENEFIT PLAN
In 1994, the Company's established a 401(k) profit sharing plan covering all
employees who meet the age and service requirements of the plan. Employees may
make elective contributions and the Company, at the discretion of the Board of
Directors, has the option of making a matching contribution each year, up to 25%
of the employee's contribution. Company contributions of approximately $4,800,
$0 and $600 were made for the years ended May 31, 1996, 1995 and 1994,
respectively.
SIGNATURES
In accordance with Sections 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BIOSENSOR CORPORATION
/s/ B. Steven Springrose
- - ----------------------------------
B. Steven Springrose
President, Chief Executive Officer
and Chief Financial Officer
Date: August 28, 1996
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
/s/ B. Steven Springrose President, Chief Executive August 28, 1996
- - --------------------------- Officer, Chief Financial
B. Steven Springrose Officer, and Director
(Principal Executive Officer)
/s/ Stephen L. Zuckerman MD Director August 28, 1996
- - ---------------------------
Stephen L. Zuckerman, MD
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 163,422
<SECURITIES> 0
<RECEIVABLES> 617,536
<ALLOWANCES> 12,000
<INVENTORY> 308,376
<CURRENT-ASSETS> 1,094,497
<PP&E> 352,124
<DEPRECIATION> 277,713
<TOTAL-ASSETS> 1,180,112
<CURRENT-LIABILITIES> 334,824
<BONDS> 0
0
0
<COMMON> 140,403
<OTHER-SE> 704,885
<TOTAL-LIABILITY-AND-EQUITY> 1,180,112
<SALES> 712,391
<TOTAL-REVENUES> 712,391
<CGS> 311,587
<TOTAL-COSTS> 304,450
<OTHER-EXPENSES> 60,295
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68
<INCOME-PRETAX> 35,991
<INCOME-TAX> (1,689)
<INCOME-CONTINUING> 37,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,680
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
