SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X] Preliminary Proxy Statement
[ ] Confidential, for Use of Commission Only (as permitted by Rule 14a-6(e)
(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or
Rule 14a-12
BIOSENSOR CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration No.:
3) Filing Party:
4) Date Filed
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 29, 1998
Notice is hereby given that the annual meeting of shareholders of
Biosensor Corporation (the "Company") will be held on Tuesday December
29, 1998 at 2:00 p.m., at the Company's principal offices located at 6
Woodcross Drive, Columbia , South Carolina for the following purposes:
1. To vote upon a proposal to amend the Company's Articles of
Incorporation to change the name of the Company to "BIOTEL Inc.";
2. To vote upon a proposal to amend the Company's Articles of
Incorporation to effectuate a one-for-six reverse stock
split of all outstanding shares of common stock of the Company;
3. To vote upon a proposal to amend the Company's Articles of
Incorporation to increase the number of shares of common stock and
the number of shares of Preferred Stock the Company is authorized to issue;
4. To vote upon election of six members to the Company's Board
of Directors to serve for a term of one year or until the next election
of directors;
5. To vote upon adoption of an Incentive Stock Option Plan for
employees and directors of the Company; and
6. To ratify the selection of McGladrey & Pullen as the
Company's independent public auditor for the fiscal year ending June 30, 1999.
The Board of Directors has fixed the close of business on December 3,
1998 as the record date for the determination of shareholders entitled
to notice of and to vote at the meeting.
By Order of the Board of Directors,
Ronald G. Moyer
President
Columbia, South Carolina
December __, 1998
TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN, DATE AND
RETURN YOUR PROXY ON THE ENCLOSED PROXY CARD WHETHER OR NOT YOU EXPECT
TO ATTEND IN PERSON. SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE
THEIR PROXIES AND VOTE IN PERSON IF THEY DESIRE.
TABLE OF CONTENTS
Page
Introduction 1
Background 2
Description of the Business..........................
Proposals
Proposal No. 1 Regarding Name Change
Proposal No. 2 Regarding Reverse Stock Split
Proposal No. 3 Regarding Increase in Authorized Capital Stock
Proposal No. 4 Regarding the Election of Directors.............
Proposal No. 5 Regarding the Incentive Stock Option Plan..........
Proposal No. 6 Regarding Ratification of the Selection of Auditors.....
Shareholder Proposals..........................
Incorporation of Certain Documents by Reference...............
Other Matters..............................
ANNEX
Annex I Carolina Medical, Inc. and BioTel International, Inc.
Audited Financial Statements for fiscal years ended June
30, 1998 and June 30, 1997.
Annex II Unaudited Pro Forma Combined Financial Information for the
Company's fiscal year ended June 30, 1998.
Annex III Unaudited Financial Statements for Quarters ended September
30, 1998 and September 30, 1997, including historical and
pro forma information.
Annex IV Articles I and Article II of the Company's Articles of
Incorporation showing Amendments pursuant to Proposals No.
1 and 3
BIOSENSOR CORPORATION
________________________
PROXY STATEMENT FOR 1998 ANNUAL MEETING OF SHAREHOLDERS
To be held on December 29, 1998
________________________
NOTICE
This Proxy Statement contains certain forward-looking statements,
including the plans and objectives of management for the business,
operations and economic performance of the Company. These forward-
looking statements may be identified by qualifiers such as "intends,"
"believes" and "anticipates," among other terms. In light of the
significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that
the objectives or plans of the Company will be achieved.
INTRODUCTION
This Proxy Statement is furnished to the shareholders of
Biosensor Corporation (the "Company") in connection with the
solicitation of proxies by the Board of Directors of the Company to be
voted at the Annual Meeting of shareholders to be held on December 29,
1998, or any adjournment(s). The purpose of the Annual Meeting is to
vote upon: i) the change of the Company's name to "BIOTEL, Inc.," ii) a
one for six reverse stock split of the Company's common stock, iii)
increasing the authorized number of shares of common stock and
preferred stock, iv) election of Directors for the coming year, v)
approval of the 1998 Employee Stock Option Plan, and vi) ratification
of Company's independent public auditors. The Company's principal
offices are located at 6 Woodcross Drive, Columbia, South Carolina.
The mailing of this Proxy Statement to shareholders of the Company
commenced on or about December ___ 1998.
Any proxy may be revoked at any time before it is voted by
written notice, mailed or delivered to the President of the Company, or
by revocation of a written proxy by request in person at the Special
Meeting; but if not so revoked, the shares represented by such proxy
will be voted according to your directions. If your proxy card is
signed and returned without specifying a vote or an abstention on any
proposal, it will be voted according to the recommendation of the Board
of Directors on each proposal.
Under Minnesota law, each item of business properly presented at
a meeting of shareholders generally must be approved by the affirmative
vote of the holders of a majority of the voting power of the shares
present, in person or by proxy, and entitled to vote on that item of
business. However, if the shares present and entitled to vote on that
item of business would not constitute a quorum for the transaction of
business at the meeting, then the item must be approved by a majority
of the voting power of the minimum number of shares that would
constitute a quorum. A shareholder who submits votes by proxy but does
not direct the proxy to vote on a specific item of business is not
considered to be present and entitled to vote with respect to such item
of business. On the other hand, a shareholder who specifically
abstains with respect to an item of business but otherwise gives a
proxy authority to vote on a shareholder's behalf will be counted as
being present and entitled to vote on such item even though the proxy
may not vote on such item on the shareholder's behalf.
The total number of shares of capital stock outstanding and
entitled to vote at the Annual Meeting as of December 3, 1998 consisted
of 3,008,055 shares of $.05 par value common stock and 149,025.15
shares of no par value Series A Preferred Stock. While each share of
common stock is entitled to one vote, each share of Series A Preferred
Stock is entitled to 96 votes. Holders of the preferred shares hold
approximately 83% of the voting power of all shares (including both
common and preferred) entitled to vote at the meeting. There is no
cumulative voting. Only shareholders of record at the close of business
on December 3, 1998 will be entitled to vote at the meeting. The
presence, in person or by proxy, of holders of 51% of the voting power
of the shares of common and preferred stock entitled to vote at the
Annual Meeting of shareholders constitutes a quorum for the transaction
of business. The proposals set forth in this Proxy Statement will be
adopted upon the affirmative vote of the holders of a majority of the
voting power of the shares entitled to vote thereon present, in person
or by proxy, at the Annual Meeting.
BACKGROUND
On July 23, 1998, Biosensor Corporation (`Biosensor" or the
"Company") acquired all of the outstanding shares of Carolina Medical,
Inc. ("Carolina Medical" or "CMI"), a Minnesota corporation, pursuant
to a Plan of Reorganization and Agreement (the "Plan") by and between
the Company and CMI, dated May 29, 1998. The Plan requires the Company
to submit to its shareholders proposals: i) to change the Company's
name to BIOTEL Inc., ii) to effect a one-for-six reverse stock split
(the "Reverse Stock Split"), and iii) to increase the authorized number
of shares of common stock to 10,000,000 and the authorized number of
preferred stock shares to 2,000,000. CMI of Minnesota was organized to
facilitate the share exchange with the Company. As a preliminary step
to the share exchange, Carolina Medical, Inc., a North Carolina
corporation that owned Braemar, Inc. and 55% of the common stock of
Advanced Medical Products, Inc., was merged with and into CMI of
Minnesota, whose name was then changed to Carolina Medical, Inc.
Pursuant to the Plan, the Company acquired all of CMI's Common
Stock in exchange for 149,025.15 shares of the Company's Series A
Preferred Stock. The Company does not currently have sufficient Common
Stock authorized to accomdate the conversion of all outstanding shares
of the Series A Preferred Stock. Each share of Series A Preferred
Stock is convertible into 96 shares of the Company's Common Stock
before the proposed one for six Reverse Stock Split, or 16 shares of
Common Stock after the Reverse Stock Split. Each share of Series A
Preferred Stock votes and participates in dividends and liquidations on
an as-if-converted basis. In addition, the Series A Preferred Stock
will automatically convert into Common Stock as of the end of business
on the first day following the date that the Company's Articles of
Incorporation authorize sufficient Common Stock to accommodate
conversion of all issued and outstanding shares of Series A Preferred
Stock. As a result, shareholders of the Series A Preferred Stock
effectively own approximately 83% of the Company's Common Stock,
assuming all shares of Series A Preferred Stock are converted to Common
Stock. While the rights of the shareholders of the Company prior to
the CMI acquisition have not been changed, their ownership of the
Company has been greatly reduced.
The Company's Board of Directors determined that the acquisition
of CMI was necessary for the long term survival and future growth of
the Company. The present regulatory environment and recent health care
reforms favor suppliers with larger market shares. For some time prior
to the acquisition of CMI, the Company was struggling to maintain its
market share and revenues, and to reduce its operating expenses. The
acquisition of CMI offered an opportunity to greatly reduce the
Company's expenses by combining its marketing, research and development
and administrative functions with those of CMI and its subsidiaries.
Management believes that combined, the Company is now the largest
producer of Holter recorders and playback units, and will be able to
compete more effectively in the present market environment.
The principal address of Carolina Medical is 157 Industrial
Drive, P.O. Box 307, King, North Carolina, 27021-0307, where the phone
number is 336-983-5132. CMI manufactures, markets and services digital
ultrasound imagers used principally for the diagnosis and treatment of
prostate cancer, and electronic instruments for detecting circulatory
system disorders and measuring the flow and pressure of blood.
Braemar, Inc., a North Carolina corporation located in Minnesota, now a
wholly owned subsidiary of the Company, develops, manufactures and
markets analog tape recording and digital recording devices for
ambulatory ECG monitoring, and transtelephonic (TTP) Event Recorder
devices. Advanced Medical Products, Inc. ("AMPI"), a publicly held
Delaware corporation located in South Carolina, a 55% owned subsidiary
of the Company, develops, markets, and services ambulatory ECG and
blood pressure monitors.
The acquisition of CMI by the Company through a statutory share
exchange was treated as a tax free reorganization under Section
368(a)(1)(B) of the Internal Revenue Code. Because the transaction was
a "reverse merger", the historical financial statements of the Company
for the fiscal years ended June 30, 1997 and June 30, 1998 are those of
Bio-Tel International, Inc. (a predecessor company that owned a
majority interest in Carolina Medical prior to December 1997) and those
of Carolina Medical, Inc. respectively, consolidated with their
subsidiaries. The assets and liabilities of Biosensor Corporation,
valued at fair market value as of June 30, 1998, were combined with the
assets and liabilities of Carolina Medical and its subsidiaries on July
1, 1998.
There are no federal or state regulatory requirements that the
Company was obligated to comply with in connection with the CMI
acquisition.
Management does not expect representatives of the Company's
independent auditors for the fiscal years ended June 30, 1997 and June
30, 1998 to be present at the annual shareholders meeting, but the
auditors have communicated directly with the chairman of the audit
committee of the Board of Directors and will have an opportunity to
make a statement at the stockholders meeting if they desire to do so.
Biosensor's Board of Directors has also authorized the merger of
a wholly owned subsidiary of the Company, Advanced Biosensor Inc, with
and into Advanced Medical Products, Inc., subject to certain terms and
conditions. The Company and Advanced Medical Products, Inc. are
negotiating a definitive agreement regarding this proposed merger.
INFORMATION ABOUT BIOSENSOR CORPORATION
General
Biosensor Corporation ("Biosensor" or the "Company") is
functionally a holding company. Operations are conducted through
Carolina Medical, Inc. ("Carolina Medical" or "CMI") and its
subsidiaries Braemar, Inc. ("Braemar") and Advanced Medical Products,
Inc. ("AMPI"). The Company manufactures, markets, and services medical
diagnostic monitoring and treatment devices, along with the associated
computer and communications hardware and software.
Following the acquisition of CMI in July 1998, Biosensor
terminated the employment of all but three of its employees and out
sourced all of its manufacturing to Braemar. As of October 1, 1998,
as an essential cost savings measure, the Company integrated the
historical Biosensor sales, marketing and administrative operations
into AMPI, pursuant to a verbal agreement which provides that AMPI will
develop, market, test and ship and service both AMPI's and the
Biosensor's cardiac monitoring products under the name "Advanced
Biosensor." These products consist of: i) ambulatory electrocardiogram
("ECG") monitoring systems (Holter monitor); ii) a combination Holter
and ambulatory blood pressure monitoring system; iii) a PC based
spirometry system, which is used by physicians to measure lung capacity
and function; and iv) three other PC based OEM products: an ambulatory
blood pressure system, a vascular testing system, and a stress/ECG system.
Carolina Medical continues to manufacture, market and service
ultrasound and blood flow products while the Company continues to
evaluate the feasibility of additional integration of the
manufacturing, marketing, product development, and administrative
functions of its subsidiaries.
Products
Caridiac Monitoring Systems. An ECG is a primary source of
diagnostic information for the physician, giving him the capability to
non-invasively (without puncture or incision of the skin or insertion
of an instrument into the body) record and detect electrical events of
the heart, including arrhythmia's (disorders of the cardiac rhythm)
and/or symptomatic or asymptomatic (without symptoms) ischemia (the
interruption of blood supply and oxygen to the heart, related to the
blockage of coronary arteries).
An ambulatory (a diagnostic technique where the patient is
monitored while engaging in normal activities) ECG monitor, known as a
"Holter" monitor, consists of electrodes which are taped to the
patient's chest and connected by cables to a monitor which records up
to 24 hours of ECG information transmitted from the electrodes. The
Holter monitor temporarily stores the information received, and, when
connected to a computer and/or external printer, can transmit the
information to be permanently stored for future use, displayed on a
viewing monitor and/or printed, or transmitted via the Internet to a
remote site for interpretation by a specialist.
Holter monitors are used when a 30 second ECG (a.k.a. EKG)
administered at the physician's office or clinic is unable to tell the
physician the information needed about a potential cardiac condition.
Holter monitors are used primarily to evaluate potential cardiac
patient symptoms to evaluate rhythm abnormalities, 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 and ischemic 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 typically charges about $150 per test. International
reimbursement can vary from several dollars up to approximately $80 per
test. Reimbursements are generally sufficient for a private physician
or health care facility to financially justify a small Holter system.
It is estimated that approximately 100,000 Holter monitors are
currently in use in the U.S. The vast majority of these are analog
devices that store cardiac data on cassette tapes. Braemar Inc. is the
leading manufacturer of analog cassette tape Holters and cassette tape
readers used by scanning service companies and hospitals for reading
the cassette tapes. Analog Holters do not accommodate transmission of
the recorded data telephonically or over the Internet because of the
relatively low speed of the analog recorders. Therefore the cassette
tapes are generally removed from the analog recorders and either
processed locally or physically sent to remote medical centers and/or
scanning services for reading, interpretation and report generation.
Approximately ten companies, including the Company, have developed
digital Holter monitors that are generally smaller, lighter, more
reliable and take less power then analog Holters. AMPI markets digital
Holter monitors developed by AMPI, Biosensor, and Braemar to
physician's offices and clinics. These digital monitors, which are
manufactured by Braemar, used in conjunction with PC's and software
supplied by the Company, are capable of transferring the recorded data
to a PC and then transmitting the data as an FTP file over the
Internet. The Company expects that Internet transfer of data will
stimulate replacement of a large number of the installed base of analog
Holter recorders over the next five to ten years.
Analog Tape Holter Monitor Components. Over eighty percent (80%)
of Braemar's revenue has historically been derived from supplying
Holter monitor components to other companies. Braemar supplies Holter
cassette decks to several companies, which in turn add the necessary
additional electronics and software. Braemar also manufactures
replacement devices for use in Holter Monitors manufactured by other
companies. Braemar is the predominate supplier of Holter scanner tape
drives and scanner subsystems to most companies that market Holter
cassette systems. The Braemar product offering includes a complete tape
deck or the tape deck with analog to digital (A/D) electronics and a PC
interface board to comprise a full subsystem solution.
Digital Holters. Digital Holter monitors are similar to analog
Holter monitors except that solid state memory chips are used to store
the cardiac data rather than cassette tapes. Some digital Holter
monitors, including those marketed by AMPI, contain micro-processors
and associated support electronics that enable the devices to pre-
process the data to make storage and transmission of the data faster
and more efficient. Digital Holter monitors are supplied by Braemar to
a number of Holter system companies and channel partners that sell the
Braemar products as replacement or add-on monitors to the installed
base of Holter customers, and digital Holter monitors are an increasing
part of Braemar's business.
Event Recorder Devices. Braemar has two transtelephonic (TTP)
Event Recorder products, positioned at the low (Model ER300) and high
(Model ER700) ends of the market. A TTP event recorder is an
ambulatory electronic device that records certain cardiac "events" when
prompted by the patient. A TTP event recorder is worn by a patient for
30 days and records cardiac activity arround the time the patient
presses the record button. The patient can transfer the data stored on
the record via telephone lines to a service that compiles and analyses
the data for diagnostis by a physician. The ER300 product line includes
a post event recorder as well as single and dual lead looping event
recorders that capture up to 20 seconds of data prior to the indicated
cardiac event. The ER700 product line does not include a post event
product but includes single and dual lead looping products and adds a
three lead product about to be marketed by an OEM customer that is
capable of deriving full 12 lead capability from the data recorded from
three leads. The ER700 includes an LCD that provides the ability to
easily check the patient "hookup" and results in an easy to use
product. These products together resulted in only a minor part of
Braemar revenue in 1998.
Ambulatory Blood Pressure Monitor. The Company also offers a
family of diagnostic devices incorporating an ambulatory blood pressure
monitor (the "ABP Monitor"). The ABP Monitor records up to 24 hours of
blood pressure data, including systolic, diastolic and mean arterial
pressures and pulse rate in a solid state recorder. Results recorded
by the ABP Monitor are capable of being printed out in a tabular format
on a printer or displayed on a viewing monitor.
The Company currently offers both a stand-alone ABP monitor and
combined ECG Holter and ABP Monitor. The stand-alone blood pressure
monitoring procedure is not generally reimbursable under existing
government-sponsored reimbursement programs; however, private, third-
party insurers are increasingly approving reimbursement for the blood
pressure procedure. The ECG Holter procedure performed simultaneously
with the blood pressure procedure, utilizing the combined ECG Holter
and ABP Monitor, is currently reimbursable under existing reimbursement
guidelines. See "Government Regulation - Reimbursement." Due to current
reimbursement guidelines, management anticipates that domestic sales of
ABP Monitors will continue to be predominantly for the combined ECG
Holter and ABP Monitor version of the product. The Company believes it
is currently the only manufacturer producing a combination system.
Vascular Testing Systems. The Vascular Lab sold by the Company
assists physicians in diagnosing vascular diseases, by measuring the
flow and pressure of the vascular system. This products is marketed as
a companion product to the Company's other physician's office products.
This PC based system integrates 4 MHz and 8 MHz Doppler, Pulse Volume
Recording, Segmental Pressures, and Venous Reflux Testing, along with
both Pneumo and Photo Plyethsmography to enable the physician to
perform a full diagnostic examination on the patients cardiovascular
system. The products innovative software controls the system's various
functions, eliminating the need for manual adjustments. The Company purchases
this product from a supplier and resells the product to its customers.
Spirometry System. The Company's spirometry system is used by
physicians to measure lung capacity and function. It uses PC
compatible software developed by the Company, 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 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. The Company purchases this product from a supplier and
resells the product to its customers.
Maintenance and Services. The Company offers maintenance, repair
services and supplies for ultrasound and other medical equipment.
Maintenance services and supplies currently provide more than 50% of
Carolina Medical's revenue, and is expected to grow modestly as the
installed base of equipment grows and new products are introduced.
Prostate Brachetherapy System. The Company assembles, markets
and services the ProScanT and ProScan PlusT ultrasound imagers, which
are used for Prostate Bracheterapy, a procedure used to treat prostate
cancer by placing small metal radioactive pellets, referred to as
"seeds," around the tumor. Radiation from the seeds destroys the
surrounding tissue and generally, if properly placed, destroys the
tumor. Accurate placement of the pellets improves patient outcomes.
Proper placement of the seeds requires an ultrasound system to locate
and measure the prostate. The Company's ProScan and ProScan Plus
ultrasound products are among several competitive systems currently
being used for Brachetherapy. The Company markets and sells its ProScan and
ProScan Plus ultrasound systems to hospitals and urology practices.
The Company is developing a next generation Brachetherapy system
which will integrate into the Company's PC NT based ultrasound platform
3-dimensional treatment planning software, supplied by another company,
that can generate and display three-dimensional images of the prostate
from multiple ultrasound images and develop a dosage treatment plan.
This is expected to substantially simplify the procedure and provide
for better accuracy and improved outcomes. It is believed that this
integrated system can facilitate performing the entire outpatient
procedure on a single visit to the hospital rather than the multiple
visit procedure spread over several weeks as it is being done
presently. This product is expected to be ready for market in calendar
year 1999, but will require FDA 510(K) approval.
Blood Flow Measurement Instruments and Accessories. The Company
manufactures the blood flow censors used in the Bard Medical heart
pump, and is the established accuracy leader in blood flow measurement.
Although electromagnetic blood flow probes and instruments are a mature
product line, there is a large installed base of equipment, and
established customers that continue to order replacement probes and
accessories.
Hand Held, Battery Powered, Portable Ultrasound. The Company is
continuing the development of a hand held ultrasonic imaging device,
the Micros QVT, initial models of which have received FDA 510(K) pre-
market approval. This product is intended to be used as an examination
tool to be carried by the physician in a variety of clinical settings,
including trauma centers, emergency departments, nursing homes, and
physician offices. The Micros QV incorporates many of the features and
capabilities of larger, more expensive ultrasound imagers into a
compact package (approximately 5"x2"x9"), weighing approximately 33
ounces. The Micros QV displays real time, ultrasound images of internal
organs on a small flat panel screen (3" diagonal). The unit permits the
physician to "freeze" any image on the screen and store up to ten images
internally in digital memory. An image may be reproduced to a hard copy
through an accompanying printer or transmitted to a personal computer for
storage, archiving, processing or for electronic transfer to a remote
location for interpretation or a "second opinion" by a specialist. The
unit is powered by a rechargeable battery pack that provides up to two
hours of continuous scanning.
The Micros QV product initially developed by AMPI was acquired by
Carolina Medical in October 1998 after it was determined that i) the
product required additional development effort in order to meet
acceptable image quality standards, and AMPI did not have the financial
or technology resources to continue the development, and ii) AMPI present
channels to market for their cardiac monitoring products were not
effective in reaching the market for this ultrasound product. Carolina
Medical is currently addressing the required image quality improvements
and other product improvements, and is currently seeking strategic
marketing partners to take this product to several selected markets.
While Management believes that there is a significant market for
a hand held ultrasound devices, there is no similar product on the
market and the Company has not done a formal market study or survey
regarding the demand for, or interest in such a product. As such no
assurance can be made that a market now or in the future will exist for
the Company's Micros QV product. The only other company known to be
developing a portable battery powered ultrasound imager is SonoSite, a
spin-off from ATL Ultrasound, the worlds largest ultrasound company.
OEM and Custom Development and Production. Braemar offers OEM and
custom development and production services to several customers.
Braemar provides minor modifications of Braemar technology for unique
customer products. These developments result in products with
significant differentiation from Braemar's standard products and
provide new manufacturing opportunities.
Braemar began manufacturing Holter products for AMPI and
Biosensor in the April 1998. In fiscal 1998 these companies
represented less than 5% of Braemar production, but this could be a
growing part of Braemar's production in the future. Inter-company sales
and profits are eliminated in financial consolidation.
Research and Development
The Company has consolidated research and development activities
for its cardiac monitoring products at Braemar and for ultrasound
products at Carolina Medical. The Company's pro forma combined
expenditures for research, development, and engineering activities were
$1,238,136 in fiscal 1998. During the fiscal year ended June 30,
1998, Biosensor expended $242,644 on research and development. The
Company expects to spend 7% to 10% of sales in fiscal 1999 on new
product development in order to remain technologically competitive.
Carolina Medical's research and development activities have been,
and continue to be, concentrated on two products, the hand held
ultrasound imager and the next generation ultrasound product for
Brachetherapy treatment. Internal technical resources applied to the
hand held ultrasound product are currently focusing on image quality,
packaging improvements and innovations, multiple frequency probe
capability, and improved battery performance. Outside vendors are
currently doing development work for Carolina Medical on the NT
platform based ultrasound system for Brachetherapy. Additional
configuration and packaging development efforts and software
integration will be addressed during the first half of calendar 1999.
Carolina Medical expended $153,668 for research, development, and
engineering activities in Fiscal 1998 and $169,361 in 1997.
Braemar's research, development and technical expenditures are
focused on ambulatory ECG patient monitoring devices. Braemar
currently has products in this market area that these technical
investments support. The Company anticipates introducing the new
digital Holter device in calendar year 1999. Braemar is also
developing an in-home ECG monitor for a single customer, predominantly
with customer funding. This technology will be the property of the
customer. Braemar expended $766,000 for research, development, and
engineering activities in Fiscal 1998 and $690,000 in 1997.
AMPI's research and development activities during the most recent
fiscal year were incurred in connection with enhancements to the Holter
and Ambulatory Blood Pressure devices and software for enhancements and
features such as personal computer (PC) interfaces, "Windows" based
software and digital storage and electronic transfer of medical records
(telemedicine) that make Advanced Medical's products more attractive to
the markets available in the current health care environment. AMPI
expended $154,991 in 1998 and $205,264 in 1997 on research and
development activities.
Manufacturing and Sources of Supply
The Company's cardiac monitoring products are manufactured at its
Braemar facility. The components which are included in products
manufactured by Braemar are presently purchased from outside vendors,
tested and incorporated into products by Braemar personnel. Most
components are available from multiple sources, but products typically
have a limited number of key components that are single source, or have
limited sources available. If Braemar was unable to continue to obtain
certain components it would be forced to develop alternative sources of
supply, or make product changes to use alternative components. Braemar
has a complete facility for final assembly and testing of its products
with adequate capacity for expected future requirements. This facility
is managed under an ISO9001 compliant Quality System providing
compliance with European and US government regulations, which are
generally recognized as providing compliance in other world markets.
The Company's ultrasound products are manufactured at its
Carolina Medical facility which has adequate capacity for expected
future requirements. This facility meets all of the FDA Good
Manufacturing Practice requirements but is not currently certified
under an ISO 9001 compliant Quality System. ISO 9001 certification of
this facility is expected during 1999. Components that are used in the
manufacturing process are purchased from outside vendors. Components
are generally available from multiple sources. If Carolina Medical
were unable to obtain certain components from one or more of its
suppliers, the Company would need 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
The Company's cardiac monitoring products are marketed on an
O.E.M. basis by Braemar to other manufacturers and re-marketing
organizations, and to end users by AMPI through independent
manufacturers sales representatives in the United States, and
distributors overseas. Most of AMPI's and Biosensor's revenues in the
past have resulted from sales to office based family practice
physicians, internists and cardiologists. Because of changes taking
place in health care, the Company is in the process of redirecting much
of it's marketing efforts for its cardiac monitoring products towards
managed care organizations, including Health Maintenance Organizations
(HMO's), Group Purchasing Organizations (GPO's), Integrated Health
Networks (IHN's) and hospitals where many of the purchasing decisions
are now being made through in-house marketing persons and regional sales
managers. Marketing personnel utilize on-going direct mail campaigns and
selected trade shows to create awareness and generate leads for its sales
force. Sales personnel are compensated by salary plus commission. The
Company also markets its cardiac monitoring products in the U.S. through
independent manufacturers' representatives and internationally through
foreign distributors. Currently the Company has distribution agreements
with Nishimoto Sangyo Company Ltd. for distribution in Japan and Taiwan
and non-exclusive distribution agreements with Kontron Instruments for
distribution throughout Europe.
The Company's cardiac monitoring products (both Biosensor;s and
AMPI's) are marketed by AMPI under the name "Advanced Biosensor."
Braemar markets its products through other medical companies and
distribution channels. One sales manager and one marketing manager
manage the Company's indirect channels. These channels concentrate
nearly 90% of sales through 20 customers, but no one customer has over
20% of sales.
The Company's ultrasound products are sold by Carolina Medical to
physicians, hospitals, clinics and laboratories, primarily in the U.S.
Carolina Medical markets its products and services directly to
physician practices, hospitals and clinics, with limited use of
distributors. It is expected that a new brachetherapy product under
development will be marketed by a strategic partner, who will also
provide three dimensional treatment planning software and sell Carolina
Medical supplied hardware as part of an integrated treatment system.
Negotiations are in process with the selected strategic partner, but
there is no assurance that they will be successfully concluded.
Carolina Medical is seeking strategic partners for marketing the hand
held ultrasound imager.
Competition
Holter Systems. The market for diagnostic equipment used in
physician's offices is characterized by intense competition. Several
well established competing organizations with resources greater than
the Company's have been successful at increasing their market share.
The Company competes against Burdick, Custo, Diagnostic Monitoring,
Rozinn, Spacelabs, and others for sales of Holter systems to office
based physicians and small hospitals. 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 has
resulted from office consolidation and transition into managed care in
the physician office market. Management believes the Company is one
of the technology and production leaders in the Holter market.
Braemar concentrates on indirect channels through other medical
companies in the Holter market. This generally makes Braemar's primary
competition internal development within the engineering departments of
its customers. Braemar is also developing direct channels to medical
service companies, and marketing representatives who sell to clinics
and doctors for its event recorder products. Instromedix is believed
to be the main competitor in this market.
Spirometry. There are a number of companies producing spirometry
systems for the office and clinic market including Burdick,
SpiroMetrics, QRS, and others. Many of these companies sell devices
which perform only one function, while others offer multi-purpose
personal computer based systems. The Company's spirometry products
sell for between $2,000 and $4,000 and are PC based companions to the
Company's Holter monitors. The Company purchases its Spirometry
products from another supplier.
Portable Ultrasound. While, to the Compan's knowledge, there are
no hand held ultrasonic imaging products currently in the market,
Carolina Medical believes that several companies are developing
products for this segment. SonoSite, Inc., a spinoff from ATL
Ultrasound, is developing a small ultrasound device and at least two
other companies are believed to be developing ultrasound systems
constructed around a laptop computer. A number of companies currently
offer trans-portable ultrasound systems, which are desktop units often
resembling a portable oscilloscope. Carolina Medical believes other
companies may be planning to develop highly portable devices.
Government Regulation
Product Regulation. The Company's products are subject to
extensive regulation by numerous governmental authorities, principally
the U.S. Food and Drug Administration ("FDA") and corresponding state
and foreign agencies, and to various domestic and foreign electrical
safety and emission standards. The FDA has broad regulatory powers with
respect to preclinical and clinical testing of new medical products and
the design, manufacturing, marketing and advertising of medical
products. The Company's product development processes, manufacturing
facilities, and the manufacture of its products are subject to FDA
regulations regarding registration of manufacturing facilities and
compliance with the FDA's Quality System Regulations ("QSRs"). The
Company is also subject to periodic on-site agency inspection for
compliance with such regulations. The Company's ability to obtain
timely FDA export and new product approvals is dependent upon the
results of such inspections.
The FDA requires that all medical devices introduced to the
market be preceded either by a pre-market notification clearance order
under Section 510(k) of the Federal Food, Drug and Cosmetic Act, as
amended (the "FDC Act"), or an approved PMA application. A 510(k) pre-
market notification clearance order indicates FDA agreement with an
applicant's determination that the product for which clearance has been
sought is substantially equivalent to medical devices that were on the
market prior to 1976 or have subsequently received clearance. An
approved PMA application indicates that the FDA has determined that the
device has been proven, through the submission of clinical trial data
and manufacturing quality assurance information, to be safe and
effective for its labeled indications. The process of obtaining 510(k)
clearance typically takes approximately six to nine months, while the
pre-market approval application process typically lasts more than a
year. All of the Company's and each of its subsidiaries current
products have 510(k) clearance. Action by the FDA does not, however,
constitute approval by the FDA of the Company's products or pass upon
their safety and effectiveness. A marketed product is subject to
continual review, and later discovery of previously unknown problems
can result in restrictions on a product's marketing, or withdrawal of
the product from the market.
Management believes that the Company's products comply generally
with applicable electrical safety standards, such as those of
Underwriters Laboratories and non-U.S. safety standards authorities.
Several countries have in recent years changed the electronic emissions
requirement which must be met by ultrasound equipment. There can be no
assurances that the Company will be able to continue to respond to
these continually changing regulatory requirements in a timely manner.
The Company's regulatory compliance programs have been expanded to
encompass verification of the Company's compliance with international
quality standards for medical device design, manufacture, installation,
and servicing known as ISO 9001 standards. ISO 9001 standards and
related medical device directives became mandatory in Europe in June
1998. In addition, the FDA has adopted the ISO 9001 standards as
regulatory standards for the U.S.
Braemar's manufacturing facilities has qualified for ISO 9001
registration. Products manufactured by Braemar have also received the
European Community (CE) mark in Europe. The CE mark means that the
products manufactured by Braemar, which includes all of the Company's
cardiac monitoring products, satisfy the regulatory requirements of all
of the countries of the European community, enabling the products to be
freely marketed throughout Europe. While Carolina Medical is not
currently ISO 9001 certified, it is seeking certification and believes it
will be obtained in 1999. Carolina Medical is not currently shipping
products it manufacturers to countries where the CE mark is required.
The FDA periodically reviews the facilities and manufacturing and
other operating procedures of the Company for compliance with the FDA
Good Manufacturing Practices (GMP) requirements. The Company has
passed such within the past twelve months at all three of its operating
locations. However there is no assurance that the Company will
continue to pass such reviews in the future.
Health Care Reform. Federal, state and foreign regulations are
constantly undergoing change. The increasing attention given to the
national health care legislation has caused the Company's and its
subsidiaries U.S. customers to become more cautious in making
expenditures and investing in capital equipment. In addition, the U.S.
health care system has undergone significant consolidations and
restructuring in recent years. The Company cannot predict what effect,
if any, such change may have on its business, or when the deleterious
effect of these conditions on its business will change.
Reimbursement. The Company's and its subsidiaries' products are
used by health care providers for diagnostic testing services and other
services for which the providers may seek reimbursement from third-
party payers, principally in the United States, Medicare, Medicaid and
private health insurance plans. Such reimbursement is subject to the
regulations and policies of governmental agencies and other third-party
payers. For example, the Medicare program, which reimburses hospitals
and physicians for services provided to a significant percentage of
hospital patients, places certain limitations on the methods and levels
of reimbursement of hospitals for procedure costs and for capital
expenditures made to purchase equipment, such as that sold by the
Company and its subsidiaries. The Medicare program also limits the
level of reimbursement to physicians for diagnostic tests. The state-
administered Medicaid programs and private payers also place
limitations on the reimbursement of both facilities and physicians for
services provided in connection with diagnostic and clinical
procedures. Reduced governmental expenditures in the United States and
many other countries continue to put pressure on diagnostic procedure
reimbursement. The Company cannot predict what changes may be
forthcoming in these policies and procedures, or the effect of such
changes on its business.
Third-party payers worldwide, including governmental agencies,
are under increasing pressure to contain medical costs. Limits on
reimbursement or other cost containment measures imposed by third-party
payers may adversely affect the financial condition and ability of
hospitals and other users to purchase products, such as those of the
Company and its subsidiaries, by reducing funds available for capital
expenditures or otherwise. The Company is unable to forecast what
additional legislation or regulation, if any, relating to the health
care industry or third-party reimbursement may be enacted in the future
or what effect such legislation or regulation would have on the
Company.
Year 2000 Impact
The Company has examined the effects that the year 2000 will have
on the operation of its business and on the its customers' use and
acceptance of its products. The Company believes that the plan it has
in place will eliminate or render immaterial any impact that the year
2000 will have on its business. Internal accounting and preparation of
monthly, quarterly and annual financial statements is currently
performed on personal computers using accounting and inventory software
obtained from various vendors that use the Microsoft DOS operating
system software. By the mid year of calendar 1999 the Company expects
to upgrade to the latest version of software running under Windows at a
total cost estimated to be less than $35,000. This new software is
believed to be Y2K compliant. The Company's products use
microprocessors and imbedded software, and data captured and stored by
these products are processed by software provided to customers by the
Company. Calculations performed by the imbedded code in the Company's
products and by processing software supplied by the Company do not
utilize the year. Management believes that the products it is
currently selling and those being serviced under warranty will be
unaffected by a change in year from 1999 to 2000 or from 2000 to 2001.
Employees
As of December 3, 1998, the Company and its subsidiaries employed
67 full-time employees. A President and CEO, a Vice President and
Chief Technology Officer, and a Chief Financial Officer operate the
holding company. As of December 3, 1998, the Company had 32 full time
employees at the Braemar facility in Minnesota, 15 full time employees
at the Carolina Medical facility in North Carolina, and AMPI had 17
full time employees in South Carolina. The Company utilizes the
services of part time employees from time to time. No employees are
represented by labor organizations and there are no collective
bargaining agreements.
Trade Secrets
The Company licenses its Argus ECG analysis algorithms used in
one of its Holter monitors from CNS, Inc. 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 the Company on its spirometry
or ambulatory blood pressure software, but the products are covered by
general U.S. and foreign copyright laws. The OEM hardware vendor has a
patent that protects the disposable sensor of the spirometry system,
though the relationship with the Company 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.
Braemar's technology depends on unique programming code or tape
mechanism technology that is designed into its products. The expense
to replicate these designs is significant and the resulting products
must be submitted for regulatory compliance resulting in significant
barriers to entry with competing products. Braemar does not have
significant patents to protect its technology. A competitor has
attempted to enter the market by replicating the technology and
appearance of the Braemar DL250. The Company intends to pursue its
proprietary product rights regarding this product.
Properties
The Company leases approximately 4,500 square feet of office
space in Maple Grove, MN from a partnership controlled by an
officer/stockholder. This space was utilized by Biosensor's operations
prior to the merger between Biosensor and Company. The lease requires
approximate future non-cancelable minimum annual lease payment of
$54,000 through December 2003, plus a pro rata share of operating
expenses. The Company will be relieved of all future lease obligations
regarding this space as soon as a new tenant has been secured. The
Company is actively pursuing discussions with several possible tenants
for this space. The liability for rent expense has been accrued
through December 1998. The Company had also guaranteed the underlying
debt on the property, which consists of a $1,100,000 term loan expiring
January 2000, but has been released from that guarantee. However, the
Company is obligated to pay certain interest and closing cost expenses
associated with refinancing such debt in January 2000. An estimate of
these future costs has been accrued as a liability as of June 30, 1998.
Carolina Medical leases a 12,000 square foot manufacturing and
office facility in King, NC from a related party partnership in which
the President and Vice President of Carolina Medical, among others, are
partners. Effective May 1, 1996, the lease term was amended to allow
for a 10% increase in rental payments to $79,200 annually. The current
three-year lease expires on May 1, 1999.
Braemar leases approximately 15,000 square feet of
office/warehouse space in Burnsville, Minnesota from an independent
company. This space is adequate for near term plans and there is space
available immediately adjacent to the present space. The current lease
expires August 31, 1999 and contains an option to renew the lease for
one additional three-year term. The current total annual lease cost of
this facility is $155,000.
AMPI leases approximately 10,000 square feet of office/warehouse
space in Columbia, South Carolina from an independent third party at a
cost of approximately $85,000 with nominal annual increases. This
space is adequate for near term plans and provides ample room for
expansion. The current lease will expire October 31, 2001.
Legal Proceedings
There are no material pending legal proceedings to which the
Company is a party or of which any of its property is subject, nor is
the Company aware of any material proceedings to which any officer,
director or affiliate of the Company is a party, except as follows:
In September 1996, a jury verdict in the amount of $325,000, plus
fees of $27,000, was awarded to a former vendor for its claim that the
Company owed additional amounts under a 1988 software license
agreement. This liability was fully accrued as of May 31, 1997. In
December 1997, the Company entered into a settlement agreement with
this vendor to reduce the jury award to $200,000. The remaining amount
of $157,000 due under the agreement calls for annual payments of
$25,000 through December 2002, with an additional $2,000 due December
1998 and an additional $25,000 due December 1999. In the event the
Company defaults on any of the annual payments, the full judgment, less
any amounts paid under the settlement agreement, will be reinstated.
On October 22, 1998, a complaint was filed in the state of
Indiana, county of Marion, against Carolina Medical, Inc. by Indiana
Business Modernization and Technology Corporation (BMT), an Indiana
not-for-profit corporation. BMT seeks a judgement in its favor against
Carolina Medical in the amount of $46,720 for royalty payments due and
owing for the calendar years 1996 and 1997, under an Intellectual
Property License Agreement entered into on January 25, 1993 by and
between BMT and Carolina Medical. An offer of settlement has been
submitted by Carolina Medical for an amount that Carolina Medical
believes would be appropriate in light of all the facts, but no
response has been received. Carolina Medical has accrued the liability
for the entire amount claimed at June 30, and September 30, 1998 and
may be required to pay the entire amount if a timely negotiated
settlement of the claim cannot be reached.
Contingent Liabilities
During fiscal year 1997, Carolina Medical determined that the land
adjacent to its building was contaminated by toxic chemicals that could
have been related to operations previously performed but no longer
performed by Carolina. This land is owned by a related third party
partnership, which also owns the land and building occupied by Carolina
Medical. The initial cleanup cost of approximately $10,000 was paid by
the partnership in 1997. During fiscal 1998, Carolina Medical paid
approximately $8,000 for environmental testing, which is still in
progress. Based on consultant studies, the cost of the property cleanup
is not expected to exceed $75,000. While Carolina Medical may be
contingently liable for these remediation costs, it is expected that the
property owner or its insurance company will be ultimately liable for
these costs.
MANAGEMENT OF COMPANY AND SUBSIDIARIES
Officers and Directors
On July 23, 1998, Dr. Stephen L. Zuckerman resigned as a director
of the Company and five persons were appointed to serve as directors
of the Company until the next annual meeting of shareholders. The
names and ages of the Company's and its subsidiaries officers and
directors, and their principal occupations are set forth below.
Name Age Position Term of Service From
L. John Ankney 70 Director July 1998
David A. Heiden 50 Director July 1998
C. Roger Jones 60 President of CMI &
Director July 1998
Ronald G. Moyer 62 President, CEO, &
Director July 1998
Roger H. Griffis 54 CFO November 1998
B. Steven Springrose 49 Vice Pres., CTO &
Director June 1982
George L. Down 56 President of AMPI July 1997
Stanley N. Bormann 57 President of Braemar July 1998
Spencer Vawter 61 Director July 1998
Other Information Regarding the Officers and Directors:
Business Experience
L. John Ankney has acted as independent consultant to several
companies since 1993. He served as President and Director from 1970 to
1993 for Transnational Electronic and Funding Corporation, an
investment, venture capital, and management consulting company. Mr.
Ankney served as a director of Digilog, Inc. from 1974 to 1989.
David A. Heiden is currently Vice President of Sales for Video Display
Corporation. From 1989 until 1998 he was president and CEO of
Urological Care America, Inc., a company that assisted urology
practices in the managed care environment. He served as President and
CEO of Lithotripter Technologies of the Americas from 1985 to 1988.
Prior to that he was Vice President of Marketing and Sales for Dornier
Medical Systems.
C. Roger Jones has served as President and Chief Operating Officer of
Carolina Medical since 1985. From 1970 to 1985, he was Vice President
of Sales and Marketing for Carolina Medical where he served in various
other capacities since 1961. He has served as Chairman for Eagle Golf
Ball Company, Inc. since 1988.
Ronald G. Moyer was appointed President, Chief Executive Officer, and
Chairman of the Board of Biosensor on July 23, 1998. He also has
served as Chief Executive Officer and Chairman of Advanced Medical
Products, Inc. since 1996 and was that company's President from 1996
until October 1997. Since 1992 he has been the Chief Executive Officer
and Chairman of Carolina Medical Inc., a manufacturer of medical
instruments. In 1991 and 1992 he was Director of Mergers and
Acquisitions for Dominion Holdings Group, a Merchant Bank. From 1989
to 1991, he served as Chief Operating Officer of CXR Corporation, an
AMEX listed public company. Prior to that time since 1969 he was the
President, Chief Executive Officer and Chairman of the Board of
Digilog, Inc., a publicly held telecommunications company. He
received a BS from Tri-State University in 1956, an MS in Aerospace
Engineering from Drexel University in 1963 and completed the Harvard
Business School Small Corporation Management Program in 1981.
Roger H. Griffis is the Chief Financial Officer of the Company, and
also serves as Controller of AMPI, the Company's 55% owned subsidiary.
Prior to joining the Company in September 1998, he was controller of
TeleQuest Corporation since 1996 and Controller of Food Service
Supplies, Inc. form 1993 to 1995. Mr. Griffis graduated from the
University of Michigan with a Bachelor of Business Administration in 1972.
George L. Down is President of Advanced Medical Products, Inc., a 55%
owned subsidiary of the Company. Prior to his appointment to the
position as President in October 1997, Mr. Down was Vice President of
Sales and Marketing for AMPI. Until December 1992, and for more than the
preceding five years, he served as the president of Design Realizations,
Ltd. ("DRL"), a closely held corporation founded by Mr. Down, where he
performed design and packaging services for a variety of companies. Mr.
Down received a Bachelor of Science in Industrial Design degree from
Syracuse University in 1964.
Stanley N. Bormann President of Braemar Corporation since 1990, and
President of Braemar, Inc. since it was acquired from Carlisle
Corporation in October 1997. He has transitioned Braemar from a
manufacturer of specialty tape drives to the market leader in Holter
medical monitors utilizing magnetic tape and flash memory cards. Mr.
Bormann received a Bachelor of Mechanical Engineering degree from the
University of Minnesota in 1964 with 30 credits additional in business
disciplines. Prior experience includes 3 years at Honeywell in
manufacturing engineering, and 20 years with Control Data in engineer,
field operations, product development and marketing.
B. Steven Springrose serves as the Company's Vice President, Chief
Technology Officer, and Director, and served as President, Chief
Executive Officer and Chairman of the Company from its inception in
1982 until July 1998. Mr. Springrose also served as Chief Financial
Officer until July, 1998. From 1973 to 1976 Mr. Springrose was
involved in the design , development, manufacture and marketing of
medical products. He developed new product concepts as a biomedical
engineer at Medtronic, Inc. (1973-1974), and held operations,
management and product development engineering positions at Minntech
Corporation (1974-1976). Mr. Springrose was employed at Cardiac
Pacemakers, Inc. from 1976 through 1982 in various marketing capacities
prior to founding the Company.
Spencer M. Vawter is President and CEO of Camile Products, Inc, a
developer and marketer of software automation products for the chemical
laboratory. Previously, Mr. Vawter served as President and/or CEO of
several urology, ultrasound and medical companies, including Mentor
Urology, Avalon Technology, Biosound, and various divisions of
Boehringer Mannheim. Mr. Vawter also was Senior Vice President of Bio-
Dynamics, Director of Medical Instrumentation for the American Medical
Association. Mr. Vawter holds a BA degree from Franklin College and an
MSc from DePaul University.
Executive Compensation
The following table discloses certain summary information
concerning the compensation paid for services rendered in all
capacities to the Company for the two fiscal years in the period ended
June 30, 1998, to the Company's Chief Executive Officer and its four
most highly compensated executive officers other than the Chief
Executive Officer, whose total annual salary and bonus were in excess
of $100,000 (each, a "Named Executive Officer"):
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
Fiscal
Name and Year Other Annual All Other
Principal Ended Salary Bonus Compensation Options Compensation
Position June 30 ($) ($) ($) (#) ($)
Ronald Moyer 1998 130,000 -0- -0- -0- -0-
Chief Executive 1997 130,000 -0- -0- -0- -0-
Officer
Steven Springrose
Vice President * 1998 100,000 -0- -0- -0- -0-
1997 100,000 -0- -0- -0- -0-
Stanley Bormann 1998 108,279 -0- -0- -0- -0-
Pres., Braemar 1997 105,500 -0- -0- -0- -0-
* During fiscal 1998 and fiscal 1997, Steven Springrose was Chief
Executive Officer of Biosensor Corporation.
There were no grants of the Company's stock options during the
fiscal year ended June 30, 1998 to the Named Executive Officers. As a
subsequent event, on November 6, 1998, Stanley Bormann, President of
Braemar, was granted a stock bonus of 150,000 shares of the Company's
common stock valued at fair market value of $10,500. George L. Down was
awarded 400,000 options in AMPI common stock at an average exercise price
of $0.175 during 1997 and 1998.
The value of unexercised options held by the Named Executive
Officers as of June 30, 1998 was zero, as the trading price of the stock
was below the exercise price of all options in both the Company's and
AMPI's stock. There were no options exercised by any Named Executive
Officer or Director during the fiscal years ended June 30, 1997 or 1998.
Employment Agreements
There were no employment agreements in effect on June 30, 1997 or
June 30, 1998, or on September 30, 1998. At the time of the merger of
the Company and CMI, the Company guaranteed 18 months salary to Steven
Springrose at his then current salary.
Section 401(k) Plan
Profit-Sharing Plan - CMI has a profit-sharing plan covering its
eligible employees which includes essentially all employees. This plan
is to be funded as accrued and is non-contributory by the participants.
Effective January 1, 1998, the Profit-Sharing Plan assets were
transferred into CMI's Employee 401(k) Plan.
Employee 401(k) Plan - CMI has an employee 401(k) plan which is
contributory by the participants. CMI, at its option, may contribute to
the plan on a matching basis. CMI contributed $5,000 to this plan during
the year ended June 30, 1998. Following the acquisition of Braemar, Inc.
in October 1997, eligible employees of Braemar are allowed to participate
in CMI's 401(k) Plan.
AMPI has a defined contribution 401(k) Plan covering substantially
all employees. Participants may contribute up to 15% of their annual
compensation to the plan. AMP has the discretion to match 25% of a
participant's contribution up to 4% of salary. There were no Company
contributions for the year ended June 30, 1998.
Limitation on Liability of Directors; Indemnification
The Company's Articles of Incorporation provide that a director of
the Company will not be personally liable to the Company or its
shareholders for monetary damages for breach of the fiduciary duty of
care as a director, except for liability (i) for breach of the director's
duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 302A.559 or Section 80A.23
of the Minnesota Statutes, (iv) for any transaction from which the
director derived improper personal benefit, or (v) for any act or
ommission occuring prior to the date Article IX was adopted by the
Company. breaches of a director's responsibilities under the Federal
securities laws.
The Company's by-laws provide that the Company shall indemnify its
officers, directors, employees and agents, to the extent permitted by the
Minnesota Business Corporation Act.
Committees of the Board
The standing committees of the Board of Directors include the Audit
Committee and the Compensation Committee.
The Audit Committee consists of two non-employee directors:
Messrs. Heiden (Chair) and Ankney. The audit committee held three
meetings in 1998. The Audit Committee reviews the Company's consolidated
financial statements; makes recommendations regarding the Company's
independent auditors and the scope of their services; reviews the
adequacy of accounting and audit policies, compliance procedures and
internal controls; and reports to the Board of Directors on the adequacy
of the financial statement disclosures and adherence to accounting
principles.
The Compensation Committee consists of two non-employee directors:
Messrs. Ankney (Chair) and Heiden. The Compensation Committee held four
meetings in 1998. The Compensation Committee reviews compensation and
benefit programs for the Company's executive officers; reviews the
selection of officers; evaluates senior management performance; and
administers certain stock and benefit plans.
PRINCIPAL SHAREHOLDERS
On July 23, 1998, Biosensor Corporation acquired all of the
outstanding shares of capital stock of Carolina Medical, Inc., a
Minnesota corporation, in exchange for 149,025.15 shares of the
Company's Series A Preferred Stock. The holders of the Series A
Preferred Stock now have voting power equal to approximately eighty-
three percent (83%) of the voting power of all issued and outstanding
shares of the Company's capital stock. Of the thirty-two (32) Series A
Preferred Stock holders, the following eight (8) own more than four (4)
per cent of the voting power of the Company.
Name of Shareholder Approximate Percentage of Ownership*
Ronald G. Moyer 27.1%
C. Roger Jones 10.6%
Ronald D. Ordway 10.3%
Nishimoto Sangyo Co., LTD. 8.4%
Bernard B. Klawans 6.8%
Charles A. Barefoot 4.9%
Counterpoint Capital Management, LLC 4.2%
Woodhaven Investors, Inc. 4.2%
TOTAL FOR 8 76.5%
* calculated as if all issued and outstanding shares of Series A
Preferred Stock were converted into Common Stock at the ratio of
96 shares of Common Stock for each share of Series A Preferred Stock.
In addition to the above holders of Series A Preferred Stock, Steven
Springrose owns 5.2% of the voting power of the Company as a result of
his beneficial ownership of 896,000 shares of the Company's Common Stock.
Security Ownership of Management
The following table sets for the the percentage voting power of the
Company that would be owned by Management if all Series A Preferred
Shares owned by Management was converted to common stock.
Name of Shareholder Approximate Percentage of Ownership
Ronald G. Moyer 27.1%
C. Roger Jones 10.6%
B. Steven Springrose 5.2%
Stanley N. Bormann 0.9%
George L. Down 0.0%
Roger H. Griffis 0.0%
TOTAL FOR 6 43.8%
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers to file reports of ownership
and changes in ownership of the Company's Common Stock with the
Securities and Exchange Commission, and the Company is required to
identify any of those individuals who failed to file such reports on a
timely basis. The Company believes that during 1998 all directors and
executive officers of the Company complied with their Section 16(a)
filing requirements.
MANAGEMENTS DISCUSSION AND ANALYSIS OF OPERATIONS
Forward Looking Statements
This and other sections of this report contain "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995, which represent the Company's expectations
concerning future events including future cash flows, results of
operations, expected continuing availability of the credit line, the
Company's continuing ability to sell its Holter and ambulatory blood
pressure products to office practices, and the Company's belief
regarding future recovery from declining revenues in the medical device
industry. By their very nature, forward-looking statements are subject
to known and unknown risks and uncertainties relating to the Company's
future performance that may cause actual results to differ materially
from those expressed or implied in such forward-looking statements.
The Company does not undertake and assumes no obligation to update any
forward-looking statement that may be made herein or from time to time
by or on behalf of the Company.
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, and the
Pro forma Combined Financial Statements, appearing elsewhere herein.
Results of Operations for the Fiscal Year Ended June 30, 1998
The Company's consolidated revenues (those of Carolina Medical
and subsidiaries) from sales of products and services were $8,481,926
for the year ended June 30, 1998 compared to $1,886,047 for the year
ended June 30, 1997. Carolina Medical's sales for the year ended June
30, 1998 were $1,767,080, down approximately 6% from the prior year .
Of the net increase in consolidated sales of $6,595,897, $4,537,915
resulted from the acquisition of Braemar, Inc. and nine months of their
operations, and $2,191,812 was due to the change from the equity method
to consolidation accounting when Carolina Medical's ownership in
Advanced Medical increased to a majority.
Gross profit margin was 35% of net sales for the year ended June
30, 1998 compared to 49.6% for the year ended June 30, 1997. Braemar
gross margins, which were included in the June 1998 calculation, are
typically at substantially lower gross margins because their sales are
to O.E.M. accounts whereas Carolina Medical's sales are generally to
end users.
Consolidated selling, general and administrative expenses of
$2,339,923 for the year ended June 30, 1998 were 26% of net sales for
the period compared to expenses of $606,840 or 34% of net sales for the
same period last year. The lower percentage of sales for selling,
general and administrative expenses was primarily because Braemar has
much lower selling expenses as a percent of sales.
Consolidated research and development costs during the fiscal
1998 were 9.4% of sales at $796,189, the largest portion of which was
spent on the Braemar digital Holter monitor development. Research and
development expenditures by Carolina Medical for the prior year were
$169,361 or 9% of sales. The Company expects to continue to spend 7%
to 10% of sales on new product development to remain technologically
competitive.
The Company had a net operating loss of $163,992 in 1998 and an
operating income of $159,572 in fiscal 1997, but losses from equity
investments in minority owned subsidiaries, and net interest and other
non-operating expenses produced the resultant net losses. Consolidated
net loss before taxes for the year ended June 30, 1998 was $416,291
compared to a net loss before taxes of $84,437 for the same period
last year. Provisions for income taxes were required for both years
even though there were net losses because the Company was not able to
utilize tax losses or file consolidated tax returns. The net after tax
loss for 1998 was $483,981 compared to net after tax loss of $116,965
in fiscal 1997. The Company is taking steps to consolidate operations
to reduce operating and other costs.
The substantial net increases in both assets and liabilities in
fiscal 1998 were primarily a result of the consolidation of Braemar's
and Advanced Medical's assets and liabilities with those of Carolina
Medical.
Pro forma results, as if the Company had been consolidated with
the present subsidiaries for the entire fiscal year ended June 30, 1998
shows consolidated revenues from sales of products and services in
fiscal 1998 of $11,756,850. Gross profit margin over manufactured cost
of goods sold was 37% of net sales.
Pro forma combined selling, general and administrative expenses
of $3,464,857 were 29% of net sales for the 1998 fiscal year.
Research and development costs on a pro forma combined basis were
$1,238,136 in fiscal 1998, and were 10.5% of sales, the majority of
which was spent on a new digital Holter monitor and Windows and
Internet file transfer software development.
The pro forma combined operating loss for fiscal 1998 was
$316,168. Other non-operating expense of $223,727, mostly interest
costs, brought the net pro forma combined loss for the year $539,895.
Results of Operations for the Quarter Ended September 30, 1998
The Company's consolidated revenues from sales of products and
services were $2,333,590 for the three months ended September 30, 1998
compared to $517,581 for the comparable quarter ended September 30,
1997. Carolina Medical's sales for the three months ended September
30, 1998 of $436,950 were off approximately $81,000 from the comparable
quarter in 1997. Of the net increase in consolidated sales of
$1,816,000, approximately $1,028,000 resulted from the acquisition of
Braemar, Inc., $194,000 resulted from the merger of Biosensor and
Carolina Medical, and $675,000 was due to the change from the equity
method to consolidation accounting when Carolina Medical's ownership
in Advanced Medical increased to a majority.
Gross profit margin was 43.4% of net sales for the three months
ended September 30, 1998 compared to 39.8% for the three months ended
September 30, 1997. Sales of Advanced Medical's and Biosensor's
products contributed to higher gross margins.
Selling, general and administrative expenses of $833,311 for the
three months ended September 30, 1998 were 35.7% of net sales for the
period compared to expenses of $148,793 or 28.7% of net sales for the
same period last year. The higher percentage of sales for selling,
general and administrative expenses was a result of the consolidation
of Advanced Medical, which has substantially higher selling expenses as
a percentage of sales, and because legal and audit expenses were higher
than usual as a result of merger and acquisition activities.
Research and development costs during the first quarter of fiscal
1999 were 10% of sales at $233,202, the majority of which was spent on
Braemar's digital Holter monitor development. Research and development
expenditures by Carolina Medical during the first quarter last year
were $38,210 or 7.4% of sales. The Company expects to continue to
spend 7% to 10% of sales on new product development in order to remain
technologically competitive.
Consolidated net income for the quarter ended September 30, 1998
was a loss of $127,642 compared to a profit of $8,598 for the same
period last year. Of the consolidated loss in the quarter ended
September 30, 1998, $93,530 was non-recurring legal, accounting and
transitional costs related to merger and acquisition activities. Net
interest and other non-operating expenses for that quarter were
$75,649. The Company is taking steps to consolidate operations to
reduce expenses, and is pursuing alternate financing in an attempt to
reduce interest costs.
During the first three months of fiscal 1999, accounts receivable
increased from $1,364,546 at June 30, 1998 to $1,504,753 at September
30, 1998; inventory increased from $1,366,232 to $1,465,034; current
accrued payroll and other expenses increased from $555,575 to $706,548.
These net increases in both current assets and current liabilities were
primarily a result of the consolidation of Biosensor's and Carolina
Medical's assets and liabilities on July 1, 1998.
Comparing the actual results to the Pro forma results shows
consolidated revenues from sales of products and services were down
$597,575 or 20% for the three months ended September 30, 1998 compared
to the pro forma three months ended September 30, 1997.
Gross profit margin was 43.4% of net sales for the three months
ended September 30, 1998 compared to 41.5% for the pro forma three
months ended September 30, 1997.
Selling, general and administrative expenses of $833,311 for the
three months ended September 30, 1998 were 35.7% of net sales for the
period compared to expenses of $895,160 or 30.5% of net sales for the
pro forma period last year. These expenses were lower in the recent
quarter even though legal and audit expenses were higher than usual as
a result of merger and acquisition activities.
Research and development costs during the first quarter of fiscal
1999 were 10% of sales at $233,202, the majority of which was spent on
the Braemar digital Holter monitor development. Pro forma combined
research and development expenditures during the first quarter last
year were $339,786 or 11.6% of sales. The Company expects to continue
to spend 7% to 10% of sales on new product development in order to
remain technologically competitive.
Consolidated net income for the quarter ended September 30, 1998
was a loss of $127,642 compared to a loss of $111,892 on a pro forma
combined basis for the same period last year. Of the consolidated loss
in the quarter ended September 30, 1998, $93,530 was non-recurring
legal, accounting and transitional costs related to merger and
acquisition activities. Net interest and other non-operating expenses
for that quarter were $75,649 compared to $92,495 for the quarter ended
September 30, 1997. The Company would have had an additional loss
applicable to common shares in the September 1997 quarter due to
dividends on Advanced Medical Preferred Stock.
During the first three months of fiscal 1999, current assets
decreased by approximately $280.000 and current liabilities decreased
by approximately $208,000 from the pro forma June numbers.
Liquidity and Capital Resources
Operating activities provided $679,327 of cash during fiscal
1998 and $ 11,744 of cash during the quarter ended September 30, 1998
compared with $53,890 provided during fiscal 1997 and $52,985 provided
during the quarter ended September 30, 1997. Investing and financing
activities during fiscal 1998 used $97,951 of cash and the first
quarter of fiscal 1999 used $53,325 compared to $256,522 and $61,673
respectively used by investing and financing activities during the same
periods last year. Net cash increased by $581,376 during fiscal 1998
and decreased by $41,581 during the fiscal 1999 first quarter to
$730,834 at September 30, 1998. Net cash decreased by $202,632 in
fiscal 1997 and decreased by $8,688 during the fiscal 1998 first
quarter to $129,979 at September 30, 1997.
The Company and its subsidiaries at September 30, 1998 had total
debt with several unrelated lenders of approximately $1,700,000 of
which $572,000 was current or current portions of long term debt and
$1,128,000 was long term debt. Advanced Medical is in violation of
certain covenants of its credit agreement, however the lender has
waived the covenant violations through December 31, 1998. During the
quarter ended September 30, 1998 the Company loaned additional funds to
Advanced Medical, and credit has been extended to Advanced Medical by a
subsidiary of the Company to enable Advanced Medical to purchase
finished goods for resale.
In addition to the various loans outstanding with unrelated
parties, the Company has loans outstanding in the amounts of $150,000
and $1,600,000 with two stockholders of the Company. Annual interest
costs of 12% and 10% respectively are due monthly on these loans, the
principal amounts of which are due in January 1999 and October 1999
respectively. Discussions are in process with several lending
institutions regarding possible credit facilities that would replace
both the related party loans and the unrelated party loans with one
consolidated credit facility.
The Company at June 30, 1998 and September 30, 1998 had net
working capital (current assets minus current liabilities) of
$1,150,912 and $1,280,284 respectively. Net stockholder equity was
$785,425 on June 30, 1998 and $767,668 on September 30, 1998. The
Company believes that internally generated funds and existing borrowing
resources will provide sufficient funds to meet current commitments and
future working capital needs. However, the Company is actively seeking
alternative financing that could increase working capital and reduce
interest costs.
The Company currently does not have plans for any major capital
expenditures in fiscal 1999.
FINANCIAL INFORMATION
Attached as Annex I are the Audited Financial Statements of Carolina Medical,
Inc. for the fiscal year ended June 30, 1998. Carolina Medical's 1998 financial
statements include BioTel International Inc. for twelve months, Braemar Inc.
for the nine months that Carolina Medical owned the Braemar assets, and
Advanced Medical Products, Inc. for the twelve months, consolidated because of
Carolina Medical's majority ownership of Advanced Medical's common stock.
Also includedin Annex I are the Audited Financial Statements of BioTel
International Inc., including Carolina Medical, Inc. (which for that period was
a 55% owned subsidiary of BioTel International Inc.), for the fiscal year
ended June 30, 1997.
The unaudited Pro forma Combined Financial Information attached as
Annex II shows operations of the Company - Biosensor Corporation, Carolina
Medical, Inc., Braemar, Inc., and Advanced Medical Products, Inc., on a
proforma combined basis as if they had been operating together for the
fiscal year ended June 30, 1998.
Unaudited Financial Statements for the Quarters ended September 30, 1997 and
June 30, 1998 are attached as Annex III.Audited financial information for
Braemar and Advanced Medical are included in the audited consolidated historical
financial statements and the unaudited pro forma combined financial
information.
DESCRIPTION OF CAPITAL STOCK
Common Stock
Each share of Common Stock is entitled to one vote on all matters
submitted to a vote of the stockholders. Stockholders do not have
cumulative voting rights, the absence of which will, in effect, allow
the holders of a majority of the outstanding shares of Common Stock to
elect all the directors then standing for election.
Subject to the rights and preferences of the Preferred Stock, if
any, each share of Common Stock has an equal and ratable right to
receive dividends, when, as and if declared by the Company's Board of
Directors, out of any funds legally available for the payment thereof.
In the event of the liquidation, dissolution or winding up of the
Company, after satisfaction of amounts payable to creditors and
distribution to the holders of outstanding Preferred Stock, if any, of
amounts to which they may be preferentially entitled, holders of the
Common Stock are entitled to share ratably, on a per share basis, in
the assets available for distribution to the stockholders.
Holders of Common Stock are not entitled to conversion or
preemptive rights. All outstanding shares of Common Stock are fully
paid and nonassessable.
Undesignated Stock
The Board of Directors of the Company generally has the power to
issue shares of capital stock without stockholder approval. The Board
of Directors is authorized to establish the rights, preferences and
limitations of this undesignated stock and to divide such shares into
classes, with or without voting rights. The ability of the Board of
Directors to issue additional shares could impede or deter an
unsolicited tender offer or takeover proposal regarding the Company.
Shares of undesignated stock could be issued with terms, provisions and
rights which would make more difficult and, therefore, less likely, a
takeover of the Company not approved by the Board of Directors. The
rights of the holders of the Common Stock could be adversely affected
by the future issuance of undesignated stock.
Certain Provisions of Minnesota Law
The Company is governed by the provisions of Sections 302A.671
and 302A.673 of the Minnesota Business Corporation Act. These anti-
takeover provisions may eventually operate to deny stockholders the
receipt of a premium for their Common Stock. Section 302A.671
basically provides that the shares of a corporation acquired in a
"control share acquisition" have no voting rights unless voting rights
are approved by the stockholders in a prescribed manner. A "control
share acquisition" is generally defined as an acquisition of beneficial
ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring
person to have voting power of 20% or more in the election of
directors. Section 302A.673 prohibits a public corporation from
engaging in a "business combination" with an "interested shareholder"
for a period of four years after the date of the transaction in which
the person became an "interested shareholder," unless the "business
combination" is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions. An
"interested shareholder" is a person who is the beneficial owner of 10%
or more of the corporation's voting stock. Reference is made to the
detailed terms of Sections 302A.671 and 302A.673 of the Minnesota
Business Corporation Act.
Transfer Agent and Registrar
The Transfer Agent and Registrar of the Common Stock is Valley
Forge Fund, Inc.; their address is 830 Ford Street, Bridgeport, PA
19405.
PROPOSALS
PROPOSAL NO. 1
CHANGING OF CORPORATE NAME
The Board of Directors has unanimously approved, for submission
to the shareholders, a resolution regarding amending Article I of the
Company's Articles of Incorporation to change the name of the Company
to "BIOTEL, Inc." (the "Name Change Amendment"). Article I of the
Company's Articles of Incorporation, as amended by the Name Change
Amendment, is attached in Annex IV.
The change of the corporate name will not in any way affect the
validity or transferability of stock certificates currently
outstanding, the capital structure of the Company, the rights or
obligations of the Company with respect to its existing contractual
obligations, nor will it impact third parties' obligations with respect
to the Company. Similarly, it will not impact the Company's ability to
use its current tradename and trademarks.
Upon adoption of this proposal, the Board of Directors will
authorize the officers of the Company to file such amendment with the
Minnesota Secretary of State. In addition, notification of the name
change will be filed with the Securities and Exchange Commission.
The Board of Directors believes that it is in the best interests
of the Company and its shareholders to amend the Company's Articles of
Incorporation to change the Company's name to "BIOTEL Inc." to reflect
the broadening nature of the Company's business.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE "FOR" THE FOREGOING PROPOSAL NO. 1.
PROPOSAL NO. 2
PROPOSAL TO EFFECT A
ONE-FOR-SIX REVERSE STOCK SPLIT
The Board of Directors has unanimously approved, for submission
to the shareholders, a resolution regarding a one-for-six reverse stock
split (the "Reverse Stock Split"). The intent of the Reverse Stock
Split is to: i) reduce the number of shares of common stock
outstanding, ii) reduce the number of shares of common stock issuable
upon conversion of the shares of Series A Preferred Stock that the
Company issued on July 23, 1998 pursuant to the Plan, and iii) to
increase the marketability and liquidity of the common stock.
The Minnesota Business Corporation Act does not require the
Reverse Stock Split be submitted to a shareholder vote. The Company is
doing so pursuant to the terms of the Plan. The shareholders' vote on
this Proposal No. 2 is not binding on the Board of Directors. If the
shareholders do not approve the Reverse Stock Split, the Board of
Directors may, in any event, exercise its rights under the Minnesota
Business Corporation Act and effect the Reverse Stock Split. The
approval of this proposal by the shareholders may affect the
shareholders rights to dispute in the future the Reverse Split.
If this Proposal No. 2 is approved, the Reverse Stock Split will
become effective as of 5:00 p.m. on the date it is approved (the
"Reverse Split Date").
On the Reverse Split Date and without any further action by
Company or its shareholders, the following will occur: i) the shares of
common stock held by shareholders of record as of the Reverse Split
Date will be converted into the right to receive an amount of shares of
common stock equal to the number of their shares divided by six, ii)
the number of shares of common stock issuable by the Company upon
conversion of the authorized Series A Preferred Stock will be reduced
from 96 to 16 shares of common stock for each share of Series A
Preferred Stock, iii) the number of authorized shares of common stock
will be reduced from 4,850,000 to 808,333.333 (prior to the increase in
authorized number of shares of common stock as set forth in Proposal
No. 3 below), iv) the outstanding shares of common stock will be
reduced from 3,008,055 to 501,342, and v) the aggregate number of
shares of common stock issuable upon conversion of the Series A
Preferred Stock will be reduced from 14,400,000 to 2,400,000 (the
number of authorized shares of Series A Preferred Stock will remain
150,000).
Table Showing Effect of Reverse Stock Split
Before Split After Split
Class of Stock Authorized Issued Authorized Issued
Common Stock 4,850,000 3,008,055 808,333.333 501,342(4)
Series A Preferred 150,000(1) 149,025.15 150,000(3) 149,025.15(2)
Footnotes
(1) Before the Reverse Stock Split each share of Series A
Preferred Stock is convertible into 96 shares of common stock, or
an aggregate of 14,400,000 shares of common stock.
(2) As of the date of this Proxy Statement there are 149,025.15
shares of Series A Preferred Stock issued and outstanding.
(3) After the Reverse Stock Split and authorization of additional
common stock, each share of Series A Preferred Stock will be
convertible into 16 shares of common stock, or an aggregate of
2,384,402 shares of common stock.
(4) After the Reverse Stock Split (but before the increase in
capital stock proposed in Proposal No. 3) 334,490 shares of
common stock will be authorized and unissued, assuming that no
additional shares of common stock are issued by the Company after
the Reverse Split Date.
Approval of the Reverse Stock Split would not affect any
continuing shareholder's percentage ownership interest in the Company
or proportional voting power, except for minor differences resulting
from the payment for fractional shares. The shares of common stock
which would be issued upon approval of the Reverse Stock Split would be
fully paid and non-assessable. The voting rights and other privileges
of the continuing holders of common stock would not be affected
substantially by adoption of the Reverse Stock Split or subsequent
implementation thereof. Consummation of the Reverse Stock Split will
have no material federal tax consequences to shareholders.
The common stock trades on the local over-the-counter market and
on the Record Date, December 3, 1998, the reported closing price of the
common stock was $.07 per share. The number of record holders of the
common stock on the Record Date was approximately 435. The Company
does not anticipate that the Reverse Stock Split would result in a
significant reduction in the number of such holders, and does not
currently intend to effect the Reverse Stock Split if it would result
in a reduction in the number of holders large enough to jeopardize the
Company's status as a "public" company
On the Reverse Split Date, each share of the common stock issued
and outstanding immediately prior thereto (the "Old Common Stock") will
be reclassified as and changed into the appropriate fraction of a share
of the Company's common stock (the "New Common Stock"), subject to the
treatment of fractional share interests described below. Shortly after
the Reverse Split Date, the Company will send transmittal forms to the
holders of the Old Common Stock for use in transmitting certificates
representing shares of Old Common Stock ("Old Certificates") to the
Company's transfer agent (the "Exchange Agent"). The letter of
transmittal will contain instructions for the surrender of Old
Certificates to the Exchange Agent in exchange for certificates
representing the appropriate number of whole shares of New Common Stock
and a payment in lieu of any fraction of a share of New Common Stock to
which such holders would otherwise be entitled. No new certificates
will be issued to a shareholder until such shareholder has surrendered
all Old Certificates, together with a properly completed and executed
letter of transmittal, to the Exchange Agent.
No certificates or cash representing fractional share interests
in the New Common Stock will be issued, and no such fractional share
interest will entitle the holder thereof to vote, or to any rights of a
shareholder of the Company. In lieu of any such fractional share
interest, each holder of Old Common Stock who would otherwise be
entitled to receive a fractional share of New Common Stock will receive
a payment in an amount equal to the product of such fraction multiplied
by the closing price of the Old Common Stock on the local over-the-
counter market as of the Reverse Split Date (or in the event that the
common stock is not so traded at such time, such closing price on the
next preceding day on which such stock was traded on the such market).
Upon proper completion and execution of the letter of transmittal
and return thereof, along with all Old Certificates, to the Exchange
Agent, shareholders will receive a new certificate or certificates
representing the number of whole shares of New Common Stock into which
their shares of common stock represented by the Old Certificates have
been converted as a result of the Reverse Stock Split, and payment in
lieu of any fraction of a share of New Common Stock to which such
holders would otherwise be entitled. Until surrendered, outstanding
Old Certificates held by shareholders will be deemed for all purposes
to represent the number of whole shares of New Common Stock to which
such shareholders are entitled as a result of the Reverse Stock Split.
Shareholders should not send their Old Certificates to the Exchange
Agent until they have received the letter of transmittal. Old
Certificates not presented for surrender as soon as practicable after
the letter of transmittal is sent shall be exchanged at the first time
they are presented for transfer. Shareholders whose shares are held of
record by their brokerage firm or other nominees need not take any
action to exchange such shares. The brokerage firm or other nominee,
as the record holder of such shares, will receive the letter of
transmittal and will be required to surrender the Old Certificates
representing such shares, together with the completed and executed
letter of transmittal, in order to receive new certificates. No
service charges will be payable by holders of shares of common stock in
connection with the exchange of certificates, all expenses of which
will be borne by the Company.
The principal purpose of the Reverse Stock Split is to reduce the
number of shares of common stock outstanding. The Board of Directors
believes that the total number of shares currently outstanding is
disproportionately large relative to the Company's present market
capitalization. The Board of Directors believes that a decrease in the
number of outstanding shares of common stock, without any material
alteration of the proportionate economic interest in the Company held
by individual shareholders, may increase the trading price of the
outstanding shares to a price roughly proportional to the Reverse Stock
Split, although no assurance can be given that the market price of the
common stock will rise in proportion to the reduction in the number of
outstanding shares resulting from the Reverse Stock Split.
The shares of common stock of the Company outstanding have not
traded on any exchange since it was de-listed by NASDAQ in 1987.
During the last twelve months, the Company's common stock has been
trade in the local over-the-counter market listed on at prices ranging
from $.0625 bid to $.45 asked. There have been no active market makers
and trading volume has been extremely light.
The Board of Directors believes it would be highly advantageous
to the Company's shareholders to obtain NASDAQ SmallCap listing for the
common stock. One requirement for listing involves a $4.00 per share
minimum price. While the Reverse Stock Split will not result in a per
share price equal to or in excess of $4.00 per share or in the Company
satisfying other NASDAQ SmallCap listing criteria, the Board of
Directors believes the Reverse Stock Split is a preliminary step
necessary to be in a position at some time to attempt to list the
common stock on the NASDAQ SmallCap market.
The following description of federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code"),
the applicable Treasury Regulations promulgated thereunder, judicial
authority and current administrative rulings and practices as in effect
on the date of this Proxy Statement. The discussion is for general
information only and does not discuss consequences which may apply to
special classes of taxpayers (e.g., non-resident aliens, broker-dealers
or insurance companies). This summary does not discuss any consequence
of the Reverse Stock Split under any state, local or foreign tax laws.
Shareholders are urged to consult their own tax advisors to determine
the particular consequences to them.
The exchange of shares of Old Common Stock for shares of New
Common Stock will not result in recognition of gain or loss. Gain or
loss will result upon the payment for the fractional shares. In such
event a shareholder would recognize gain or loss, as the case may be,
measured by the difference between the amount of cash or other property
received and the basis of his or her Old Common Stock allocable to the
fractional share represented by the scrip. Such gain or loss will be
capital gain or loss if such shareholder's Old Common Stock was held as
a capital asset, and any such capital gain or loss will generally be
long-term capital gain or loss to the extent such shareholder's holding
period for his or her Old Common Stock exceeds twelve (12) months.
The holding period of the shares of New Common Stock will include
the shareholder's holding period for the shares of Old Common Stock
exchanged therefor, provided that the shares of Old Common Stock were
held as a capital asset. The total basis of the shares of New Common
Stock will be the same as the total basis of the shares of Old Common
Stock exchanged therefor, reduced by the basis allocable to the receipt
of scrip in lieu of fractional shares described above.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE "FOR" THE FOREGOING PROPOSAL NO. 2.
PROPOSAL NO. 3
PROPOSAL TO AMEND
ARTICLES OF INCORPORATION TO
INCREASE AUTHORIZED NUMBER OF SHARES
OF COMMON STOCK AND PREFERRED STOCK
The Board of Directors has unanimously approved, for submission
to the shareholders, a resolution regarding amending Article III of the
Company's Articles of Incorporation to increase the authorized number
of shares of common stock of the Company from 808,333.333, following
the Reverse Stock Split, to 10,000,000 shares, and to increase the
authorized number of shares of Preferred Stock of the Company from
150,000, following the Reverse Stock Split, to 2,000,000 shares.
Article III of the Company's Articles of Incorporation, as amended by
this proposal, is attached in Annex IV.
The Company's Articles of Incorporation currently provide that
the Company is authorized to issue up to 5,000,000 shares of capital
stock, of which 4,850,000 has been designated Class A common stock and
150,000 of which has been designated as Series A Preferred Stock. If
the Reverse Stock Split is approved, there will be 808,333.333 shares
of common stock authorized of which 501,342 will be issued and
outstanding. The authorized number of Series A Preferred Stock will be
unaffected by the Reverse Stock Split. The number of shares of common
stock issuable upon conversion of the Series A Preferred Stock will,
however, be reduced from 14,400,000 to 2,400,000. In addition, if the
Reverse Stock Split is approved, the Company will have 334,490 whole
shares of common stock that are authorized but unissued, of which
13,750 will be reserved for issuance upon exercise of outstanding
options and warrants. In order to fulfill its obligations under the
outstanding options and warrants, and to convert the Series A Preferred
Stock, which the Board of Directors believes is in the best interest of
the Company, the Company needs at least 2,413,750 shares of authorized
but unissued common stock.
The Board of Directors believes conversion of the Series A
Preferred Stock into common stock is in the best interests of the
Company and its shareholders because it will simplify the
capitalization of the Company, which is generally more attractive to
both the public and private equity markets.
The Board of Directors recommends the increase in authorized
number of shares of common stock and Preferred Stock to enable the
Company to convert the Series A Preferred Stock and to have additional
shares available for issuance in connection with future acquisitions,
public or private offerings, conversions of convertible securities
(including the conversion of the Series A Preferred Stock), employee
benefit plans, stock splits effected in the form of stock dividends,
and other general corporate purposes. Increasing the authorized number
of shares of common stock and Preferred Stock will give the Company
greater flexibility and will allow the Company to issue additional
capital stock for the purposes described above.
Other than in connection with: i) the Plan and ii) the possible
merger of Advance Medical Products, Inc. into Advanced Biosensor, Inc.,
a wholly owned subsidiary of the Company, the Company has no current
plans, agreements or arrangements for the issuance of additional shares
of common stock or Preferred Stock, other than the issuance of shares
pursuant to its stock option and other employee benefit plans. The
Company is at all times investigating additional sources of financing
and future acquisitions which the Board of Directors believes will be
in the best interests of the Company and its shareholders. In
addition, the Company is currently seeking and plans to continue to
seek additional financing, which could involve the issuance of either
or both debt or equity of the Company.
The additional authorized shares of common stock and Preferred
Stock would also be available for issuance (subject to shareholder
approval if required by law) at such times, on such terms and for such
proper corporate purposes as the Board of Directors may approve,
including possible future financing and acquisition transactions.
Depending upon the nature and terms thereof, such transactions could
enable the Board of Directors to render more difficult an attempt by a
third party to obtain control of the Company. For example, the
issuance of shares of common stock or Preferred Stock in a public or
private sale, merger or similar transaction would increase the number
of the Company's outstanding shares, thereby diluting the interest of a
party seeking to acquire control of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE "FOR" THE FOREGOING PROPOSAL NO. 3.
PROPOSAL NO. 4
ELECTION OF SIX MEMBERS TO THE BOARD OF DIRECTORS
On July 23, 1998, Dr. Stephen L. Zuckerman resigned as a director
of the Company. Steven Springrose remained as the elected Director,
and five additional persons were appointed to serve as Directors of
the Company until the next annual meeting of shareholders. The Board
proposes that the following six Directors who have been serving as the
Board of Directors be re-elected to serve until the next election of
Directors.
L. John Ankney
David A. Heiden
C. Roger Jones
Ronald G. Moyer
B. Steven Springrose
Spencer M. Vawter
THE BOARD RECOMMENDS THAT YOU VOTE FOR ALL OF THE DIRECTORS.
PROPOSAL NO. 5
APPROVAL OF THE COMPANY'S 1998 STOCK OPTION PLAN
General Information. On December 3, 1998 the Company's Board of
Directors adopted the Biosensor Corporation 1998 Stock Option Plan (the
"1998 Plan"), subject to approval by the Company's shareholders. The
purpose of the 1998 Plan is to enable the Company and its subsidiaries
to retain and attract key employees, consultants and non-employee
directors who contribute to the Company's success by their ability,
ingenuity and industry, and to enable such key employees, consultants
and non-employee directors to participate in the long-term success and
growth of the Company by giving them a proprietary interest in the
Company.
The 1998 Plan includes an authorization of up to 500,000 shares
of Company common stock (following the proposed one-share-for-six
reverse stock split) in order to provide an adequate reserve for the
grant of options to key employees and non-employee directors. The
principal features of the 1998 Plan are summarized below.
Shares Available Under 1998 Plan. The maximum number of shares of
common stock reserved and available under the 1998 Plan for awards is
500,000 (following the proposed one-share-for-six reverse stock split,
and subject to possible adjustment in the event of stock splits or
other similar changes in the common stock in the future). Shares of
common stock covered by expired or terminated stock options may be used
for subsequent awards under the 1998 Plan.
Eligibility and Administration. Officers and other key employees
of the Company and its subsidiaries who are responsible for or
contribute to the management, growth and/or profitability of the
business of the Company and its subsidiaries, as well as consultants
and non-employee directors, are eligible to be granted awards under the
1998 Plan. The 1998 Plan shall be administered by the Board or, in its
discretion, by a committee of not less than two "non-employee
directors" who are "outside directors" as defined in the 1998 Plan (the
"Committee"), who shall be appointed by the Board of Directors. The
term "Board" as used in this section refers to the Board or, if the
Board has delegated its authority, the Committee. The Board will have
the power to make awards including awards to non-employee directors,
determine the number of shares covered by each award and other terms
and conditions of such awards, interpret the 1998 Plan, and adopt
rules, regulations and procedures with respect to the administration of
the 1998 Plan. The Board may delegate its authority to the CEO of the
Company for the purpose of selecting and granting options to key
employees who are not officers of the Company under the 1998 Plan.
Stock Options. The Board may grant stock options that either
qualify as "incentive stock options" under the Internal Revenue Code of
1986, as amended ("Code") or are "non-qualified stock options" in such
form and upon such terms as the Board may approve from time to time.
Stock options granted under the 1998 Plan may be exercised during their
respective terms as determined by the Board. The purchase price may be
paid by tendering cash or previously owned shares of common stock, or
in the Board's discretion, by tendering promissory notes. The optionee
may elect to pay all or part of any taxes due by having the Company
withhold upon exercise of the option a number of shares with a fair
market value equal to the taxes. No "incentive stock option" shall be
transferable by the optionee or exercised by anyone else during the
optionee's lifetime. "Non-qualified stock options" may be transferred
only to the optionee's family as defined in the Code or a trust or
similar entity whose beneficiaries are the optionee and/or the family
of the optionee. The exercise price for any stock option may not be
less than the fair market value of the common stock on the date the
option is granted (or, in the event the participant owns more than 10%
of the combined voting power of all classes of stock of the Company,
the option price shall be not less than 110% of the fair market value
of the stock on the date the option is granted).
Stock options may be exercised during varying periods of time
after a participant's termination of employment, dependent upon the
reason for the termination. Following a participant's death, the
participant's stock options may be exercised to the extent they were
exercisable at the time of death by the legal representative of the
estate or the optionee's legatee for a period of twelve months from the
date of death or until the expiration of the stated term of the option,
whichever is less. The same time periods apply if the participant is
terminated by reason of disability as defined in the Plan. If the
participant retires, the participant's stock options may be exercised
to the extent they were exercisable at the time of retirement for a
period of twelve months from the date of retirement or until the
expiration of the stated term of the option, whichever is less. If the
participant is involuntarily terminated without cause, the
participant's options may be exercised to the extent they were
exercisable at the time of termination for the lesser of three months
or the balance of the stated term of the option. If the participant's
employment is terminated for cause, the participant's stock options
immediately terminate. These exercise periods may be reduced or
increased by the Board for particular options. The Board may, in its
discretion, accelerate the exercisability of stock options which would
not otherwise be exercisable.
No incentive stock options shall be granted under the 1998 Plan
after January 21, 2008. The term of an incentive stock option may not
exceed 10 years (or 5 years if issued to a participant who owns or is
deemed to own more than 10% of the combined voting power of all classes
of stock of the Company). The aggregate fair market value of the common
stock with respect to which an incentive stock option is exercisable
for the first time by an optionee during any calendar year shall not
exceed $100,000.
Federal Income Tax Consequences. An optionee will not realize
taxable compensation income upon the grant of an incentive stock
option. In addition, an optionee generally will not realize taxable
compensation income upon the exercise of an incentive stock option if
he or she exercises it as an employee or within three months after
termination of employment (or within one year after termination if the
termination results from a permanent and total disability). The amount
by which the fair market value of the shares purchased exceeds the
aggregate option price at the time of exercise will be alternative
minimum taxable income for purposes of applying the alternative minimum
tax. If stock acquired pursuant to an incentive stock option is not
disposed of prior to the date two years from the option grant date or
prior to one year from the option exercise date (the "Applicable
Holding Periods"), any gain or loss realized upon the sale of such
shares will be characterized as capital gain or loss. If the Applicable
Holding Periods are not satisfied, then any gain realized in connection
with the disposition of such stock will generally be taxable as
ordinary compensation income in the year in which the disposition
occurred, to the extent of the difference between the fair market value
of such stock on the date of exercise and the option exercise price.
The Company is entitled to a tax deduction to the extent, and at the
time, the participant realizes compensation income. The balance of any
gain will be characterized as a capital gain.
An optionee will not realize taxable compensation income upon the
grant of a non-qualified stock option. As a general matter, when an
optionee exercises a non-qualified stock option, he or she will realize
taxable compensation income at that time equal to the difference
between the aggregate option price and the fair market value of the
stock on the date of exercise. The Company is entitled to a tax
deduction to the extent, and at the time, the participant realizes
compensation income.
Withholding. The 1998 Plan requires each participant, no later
than the date as of which any part of the value of an option first
becomes includible as compensation in the gross income of the
participant, to pay to the Company any federal, state or local taxes
required by law to be withheld with respect to the award. The Company
shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment otherwise due to the participant. With
respect to any option awarded under the 1998 Plan, a participant may
elect to satisfy part or all of the withholding tax requirements
associated with the award by (i) authorizing the Company to retain from
the number of shares of Company common stock which would otherwise be
deliverable to the participant, or (ii) delivering to the Company from
shares of Company common stock already owned by the participant that
number of shares having an aggregate fair market value equal to part or
all of the tax payable by the participant. The Company would then pay
the tax liability from its own funds.
Restricted Securities. The options granted pursuant to the 1998
Plan and the shares of common stock issuable upon exercise of the
options will be restricted securities as defined in SEC Rule 144. Such
securities may not be transfered in the absnece of an effective
regsitations statement or an opinion of cousnel stating that no such
registration is necessary.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE "FOR" APPROVAL OF THE COMPANY'S
1998 STOCK OPTION PLAN.
PROPOSAL NO. 5
RATIFICATION OF RE-APPOINTMENT OF INDEPENDENT AUDITORS
The accounting firm of McGladrey & Pullen has been the Company's
auditing firm since its inception. McGladrey & Pullen has been re-
appointed by the Board of Directors as the Company's auditing firm for
the current year. Although shareholder approval is not required, the
Board of Directors requests shareholder ratification of McGladrey &
Pullen's re-appointment. In the event the re-appointment of McGladrey &
Pullen should not be ratified by the shareholders, the Board of
Directors will make another appointment to be effective at the earliest
possible time. A representative from McGladrey & Pullen will not be
available at the annual meeting of shareholders to answer any
appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE "FOR" RATIFICATION OF THE RE-APPOINTMENT OF
MCGLADREY & PULLEN AS THE COMPANY'S INDEPENDENT
1999 ANNUAL MEETING
The proxy rules of the Securities and Exchange Commission permit
shareholders, after timely notice to issuers, to present proposals for
shareholder action in issuer proxy statements where such proposals are
consistent with applicable law, pertain to matters appropriate for
shareholder action and are not properly omitted by issuer action in
accordance with the proxy rules. The Company's annual meeting for the
fiscal year ended June 30, 1999, is expected to be held on or about
November 2, 1999, and all proxy materials in connection with that
meeting are expected to be mailed on or about October 15, 1999.
Shareholder proposals prepared in accordance with the proxy rules must
be received by the Company at the registrant's principal executive
offices a reasonable period of time in advance of the date of the
Company plans to release to shareholders in connection with its annual
meeting of shareholders.
OTHER MATTERS
All proxies properly executed will be voted in the manner
directed by shareholders. If no direction is made, proxies will be
voted "FOR" proposals 1, 2, 3, 4, 5, and 6.
All expenses in connection with solicitation of proxies will be
borne by the Company. The Company will pay brokers, fiduciaries, or
other custodians their reasonable expenses for sending proxy material
to, and obtaining instructions from, persons for whom they hold stock
of the Company. The Company expects to solicit proxies by mail, but
directors, officers, and other employees of the Company may also
solicit in person, by telephone, by facsimile or by mail.
By Order of the Board of Directors,
Ronald G. Moyer
PRESIDENT
December__, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD DECEMBER 29, 1998
The undersigned hereby appoints B. Steven Springrose or Ronald G.
Moyer or either one of them, as proxies, with full power of
substitution to vote all the shares of common stock which the
undersigned would be entitled to vote if personally present at the
Annual Meeting of shareholders of Biosensor Corporation, to be held
December 29, 1998, at 2:00 p.m. at the Company's principal offices
located at 6 Woodcross Drive, Columbia, SC 29212, or at any
adjournments thereof, hereby revoking all former proxies.
(1) PROPOSAL TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO
CHANGE THE NAME OF THE COMPANY TO "BIOTEL, INC."
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) PROPOSAL TO EFFECTUATE A ONE-FOR-SIX REVERSE STOCK SPLIT OF ALL
OUTSTANDING SHARES OF COMMON STOCK AND PREFERRED STOCK OF THE
COMPANY.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) PROPOSAL TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO
INCREASE THE AMOUNT OF AUTHORIZED COMMON STOCK AND PREFERRED STOCK.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(4) PROPOSAL TO ELECT SIX MEMBERS TO THE BOARD
[ ] FOR ALL [ ] AGAINST ALL [ ] WITHHOLD AUTHORITY FOR
NOMINEES NOMINEES ANY INDIVIDUAL NOMEE,
WRITE NAME BELOW
(5) PROPOSAL TO APPROVE THE INCENTIVE STOCK OPTION PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(6) PROPOSAL TO RATIFY THE SELECTION OF AUDITORS
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2,
3, 4,5, AND 6 IF THERE IS NO SPECIFICATION.
Dated _________________________, 1998
___________________________________
Signature of shareholder
___________________________________
Signature of Joint shareholder (if
held jointly)
PLEASE DATE AND SIGN exactly as your name(s) appear below indicating,
where proper, official position or representative capacity in which you
are signing. When signing as executor, administrator, trustee or
guardian, give full title as such; when shares have been issued in
names or two or more persons, all should sign.
PRELIMINARY COPIES
June 1, 1998
1
i
PRELIMINARY COPIES
December 3, 1998
ANNEX I
CAROLINA MEDICAL INC.
AND SUBSIDIARIES
King, North Carolina
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
AND FOR THE YEAR THEN ENDED
Audited Consolidated Financial Statements
CAROLINA MEDICAL, INC. AND SUBSIDIARIES
June 30, 1998
and For The Year Then Ended
Audited Consolidated Financial Statements
Independent Auditors' Report 1
Consolidated Balance Sheet 2
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Consolidated Statement of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements 8
The Board of Directors and Stockholders
Carolina Medical, Inc. and Subsidiaries
King, North Carolina
Independent Auditors' Report
We have audited the accompanying consolidated balance sheet of Carolina
Medical, Inc. and Subsidiaries (the "Company") as of June 30, 1998, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We did not audit the financial statements of
Advanced Medical Products, Inc., a subsidiary, which statements reflect total
assets of $1,100,302 as of June 30, 1998, and total revenues of $2,191,812 for
the year then ended. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Advanced Medical Products, Inc., is based solely on the
report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audit and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Carolina Medical, Inc. and
Subsidiaries as of June 30, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note Q, under a Plan of Reorganization and Merger, all of the
outstanding common stock of Carolina Medical, Inc. was acquired by Biosensor
Corporation on July 23, 1998, and the Board of Directors of Advanced Medical
Products, Inc., a subsidiary of Carolina Medical, Inc., approved a plan
authorizing this company to merge with a subsidiary of Biosensor Corporation.
ROYSTER SMITH SHELTON & COMPANY, PC.
August 14, 1998, except for the last sentence
of Note F, as to which the date is October 8, 1998.
CONSOLIDATED BALANCE SHEET
CAROLINA MEDICAL, INC. AND SUBSIDIARIES
June 30, 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 772,415
Accounts receivable, net of allowance for
bad debts of $25,000 1,364,546
Refundable income taxes 30,708
Inventories--Note C 1,366,232
Deferred income taxes--Note N 138,868
Other 102,299
Total Current Assets 3,775,068
PROPERTY AND EQUIPMENT--Note D 891,764
OTHER ASSETS
Goodwill, net of accumulated amortization
of $45,148--Note L 1,220,934
Other assets, net--Note E 216,166
1,437,100
_________
$6,103,932
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEET - CONTINUED
CAROLINA MEDICAL, INC. AND SUBSIDIARIES
June 30, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt--Note F $ 265,923
Current maturities of related party obligations--Note G 161,136
Current maturities of capital lease obligations--Note H 14,791
Note payable--Note F 295,798
Trade accounts payable 1,017,962
Accrued payroll and related liabilities 224,601
Deferred service contract revenue 312,971
Other accrued expenses 330,974
Total Current Liabilities 2,624,156
LONG-TERM DEBT, less current maturities--Note F 1,044,232
RELATED PARTY OBLIGATIONS, less current maturities--Note G 1,638,507
CAPITAL LEASE OBLIGATIONS, less current maturities--Note H 7,757
DEFERRED TAX LIABILITY--Note N 3,855
COMMITMENTS AND CONTINGENCIES--Notes H, I, and Q
STOCKHOLDERS' EQUITY
Common stock, $.20 par value; 4,000,000 shares
authorized; 1,987,002 issued and outstanding 397,400
Additional paid-in capital 1,267,152
Accumulated deficit (879,127)
785,425
$6,103,932
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF OPERATIONS
CAROLINA MEDICAL, INC. AND SUBSIDIARIES
For The Year Ended June 30, 1998
NET SALES AND SERVICES $8,481,926
COST OF SALES AND SERVICES 5,509,806
GROSS PROFIT 2,972,120
OPERATING EXPENSES:
Selling, general and administrative 2,339,923
Research and development 796,189
3,136,112
OPERATING LOSS (163,992)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 28,410
OTHER EXPENSES, net--Note P (280,709)
NET LOSS BEFORE INCOME TAXES (416,291)
PROVISION FOR INCOME TAXES--Note N (67,690)
NET LOSS $ (483,981)
LOSS PER COMMON SHARE $ (.34)
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
CAROLINA MEDICAL, INC. AND SUBSIDIARIES
For The Year Ended June 30, 1998
OPERATING ACTIVITIES
Net loss $ (483,981)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Minority interest in consolidated subsidiary (28,410)
Depreciation 244,264
Amortization 93,106
Deferred income taxes (46,720)
(Increase) decrease in current assets:
Accounts receivable 390,341
Refundable income taxes (22,128)
Inventories 471,153
Prepaid and other current assets 17,398
Increase (decrease) in current liabilities:
Accounts payable 128,690
Accrued payroll and related liabilities (66,457)
Deferred service contract revenue 156,577
Other accrued expenses (174,506)
CASH PROVIDED BY OPERATING ACTIVITIES 679,327
INVESTING ACTIVITIES
Purchase of property and equipment (110,125)
Capitalization of product software (10,632)
Capitalization of costs related to mergers (47,722)
Increase in deposits and other assets 61,043
CASH USED BY INVESTING ACTIVITIES (107,436)
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
CAROLINA MEDICAL, INC. AND SUBSIDIARIES
For The Year Ended June 30, 1998
FINANCING ACTIVITIES
Proceeds from issuance of long term debt 65,335
Payments of long term debt (465,537)
Issuance of common stock 250,000
Increase in additional paid in capital 159,687
CASH PROVIDED BY FINANCING ACTIVITIES 9,485
NET INCREASE IN CASH AND CASH EQUIVALENTS 581,376
CASH AT BEGINNING OF YEAR 191,039
CASH AT END OF YEAR $ 772,415
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 258,565
Cash paid for income taxes $ 154,440
SCHEDULE OF NON-CASH ACTIVITIES:
Debt issued in exchange for assets
of Braemar, Inc.--Note L $2,403,760
Capitalization of demo inventory $ 59,507
Capitalization of software costs $ 28,873
Issuance of common stock in settlement of accounts payable $ 55,988
Issuance of common stock in exchange for certain assets $ 277,144
Exchange of assets in settlement of accounts payable $ 24,120
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
CAROLINA MEDICAL, INC. AND SUBSIDIARIES
For The Year Ended June 30, 1998
Common Additional
Stock Paid-in Accumulated
Shares Amount Capital Deficit
Beginning Equity - BIO-TEL
International, Inc. as of
June 30, 1997 1,552,000 $ 15,520 $ 528,827 $(258,513)
Interest in losses of
subsidiary limited by
investment balance (136,633)
Issuance of BIO-TEL
International, Inc. stock 80,000 800
BIO-TEL International, Inc.
merger into Carolina Medical,
Inc. --Note L (57,392) 298,602 (180,179)
Issuance of Carolina
Medical, Inc. stock 412,394 82,478 918,504
Current year net loss (483,981)
Ending Equity - Carolina
Medical, Inc. and
subsidiaries as of
June 30, 1998 1,987,002 $397,400 $1,267,152 $(879,127)
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAROLINA MEDICAL, INC. AND SUBSIDIARIES
NOTE A--NATURE OF BUSINESS
Carolina Medical, Inc. and Subsidiaries consist of Carolina Medical, Inc.
("CMI"), Advanced Medical Products, Inc. ("AMP") and Braemar, Inc. CMI was
incorporated in July 1959, and manufactures and services ultrasound imaging and
electronic diagnostic instruments for detecting circulatory disorders,
measuring blood flow and blood pressure. AMP manufactures (through
subcontractors), assembles and markets diagnostic equipment, primarily for use
in physicians' offices. Braemar, Inc. manufactures and services non-invasive
medical and other specialized monitoring devices. The Company's sales are
principally to customers in the United States with some international sales.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Carolina Medical, Inc. and its subsidiaries (collectively, the
"Company"). Significant intercompany accounts and transactions are eliminated
in consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid short-term
investments purchased with an original maturity of three months or less to be
equivalent to cash. During fiscal year 1998, the Company had bank deposits in
excess of the amount insured by the Federal Deposit Insurance Corporation.
Concentration of Credit Risk: Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of temporary
cash investments and trade accounts receivable. The Company places its
temporary cash investments with high quality financial institutions. No losses
have been experienced on such investments. The Company reviews a customer's
credit history before extending credit. An allowance for doubtful accounts is
established based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
Inventories: Inventories are valued at the lower of cost or market using the
average and first-in first-out cost methods.
Property and Equipment: Property and equipment are recorded at cost.
Depreciation is calculated by the straight-line or declining-balance method
over estimated useful lives of three to ten years for equipment and three to
five years for automobiles.
Revenue Recognition: Revenues from product sales are recognized at date of
shipment. Service contract revenues are recognized during the term of the
service contract which, in most cases, ranges from one to three years.
Service Contracts: Amounts billed to customers for service contracts are
recognized as income over the term of the agreements and the associated costs
are recognized as incurred. Current liabilities include service contract
revenue deferrals of approximately $313,000 as of June 30, 1998.
Warranty Reserve: The Company warrants its products against defects in
material and workmanship for ninety days for electromagnetic and ultrasound
probes and one year for electronic and ultrasound equipment. An accrual is
provided for estimated future claims. Such accruals are based on historical
experience and management's estimate of the level of future claims.
Research and Development: Research and development costs are charged to
operations as incurred. These costs are for proprietary research and
development activities that are expected to contribute to the future
profitability of the Company.
Software Development Costs: The costs incurred by the Company to develop
computer software for sale with products are expensed as research and
development costs until technological feasibility is established. Costs
incurred after the attainment of technological feasibility are capitalized
until the software is ready for sale. Thereafter, capitalized software costs
are amortized over their estimated useful lives. Software amortization expense
for the year ended June 30, 1998 was $76,832.
License Agreements: The Company amortizes its licensing agreements using the
straight-line method over the life of the license.
Management Estimates: Management uses estimates and assumptions in preparing
financial statements. Those estimates and assumptions may affect the reported
amounts of assets and liabilities, the disclosures of contingent assets and
liabilities, and reported revenues and expenses. Significant estimates used in
preparing these financial statements include those assumed in computing the
inventory valuation allowance and warranty reserve. Actual results could
differ from those estimates.
Income Taxes: Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes relate primarily to differences between
financial and income tax reporting for the basis of inventory, accounts
receivable, property and equipment, and accrued liabilities. The deferred tax
accounts represent the future tax return consequences of those differences,
which will either be deductible or taxable when the assets and liabilities are
recovered or settled (Note N).
Advertising: The Company expenses the initial production costs of advertising,
except for direct-response advertising which is capitalized and amortized over
its expected period of future benefits. Direct-response advertising consists
primarily of brochures and distribution of brochures that include response
cards for the Company's products. The capitalized costs of the advertising are
amortized over a six-month period from the date that the production costs were
incurred.
At June 30, 1998, approximately $36,000 were reported as assets and advertising
expense was approximately $60,000.
Goodwill: Goodwill is recorded for the excess of the purchase price over the
fair value of acquired net assets, and is amortized using the straight-line
method over 15 years.
Loss per Common Share: The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS No. 128), Earnings Per Share, which supersedes APB
Opinion No. 15. SFAS No. 128 requires the presentation of earnings per share
by all entities that have common stock or potential common stock, such as
options, warrants, and convertible securities, outstanding that trade in a
public market. Generally, basic per share amounts are computed by dividing net
income or loss by the weighted-average number of common shares outstanding.
New Accounting Pronouncements: The Financial Accounting Standards Board has
issued SFAS No. 130, Reporting Comprehensive Income, which establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes
in equity except those resulting from investments by owners and distributions
to owners. Among other disclosures, SFAS No. 130 requires that all items that
are required to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective for financial statements for periods beginning after December 15,
1997, and requires comparative information for earlier years to be restated.
The FASB has issued Statement No. 131, Disclosures About Segments of an
Enterprise and Related Information. Statement No. 131 establishes standards
for the manner in which a publicly held enterprise reports certain information
about operating segments of their business. The information required to be
disclosed for an entity's operating segment not only consists of financial
information, but also certain related disclosures of the segment's products and
services, geographic areas, and major customers. Statement No. 131 will become
effective for the Company's year ending June 30, 1999; however, the impact on
disclosures is not anticipated to be significant.
NOTE C--INVENTORIES
Raw materials and supplies $1,207,964
Work in process 225,728
Finished goods 459,158
Evaluation units and replacements 16,500
Inventory reserve (543,118)
$1,366,232
The inventory reserve has been established for estimated inventory losses due
to obsolescence and waste.
NOTE D--PROPERTY AND EQUIPMENT
Machinery and equipment $2,480,053
Vehicles 45,083
Furniture and fixtures 177,373
Leasehold improvements 36,421
Projects in progress 8,130
2,747,060
Accumulated depreciation (1,855,296)
$ 891,764
Depreciation expense recorded for the year ended June 30, 1998 was $244,264.
NOTE E--OTHER ASSETS
Other assets consist of the following as of June 30, 1998:
Deferred charges, net of accumulated
amortization of $22,500 $ 60,000
Cash surrender value of life insurance,
net of policy loans of $22,736 20,698
Software development costs, net of accumulated
amortization of $319,381 52,751
License agreement, net of accumulated
amortization of $5,000 5,000
Pending merger costs--Note Q 52,748
Deposits 24,969
$216,166
NOTE F--LONG-TERM DEBT AND NOTE PAYABLE
Term loan with bank, payable in monthly installments
of $3,600, including interest at 8% per annum through
June 1, 2001; guaranteed by certain officers of CMI
and collateralized by substantially all of CMI's assets $113,768
Term loan with bank, payable in monthly installments
of $1,500, including interest at the bank's prime
rate plus 2% per annum, due on April 1, 1999, secured
by equipment 60,246
Term loan with bank, payable in monthly
installments of $2,042, including interest at
10% per annum through October 10, 2000,
collateralized by substantially all of CMI's assets 102,052
Non-interest bearing note payable to a company for
purchase of inventory, face amount of $144,468,
due February 1999, payable in monthly installments of
$6,020, interest imputed at 8% per annum; (net of
unamortized discount of $1,154 in 1998) 42,002
Term loan for product liability insurance
coverage, due March 1998, payable in monthly
installments, including interest at 9 1/2% per annum,
unsecured 17,068
Term loan with bank, payable in monthly installments
of $2,000, including interest at 11% per annum due
March 2000, secured by furniture, fixtures and equipment 40,279
Term loan for royalty agreements, payable in monthly
installments of principal only of $2,981, unsecured 9,740
Term loan, principal payable in quarterly installments
of $25,000 through September 1999, $40,000
through June 2002, with balance of $360,00
due September 1, 2002; interest payable quarterly
at 7 1/4 per annum, guaranteed by CMI and
collateralized by a pledge of shares of CMI 925,000
1,310,155
Less current maturities 265,923
$1,044,232
Certain of the bank loan agreements contain requirements to provide specified
financial information to the bank on a quarterly basis. These agreements
require the book values of the assets securing the obligations to be at least
1.5 times the outstanding loan balances.
As of June 30, 1998, one of the Company's subsidiaries, AMP, had $295,798
outstanding under a line-of-credit agreement with a bank. The line-of-credit
is limited to the lesser of $750,000, or the sum of 80% of eligible
receivables and 100% of eligible inventories up to $130,000. The line bears
interest at 2% plus the greater of the bank's prime rate or 7%. The line is
due on December 31, 1998, and is secured by substantially all assets of AMP.
However, AMP is in violation of certain covenants, including the minimum net
working capital, location of inventory, delivery of audited financial
statements and minimum tangible net worth requirements. The lender has
waived the covenant violations through December 31, 1998, except for location
of inventory.
Maturities of long-term debt at June 30, 1998 were as follows:
1999 $ 265,923
2000 229,944
2001 231,037
2002 189,129
2003 380,494
Thereafter 13,628
$1,310,155
NOTE G--RELATED PARTY OBLIGATIONS AND TRANSACTIONS
Note payable to CMI stockholder, annual interest of 9%,
due September 30, 1998, unsecured $ 28,129
Note payable to affiliated partnership, annual
interest of 5 1/4%, due July 21, 1999, unsecured (Note H) 21,514
Note payable to stockholder, annual interest of 10%,
due January 1, 1999, secured by accounts receivable
and inventory 150,000
Note payable to stockholder, annual interest of prime
plus 1 1/2%, due October 20, 1999, unsecured (Note L) 1,600,000
1,799,643
Less current maturities 161,136
$1,638,507
Maturities of the related party notes payable as of June 30, 1998 were as
follows:
1999 $ 161,136
2000 1,638,507
$1,799,643
AMP had sales of approximately $88,000 in 1998 to Nishimoto Sangyo Company,
Ltd., a stockholder.
As more fully explained in Note H, CMI leases its land and building from an
affiliated partnership. Total rent expense under this lease agreement was
$79,200 for the year ended June 30, 1998.
NOTE H--LEASE OBLIGATIONS
The Company's subsidiary, Braemar, Inc., acquired a copier and a telephone
system under long-term lease agreements. For financial reporting purposes,
minimum lease payments relating to the equipment have been capitalized. The
copier lease expires in January 2000, and the telephone system lease expires
in September 1999. Capitalized costs and related accumulated depreciation of
assets under capital leases as of June 30, 1998, were approximately $32,500
and $16,500, respectively.
Future minimum lease payments under capital lease agreements as of June 30,
1998 were as follows:
1999 $16,144
2000 7,911
Total minimum lease payments 24,055
Less amounts representing interest 1,507
Present value of minimum lease payments 22,548
Less current maturities 14,791
$ 7,757
In April 1987, CMI sold its land and building located in King, North Carolina
to King Investment Partners ("KIP"), a partnership composed principally of
CMI's controlling stockholders and their spouses, and entered into an agreement
to lease the land and building from KIP. Under this agreement, KIP has the
option of increasing the lease amount at the end of each year. The lease
imposes certain subleasing restrictions on CMI, as well as minimum insurance
requirements. During July 1994, CMI issued an unsecured note payable to KIP
for unpaid rent payable over five years at an interest rate of 5 1/4% per annum
(Note G). Effective May 1, 1996, the lease term was amended to allow for a 10%
increase in rental payments to $79,200 annually. The current three-year lease
expires on May 1, 1999.
AMP leases its current facility under a five-year lease agreement which will
expire October 31, 2001. AMP also leases equipment under agreements with
varying monthly payment amounts. The terms of the lease range from 36 to 60
months.
Braemar, Inc. maintains a non-cancelable operating lease for office and
manufacturing space, which includes costs allocated by the lessor for property
taxes, insurance and maintenance. This lease expires August 31, 1999, and
contains an option for Braemar to renew the lease for one additional three-year
term. In addition, Braemar rents office equipment under operating leases with
various expiration dates.
Future minimum lease payments under operating leases as of June 30, 1998 were
as follows:
1999 $331,750
2000 191,683
2001 103,929
2002 40,761
2003 5,670
$673,793
Total rent expense under operating leases was $314,564 for the year ended June
30, 1998.
NOTE I--COMMITMENTS AND CONTINGENCIES
In January 1993, certain intellectual property was acquired through a non-
exclusive licensing agreement with Indiana Business Modernization and
Technology Corporation ("BMT"). In connection with this agreement, CMI paid an
initial fee of $10,000, and is required to pay a royalty equal to 1% of net
sales generated by the intellectual property, until total payments equal
$300,000. Thereafter, CMI is required to pay 1/2% of net sales, until total
payments equal $603,450. In no event shall the royalty payments be less than
$25,000 per year for the first five years of the agreement. The agreement also
stipulates that BMT shall not grant any nonexclusive license of the
intellectual property to any other party for eighteen months after the date of
the agreement. CMI's royalty fees for the year ended June 30, 1998 were
$26,668.
In fiscal year 1997, CMI determined that the land adjacent to its building was
contaminated by toxic chemicals. This land is owned by an affiliated
partnership which also owns the land and building occupied by CMI (Note H).
The initial cleanup cost of approximately $10,000 was paid by the partnership
in 1997. During fiscal 1998, CMI paid approximately $8,000 for environmental
testing, which is still in progress. The cost of the property cleanup is not
expected to exceed $75,000. While CMI may be contingently liable for these
remediation costs, it is possible that the property owner or its insurance
company will be ultimately liable for these costs.
AMP has not obtained product liability insurance due to prohibitive costs. The
nature and extent of liability for product defects is uncertain. There are no
known product liability claims, and management presently believes that there is
no material risk of loss to AMP from product liability claims.
NOTE I--COMMITMENTS AND CONTINGENCIES - Continued
During 1993, the Security and Exchange Commission ("SEC") commenced a private
investigation of AMP's accounting and recordkeeping practices to determine if
violations of federal securities laws had occurred. On September 5, 1996, the
SEC accepted an offer of settlement whereby AMP, AMP's former President, and
AMP's former Vice President, without admitting or denying any wrongdoing,
signed a consent decree to cease and desist from committing or causing any
violations and any future violations of certain sections of the Securities
and Exchange Act.
Braemar, Inc. has entered into product licensing agreements with various
companies which allow Braemar to manufacture and sell certain medical devices
protected by patent or copyright. These agreements have terms of five or more
years. Royalties due under license agreements are required as a percentage of
net sales of those products ranging from 5% to 20%, or as a fixed dollar amount
per unit sold.
NOTE J--SIGNIFICANT CUSTOMER CONCENTRATIONS
The percentages of the Company's sales to certain major customers during the
year ended June 30, 1998 were:
Customer A 10%
Customer B 7%
Customer C 7%
Accounts receivable at June 30, 1998 from these companies were:
Customer A $ 88,266
Customer B $ 128,452
Customer C $ 85,674
The Company had sales to foreign entities during fiscal year 1998 of
approximately $957,000.
NOTE K--INVESTMENT IN AMP
During fiscal year 1998, CMI increased its ownership interest in AMP from 44.4%
to 55.3% by acquiring shares of AMP's common stock. These acquisitions
included shares acquired directly from AMP and from two stockholders. The
acquisitions were financed in part with proceeds from a $196,240 loan from a
stockholder (Note G).
Also during 1998, CMI acquired all of the outstanding shares of AMP preferred
stock and accrued preferred stock dividends from two stockholders.
NOTE L--BUSINESS COMBINATIONS
Effective October 1, 1997, a wholly-owned subsidiary of Bio-Tel International,
Inc. ("BTI"), an affiliate of CMI, acquired certain assets and assumed certain
liabilities of Braemar, Inc., a Minnesota company. This subsidiary was
subsequently renamed Braemar, Inc. The purchase price was $2,447,355,
including acquisition fees of $43,395, and the fair value of the acquired net
assets was $1,520,328, with the difference allocated to goodwill. This
acquisition was financed by a $1,000,000 note payable to the seller and from
loan proceeds of $1,403,760 from a note with one of the Company's stockholders
(Note G).
The consolidated financial statements as of June 30, 1998 include the
operations of Braemar, Inc. for the period from October 1, 1997 through June
30, 1998.
Effective December 8, 1997, BTI merged into CMI, and CMI was the surviving
entity.
NOTE M--STOCK OPTIONS
The following information discloses the details of a stock option plan in
effect for AMP.
AMP has reserved 750,000 shares of authorized common stock for issuance
pursuant to the terms of an Incentive Stock Option Plan.
Stock options are granted at prices not less than 100% of the fair market value
of common shares at the date of the grant and expire five years from the date
of grant. Stock option activity during 1998 is as follows:
Exercise Price
Number Weighted Average
Shares per Share Total
Outstanding as of
June 30, 1997 335,000 $ .3318 $111,150
Granted 400,000 .1750 70,000
Canceled (132,500) .2583 (34,225)
Outstanding as of
June 30, 1998 602,500 $ .2439 $146,925
AMP 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 the stock option
plans. Had compensation cost for AMP's stock option plan been determined based
on the fair value at the grant date for awards consistent with the provisions
of SFAS No. 123, AMP's net loss and loss per share would have been changed to
the pro forma amounts indicated below for June 30,
1998
Net loss - as reported $ (795,612)
Net loss - pro forma $ (807,371)
Basic and diluted loss per share - as reported $ (.16)
Basic and diluted loss per share - pro forma $ (.16)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants:
1998
Dividend yield 0%
Expected volatility 125%
Risk free interest rate 6.3%
Expected life 5 years
NOTE N--INCOME TAXES
The Company accounts for its income taxes under Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes, which requires an
asset and liability approach to financial accounting and reporting for income
taxes. The Company's income tax year end is September 30, even though its
financial reporting year end is June 30. The Company intends to change its
income tax year to June 30 upon approval from the Internal Revenue Service.
The income tax provision (benefit) consists of the following:
Federal State Total
Current $100,180 $14,231 $114,411
Deferred (41,605) (5,116) (46,721)
$ 58,575 $ 9,115 $ 67,690
The net deferred tax assets and liabilities in the accompanying balance sheet
include the following components:
Deferred tax assets $143,468
Deferred tax liabilities (8,455)
Net deferred tax assets 135,013
Less current deferred tax assets 138,868
Long-term deferred tax liability $ (3,855)
The Company has net operating loss carryovers totaling approximately $69,000
for state tax purposes that may be offset against future taxable income.
Additionally, the Company has research and development tax credits of
approximately $40,000 which are available to reduce income taxes payable in
future periods.
The loss and credit carryovers expire as follows:
Research and
Development
Year Ending State Loss Tax Credit
September 30 Carryovers Carryovers
1998 $69,000
2002 $40,000
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate of 34% and the Company's effective tax rate for
financial statement purposes as of June 30, 1998:
Income tax provision at U.S. statutory rates $(151,198)
Benefit of states' operating loss (2,219)
Expenses with no tax benefit 143,206
Temporary differences 86,227
Prior year over provision (16,758)
State income taxes 6,911
Other 1,521
Income tax provision $ 67,690
NOTE O--EMPLOYEE BENEFIT PLANS
Profit-Sharing Plan - CMI has a profit-sharing plan covering its eligible
employees which includes essentially all employees. This plan is to be funded
as accrued and is non-contributory by the participants. Effective January 1,
1998, the Profit-Sharing Plan assets were transferred into CMI's Employee
401(k) Plan.
Employee 401(k) Plan - CMI has an employee 401(k) plan which is contributory by
the participants. CMI, at its option, may contribute to the plan on a matching
basis. CMI contributed $5,000 to this plan during the year ended June 30,
1998. Following the acquisition of Braemar, Inc. in October 1997, eligible
employees of Braemar are allowed to participate in CMI's 401(k) Plan.
AMP has a defined contribution 401(k) Plan covering substantially all
employees. Participants may contribute up to 15% of their annual compensation
to the plan. AMP has the discretion to match 25% of a participant's
contribution up to 4% of salary. There were no Company contributions for the
year ended June 30, 1998.
Employee Flexible Benefits Plan - CMI has an employee flexible benefits plan,
or salary reduction plan, which provides for pre-tax payment by employees of
medical insurance premiums and part of their unreimbursed medical and dependent
care expenses.
NOTE P--OTHER INCOME AND EXPENSES
Other income and (expenses) as of June 30, 1998 consist of:
Interest income $ 3,852
Interest expense (301,534)
Miscellaneous income 21,846
Miscellaneous expense (4,873)
$(280,709)
NOTE Q--PLAN OF REORGANIZATION AND MERGER
On July 23, 1998, all of the outstanding shares of CMI were acquired by
Biosensor Corporation ("Biosensor") pursuant to a Plan of Reorganization and
Agreement by and between CMI and Biosensor, dated May 29, 1998. Because the
former shareholders of CMI effectively control Biosensor after the transaction,
it will be recorded as a "reverse acquisition" whereby CMI will be deemed to
have acquired Biosensor.
Also in July 1998, AMP's Board of Directors approved a Plan of Reorganization
and Merger, that had been previously approved by the Board of Biosensor
Corporation, authorizing the merger of a wholly-owned subsidiary of Biosensor
Corporation, which has not yet been organized, with and into AMP, subject to
certain terms and conditions. AMP and Biosensor are currently preparing a
definitive agreement to combine their cardiac monitor businesses, and to do
business as Advanced Biosensor, Inc.
BIO-TEL INTERNATIONAL, INC.
AND SUBSIDIARY
King, North Carolina
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
AND FOR THE YEAR THEN ENDED
Audited Consolidated Financial Statements
BIO-TEL INTERNATIONAL, INC. AND SUBSIDIARY
June 30, 1997
and For The Year Then Ended
Audited Consolidated Financial Statements
Independent Auditors' Report 1
Consolidated Balance Sheet 2
Consolidated Statement of Operations 4
Consolidated Statement of Cash Flows 5
Consolidated Statement of Changes in Stockholders' Equity 7
Notes to Consolidated Financial Statements 8
The Board of Directors and Stockholders
BIO-TEL International, Inc. and Subsidiary
King, North Carolina
Independent Auditors' Report
We have audited the accompanying consolidated balance sheet of BIO-TEL
International, Inc. and Subsidiary as of June 30, 1997, and the related
consolidated statements of income, changes in stockholders' equity, and
cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit
provides 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 BIO-TEL
International, Inc. and Subsidiary as of June 30, 1997, and the results
of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
ROYSTER SMITH SHELTON & COMPANY, PC.
CONSOLIDATED BALANCE SHEET
BIO-TEL INTERNATIONAL, INC. AND SUBSIDIARY
June 30, 1997
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 140,101
Accounts receivable 286,812
Refundable income taxes 8,580
Inventories--Note C 805,760
Prepaid expenses 32,279
Deferred income taxes--Note J 56,152
Total Current Assets 1,329,684
PROPERTY AND EQUIPMENT--Note D 155,208
NOTE RECEIVABLE - RELATED PARTY--Note M 159,482
DEFERRED TAXES - Noncurrent--Note J 32,141
OTHER ASSETS
Cash value of life insurance,
net of policy loans--Note E 23,547
Other--Notes F and M 40,899
64,446
$1,740,961
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEET - Continued
BIO-TEL INTERNATIONAL, INC. AND SUBSIDIARY
June 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt--Note H $ 359,171
Note payable--Note G 18,333
Trade accounts payable 126,733
Accrued salaries and other expenses 84,001
Warranty reserve 49,924
Deferred service contract revenue 154,763
Advances from customers 16,143
Income taxes payable--Note J 9,200
Other accrued expenses 77,832
Total Current Liabilities 896,100
LONG-TERM DEBT, less current maturities--Note H 321,715
DEFERRED CONTRACT REVENUE 1,631
COMMITMENTS AND CONTINGENCIES--Notes H and M
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY--Note N 235,681
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 5,000,000 shares
authorized; 1,552,000 issued and outstanding 15,520
Additional paid-in capital 528,827
Accumulated deficit (258,513)
285,834
$1,740,961
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF OPERATIONS
BIO-TEL INTERNATIONAL, INC. AND SUBSIDIARY
For The Year Ended June 30, 1997
GROSS SALES:
Product sales $ 913,479
Service contracts and other 972,568
1,886,047
COST OF SALES AND SERVICES 950,274
GROSS PROFIT 935,773
OPERATING EXPENSES:
Research and development 169,361
Marketing and sales 242,926
General and administrative 363,914
776,201
OPERATING INCOME 159,572
LOSS FROM EQUITY INVESTMENT--Note N (165,692)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY (35,734)
OTHER EXPENSES, net--Note L (42,583)
NET LOSS BEFORE INCOME TAXES (84,437)
PROVISION FOR INCOME TAXES--Note J (32,528)
NET LOSS $ (116,965)
LOSS PER COMMON SHARE $ (0.08)
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS
BIO-TEL INTERNATIONAL, INC. AND SUBSIDIARY
For The Year Ended June 30, 1997
OPERATING ACTIVITIES
Net loss $ (116,965)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 44,096
Increase in deferred tax assets 3,907
Minority interest 35,734
Loss from operations of equity investment 165,692
Decrease in refundable income taxes 19,420
Decrease in accounts receivable 14,295
Increase in inventories (66,506)
Increase in other prepaids (3,193)
Decrease in accounts payable and accrued expenses (30,235)
Decrease in deferred service contract revenue (12,355)
CASH PROVIDED BY OPERATING ACTIVITIES 53,890
INVESTING ACTIVITIES
Decrease in cash value of life insurance 2,225
Increase in note receivable (59,978)
Purchase of property and equipment (23,191)
Purchase of software (7,753)
CASH USED BY INVESTING ACTIVITIES (88,697)
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CASH FLOWS - Continued
BIO-TEL INTERNATIONAL, INC. AND SUBSIDIARY
For The Year Ended June 30, 1997
FINANCING ACTIVITIES
Proceeds from issuance of debt 70,530
Repayments of debt (238,355)
CASH USED BY FINANCING ACTIVITIES (167,825)
NET DECREASE IN CASH AND CASH EQUIVALENTS (202,632)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 342,733
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 140,101
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 48,459
SCHEDULE OF NON-CASH OPERATING AND FINANCING TRANSACTIONS
Acquisition of inventory in exchange for a note payable $ 183,118
Issuance of note payable in exchange for inventory $ 144,468
See notes to consolidated financial statements
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
BIO-TEL INTERNATIONAL, INC. AND SUBSIDIARY
For The Year Ended June 30, 1997
Common Additional
Stock Paid-In Accumulated
Shares Amount Capital Deficit
Balance, June 30, 1996 1,552,000 $15,520 $528,827 $(141,548)
Net Loss (116,965)
Balance, June 30, 1997 1,552,000 $15,520 $528,827 $(258,513)
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BIO-TEL INTERNATIONAL, INC. AND SUBSIDIARY
NOTE A--NATURE OF BUSINESS
BIO-TEL International, Inc., a Delaware corporation, was incorporated and
began operations in January 1996. Its subsidiary, Carolina Medical, Inc.
(CMI), is established in manufacturing and servicing of ultrasound
imaging and electronic diagnostic instruments for detecting circulatory
disorders and measuring blood flow and blood pressure parameters. These
companies' sales are principally to customers in the United States with
some international sales.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of BIO-TEL International, Inc. and its subsidiary
(collectively, the "Company"). Significant intercompany accounts and
transactions are eliminated in consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid
short-term investments purchased with an original maturity of three
months or less to be equivalent to cash. During fiscal year 1997, the
Company had bank deposits in excess of the amount insured by the Federal
Deposit Insurance Corporation.
Inventories: Inventories are valued at the lower of cost or market using
the standard cost method.
Property and Equipment: Property and equipment are recorded at cost.
Depreciation is calculated by the straight-line or declining-balance
method over estimated useful lives of three to ten years for equipment
and three to five years for automobiles.
Revenue Recognition: Revenues from product sales are recognized at date
of shipment. Service contract revenues are recognized during the term of
the service contract which, in most cases, ranges from one to three
years.
Warranty Reserve: The Company warrants its products against defects in
material and workmanship for ninety days for electromagnetic and
ultrasound probes and one year for electronic and ultrasound equipment.
An accrual is provided for estimated future claims. Such accruals are
based on historical experience and management's estimate of the level of
future claims.
Research and Development: Research and development costs are charged to
operations as incurred. These costs are for proprietary research and
development activities that are expected to contribute to the future
profitability of the Company.
Advertising: The Company follows the policy of charging the costs of
advertising to operating expenses as incurred.
Loss per Common Share: The Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), Earnings Per Share, which
supersedes APB Opinion No. 15. SFAS No. 128 requires the presentation of
earnings per share by all entities that have common stock or potential
common stock, such as options, warrants, and convertible securities,
outstanding that trade in a public market. Generally, basic per share
amounts are computed by dividing net income or loss by the weighted-
average number of common shares outstanding.
Software Development Costs: The costs incurred by the Company to develop
computer software for sale with products are expensed as research and
development costs until technological feasibility is established. Costs
incurred after the attainment of technological feasibility are
capitalized until the software is ready for sale. Thereafter,
capitalized software costs are amortized over their estimated useful
lives. No amounts relating to these costs were expensed during the year
ended June 30, 1997.
Management Estimates: Management uses estimates and assumptions in
preparing financial statements. Those estimates and assumptions may
affect the reported amounts of assets and liabilities, the disclosures of
contingent assets and liabilities, and reported revenues and expenses.
Significant estimates used in preparing these financial statements
include those assumed in computing the inventory valuation allowance and
warranty reserve. Actual results could differ from those estimates.
Income Taxes: Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes. Deferred taxes relate primarily to
differences between financial and income tax reporting for the basis of
inventory, property and equipment, accounting for equity investments, and
accrued compensation. The deferred tax accounts represent the future tax
return consequences of those differences, which will either be deductible
or taxable when the assets and liabilities are recovered or settled (Note
I).
Equity Investments: An investment in a corporation over which the
Company can exert significant influence is accounted for under the equity
method of accounting, whereby the investment is recorded at cost and
adjusted for the Company's proportionate share of its undistributed
earnings or losses (Note N).
New Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be
recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on
future financial disclosures. Results of operations and financial
position, however, will be unaffected by implementations of this standard.
NOTE C--INVENTORIES
Raw materials and supplies $414,941
Work in process 227,907
Finished goods at plant 140,768
Finished goods on short-term loan,
held for sale and demonstration 72,144
Inventory reserve (50,000)
$805,760
The inventory reserve has been established for estimated inventory losses
due to obsolescence and waste.
NOTE D--PROPERTY AND EQUIPMENT
Machinery and equipment $931,835
Vehicles 23,330
Leasehold improvements 9,127
964,292
Accumulated depreciation (809,084)
$155,208
Depreciation expense recorded for the year ended June 30, 1997 was
$33,162.
NOTE E--CASH VALUE OF LIFE INSURANCE
Cash surrender value $44,628
Policy loans (21,081)
Net cash value of life insurance $23,547
NOTE F--OTHER ASSETS
Other assets consist of the following as of June 30, 1997:
Accumulated Unamortized
Cost Amortization Amount
Asset acquisition costs $44,923 $(39,897) $ 5,026
Software development costs 28,873 28,873
License agreement--Note M 10,000 (3,000) 7,000
$83,796 $(42,897) $40,899
NOTE G--PRODUCT LIABILITY
The Company owed $18,333 as of June 30, 1997, under note agreements for
product liability insurance coverage. The current note is due in nine
monthly installments, including interest at 9 1/2% per annum.
NOTE H--LONG-TERM DEBT
Term loan with bank, payable in monthly installments
of $3,600, including interest at 8% per annum through
June 1, 2001; guaranteed by certain officers of the
Company and collateralized by substantially all of
the Company's assets $146,412
Term loan with bank, payable in monthly installments
of $1,500 including interest at the bank's prime rate
plus 2% per annum, due on April 1, 1999, secured by
equipment 71,218
Term loan with bank, payable in monthly
installments of $2,042, including interest at
10% per annum through October 10, 2000,
collateralized by substantially all of the
Company's assets 115,647
Note due to stockholder, annual interest of 10% due
monthly, principal due January 1998, secured by
certain assets of an affiliate 150,000
Note due affiliated partnership, annual interest at
5?%, due July 1999, unsecured 32,081
Note due to stockholder, annual interest at 9%,
due September 30, 1997, unsecured 25,800
Non-interest bearing notes to a company for
purchase of equipment, due December 31, 1997,
secured by equipment 31,746
Non-interest bearing note to a company for
purchase of inventory, due February 1999,
payable in monthly installments of $6,020,
interest imputed at 8% per annum; ( net of
unamortized discount of $7,408) 107,982
680,886
Less current maturities 359,171
$321,715
Certain of the bank loan agreements contain requirements to provide
certain financial information to the bank on a quarterly basis. These
agreements require the book values of the assets securing the obligations
to be at least 1.5 times the outstanding loan balances.
Maturities of long-term debt are as follows:
1998 $359,171
1999 111,801
2000 81,048
2001 74,533
2002 25,504
Thereafter 28,829
$680,886
NOTE I--COMMITMENTS AND CONTINGENCIES
In January 1993, certain intellectual property was acquired through a
non-exclusive licensing agreement with Indiana Business Modernization and
Technology Corporation ("BMT"). In connection with this agreement, the
Company paid an initial $10,000 fee and is required to pay a royalty
equal to 1% of net sales incorporating the intellectual property, until
total payments equal $300,000. Thereafter, the Company is required to
pay 1/2% percent of net sales, until total payments equal $603,450. In no
event shall the royalty payments be less than $25,000 per year for the
first five years of the agreement. The agreement also stipulates that
BMT shall not grant any non-exclusive license of the intellectual
property to any other party for eighteen months after the date of the
agreement. The Company's royalty fees for the year ended June 30, 1997
were $25,000.
In fiscal year 1997, the Company determined that the land adjacent to its
building was contaminated by toxic chemicals. This land is owned by an
affiliated partnership which also owns the land and building occupied by
the Company (Note L). The initial cleanup cost of approximately $10,000
was paid by the partnership in 1997. The cost of the property cleanup is
not expected to exceed $75,000. While the Company may be contingently
liable for these remediation costs, it is possible that the property
owner or its insurance company will be ultimately liable for these costs.
NOTE J--INCOME TAXES
The Company accounts for its income taxes under Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes, which requires
an asset and liability approach to financial accounting and reporting for
income taxes. The Company's income tax year end is September 30, even
though its financial reporting year end is June 30. The Company intends
to change its income tax year end to June 30 upon approval from the
Internal Revenue Service.
The income tax provision consists of the following:
Federal State Total
Current $28,621 $ $28,621
Deferred 3,087 820 3,907
$31,708 $ 820 $32,528
The following table summarizes the significant differences between the
U.S. Federal statutory tax rate of 34% and the Company's effective tax
rate for financial statement purposes as of June 30, 1997:
Income tax provision at U.S. statutory rates $(28,709)
Benefit of net operating loss not recognized 54,617
Minority interest loss 12,149
Expenses with no tax benefit 2,206
Other (7,735)
Income tax provision $ 32,528
The net deferred tax assets in the accompanying balance sheet include the
following components:
Deferred tax assets $108,572
Deferred tax liabilities (20,279)
Net deferred tax assets 88,293
Less current portion 56,152
Long-term portion $ 32,141
The Company has net operating loss carryovers totaling approximately
$34,500 for state tax purposes that may be offset against future taxable
income. Additionally, the Company has research and development tax
credits of approximately $40,000 which are available to reduce income
taxes payable in future periods.
The loss and credit carryovers expire as follows:
Research and
Development
Year Ending State Loss Tax Credit
September 30 Carryovers Carryovers
1998 $34,500 $
2002 40,000
$34,500 $ 40,000
NOTE K - EMPLOYEE BENEFIT PLANS
Profit-Sharing Plan - The Company has a profit-sharing plan covering its
eligible employees, which includes essentially all employees. This plan
is to be funded as accrued and is non-contributory by the participants.
There were no contributions made by the Company to this plan for the year
ended June 30, 1997.
Employee 401(k) Plan - The Company has an employee 401(k) plan which is
contributory by the participants. The Company, at its option, may
contribute to the plan on a matching basis. There were no contributions
by the Company for the year ended June 30, 1997.
Employee Flexible Benefits Plan - The Company has an employee flexible
benefits plan, or salary reduction plan, which provides for pre-tax
payment by employees of medical insurance premiums and part of their
unreimbursed medical and dependent care expenses.
NOTE L--OTHER INCOME AND EXPENSES
Other income and (expenses) consist of:
Interest income $ 17,198
Interest expense (59,412)
Miscellaneous expense (369)
$(42,583)
NOTE M--RELATED PARTY TRANSACTIONS
In April 1987, the Company sold its land and building located in King,
North Carolina to King Investment Partners ("KIP"), a partnership
composed principally of Carolina Medical, Inc.'s controlling stockholders
and their spouses, and entered into an agreement to lease the land and
building from KIP. Under this agreement, KIP has the option of
increasing the lease amount at the end of each year. The lease imposes
certain subleasing restrictions on the Company, as well as minimum
insurance requirements. During July 1994, the Company issued an
unsecured note payable to KIP for unpaid rent payable due over five years
at an interest rate of 5 1/4 percent per annum. Effective May 1, 1996, the
lease term was amended by the Company and KIP to allow for a 10% increase
in rental payments to $79,200 annually. The current three-year lease
expires on May 1, 1999.
Total rent expense to KIP was $79,200 for the year ended June 30, 1997.
Future minimum lease payments under the lease with KIP as of June 30,
1997 are as follows:
1998 $ 79,200
1999 66,000
$145,200
The Company owns approximately 29% of the common stock of Advanced
Medical Products, Inc. ("AMPI"). AMPI owes the Company $150,000 under a
note agreement which bears interest at 12% per annum. This note is due
December 31, 1998 and includes unpaid interest of $9,482 as of June 30, 1997.
In January 1996, certain intellectual property was acquired through a
non-exclusive licensing agreement with AMPI. In connection with this
agreement, the Company paid an initial fee of $10,000 and is required to
pay royalties, based on attained levels of net sales incorporating the
licensed property, ranging from 1% to 3% of those sales up to $990,000.
The Company's obligation under this agreement will terminate when
cumulative royalties and cash payments to AMPI total $1,000,000. The
agreement also stipulates that AMPI shall not grant any nonexclusive
license of the intellectual property to any other party for a period of
twelve months from the date of the agreement. There were no royalties
paid under this agreement for the year ended June 30, 1997.
The Company capitalized the initial fee of $10,000 relating to the
license agreement as an intangible asset. This asset is being amortized
over a period of five years using the straight-line method.
NOTE N--EQUITY INVESTMENT
The Company owns approximately 29% of the common stock of AMPI, which is
a publicly held company, and accounts for its investment under the equity
method.
AMPI's assets, liabilities, and results of operations as of and for the
year ended June 30, 1997 were as follows:
Total Assets $1,556,444
Total Liabilities $1,646,682
Net Loss $ (680,912)
NOTE O--SUBSEQUENT EVENTS
In July 1997, a company was formed as a wholly-owned subsidiary of the
Company. Effective on October 1, 1997, this subsidiary acquired certain
assets and assumed certain liabilities of Braemar, Inc. of Burnsville,
Minnesota. Braemar manufactures non-invasive medical recording and
monitoring equipment. The purchase price was $2,447,355 including
acquisition fees of $43,395, and the fair value of the acquired net
assets was $1,520,328, with the difference allocated to goodwill. This
acquisition was financed by a $1,000,000 note payable to the seller and
from loan proceeds of $1,403,760 from a note with one of the Company's
stockholders.
Effective December 8, 1997, the Company was merged into Carolina Medical,
Inc., with Carolina Medical, Inc. as the surviving entity.
ANNEX II
BIOSENSOR CORPORATION
Pro forma Combined Balance Sheets
June 30, 1998
Carolina Proforma Proforma
Medical Biosensor Combining Combined
Consolidated Corp. Adjustments Biosensor Corp
ASSETS
CURRENT ASSETS
Cash and
cash equivalents $772,415 $50,082 $822,497
Accounts receivable,
net of allowance for
bad debts 1,364,546 204,068 1,568,614
Refundable income
taxes 30,708 0 30,708
Inventories 1,366,232 217,222 1,583,454
Deferred income
taxes 138,868 0 138,868
Other 102,299 42,508 144,807
Total Current Assets 3,775,068 513,880 0 4,288,948
PROPERTY AND EQUIPMENT 891,764 33,411 925,175
OTHER ASSETS
Goodwill, net of accum.
amortization 1,220,934 0 1,220,934
Other assets, net 216,166 0 216,166
1,437,100 0 0 1,437,100
$6,103,932 $547,291 $0 $6,651,223
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of
long-term debt $265,923 $27,000 $292,923
Current maturities of
related party
obligations 161,136 0 161,136
Current maturities of
capital lease
obligations 14,791 0 14,791
Notes payable 295,798 0 295,798
Trade accounts
payable 1,017,962 71,440 1,089,402
Accrued payroll
and related
liabilities 224,601 32,510 257,111
Deferred service
contract revenue 312,971 41,051 354,022
Other accrued
expenses 330,974 140,405 471,379
Total Current
Liabilities 2,624,156 312,406 0 2,936,562
LONG-TERM DEBT, less
current maturities 1,044,232 125,000 1,169,232
RELATED PARTY
OBLIGATIONS, less
current maturities 1,638,507 0 1,638,507
CAPITAL LEASE
OBLIGATIONS, less
current maturities 7,757 0 7,757
DEFERRED TAX LIABILITY 3,855 0 3,855
STOCKHOLDERS' EQUITY
Common stock 397,400 142,153 (397,400) (A) 142,153
Preferred stock 0 0 715,321 (B) 715,321
Additional paid-in
capital 1,267,152 2,941,447 (3,291,636) (C) 916,963
Accumulated
deficit (879,127) (2,973,715) 2,973,715 (D) (879,127)
785,425 109,885 0 895,310
$6,103,932 $547,291 $0 $6,651,223
Notes:
(A) Elimination of par value of Carolina Medical, Inc. common stock
(B) Assignment of value to preferred stock equal to par value of Biosensor
common stock upon conversion of preferred to common.
(C) Adjustment to paid in capital for adjustments to common stock,
preferred stock & retained earnings.
(D) Elimination of Biosensor's retained deficit as a result of the reverse
merger.
BIOSENSOR CORPORATION
Pro forma Combined Statements of Operations
Year Ended June 30, 1998
Carolina Braemar Inc. Proforma Proforma
Medical,Inc. Additional Biosensor Combining Combined
Consolidated Quarter- (E) Corp. (F)Adjustments Biosensor
Corp.
NET SALES
AND SERVICES $8,481,926 $1,345,892 1,929,036 $11,756,854
COST OF SALES
AND SERVICES 5,509,806 869,054 991,169 7,370,029
GROSS PROFIT 2,972,120 476,838 937,867 0 4,386,825
OPERATING EXPENSES:
Selling, general
and admin. 2,301,223 190,939 957,996 14,699(G) 3,464,857
Research and
development 796,189 199,303 242,644 1,238,136
3,097,412 390,242 1,200,640 14,699 4,702,993
OPERATING INCOME
(LOSS) (125,292) 86,596 (262,773) (14,699) (316,168)
MINORITY INTEREST
IN CONSOLIDATED
SUBSIDIARY 28,410 0 0 (28,410)(H) $0
OTHER INCOME
(EXPENSE), NET (319,409) (529) 154,336 (58,125)(I) (223,727)
NET LOSS BEFORE
INCOME TAXES (416,291) 86,067 (108,437) (101,234) (539,895)
PROVISION FOR
INCOME TAXES (67,690) (33,997) 101,687(J) 0
NET LOSS ($483,981) $52,070 ($108,437) $453 ($539,895)
Basic Earnings (Loss) per
Common Share (based on 2,843,055
shares issued and outstanding) $0.19
Notes:
(E) Quarter ended Sept. 30, 1997 - prior to the acquisition of Braemar assets.
(F) Statement of Operations for Biosensor is for twelve months ended May 31,
1998.
(G) One additional quarter of amortization of Good Will for Braemar, Inc.
(H) Elimination of minority interest in net loss based on majority interest
in Advanced Medical for the full twelve months.
(I) Interest for additional quarter on debt incurred with the purchase of
Braemar assets is purchased at the beginning of the fiscal year.
(J) Elimination of provision for income tax based on consolidated tax return.
ANNEX III
BIOSENSOR CORPORATION
Consolidated Balance Sheets - Note 1 September 30, 1998 June 30, 1998
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $730,834 $772,415
Accounts receivable, net of allowance for
doubtful accounts 1,504,753 1,364,546
Refundable income taxes 30,708 30,708
Inventories--Note 2 1,465,034 1,366,232
Deferred income taxes 138,868 138,868
Prepaid expenses 138,688 102,299
Total Current Assets 4,008,885 3,775,068
PROPERTY AND EQUIPMENT--Net of depreciation 839,784 891,764
OTHER ASSETS
Goodwill, net of accumulated amortization--
Note 3 1,206,210 1,220,934
Other assets, net--Note 4 206,857 216,166
1,413,067 1,437,100
$6,261,736 $6,103,932
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $252,711 $265,923
Current maturities of related party
obligations 168,784 161,136
Current maturities of capital lease
obligations 14,269 14,791
Notes payable--Note 5 304,837 295,798
Trade accounts payable 966,813 1,017,962
Accrued payroll and related liabilities 292,243 224,601
Deferred service contract revenue 314,639 312,971
Other accrued expenses 414,305 330,974
Total Current Liabilities 2,728,601 2,624,156
LONG-TERM DEBT, less current maturities 1,127,608 1,044,232
RELATED PARTY OBLIGATIONS, less current
maturities-Notes 5,9 1,628,129 1,638,507
CAPITAL LEASE OBLIGATIONS, less current
maturities 5,875 7,757
DEFERRED TAX LIABILITY 3,855 3,855
STOCKHOLDERS' EQUITY - Notes 1,9
Common stock, $.05 par value; 4,850,000 shares
authorized, 2,843,055 shared issued at
September 30, 1998: $.20 par value
4,000,000 shares authorized, 1,987,002 issued
at June 30, 1998 142,153 397,400
Preferred stock--Note 1 715,321 0
Additional paid-in capital 916,963 1,267,152
Accumulated deficit (1,006,769) (879,127)
767,668 785,425
$6,261,736 $6,103,932
The accompanying notes are an integral part of these financial statements.
BIOSENSOR CORPORATION
Pro forma Combined Balance Sheets - Notes 1, 10
September 30, 1998 June 30, 1998
ASSETS (Unaudited) (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $730,834 $822,497
Accounts receivable, net of allowance for
doubtful accounts 1,504,753 1,566,614
Refundable income taxes 30,708 30,708
Inventories 1,465,034 1,583,454
Deferred income taxes 138,868 138,868
Prepaid expenses 138,688 144,807
Total Current Assets 4,008,885 4,288,948
PROPERTY AND EQUIPMENT--Net of depreciation 839,784 925,175
OTHER ASSETS
Goodwill, net of accumulated amortization--
Note 3 1,206,210 1,220,934
Other assets, net--Note 4 206,857 216,166
1,413,067 1,437,100
$6,261,736 $6,651,223
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $252,711 $292,923
Current maturities of related party obligations 168,784 161,136
Current maturities of capital lease obligations 14,269 14,791
Notes payable--Note 5 304,837 295,798
Trade accounts payable 966,813 1,069,402
Accrued payroll and related liabilities 292,243 257,111
Deferred service contract revenue 314,639 354,022
Other accrued expenses 414,305 471,379
Total Current Liabilities 2,728,601 2,936,562
LONG-TERM DEBT, less current maturities 1,127,608 1,169,232
RELATED PARTY OBLIGATIONS, less current
maturities-Notes 5,9 1,628,129 1,638,507
CAPITAL LEASE OBLIGATIONS, less current
maturities 5,875 7,757
DEFERRED TAX LIABILITY 3,855 3,855
STOCKHOLDERS' EQUITY - Notes 1,9
Common stock, $.05 par value; 4,850,000 shares
authorized, 2,843,055 shared issued at June 30,
and September 30, 1998 142,153 142,153
Preferred stock--Note 1 715,321 715,321
Additional paid-in capital 916,963 916,963
Accumulated deficit (1,006,769) (879,127)
767,668 895,310
$6,261,736 $6,651,223
The accompanying notes are an integral part of these financial statements.
BIOSENSOR CORPORATION
Consolidated Statements of Operations - Note 1
For the Quarters Ended September 30, 1998 1997
(Unaudited) (Unaudited)
NET SALES AND SERVICES $2,333,590 $517,581
COST OF SALES AND SERVICES 1,319,703 311,774
GROSS PROFIT 1,013,887 205,807
OPERATING EXPENSES:
Selling, general and administrative 833,311 148,793
Research and development 233,202 38,210
1,066,513 187,003
OPERATING PROFIT (LOSS) (52,626) 18,804
OTHER EXPENSES, net (75,649) (10,475)
NET PROFIT (LOSS) BEFORE INCOME TAXES (128,275) 8,329
PROVISION FOR INCOME TAXES 633 269
NET PROFIT (LOSS) (127,642) 8,598
ACCUMULATED SURPLUS (DEFICIT)--BEGINNING OF
PERIOD (879,127) 34,790
ACCUMULATED SURPLUS (DEFICIT)--END OF PERIOD ($1,006,769) $43,388
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES ($127,642) $8,598
BASIC EARNINGS (LOSS) PER COMMON SHARE - Note7 ($0.04) $0.00
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - Note 9 2,843,055 1,987,002
The accompanying notes are an integral part of these financial statements.
BIOSENSOR CORPORATION
Pro forma Combined Statements of Operations - Notes 1, 10
For the Quarters Ended September 30, 1998 1997
(Unaudited) (Unaudited)
NET SALES AND SERVICES $2,333,590 $2,931,165
COST OF SALES AND SERVICES 1,319,703 1,715,616
GROSS PROFIT 1,013,887 1,215,549
OPERATING EXPENSES:
Selling, general and administrative 833,311 895,160
Research and development 233,202 339,786
1,066,513 1,234,946
OPERATING PROFIT (LOSS) (52,626) (19,397)
OTHER EXPENSES, net (75,649) (92,495)
NET PROFIT (LOSS) BEFORE INCOME TAXES (128,275) (111,892)
PROVISION FOR INCOME TAXES 633 0
NET PROFIT (LOSS) (127,642) (111,892)
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES ($127,642) ($141,605)
BASIC EARNINGS (LOSS) PER COMMON SHARE - Note7 ($0.04) ($0.05)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - Note 9 2,843,055 2,843,055
these financial statements
BIOSENSOR CORPORATION
Consolidated Statements of Cash Flows -Note 1
For the Quarters Ended September 30, 1998 1997
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net profit (loss) ($127,642) $8,598
Adjustment to reconcile net loss to net cash
Provided by operating activities:
Depreciation 99,661 11,992
Amortization 35,239 0
(Increase) decrease in current assets:
Accounts receivable 63,861 14,447
Inventories 118,420 37,201
Prepaid and other current asset 6,119
Increase (decrease) in current liabilities:
Accounts payable (122,589) (31,013)
Accrued payroll and related liabilities 35,132
Deferred service contract revenue (39,383)
Other accrued expenses (57,074) 11,760
CASH PROVIDED (USED) BY OPERATING ACTIVITIES 11,744 52,985
INVESTING ACTIVITIES
Purchase of property and equipment (14,270) (9,000)
Capitalization of product software (6,040)
Capitalization of costs related to mergers (5,166)
Increase in deposits and other assets (1,882)
CASH USED BY INVESTING ACTIVITIES (27,358) (9,000)
FINANCING ACTIVITIES
Proceeds from issuance of long term debt 0
Net change in short term debt 9,039 (52,673)
Payments of long term debt (85,088)
Cash acquired in merger with Biosensor--
Note 1 50,082
CASH PROVIDED BY FINANCING ACTIVITIES (25,967) (52,673)
NET DECREASE IN CASH AND CASH EQUIVALENTS (41,581) (8,688)
CASH AT BEGINNING OF PERIOD 772,415 138,667
CASH AT END OF PERIOD $730,834 $129,979
The accompanying notes are an integral part of these financial statements.
BIOSENSOR CORPORATION
Notes to Financial Statements
1. Basis of Presentation Background
On July 23, 1998, effective July 1, 1998 Biosensor Corporation ("Biosensor"
or the "Company") acquired through a "reverse merger" all outstanding shares
of capital stock of Carolina Medical Inc. ("Carolina Medical" or "CMI") in
exchange for 149,025.15 shares of the Company's Series A Preferred Stock and
adopted a Plan of Reorganization and Agreement (the "Plan") dated May 29,
1998. This Plan requires the Company to submit to its shareholders proposals
i) to change the Company's name to BIOTEL, Inc., ii) to effect a one-for-six
reverse stock split of its common stock (the "Reverse Stock Split"), and iii)
to increase the authorized number of shares of common stock to 10,000,000 and
the authorized number of shares of preferred stock to 2,000,000. These
proposals will be set forth in a proxy solicitation, which the Company
expects to mail to shareholders on or about December 10, 1998.
CMl develops, manufactures, markets and services digital ultrasound imagers,
electronic instruments for detecting circulatory system disorders and
measuring the flow and pressure of blood. CMI has two subsidiaries: Braemar,
Inc., and Advance Medical Products, Inc. Braemar, Inc. is a wholly owned
subsidiary of CMI that develops, manufactures and markets tape recording
devices and digital electronics for ambulatory ECG (Holter) monitoring
devices. CMI owns approximately 55% of the issued and outstanding common
stock of Advanced Medical Product, Inc., a publicly held Delaware
corporation, that develops, manufactures, markets and services ambulatory ECG
and blood pressure monitors.
Each share of Series A Preferred Stock is convertible into 96 shares of the
Company's Common Stock prior to the proposed one share for six reverse stock
split, or 16 shares of common stock after the proposed reverse stock split.
Each share of Series A Preferred Stock votes and participates in dividends
and liquidations on an as-if-converted basis. The Series A Preferred Stock
will automatically convert into common stock as of the end of business on the
first day following the date that the Company's Articles of Incorporation
authorize sufficient common stock to accommodate conversion of all issued and
outstanding shares of Series A Preferred Stock. As a result, shareholders of
the Series A preferred stock effectively own approximately 83% of the
Company's outstanding common stock. Because this transaction was a "reverse
merger", the historical financial statements of the Company for Fiscal 1997
and Fiscal 1998 are those of Carolina Medical consolidated with its
subsidiaries. The net assets of Biosensor acquired in the reverse merger
were recorded at the June 30, 1998 fair market value.
On July 23, 1998, the Company determined to change its fiscal year end to
June 30, 1998 from May 31, 1998. The Company has adopted the fiscal year of
CMI, the accounting acquiror. The accompanying unaudited financial
statements for the quarter ended September 30, 1998 are those of the combined
Company, consolidating the balance sheets and statements of operations of
Carolina Medical, Braemar, Biosensor and Advanced Medical (the Company's 55%
subsidiary), with all appropriate consolidating adjustments. The comparative
statement of operations for the quarter ended September 30, 1997 is that of
the acquiror, and does not include the results of Braemar, which had not been
acquired at that time; or Biosensor, as the September 1997 period was prior
to the merger of Biosensor and Carolina Medical; or Advanced Medical which as
a minority owned subsidiary was accounted for at that time using the equity
method.
Unaudited Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principals for
interim financial information and with the instructions to Form 10-QSB and
Article 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principals for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three-month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for fiscal year 1999. These
unaudited financial statements should be read in conjunction with the
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended May 31, 1998, and in the Company's
report on Form 8K filed July 23, 1998 and the Financial Amendment to Form 8K
filed on November 24, 1998.
2. Inventory
Sept. 30, 1998 June 30, 1998
(unaudited)
Inventory consisted of:
Raw materials and work in process $ 1,326,865 $ 1,270,522
Finished goods 589,213 505,667
Reserve for obsolescence (451,044) (409,957)
$ 1,465,034 $ 1,366,232
3. Business Combinations and Goodwill
Carolina Medical acquired the assets of Braemar Inc. and certain other assets
at purchase prices greater than the fair market value of the acquired net
assets; the difference was allocated to goodwill totaling $1,266,082, which
is being amortized over 15 years. Accumulated amortization totaled $45,148
at June 30, 1998 and $59,872 at September 30, 1998.
4. Other Long Term Assets Sept. 30, 1998 June 30, 1998
(unaudited)
Product software costs net of amortization at
9/30/98 of $330,287 and 6/30/98 of $319,381 $ 47,885 $ 52,751
Deferred charges, net of amortization 52,500 60,000
Acquisition assets, net of amortization 56,305 52,748
Other 45,667 40,667
$ 206,857 $ 216,166
5. Related Party Transactions
The Company has a note payable to a stockholder of the Company in the amount
of $1,600,000 at an annual interest of prime plus 1.5%, interest paid monthly
and the principal due October 20, 1999. At September 30, 1998, interest of
$6,667 was accrued on this note. In addition, the Company has a note payable
to another stockholder of the Company in the amount of $150,000 at an annual
interest rate of 12%, with interest paid monthly and the principal due
January 1, 1999. At September 30, 1998, $19,329 in interest was due on this
note, and was accrued.
In July 1996, the Company entered into a loan agreement with Advanced Medical
Products, Inc., a majority owned subsidiary of the Company, under which the
Company loaned Advanced Medical $150,000 12 percent annual rate of interest.
This note, originally set to mature September 30, 1996 has subsequently been
extended to December 31, 1999. At September 30, 1998, $3,000 in interest
was due the Company, in addition to the principle of $150,000. Inter-company
debt and expense has been eliminated in the consolidated financial
statements.
During July and August 1998, the Company loaned to Advanced Medical an
additional $70,000 to meet working capital needs, of which $30,000 was repaid
in September 1998.
Advanced Medical purchased approximately $151,000 of finished goods from
Braemar, Inc. a subsidiary of the Company, and approximately $70,000 of
finished goods from Biosensor during the quarter ended September 30, 1998, in
addition to $240,000 of finished goods purchased from Braemar prior to June
30, 1998. At September 30, 1998, approximately $327,000 was owed to the
Company and its subsidiary by Advanced Medical as accounts payable for
finished goods that had been purchased by Advanced Medical from the Company
and its subsidiaries. Inter-company receivables and payables have been
eliminated in the consolidated financial statements. Inter-company profits
were not material. (see Note 9, Subsequent Events)
6. Capital Stock Transactions
In May 1998, Carolina Medical, Inc. sold shares of Carolina Medical's common
stock to two investors for $470,000, net of costs of the transaction. As a
result of the July 23, 1998 exchange of Carolina Medical's common stock for
the Company's Series A Preferred Stock, these two investors own 15,000 Shares
of the Company's Series A Preferred Stock or 10% of the total Series A
Preferred Stock issued and outstanding.
Also in May 1998, Carolina Medical, Inc., issued shares of its common stock
to acquire 300,000 shares of Advanced Medical Products, Inc. common stock
previously owned by Nishimoto Sangyo Company, Ltd., which increased the
Company's ownership in Advanced Medical from 51% to 55.3% of the issued and
outstanding common stock.
During May and June 1998 Carolina Medical, Inc. issued additional shares of
its common stock to acquire all of the issued and outstanding shares of
Advanced Medical's Preferred Stock totaling 2,377 shares, 2,217 previously
owned by Nishimoto and 160 shares previously owned by SCANA, including all
unpaid dividends of $162,981. (See Note 9, Subsequent Events) As a result
of the share exchange of Carolina Medical common stock for the Company's
Series A Preferred Stock, Nishimoto, a distributor for certain of the
Company's products, owns 15,000 Shares of the Company's Series A Preferred
Stock or 10% of the total Series A Preferred Stock issued and outstanding.
7. Per Share Earnings
Basic earnings (loss) per common share were computed by dividing net income
by the weighted average number of common shares outstanding during the
period. Earnings per share calculations did not include the impact of
outstanding options as they would be antidilutive.
8. Plan to Acquire Advanced Medical Products, Inc. by Merger
In July 1998 the Company's Board of Directors approved a Plan of
Reorganization and Merger, which plan was subsequently approved by the Board
of Directors of Advanced Medical, authorizing the merger of a wholly owned
subsidiary of Biosensor, which has not yet been organized, with and into
Advanced Medical Products, Inc., subject to certain terms and conditions.
The Company and Advanced Medical are currently preparing a definitive
agreement to combine their cardiac monitor businesses, and to do business as
Advanced Biosensor Inc.
9. Subsequent Events
In July 1998, the Board of Directors of the Company and the Board of
Directors of Advanced Medical approved a plan for Carolina Medical to
purchase from Advanced Medical the Micros QV ultrasound product line,
including inventory valued at June 30, 1998 at $135,152 and all rights and
related intellectual property, in exchange for the return to Advanced Medical
of all of the 2,377 shares of the Advanced Medical's Preferred Stock having a
face value of $2,377,000 and forgiveness of all of the accrued unpaid
dividends totaling $162,981 as of June 30, 1998. The Company also agreed to
waive any payment of dividends on the Preferred Stock for the quarter ended
September 30, 1998; thus no dividend income was accrued by the Company and no
dividend expense accrued by Advanced Medical for the quarter ended September
30, 1998. This transaction, approved by both company's boards in July, was
completed In October 1998.
In November 1998, 150,000 shares of the Company's common stock were issued to
the President of Braemar, Inc., a wholly owned subsidiary of the Company, as
a stock bonus. Expense was accrued in the September 1998 quarter at fair
market value of the stock over the prior 30 day period. Also in November,
15,000 shares of the Company's common stock were issued to a prior employee
of Biosensor upon exercise of stock options under the Company's incentive
stock option plan and a stock option agreement dated December 30, 1997.
10. Pro forma Combined Financial Statements
Included herewith are Pro forma Combined Balance Sheets and Pro forma
Combined Statements of Operations showing what the financial results would
have been at June 30, 1998 and for the comparative quarter ended September
30, 1998 if the acquisition of Braemar Inc., the purchase of majority
ownership of Advanced Medical, and the merger of Carolina Medical and
Biosensor had all taken place on June 30, 1997.
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS
Forward Looking Statements
This and other sections of this report contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which represent the Company's expectations concerning future events including
future cash flows, results of operations, expected continuing availability of
the credit line, the Company's continuing ability to sell its Holter and
ambulatory blood pressure products to office practices, and the Company's
belief regarding future recovery from declining revenues in the medical
device industry. By their very nature, forward-looking statements are
subject to known and unknown risks and uncertainties relating to the
Company's future performance that may cause actual results to differ
materially from those expressed or implied in such forward-looking
statements. The Company does not undertake and assumes no obligation to
update any forward-looking statement that may be made herein or from time to
time by or on behalf of the Company.
Results of Operations
The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements, including the notes thereto, and the Pro
forma Combined Financial Statements, appearing elsewhere herein.
The Company's consolidated revenues from sales of products and services were
$2,333,590 for the three months ended September 30, 1998 compared to $517,581
for the comparable quarter ended September 30, 1997. Carolina Medical's
sales for the three months ended September 30, 1998 of $436,950 were off
approximately $81,000 from the comparable quarter in 1997 . Of the net
increase in consolidated sales of $1,816,000, approximately $1,028,000
resulted from the acquisition of Braemar, Inc., $194,000 resulted from the
merger of Biosensor and Carolina Medical, and $675,000 was due to the change
from the equity method to consolidation accounting when Carolina Medical's
ownership in Advanced Medical increased to a majority.
Gross profit margin was 43.4% of net sales for the three months ended
September 30, 1998 compared to 39.8% for the three months ended September 30,
1997. Sales of Advanced Medical's and Biosensor's products contributed to
higher gross margins.
Selling, general and administrative expenses of $833,311 for the three months
ended September 30, 1998 were 35.7% of net sales for the period compared to
expenses of $148,793 or 28.7% of net sales for the same period last year.
The higher percentage of sales for selling, general and administrative
expenses was a result of the consolidation of Advanced Medical, which has
substantially higher selling expenses as a percentage of sales, and because
legal and audit expenses were higher than usual as a result of merger and
acquisition activities.
Research and development costs during the first quarter of fiscal 1999 were
10% of sales at $233,202, the majority of which was spent on the Braemar
DXP1000 digital Holter monitor development. Research and development
expenditures by Carolina Medical during the first quarter last year were
$38,210 or 7.4% of sales. The Company expects to continue to spend 7% to 10%
of sales on new product development in order to remain technologically
competitive.
Consolidated net income for the quarter ended September 30, 1998 was a loss
of $127,642 compared to a profit of $8,598 for the same period last year. Of
the consolidated loss in the quarter ended September 30, 1998, $93,530 was
non-recurring legal, accounting and transitional costs related to merger and
acquisition activities. Net interest and other non-operating expenses for
that quarter were $75,649. The Company is taking steps to consolidate
operations to reduce expenses, and is pursuing alternate financing in an
attempt to reduce interest costs.
During the first three months of fiscal 1999, accounts receivable increased
from $1,364,546 at June 30, 1998 to $1,504,753 at September 30, 1998;
inventory increased from $1,366,232 to $1,465,034; current accrued payroll
and other expenses increased from $555,575 to $706,548. These net increases
in both current assets and current liabilities were primarily a result of the
consolidation of Biosensor's and Carolina Medical's assets and liabilities on
July 1, 1998.
Comparing the actual results to the Pro forma results shows consolidated
revenues from sales of products and services were down $597,575 or 20% for
the three months ended September 30, 1998 compared to the pro forma three
months ended September 30, 1997.
Gross profit margin was 43.4% of net sales for the three months ended
September 30, 1998 compared to 41.5% for the pro forma three months ended
September 30, 1997.
Selling, general and administrative expenses of $833,311 for the three months
ended September 30, 1998 were 35.7% of net sales for the period compared to
expenses of $895,160 or 30.5% of net sales for the pro forma period last
year. These expenses were lower in the recent quarter even though legal and
audit expenses were higher than usual as a result of merger and acquisition
activities.
Research and development costs during the first quarter of fiscal 1999 were
10% of sales at $233,202, the majority of which was spent on the Braemar
DXP1000 digital Holter monitor development. Pro forma combined research and
development expenditures during the first quarter last year were $339,786 or
11.6% of sales. The Company expects to continue to spend 7% to 10% of sales
on new product development in order to remain technologically competitive.
Consolidated net income for the quarter ended September 30, 1998 was a loss
of $127,642 compared to a loss of $111,892 on a pro forma combined basis for
the same period last year. Of the consolidated loss in the quarter ended
September 30, 1998, $93,530 was non-recurring legal, accounting and
transitional costs related to merger and acquisition activities. Net
interest and other non-operating expenses for that quarter were $75,649
compared to $92,495 for the quarter ended September 30, 1997. The Company
would have had an additional loss applicable to common shares in the
September 1997 quarter due to dividends on Advanced Medical Preferred Stock.
During the first three months of fiscal 1999, current assets decreased by
approximately $280.000 and current liabilities decreased by approximately
$208,000 from the pro forma June numbers.
Liquidity and Capital Resources
Operating activities provided $ 11,744 of cash during the quarter ended
September 30, 1998 compared with $52,985 provided during the quarter ended
September 30, 1997. Investing and financing activities during the first
quarter of fiscal 1999 used $53,325 compared to $$61,673 used by investing
and financing activities during the same period last year. Net cash
decreased by $41,581 during the fiscal 1999 first quarter to $730,834 at
September 30, 1998, and by $8,688 during the fiscal 1998 first quarter to
$129,979 at September 30, 1997.
The Company and its subsidiaries at September 30, 1998 had total debt with
several unrelated lenders of approximately $1,700,000 of which $572,000 was
current or current portions of long term debt and $1,128,000 was long term
debt. Advanced Medical is in violation of certain covenants of its credit
agreement, however the lender has waived the covenant violations through
December 31, 1998. During the quarter ended September 30, 1998 the Company
loaned additional funds to Advanced Medical, and credit has been extended to
Advanced Medical by a subsidiary of the Company to enable Advanced Medical to
purchase finished goods for resale.
In addition to the various loans outstanding with unrelated parties, the
Company has loans outstanding in the amounts of $150,000 and $1,600,000 with
two stockholders of the Company. Annual interest costs of 12% and 10%
respectively are due monthly on these loans, the principal amounts of which
are due in January 1999 and October 1999 respectively. Discussions are in
process with several lending institutions regarding possible credit
facilities that would replace both the related party loans and the unrelated
party loans with one consolidated credit facility.
The Company at June 30, 1998 and September 30, 1998 had net working capital
(current assets minus current liabilities) of $1,150,912 and $1,'280,284
respectively. Net stockholder equity was $785,425 on June 30, 1998 and
$767,668 on September 30, 1998. The Company believes that internally
generated funds and existing borrowing resources will provide sufficient
funds to meet current commitments and future working capital needs. However,
the Company is actively seeking alternative financing that could increase
working capital and reduce interest costs.
The Company currently does not have plans for any major capital expenditures
in fiscal 1999.
ANNEX IV
ARTICLE I
The name of this corporation is BIOTEL Inc.
ARTICLE III
The number of shares of common stock which this
corporation shall have the authority to issue is Ten
Million (10,000,000) shares with a stated par value of five
cents ($.05) per share. The number of shares of preferred
stock which this corporation shall have the authority to
issue is Two Million (2,000,000) shares with a stated par
value of ($.01) per share. The Board of Directors may,
from time to time, establish by resolution different
classes or series of shares and may fix the rights and
preferences of said shares in any class or series. The
Board of Directors shall have the authority to issue shares
of a class or series to holders of shares of another class
or series to effectuate share dividends, splits, or
conversion or its outstanding shares.
