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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 28, 2003
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ to ____
Commission File No. 0-12240
BIO-LOGIC SYSTEMS CORP.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 36-3025678
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Bio-logic Plaza, Mundelein, Illinois 60060-3700
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 949-5200
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Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
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Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-X is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Yes _____ No X
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The aggregate market value of the registrant's common stock held by
nonaffiliates as of August 30, 2002 (the last business day of the registrant's
most recently completed second fiscal quarter) was $17,635,825.
As of May 22, 2003 the issuer had 4,198,706 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III
To be included in the Proxy Statement to be filed pursuant to Regulation 14A not
later than 120 days after the end of the Registrant's fiscal year:
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
TABLE OF CONTENTS
PART I Page #
Item 1. Business 4
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial data 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Consolidated Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management 25
Item 13. Certain Relationships and Related Transactions 25
PART IV.
Item 14. Controls and Procedures 26
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26
Signatures
Certifications
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PART I
Item 1. Business
Bio-logic(R) Systems Corp. ("Bio-logic" or the "Company") designs, develops,
assembles and markets computer-based electro-diagnostic systems for use by
hospitals, clinics, universities and physicians. The principal
electro-diagnostic procedures performed by the Company's systems include
automated auditory brainstem response used for infant hearing screening, evoked
response testing, otoacoustic emissions testing, polysomnography, digital
electroencephalography for routine and long-term monitoring, and other
quantitative EEG analyses. These tests are typically used by medical
practitioners specializing in fields such as audiology, otolaryngology,
neurology, pulmonology, anesthesiology and psychiatry to aid in diagnosis of
certain neurological, sensory and psychiatric disorders, and to monitor brain
function in the intensive care unit and operating theater.
The Company was incorporated under the laws of the State of Delaware in July
1981 as a successor to an Illinois corporation formed in March 1979. Unless
otherwise indicated, all references herein to the Company include the operations
of the Company and its wholly-owned subsidiaries. The Company's executive
offices are located at One Bio-logic Plaza, Mundelein, Illinois 60060-3700.
Financial Information About Industry Segments
The Company operates in one business segment: the design, development, assembly
and marketing of computerized medical electro-diagnostic systems for use in the
health care field.
Narrative Description of Business
Bio-logic Systems Corp. designs, develops, assembles and markets computer-based
electro-diagnostic systems for use by hospitals, clinics, universities and
physicians. The systems conduct tests that are typically used by medical
practitioners to aid in the diagnosis of certain neurological disorders, brain
disorders and tumors, sensory disorders, sleep disorders, and hearing loss
(including audiological and hearing screening and diagnosis).
Bio-logic's systems are modular, consisting of PCs purchased from third parties,
interfaced with software and peripheral devices developed and manufactured by
the Company. Any combination of available diagnostic tests can be included in a
system depending on the user's specialty and requirements. The Company has
developed software which enables medical personnel to administer diagnostic
tests, to control various aspects of the testing, and to record and process data
generated by the tests. Operation of any of the Company's systems does not
require programming skills on the part of the customer. The Company believes
that its systems allow users to test patients on a cost efficient basis, and
that cost effectiveness and ease of operation are important competitive
advantages of its systems.
-4-
The majority of the Company's systems perform tests by means of computer
programs that are controlled by flexible software. The monitor screen displays a
menu of instructions prompting the operator to input information, test
parameters or specify hardware setting adjustments. Testing can be interrupted,
continued or aborted at any time. The Company's systems can be expanded beyond
the main system to include remote monitors or "universal review stations,"
allowing data collected on the main system to be analyzed in convenient
locations. Because the Company's system is PC-compatible, the user's PC can be
converted into a universal reader for Bio-logic products, and a variety of
commercially available programs, such as word processing and database
management, can be used.
Bio-logic has incorporated remote communications capabilities in its product
lines through both modem communications and computer networks. These new
information capabilities include (a) the ability to view in real-time tests
being conducted on a remote system, which is particularly useful for
consultation during monitoring in the operating room in connection with tests
performed at alternate sites outside the hospital; (b) electronic transfer of
test results, reports and patient information among different systems; (c)
review and analysis of records stored in a remote location; and (d) sharing of
archiving media (such as DVD) and printing devices among several systems. These
enhancements are designed to increase the efficiency and productivity of
operations and minimize duplication of equipment by customers of the Company's
systems.
More recently developed products take advantage of computer component
miniaturization, which allows compact devices for ambulatory testing. These
tests can then be reviewed on a reader station.
The Company's systems are sold to hospitals, universities, private clinics and
physicians to test and monitor patients as well as conduct research. Bio-logic
has a continuing program to develop new applications of electro-diagnostic
testing.
Products and Systems
The following sets forth the various products and systems offered by the
Company.
Hearing Screening and Diagnostic Products
The Hearing Division designs and manufactures a variety of products used to
screen for or diagnose hearing loss or to identify abnormalities affecting the
peripheral and central auditory nervous systems. The technology used in all of
these systems is either electrodiagnostic in nature or measures a response from
the auditory system referred to as an otoacoustic emission (OAE).
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Electrodiagnostic systems record electrical potentials generated in the central
nervous system. The test device delivers acoustic stimuli to the ears and
records the brain electrical activity produced by the auditory stimulation via
electrodes placed on the scalp. The most common auditory test performed with
electrodiagnostic equipment is the auditory brainstem response (ABR) test. This
test is used by the medical community to screen for and define hearing loss
characteristics particularly for patients who cannot respond reliably to
standard behavioral tests of hearing. A technician with minimal training can
effectively operate an instrument that performs an automated ABR screening test.
More advanced ABR techniques needed to define the details of the hearing loss or
rule out other auditory abnormalities, such as an acoustic tumor, require the
expertise of an individual, usually an audiologist, with extensive training and
understanding of the technology and the ability to interpret complex waveforms
that represent the brain's electrical activity.
Stacked ABR, a modification of the standard ABR measure, is another promising
electrodiagnostic procedure that is being validated in a 5-center study that
began at the close of 2002. The technique was developed to improve the
sensitivity of ABR as a screening tool for detecting small tumors that affect
the auditory nerve. Currently, patients suspected of having an acoustic tumor
are routinely referred for expensive Magnetic Resonance Imaging (MRI) tests
because a less expensive screening method that has acceptable sensitivity to the
presence of small tumors is not available. Based on the research and clinical
data collected so far, Stacked ABR holds significant promise as a viable,
sensitive screening tool for small acoustic tumors.
Otoacoustic Emissions (OAE) testing is a non-invasive, objective technique for
evaluating the function of the cochlea, the sensory organ of the auditory
system. OAE instrumentation introduces calibrated sounds into the patient's ear
and measures a small amplitude acoustic response generated by cochlear outer
hair cells in response to the signal. The measurement of an emission greater in
amplitude than the level of the ambient acoustic noise suggests functional
cochlear structures; patients with hearing losses due to cochlear dysfunction
will have very small or absent OAEs. OAE testing requires very little patient
preparation and usually can be completed in less than 30 seconds per ear.
Therefore, this procedure has become a standard tool for hearing screening for
all ages as well as a verification test included in a complete diagnostic
audiologic test battery.
In fiscal 2002, the Company expanded its line of electrodiagnostic and OAE
systems. The ABaer(TM) Cub, a new infant hearing screening device, was
introduced. It uses proprietary hardware coupled to a standard personal digital
assistant (PDA) device. The ABaer Cub was based on a predecessor instrument, the
ABaer(TM), which was introduced in August 2001. The ABaer Cub instrument is more
portable, entirely battery-operated and economically priced, meeting the needs
of another segment of the newborn hearing screening market. Both the ABaer and
the ABaer Cub instruments utilize automated ABR and/or OAE technology and employ
sophisticated signal detection methods so that the operator does not have to be
skilled at data interpretation.
The M.A.S.T.E.R(TM) system also was introduced in fiscal 2003. The Company
obtained an exclusive license from the Rotman Research Institute at Baycrest
Centre in Toronto, Canada to
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modify a research-oriented auditory steady-state response (ASSR) system
developed by its leading experts in the technology of ASSR into a viable
clinical tool. There are patents pending on the unique aspects of their ASSR
technology that give the system significant advantages over the competitive ASSR
system. The Company's version of the MASTER system became available during the
third quarter of fiscal 2003. Market reaction was very positive and this product
will continue to evolve. The market's need for tools to define hearing loss
characteristics quickly and with computer-assisted interpretation features will
continue to grow to meet the expanding needs of hearing health caregivers who
are involved in the follow-up of infants referred with the suspicion of
congenital hearing loss.
The Company also continues to add functionality to the AuDX(R) line of products.
These hand-held devices, offered in a variety of configurations with different
options, use OAE technology to rapidly screen for hearing impairment. These
devices are suitable for use with newborns as well as older children and adults.
Enhancements to expand the flexibility of the devices were made in fiscal 2003
to allow both distortion product OAE and transient evoked OAE methodologies in
the same AuDX unit.
In January 1999 Bio-logic entered into an exclusive agreement with another
clinical partner, House Ear Institute, to develop their patented technology for
performing Stacked ABR into a commercial system. A Phase I Small Business
Innovative Research (SBIR) grant was obtained from the government for a
feasibility study which was completed in fiscal 2001. A second phase grant was
awarded in fiscal 2002 to support a multi-center study validating the Stacked
ABR procedure. The system developed for performing the test is based on the
Company's Navigator(R) Pro hardware and a modified version of the Company's
evoked potential software. Based on preliminary information from that study, the
Company anticipates that this product will be validated as a sensitive test for
acoustic abnormalities reducing the need for referrals for unnecessary MRI
tests. The release of this product for clinical use is anticipated in fiscal
2004.
Computerized Electroencephalograph (EEG)
The Company's Neurology/Sleep Division designs, manufactures, and markets a full
line of computerized instruments (electroencephalographs) used to help diagnose
the presence of seizure disorders, to look for causes of confusion, to evaluate
head injuries, tumors, infections, degenerative diseases, metabolic disturbances
that affect the brain, to evaluate sleep disorders, and to investigate periods
of unconsciousness. This type of testing is also done to confirm brain death in
a comatose patient.
Brain activity is characterized by tiny electrical impulses (EEG). To record
EEG, electrodes are placed on the scalp over various locations of the brain to
record and detect patterns of activity and specific types of electrical events.
Testing is performed by EEG technologists. The results of these tests are then
reviewed and interpreted by neurologists.
Outpatient EEG testing is performed in both private physicians' offices or
hospital EEG labs. These tests provide physicians with a clinical assessment of
a patient's condition. For patients
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with seizures that do not respond to conventional therapeutic approaches,
long-term inpatient testing of EEG and behavior is used to determine if surgical
solutions would be safe and effective.
The Company's Ceegraph(TM) line of computerized EEG systems includes a broad
range of products from software licenses, ambulatory monitors, advanced
laboratory systems with multiple capabilities for EEG and long-term epilepsy
monitoring of up to 128 channels, to powerful physician review stations with
advanced quantitative EEG analysis capabilities.
Ceegraph Netlink(TM) represents the leading edge of amplifier and ergonomics
design. The latest innovations in electronics technology and advanced internet
protocol (IP) data transmission provides high quality recordings of upto 32
channels of digital EEG data. Netlink's innovative cart allows the instrument to
be moved within the institution easily and in height and configuration as
needed. Ceegraph Netlink instruments are built using the highest quality PC
components available to ensure the highest levels of performance and
reliability. Ceegraph(TM) Netlink is priced from $23,000 to $40,000 depending
upon the options selected.
Ceegraph XL is designed for use in long-term epilepsy monitoring applications.
XL's forward looking design allows labs to place amplifiers and recording PCs
anywhere in the facility using Ethernet data transmission. This design
eliminates commonly encountered connectivity and associated data quality issues.
Three automated event (spike and seizure) detection software options are
available to assist in the identification of clinical events indicative of
epilepsy: SmartTrack(TM), Stellate and Persyst. SmartTrack, developed through
collaboration between the Company and Johns Hopkins Epilepsy Center, is used for
automatic analysis of epileptogenic brain activity. The detection algorithm is
based on a neural network and can be used on/offline. Stellate Systems' patented
algorithms operate on/offline and include Newborn Seizure, Seizure Onset, and
State-dependent Seizure Detection. Persyst's SpikeDetector is also a neural
network algorithm trained and tested to detect spikes and seizures in adults and
children. Ceegraph XL is priced from $40,000 to $75,000, depending upon the
model and options selected.
A digital video option is available for both Ceegraph Netlink and Ceegraph XL.
This option provides synchronized video recording of a patient's behavior while
recording electrical activity from the brain.
SmartPack(TM), a patented software option available with the Ceegraph line, is
an innovative data compression process that saves about 60% in storage and
archiving space. Data compression is performed in real-time with no loss of
information.
Universal Reader(TM) is a powerful physician's review station that permits fast
and easy data analysis in a graphic format. BESA 2000, advanced research
software from MEGIS Software GmbH (Germany), is available for source analysis
and localization of EEG data. BESA provides interactive hypothesis testing and
advanced constraints based on both anatomy and physiology. The output of BESA
can be directly exported to BrainVoyager(TM) software from Brain Innovation
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BV (Netherlands). BrainVoyager provides MRI and functional MRI image seeding and
visualization of multiple source solutions from BESA 2000.
The Ceegraph Traveler(R) is a solid-state battery-operated ambulatory recorder
for epilepsy monitoring that records continuous information from 24 channels and
saves data on a removable flash card. Data can immediately be reviewed and
analyzed by the Ceegraph analysis program, and subjected to automatic spike and
seizure analysis.
Computerized Polysomnography (Sleep Monitoring)
Increasing public awareness of sleep disorders has made sleep medicine, although
relatively new, a rapidly growing specialty. The analysis of respiratory
patterns, brain electrical activity and other physiological data has proven
critical for the diagnosis and treatment of sleep-related diseases such as
apnea, insomnia and narcolepsy. Bio-logic offers a broad range of products for
the contemporary sleep laboratory including fully configured laboratory systems,
portable systems, and ambulatory recorders for home monitoring. Bio-logic's
Sleepscan(TM) systems provide flexible report generation capabilities, expert
analysis modules and many advanced features.
A sleep study entails whole-night recordings of brain electrical activity,
muscle movement, airflow, respiratory effort, oxygen levels, EKG and other
parameters. These recordings result in over 1,000 pages of data that must be
reviewed, analyzed, scored by a specialist, and summarized in a report. This
process is costly and time-consuming. Bio-logic's Sleepscan product stores all
of this information digitally and provides time-saving features and software for
acquiring and analyzing this data. This flexible system enables the user to
specify rules and personal preferences to be used during analysis. The computer
can rapidly perform this analysis, and the results are summarized graphically
and incorporated into a detailed report that is readily available. The user has
the ability to verify the analysis, manually override sections as needed, modify
parameters and reanalyze data. Sleepscan is priced from approximately $20,000 to
$45,000, depending on the model and options selected. The Company offers the
Sleepscan Netlink(TM) console system as well as a portable Sleepscan laptop
system, both with 40-channel recording capability and built-in oximeter.
Sleepscan console and laptop products feature the Netlink data acquisition
system, which incorporates the latest development in superior amplifiers for
polysomnography. In addition to excellent signal quality, the Sleepscan Netlink
amplifier includes a built-in oximeter, and allows the user to start and stop a
study or perform electrode impedance testing either at the patient's bedside or
from the monitoring room. Sleepscan Netlink also offers a convenient electrode
test device for quality control.
Bio-logic's Traveler(R) is designed for home studies. It is a solid-state,
battery-operated ambulatory recorder for sleep and epilepsy monitoring. It
records continuous information on 8, 19 or 27 channels for sleep and 16, 18 or
24 channels for EEG applications. The data, which is saved on a flash card for
easy access, can be immediately reviewed and analyzed by the Sleepscan or
Ceegraph analysis program.
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Bio-logic also provides a complete line of consumables and accessories for the
polysomnography laboratory. The Company's Airflow Pressure Transducer provides
an alternative to the current airflow monitoring devices that use changes in
temperature as an indicator. It detects airflow by pressure changes so it can
detect shallow breathing where temperature related transducers remain
substantially unchanged. This method has been documented in industry
publications to produce the signature waveform used in identifying a respiratory
disorder known as Upper Airway Resistance Syndrome.
In February 2003 Bio-logic introduced a new version of Sleepscan analysis
software adding several important new features. The new software includes both
pediatric and adult programs. It is capable of analyzing data and calculating a
respiratory disturbance index (RDI) as patient information is being acquired.
Other enhancements include broader report generation capabilities and improved
graphics making the system more intuitive and easier to use.
Product Development
Bio-logic focuses most of its research and development (R&D) resources on the
development of new products for its core markets, along with making
modifications, additions and improvements to existing products. Most new
features and product modifications are completed based on the reviews and
suggestions of customers and users of the products. Bio-logic expended $4.8
million, $3.7 million and $4.1 million, for research and development during
fiscal 2003, 2002, and 2001, respectively. The fiscal 2003 and 2002 expenditures
are exclusive of $0.4 million and $0.9 million, respectively, of capitalized
software development costs (net of amortization) associated with the significant
software development that have created new functionality in both the hearing and
neurology areas.
In the digital EEG market, the Ceegraph IV and Ceegraph Netlink product families
continue to evolve as more software capabilities and features are added to the
product line. These Windows-based products are intended to meet the expanding
needs of the Digital EEG and long-term EEG monitoring markets, from small,
portable applications (Ceegraph/Sleepscan Traveler, Bio-logic's 24-channel
ambulatory system) to large, powerful systems having up to 128 acquisition
channels with patient digital video and many automatic analysis features. New
software features include enhanced video control and graphical user interaction,
improved file conversion, file sharing and compatibility with other standard
file formats, and many new analysis enhancements. Higher speed, more powerful
computers have been designed into new, more portable packaging options, for
added performance, flexibility and convenience.
The Sleepscan II and Sleepscan Netlink systems for computerized polysomnography
have had many new analysis features added to its extensive list of functions,
including completely new graphical user interfaces, user-defined customization
capability, pediatric analysis functions, and customizable reports. Also, the
new Sleepscan systems are Windows 98, 2000 and XP compatible.
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Major improvements and feature additions have also been made to Bio-logic's
audiology market offerings. The new ABaer Cub product offers both the Distortion
Product Otoacoustic Emissions (DPOAE) and Transient Evoked Otoacoustic Emissions
(TEOAE) tests, along with the ABR screening functions of the original ABaer,
using a PDA device with a proprietary portable, battery-operated unit. This and
other packaging and printing options have been added to enhance ease of use. The
Auditory Evoked Potential (AEP) product family has continued to evolve, with the
release of the M.A.S.T.E.R ASSR system, Navigator Pro Stacked ABR, and the
completely new Windows version of AEP. The ABaer and Navigator Pro portable
products have achieved significant market success because of their extensive set
of easy-to-use features, dependable performance and expandability. These two
products are used together to perform a complete range of ABR testing, from fast
and accurate screening of newborn infants to in-depth diagnostic testing for
patients of all ages.
For the neurology markets, which include both EEG (Ceegraph) and Sleep
(Sleepscan), new developments have added expanded operating system compatibility
and many software features that include higher data sampling rates, new user
interface enhancements, and overall improved reliability and performance. Both
products are now fully compatible with the Windows 98, 2000 and XP operating
systems. New software features include a revised Summary Window which displays
patient events (seizures, etc.) over the entire length of a study all on one
screen, options for sampling rates up to 1024 per second, SQL Queries for Report
Generator, enhancements to the Patient and Test Information database system,
automatic system recovery from power failure or reset, and the new DataShare
file sharing feature (which allows specifically-saved Ceegraph and Sleepscan
data files to be viewed and analyzed by colleagues without Bio-logic application
software). A modification to the XL patient connection module has been made
which enhances the performance and computational power for recording and
communicating up to 128 channels of data at higher sampling rates. Both the XL
and the Netlink patient connection modules now collect patient data and
communicate it back to the host computer over standard Ethernet interfaces at
speeds up to 1024 samples per second.
The Company anticipates that it will continue to incur significant research and
development expenditures in connection with the introduction of new products and
new models, and upgrades of existing products. Additionally, from time to time
the Company may seek to license or acquire complementary technologies from third
parties.
Sales and Marketing
Bio-logic's marketing efforts are directed at medical practitioners, hospitals
and clinics. Sales are presently conducted by sales representatives and
independent dealer organizations covering the United States and Canada. Some of
these dealers may also represent other companies offering competing products.
Bio-logic also has arrangements with foreign distributors to sell its products
overseas, including the European, Middle Eastern, Far East, South American and
Latin American markets. During the last three fiscal years, no one customer or
distributor accounted
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for over 10% of the Company's revenues.
In March 2001 the Company renewed and expanded its contract with Premier Inc.,
one of the nation's largest healthcare alliances, as a dual-source supplier for
neurodiagnostic products to its 1,800 hospital and health system members.
Bio-logic's new three-year contract with Premier Inc. includes its epilepsy
monitoring, hearing and sleep diagnostic systems, in addition to
neurodiagnostics products previously under contract.
In May 2002 the Company signed a three-year contract with Broadlane for
supplying Hearing Division products. Broadlane includes 450 active hospitals and
encompasses Kaiser Permanente, Tenet Healthcare and many others.
In March 2002 the Company signed contracts with Direct Medical/Managed
Healthcare Associates (MHA) for Hearing Division products and with Shared
Services for both Hearing and Neurology/Sleep Division Products.
In April 2001 the Company signed two contracts with Novation, the supply company
of the Volunteer Hospital Association (VHA) and University Health Systems
Consortium (UHC), as a dual-source supplier for neurodiagnostic and hearing
assessment systems to its 2,200 hospital and health system members. Bio-logic's
new three-year contracts with Novation cover its EEG, epilepsy monitoring,
surgery monitoring and sleep study systems, as well as products for screening
and diagnosis of hearing disorders.
To demonstrate, promote and market its systems, the Company sponsors its own
educational and sales oriented seminars throughout the United States; it also
attends seminars and trade shows organized by others. Selling and marketing
programs include sales and product brochures, advertising and direct mail
programs. Bio-logic inside sales representatives work to generate and follow up
on leads, and provide overall assistance in the sales process for systems and
disposable products.
Foreign Sales
During fiscal 2003, export sales (excluding Canada) were $4.7 million, or
approximately 16% of net sales, compared to $4.0 million, or approximately 13%
of net sales, in fiscal 2002, and $4.8 million, or approximately 20% of net
sales, in fiscal 2001. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information. The Company is
required to obtain export licenses for some system sales to certain foreign
countries.
Customer Training, Support and Maintenance
In connection with the installation of a system, the Company's independent
domestic dealers' sales representatives or, if the sale is made directly by the
Company, the Company's field support group, will typically train the customer's
medical and office personnel in the use of the equipment, assist in the
introduction of the data into the system and provide assistance to the customer
during the initial period of operation. Phone-based support is provided 24 hours
a day by a dedicated group of clinical and information systems specialists.
Foreign sales are supported by the Company's foreign distributors who are
provided periodic training and support. The Company's practice is to offer a
one-year limited warranty at no additional charge on its software and equipment
for parts and labor. The Company has experienced satisfactory field operating
results, and warranty expense has been insignificant to date. The manufacturers
of the
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microcomputers included in the Company's systems provide a one-year warranty
against defects and have service capabilities throughout the United States. In
addition, the Company offers its customers service and maintenance agreements
for an additional fee; to date, these fees have been minimal. Finally, software
enhancements developed by the Company are typically distributed to system users
for a minimal fee.
Assembly, System Hardware and Sources of Supply
Bio-logic assembles its systems by integrating microcomputers, monitors,
printers and certain standard components produced by other manufacturers with
peripherals and other hardware, including circuit boards, and certain electronic
components manufactured by Bio-logic and software packages it has developed. The
Company's systems are composed of PCs, appropriate printers and mass storage
media such as high capacity hard disks and removable DVD disks for the storage
of both operating programs and data. The Company purchases microcomputers from
distributors of such products for varying discounts depending upon the volume of
equipment purchased. The components used in the Company's systems are available
from a number of suppliers. The Company also performs quality control and
testing procedures on all systems prior to delivery.
Patents and Trademarks
The Company currently owns eight patents covering certain aspects of its brain
mapping system and other technology developed by the Company. The Company
continues to expand its intellectual property and has applied for three
additional patents. These applications are currently under review by the U.S.
Patent Office. There is no assurance that such patents will afford any
commercial benefits. The Company has registered the trademarks Bio-logic, AuDX,
ABaer, TreeTip, Scout, Navigator, Brain Atlas and Traveler. The Company has
developed a number of unpublished computer software programs that are entitled
to unpublished copyright privileges as confidential proprietary material. The
Company believes that rapidly changing technology makes its continued success
dependent primarily upon the technical competence and creative skill of its
personnel rather than on patents, copyrights or other proprietary rights.
From time to time, third parties have made claims that Bio-logic products
infringe upon their patents. In the event of a successful claim of infringement
against the Company, it may be required to pay substantial damages, stop using
its technologies and methods, develop non-infringing products or methods and/or
obtain one or more licenses from third parties. If required, the Company may not
be able to obtain such licenses on acceptable terms, or at all. Any litigation,
whether to enforce Bio-logic patent rights or to defend against allegations of
infringement on third party rights, will be costly, time-consuming, and may
distract management from other important tasks.
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Competition
The Company competes with a number of entities that offer systems performing
similar diagnostic tests. The Company's principal competitors in the neurology
and sleep monitoring business, some of which are substantially larger and have
more marketing personnel and greater technical resources than the Company, are
Nicolet Instrument Corporation (a unit of Viasys Corporation), ExcelTech,
Nihon-Kohden Corporation, Grass Telefactor (a subsidiary of Astro-Med
Corporation), Oxford Instruments, Mallinckrodt, Inc. (a subsidiary of Tyco), and
Caldwell Laboratories, Inc. The principal competitors with the Company's hearing
business are Natus Medical, Inc., GSI (a division of Nicolet Instrumentation
Corp., a unit of Viasys Corporation) and Madsen Electronics. The Company
believes that it competes for customers on the basis of the range and quality of
software and hardware offered, the breadth and quality of its disposable product
offering, and the cost effectiveness of its integrated systems. Another major
competitive factor is the Company's ability to tailor systems to a customer's
particular diagnostic and data processing requirements.
Government Regulation
The Company's products, to the extent they are deemed medical devices, are
subject to government regulation by the United States Food and Drug
Administration ("FDA") and accordingly, unless determined to be exempt, are
subject to the FDA's Premarket 510(K) clearance procedures.
Under FDA regulations, a medical device is classified as either a Class I
device, which is subject only to general control provisions, a Class II device
which, in addition to applicable general controls, will be made subject to
future performance standards developed by the FDA, or a Class III device which,
in addition to applicable general controls, is subject to FDA premarket
approval.
The Company's systems have been classified as Class II medical devices as such
term is defined in the regulations promulgated by the FDA. The Company has filed
510(K) applications (notifications of intent to market) with the FDA. The
Company continues to advise the FDA as modifications and additions are made to
its systems.
In addition, all manufacturers of medical devices are required to register with
the FDA and to adhere to certain "good manufacturing practices" and "good
laboratory practices," which prescribe recordkeeping procedures and provide for
the inspection of facilities.
-14-
Backlog
The Company's backlog is virtually all related to its manufactured systems.
Production time varies from a few days to a few weeks, depending on the
complexity of the system. Systems backlog was $0.8 million at April 30, 2003,
compared to $0.9 million on April 30, 2002.
Employees
As of February 28, 2003, the Company had 128 full-time employees. The Company's
business is dependent in part upon its ability to recruit and retain qualified
personnel. None of its employees are represented by a labor union and the
Company believes its employee relations are satisfactory.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position
---- --- --------
Gabriel Raviv, Ph.D. 52 Chairman, Chief Executive Officer
Roderick G. Johnson 53 President, Chief Operating Officer
Thomas S. Lacy 60 Vice President, Neurology/Sleep
Division, North America
Gabriel Raviv has been a Director of the Company since it commenced operations
in March 1979. He became President and Chief Executive Officer of the Company in
February 1981. In September 1999, Dr. Raviv relinquished the role of President,
retaining the position of Chief Executive Officer of the Company. Dr. Raviv
formerly served as director of the Clinical Research Instrumentation Laboratory
at Evanston Hospital (an affiliate of Northwestern University) and is currently
an Adjunct Professor at Northwestern University. Dr. Raviv received his M.S. and
Ph.D. degrees in Electrical Engineering and Computer Sciences from Northwestern
University.
Roderick Johnson joined the Company in September 1999 as President, Chief
Operating Officer and a member of the Board of Directors. He founded the
NeuroCare Group in 1994 and served as Chairman, President and Chief Executive
Officer until 1999. From 1992 through 1994, Mr. Johnson served as Chief
Executive Officer in Residence at Weiss, Peck & Greer and the Continental
Illinois Venture Corporation. In addition, from 1988 through 1991, Mr. Johnson
was President and Chief Executive Officer of Domino Amjet, Inc.
-15-
Thomas Lacy joined the Company in January 1994. Prior thereto, he was Vice
President-International of Packard Instrument Corporation from July 1992 until
July 1993, and Vice President-General Manager of Packard Instrument Company from
September 1988 until July 1992.
Item 2. Properties
Bio-logic's headquarters and manufacturing operations are located in an
approximately 26,000 square foot facility built by the Company on approximately
20 acres in Mundelein, Illinois. The Company owns its building and property.
The Company also leases three offices overseas with current annual rents of
approximately $89,327, $17,548 and $6,192.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
-16-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Securities
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol BLSC. The following tables set forth the high and low sales prices of the
Common Stock for the periods indicated as reported by Nasdaq. These quotations
represent prices between dealers in securities, do not include retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
High Low
Sales Price Sales Price
----------- -----------
Fiscal Year Ended February 28, 2003
-----------------------------------
1st Quarter $5.09 $4.26
2nd Quarter 4.88 4.00
3rd Quarter 4.30 2.32
4th Quarter 5.23 3.73
High Low
Sales Price Sales Price
----------- -----------
Fiscal Year Ended February 28, 2002
-----------------------------------
1st Quarter $6.15 $3.06
2nd Quarter 5.25 3.75
3rd Quarter 6.00 3.95
4th Quarter 8.54 4.51
Disclosure Regarding the Company's Equity Compensation Plan
The Company maintains a 1994 stock option plan (the "Plan") pursuant to which it
may grant equity awards to eligible persons. The following table summarizes
information about equity awards under the Plan as of February 28, 2003:
Number of Number of
securities to be securities remaining
issued upon Weighted-average available for future
exercise of exercise price issuance under
outstanding of outstanding equity compensation
options options plans
---------------- ---------------- --------------------
Equity compensation plans
approved by the security holders 988,725 $4.16 611,275
Equity compensation plans not
approved by the security holders -- $ -- --
---------------- ---------------- --------------------
Total 988,725 $4.16 611,275
================ ================ ====================
Approximate Number of Equity Security Holders
As of April 24, 2003, there were approximately 226 record holders of the
Company's Common Stock. The Company believes, based on its last ADP search,
there are in excess of 1,500 beneficial owners of its Common Stock.
-17-
Dividends
The Company has never paid a cash dividend on its Common Stock and intends to
continue to follow a policy of retaining earnings to finance future growth.
Accordingly, the Company does not anticipate the payment of cash dividends to
holders of Common Stock in the foreseeable future.
Item 6. Selected Financial Data
The selected information presented below summarizes certain financial data and
should be read in conjunction with Bio-logic's Consolidated Financial Statements
and the Notes thereto included elsewhere in this report.
Fiscal Year Ended Last Day of February
(dollars in thousands except per share data)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Net sales $ 29,264 $ 29,858 $ 24,122 $ 26,391 $ 17,418
Operating income (loss) 1,998 2,351 (221) 2,781 99
Net income (1) 1,450 1,502 449 2,163 289
Net income per share-basic (2) 0.35 0.36 0.11 0.54 0.07
Net income per share-diluted (2) 0.34 0.35 0.11 0.52 0.07
Working capital 14,805 13,986 12,691 12,431 10,593
Total assets 25,190 22,942 20,123 19,168 16,038
Long-term debt - - - 140 295
Total liabilities 6,903 5,753 4,495 4,127 3,333
Shareholder's equity 18,287 17,189 15,628 15,041 12,705
Shares outstanding (2) 4,317,556 4,350,720 4,259,453 4,180,094 4,095,939
(1) Includes net interest income of $112, $191, $305, $220 and $227 in fiscal
2003, 2002, 2001, 2000 and 1999 respectively.
(2) Weighted average number of common and dilutive common equivalent shares
calculated using average market prices.
-18-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Prospective investors are cautioned that the statements in this Annual Report on
Form 10-K that are not descriptions of historical facts may be forward-looking
statements within the meaning of the Private Securities Reform Act of 1995,
including statements concerning the Company's future products, results of
operations and prospects. These forward-looking statements are subject to risks
and uncertainties. Actual results could differ materially from those currently
anticipated, including those relating to general economic and business
conditions, the results of research and development efforts, technological
changes and competition, potential changes in regulation by the FDA, costs
relating to manufacturing of products and the timing of customer orders detailed
elsewhere in this Annual Report on Form 10-K and from time to time in the
Company's filings with the Securities and Exchange Commission.
Critical Accounting Policies and the Use of Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
our financial statements and accompanying notes. Actual results could differ
materially from those estimates. The items in the Company's financial statements
requiring significant estimates and judgments are as follows:
Inventories, consisting principally of components, parts and supplies, are
valued at the lower of cost or market, and include materials, labor and
manufacturing overhead. The Company writes down inventory for estimated
obsolescence for unmarketability equal to the difference between the cost of the
inventory and its estimated market value, based on assumptions about future
demand and market conditions. If future demands or market conditions were to be
less favorable than what was projected, additional inventory write-downs may be
required.
The Company recognizes revenue upon shipment of its products to customers,
provided that the Company has received a signed purchase order, the price is
fixed, the title has transferred, product returns are reasonably estimable,
collection of the resulting receivable is reasonably assured, there are no
customer acceptance requirements, and there are no remaining significant
obligations. The Company maintains an allowance for estimated product returns
based on historical experience. The Company also maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. This estimate is based on historical
experience, current economic and industry conditions, and the financial
condition of the customer. If the financial condition of the customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Capitalized software costs for research and development are amortized over a
five-year period. On an ongoing basis, management reviews the valuation of these
software costs to determine if there has been impairment to the carrying value
of these assets, and adjusts this value accordingly.
-19-
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. Policies relating to fair value
of financial instruments, depreciation, and income taxes require judgments on
complex matters that are often subject to multiple external sources of
authoritative guidance such as the Financial Accounting Standards Board,
Securities and Exchange Commission, etc. Although no specific conclusions
reached by these authorities appear likely to cause a material change in the
Company's accounting policies, outcome cannot be predicted with confidence. Also
see Note 2 to the Company's Consolidated Financial Statements, which provides a
summary of the Company's significant accounting policies.
New Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this statement are effective for exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS 146 is not expected to have a material
impact on the Company's financial position and results of operations.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Other." This interpretation addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligation under guarantees. This interpretation also
clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations the guarantor has
undertaken in issuing that guarantee. The initial recognition and measurement
provisions of this statement shall be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002 irrespective of the
guarantors' fiscal year-end. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 31,
2002. The adoption of FIN 45 did not have a material impact on the Company's
financial position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure an amendment of FASB Statement No. 123."
This statement provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends Accounting Principles Board ("APB")
Opinion No. 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information. The provisions of this statement are
effective for financial statements for fiscal years ending after December 15,
2002 and for interim periods beginning after December 15, 2002. The adoption of
SFAS 148 is not expected to have a material impact on the Company's financial
position and results of operations.
20
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest
Entities." This interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities. The provisions of this interpretation
are effective immediately for all variable interest entities created after
January 31, 2003; for the first fiscal year or interim period beginning after
June 15, 2003 for variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The adoption of FIN
No. 46 is not expected to have a material impact on the Company's financial
position and results of operations.
Dollar amounts in the following discussion are in thousands except for per share
amounts and where noted:
Results of Operations
Fiscal 2003 Compared To Fiscal 2002
Worldwide sales for fiscal 2003 were $29,264, a 2% decrease from fiscal 2002
sales of $29,858. Domestic sales, which include Canada, were $24,560 for fiscal
2003, or 84% of the Company's total sales. This represents a 5% decrease from
$25,863, or 87% of total sales, in fiscal 2002. The fiscal 2002 results included
a $4.5 million one-time sale of hearing screening and diagnostic products to the
Province of Ontario, Canada. A maturing domestic hearing screening and
diagnostic market contributed to lower hearing system sales, but the Company
experienced significant growth in its domestic hearing supply business, almost
doubling the amount of sales from fiscal 2002 levels. Domestic neurology system
sales for fiscal 2003 were slightly below prior year's levels, due to the impact
of current market conditions on the industry's capital purchasing patterns.
Warranty and service revenue showed strong improvement over fiscal 2002, due to
a higher installed base of systems.
International sales represented 16% of the Company's sales in fiscal 2003,
compared to 13% in fiscal 2002. Sales of $4,704 were up 18% from $3,995 in
fiscal 2002, reflective of a strong hearing diagnostic market in Europe and
South America. The Company also had strong hearing supply sales internationally
in fiscal 2003, experiencing a fourfold increase over fiscal 2002.
Gross margins for fiscal 2003 improved to 67.2% from 63.4% in fiscal 2002. This
improvement was mainly the result of the Company's recording of a one-time
inventory obsolescence charge of approximately $1 million in fiscal 2002, due to
accelerated obsolescence of older technology resulting from rapid customer
acceptance of new product releases.
Selling, general and administrative (SG&A) expenses for fiscal 2003 were
$12,786, essentially flat to fiscal 2002 levels of $12,840. As a percent of
sales, SG&A expenses were 44%, a slight increase over 43% for fiscal 2002.
Reduced selling expenses in fiscal 2003 were partially offset by increased
audit, legal and consulting expenses.
Research and development (R&D) costs for fiscal 2003 were $4,884, a 31% increase
over fiscal
21
2002 levels of $3,737. As a percent of sales, fiscal 2003 R&D expenses were 17%,
compared to 13% in fiscal 2002. Approximately $600 of the increase over fiscal
2002 related to the Company's continued investment in development activities;
the remaining $500 resulted from a reduction in net capitalized costs compared
to fiscal 2002, when the Company capitalized $910 of R&D expenses related to
significant software development in its neurology and sleep product lines.
Fiscal 2003 capitalized R&D costs were $585, relating to the continued
development of fiscal 2002 projects, as well as development costs for the
M.A.S.T.E.R.(TM) hearing screening product and other hearing products not yet
brought to market.
For fiscal 2003 the Company had operating income of $1,998, compared to $2,351
in fiscal 2002. The decrease was due primarily to lower sales and increased R&D
expenses, partially offset by improved gross margins.
The Company had net interest income of $112 in fiscal 2003, down from $191 in
fiscal 2002 mainly due to lower interest rates on invested funds.
The Company recorded an income tax provision in fiscal 2003 of $656, compared to
$967 in fiscal 2002. The effective tax rate was 31%, compared to 39% in fiscal
2002. The decrease in the fiscal 2003 tax rate resulted mainly from an increase
in the rate used to determine foreign deferred tax assets incorporated into the
determination of currently taxable income. The deferred tax assets related to
foreign taxable income increased due to the end of the tax holiday in certain
jurisdictions and the deferred assets will be realized at higher rates. These
items represent a one-time favorable adjustment to the tax rate and will not be
a contributing factor to effective tax rates in future years.
Net income for fiscal 2003 was $1,450, compared to $1,502 in fiscal 2002.
Diluted earnings per share (EPS) for fiscal 2003 were $0.34, compared to fiscal
2002 EPS of $0.35. The reduction of EPS was due to lower net income, partially
offset by a reduction in outstanding shares. Net income decreased due to lower
sales, and increased spending and lower levels of capitalized costs in R&D,
partially offset by improved margins and favorable income tax adjustments.
Fiscal 2002 Compared To Fiscal 2001
Net sales for fiscal 2002 were $29,858, a 24% increase from net sales of $24,122
in fiscal 2001. Domestic sales, which include Canada, increased 34% to $25,863
over fiscal 2001 sales of $19,296. Foreign sales in fiscal 2002 decreased 17% to
$3,995, compared to $4,826 for fiscal 2001. As a percentage of net sales,
domestic and foreign sales for fiscal 2002 were 87% and 13%, respectively,
compared to 80% and 20% for fiscal 2001, respectively.
At $29.9 million, fiscal 2002 sales represented an all-time record for the
Company. The increase in domestic sales was primarily attributable to
approximately $4.5 million of sales of hearing screening and diagnostic products
to the Province of Ontario, Canada in the first and fourth quarters of the year.
The Sleepscan(TM) product line also achieved record sales. Finally, hearing
sales were also boosted by sales of the ABaer(TM) infant hearing screening
system, the Navigator(R) Pro diagnostic system, and by supply sales, now at
approximately 10% of total sales, with hearing supplies increasing 78% over
fiscal 2001.
22
Gross margins of 63.4% declined by 0.9 percentage points in fiscal 2002
primarily due to an inventory obsolescence charge of approximately $1 million
due to the rapid acceptance of the Company's new neurology and sleep products in
the marketplace, rendering inventory related to the older systems obsolete
sooner than expected. This charge reduced margins by 3.5%. Without the charge,
the Company would have experienced a margin increase over the prior year due to
a greater mix of higher-margin sales from the hearing business.
Selling, general and administrative (SG&A) expenses increased by 10% to $12,840
during fiscal 2002 compared to $11,638 for fiscal 2001; as a percentage of net
sales, however, SG&A expenses decreased to 44% in fiscal 2002 from 50% in fiscal
2001. The SG&A expense increase in fiscal 2002 was due to sales organizational
build-ups, as well as higher commissions and bonuses related to the increased
sales levels.
Research and development (R&D) expenses decreased by 9% to $3,737 during fiscal
2002 in contrast to $4,105 for fiscal 2001; as a percentage of net sales, R&D
expenses decreased to 13% for fiscal 2002 compared to 17% for fiscal 2001. In
fiscal 2002 the Company capitalized $910 in R&D expenses related to significant
software upgrades that have created new functionality in its neurology and sleep
product lines. Total R&D expenditures for fiscal 2002 including the capitalized
costs were $4,647, representing a 13% increase over fiscal 2001 spending levels,
and 16% of net sales.
For fiscal 2002 the Company had operating income of $2,351, compared to an
operating loss of $221 in fiscal 2001. The increase in operating income in
fiscal 2002 was due primarily to the strong sales increase with margins
negatively impacted by the inventory obsolescence provision, partially offset by
higher SG&A expenses associated with the increased level of sales.
The Company had net interest income of $191 for fiscal 2002 compared to $304 for
fiscal 2001. This decrease in net interest income was primarily due to lower
interest rates.
The Company recorded an income tax provision in fiscal 2002 of $967, or 39% of
income before taxes, compared to an income tax benefit of $378 in fiscal 2001,
the latter of which included a favorable adjustment for net operating losses.
The income tax provision for fiscal 2002 approximates the marginal tax rate for
federal and state income tax, and reflects the end of a tax holiday for an
overseas subsidiary.
The Company had net income of $1,502 or $0.35 per diluted share for fiscal 2002,
compared to $449 or $0.11 per diluted share for fiscal 2001. The increase in net
income was largely the result of higher net sales partially offset by
sales-related expense increases in SG&A.
Liquidity and Capital Resources
As of February 28, 2003, the Company had working capital of $14,804, compared to
$13,986 at fiscal year end 2002. Total cash and cash equivalents increased
$4,293 to $10,678 during fiscal 2003.
Net cash provided by operating activities during fiscal 2003 was $5,653,
compared to $2,108 in fiscal 2002, primarily due to improved asset management
and an increase in deferred warranty revenue. Accounts receivable (A/R) declined
21% to $5,569 as of February 28, 2003, on essentially the same level of sales, a
result of the Company's improved collection efforts. The number of days sales in
A/R, based on the exhaustion method of calculation, was 61 at February 28, 2003,
a 17 day reduction from February 28, 2002; this calculation is based on the
consumption of the A/R balance by the most recent sales. The Company also
improved its
23
inventory turns from 2.6 to 3.2 while reducing inventory levels by 26%,
primarily due to better management of raw material levels.
Net cash utilized in investing activities in fiscal 2003 was $907, compared to
$1,264 in fiscal 2002. The utilization during both fiscal years was primarily
the result of capital additions and the capitalization of R&D costs.
Net cash used in financing activities in fiscal 2003 increased to $353, compared
to $78 in fiscal 2002. Pursuant to the Company's stock repurchase program
initiated in November, 2002, the Company purchased 80,700 shares of its common
stock at an aggregate purchase price of $390, of which 5,700 shares were retired
as of February 28, 2003.
The Company has no interest bearing debt, and believes its liquidity and capital
requirements for the foreseeable future will be satisfied by available and
internally generated funds. To the extent the Company's capital and liquidity
requirements are not satisfied internally, the Company may utilize a $1,000,000
unsecured bank line of credit, all of which is currently available. Borrowings
under this line of credit bear interest at the bank's prime rate.
From time to time, the Company explores various corporate finance transactions
such as business combinations or acquisitions, certain of which may include the
issuance of Company securities. However, the Company has no agreements or
commitments with respect to any particular transaction and there can be no
assurance that any such transaction would be completed.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to some market risk at both the financial and business
level. Financial risks include, but are not limited to, the impact on sales
resulting from competitive pricing; costs associated with the unfavorable
settlement of patent infringement claims; and the unfavorable impact of interest
rate reductions, given the Company's significant cash and cash equivalent
balances. Additionally, the Company's foreign sales can at times be adversely
affected by political and governmental conditions, import and export
restrictions, and currency fluctuations. Business risks include, but are not
limited to, customers capital purchasing constraints, which can fluctuate on a
quarterly basis; the timeliness of bringing new products to market; product
obsolescence resulting from competitors' new product introductions; turnover in
the Company's sales force; acceptance of new technology by clinicians and other
healthcare professionals; and the speed and breadth of 510(K) clearances issued
by the FDA.
Item 8. Consolidated Financial Statements and Supplementary Data
The information required by Item 8 is included in the consolidated financial
statements beginning on page F-1 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
24
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors of the Registrant-- Information with respect to directors of the
registrant will be set forth under the section captioned "Election of Directors"
in the registrant's proxy statement and is incorporated herein by reference.
Executive Officers of the Registrant--Information with respect to executive
officers of the registrant is set forth in Item 1 of Part I hereof.
Information with respect to compliance with Section 16(a) of the Securities
Exchange Act of 1934 will be set forth under the section captioned "Section
16(a) Beneficial Ownership Reporting Compliance" in the registrant's proxy
statement and is incorporated herein by reference.
Item 11. Executive Compensation
Information beginning with the section captioned "Directors Compensation and
Benefits" through and including the section captioned "Compensation Committee
Interlocks and Insider Participation" will be set forth in the registrant's
proxy statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item will be set forth under the section captioned
"Beneficial Ownership of the Company's Stock" in the registrant's proxy
statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information required by this item will be set forth under the section captioned
"Transactions with Management and Others" in the registrant's proxy statement
and is incorporated herein by reference.
25
PART IV
Item 14. Controls and Procedures
The Company maintains a system of disclosure, as well as procedures to provide
reasonable assurance that information required to be disclosed in its periodic
reports filed under the Exchange Act is properly recorded, processed, summarized
and reported within the time rules specified by the SEC. The Company regularly
monitors the effectiveness of these controls, and as of February 28, 2003 the
Company's principal executive and principal financial officers have concluded
that these disclosure controls and procedures are operating effectively. There
have been no significant changes in the Company's internal controls or other
factors that could significantly affect these controls.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the internal control
system are met. Because of the inherent limitations of any internal control
system, no evaluation of controls can provide absolute assurance that all
control issues, if any, within a company have been detected.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements Page
- -------------------- ----
The following consolidated financial statements are included in this report:
Consolidated Balance Sheets, February 28, 2003 and 2002 ...................... F-3
Consolidated Statements of Earnings for the Years Ended
February 28, 2003, 2002 and 2001 ......................................... F-4
Consolidated Statement of Shareholders' Equity for the Years
Ended February 28, 2003, 2002 and 2001 ................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
February 28, 2003, 2002 and 2001 ......................................... F-6
Notes to Consolidated Financial Statements ................................... F-7
26
Exhibits
An index of the exhibits which are required by this item and which are included
or incorporated herein by reference in this Annual Report on Form 10-K appears
at the end of this report.
Reports on Form 8-K
During the three months ended February 28, 2003, no reports on Form 8-K were
filed by the Company.
27
BIO-LOGIC SYSTEMS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................... F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets, February 28, 2003 and 2002 ............ F-3
Consolidated Statements of Earnings for the Years Ended
February 28, 2003, 2002 and 2001 ............................... F-4
Consolidated Statement of Shareholders' Equity for the Years
Ended February 28, 2003, 2002 and 2001 ......................... F-5
Consolidated Statements of Cash Flows for the Years Ended
February 28, 2003, 2002 and 2001 ............................... F-6
Notes to Consolidated Financial Statements ......................... F-7
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
Bio-logic Systems Corp.:
We have audited the accompanying consolidated balance sheets of Bio-logic
Systems Corp. and subsidiaries as of February 28, 2003 and 2002, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended February 28, 2003. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bio-logic Systems
Corp. and subsidiaries as of February 28, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 28, 2003, in conformity with accounting principles
generally accepted in the United States of America.
GRANT THORNTON LLP
Chicago, IL
April 15, 2003
F-2
BIO-LOGIC SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
FEBRUARY 28,
ASSETS 2003 2002
------- -------
CURRENT ASSETS:
Cash and cash equivalents $10,678 $ 6,385
Accounts receivable, less allowance for doubtful accounts
of $500 in 2003 and $578 in 2002 5,569 7,059
Inventories, net of reserves of $562 in 2003
and $743 in 2002 3,061 4,127
Prepaid expenses 354 428
Deferred income taxes 1,366 1,118
------- -------
Total current assets 21,028 19,117
PROPERTY, PLANT AND EQUIPMENT - Net 2,075 2,355
OTHER ASSETS 2,087 1,470
------- -------
TOTAL ASSETS $25,190 $22,942
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,896 $1,805
Accrued salaries and payroll taxes 1,072 1,068
Accrued interest and other expenses 1,201 1,127
Accrued income taxes 781 708
Deferred revenue 1,274 423
------- -------
Total current liabilities 6,224 5,131
LONG-TERM DEBT -- --
DEFERRED INCOME TAXES 680 622
------- -------
Total liabilities 6,904 5,753
------- -------
COMMITMENTS -- --
SHAREHOLDERS' EQUITY:
Capital stock, $.01 par value; authorized, 10,000,000
shares; 4,198,606 issued and 4,123,606 outstanding at
February 28, 2003; 4,191,656 issued and outstanding at
February 28, 2002 42 42
Additional paid-in capital 5,049 5,035
Retained earnings 13,562 12,112
------- -------
Shareholders' equity before treasury stock 18,653 17,189
Less treasury stock, at cost: 75,000 shares at February
28, 2003 367 --
------- -------
Total shareholders' equity 18,286 17,189
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,190 $22,942
======= =======
The accompanying notes are an integral part of these statements.
F-3
BIO-LOGIC SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS)
YEARS ENDED FEBRUARY 28,
2003 2002 2001
----------- ----------- -----------
NET SALES $ 29,264 $ 29,858 $ 24,122
COST OF SALES 9,596 10,930 8,600
----------- ----------- -----------
Gross profit 19,668 18,928 15,522
OPERATING EXPENSES:
Selling, general, and administrative 12,786 12,840 11,638
Research and development 4,884 3,737 4,105
----------- ----------- -----------
Total operating expenses 17,670 16,577 15,743
----------- ----------- -----------
OPERATING INCOME (LOSS) 1,998 2,351 (221)
OTHER INCOME (EXPENSE):
Interest income 139 200 334
Interest expense (27) (9) (30)
Miscellaneous (4) (73) (12)
----------- ----------- -----------
TOTAL OTHER INCOME 108 118 292
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,106 2,469 71
PROVISION (BENEFIT) FOR INCOME TAXES 656 967 (378)
----------- ----------- -----------
NET INCOME $ 1,450 $ 1,502 $ 449
=========== =========== ===========
NET INCOME PER SHARE:
Basic 0.35 0.36 0.11
=========== =========== ===========
Diluted 0.34 0.35 0.11
=========== =========== ===========
AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 4,196,362 4,178,885 4,138,833
=========== =========== ===========
Diluted 4,317,556 4,350,720 4,259,453
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
BIO-LOGIC SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
YEARS ENDED FEBRUARY 28, 2003, 2002 AND 2001
(DOLLARS IN THOUSANDS)
Capital Stock
------------------------- Additional
Number of Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
------------------------ ----------- ---------- ----------- -----------
BALANCE, March 1, 2000 4,161,309 $ 41 $ 4,970 $ 10,161 $ (132) $ 15,040
Exercise of stock options 53,325 1 138 -- -- 139
Net income -- -- -- 449 -- 449
----------------------- ---------- ---------- ---------- -----------
BALANCE, February 28, 2001 4,214,634 $ 42 $ 5,108 $ 10,610 $ (132) $ 15,628
Retirement of treasury stock (47,800) -- (132) -- 132 --
Exercise of stock options and gifts 31,225 -- 92 -- -- 92
Surrender and cancellation of shares (6,403) -- (33) -- -- (33)
Net income -- -- -- 1,502 -- 1,502
----------------------- ---------- ---------- ---------- -----------
BALANCE, February 28, 2002 4,191,656 $ 42 $ 5,035 $ 12,112 -- $ 17,189
Purchase of treasury stock -- -- -- -- (390) (390)
Retirement of treasury stock (5,700) -- (23) -- 23 --
Exercise of stock options and gifts 12,650 -- 37 -- -- 37
Net income -- -- -- 1,450 -- 1,450
----------------------- ---------- ---------- ---------- ----------
BALANCE, February 28, 2003 4,198,606 $ 42 $ 5,049 $ 13,562 $ (367) $ 18,286
======================= ========== ========== ========== ==========
The accompanying notes are an integral part of this statement
F-5
BIO-LOGIC SYSTEMS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED FEBRUARY 28,
2003 2002 2001
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,450 $ 1,502 $ 449
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and amortization 670 547 446
Deferred income tax provision (190) (72) (200)
(Increases) decreases in assets:
Accounts receivable 1,490 (1,015) 280
Inventories 1,066 367 (85)
Prepaid expenses 74 (165) (113)
Increases (decreases) in liabilities:
Accounts payable 91 (262) 1,038
Accrued liabilities and deferred revenue 929 606 (147)
Accrued income taxes 73 600 (361)
-------- -------- --------
Net cash flows provided by operating activities 5,653 2,108 1,307
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (111) (263) (453)
Other assets (796) (1,001) (177)
-------- -------- --------
Net cash flows used in investing activities (907) (1,264) (630)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 14 59 139
Purchase of treasury stock, net of retirement (367) -- --
Payments on long-term debt -- (137) (157)
-------- -------- --------
Net cash flows used in financing activities (353) (78) (18)
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 4,293 766 659
CASH AND CASH EQUIVALENTS - Beginning of year 6,385 5,619 4,960
-------- -------- --------
CASH AND CASH EQUIVALENTS - End of year $ 10,678 $ 6,385 $ 5,619
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid during the period for:
Interest $ 27 $ 9 $ 13
======== ======== ========
Income taxes, net of refunds $ 560 $ 614 $ 183
======== ======== ========
The accompanying notes are an integral part of these statements
F-6
BIO-LOGIC SYSTEMS CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 2003, 2002 AND 2001
1. BUSINESS
Bio-logic Systems Corp. (the "Company") develops and markets
computer-assisted medical diagnostic equipment. The Company sells
primarily to the health care industry in North America, Europe and the
Far East.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the
Company and its wholly-owned domestic subsidiaries, Neuro Diagnostics,
Inc., Bio-logic `83 Research Corp. and Bio-logic International Corp.,
and its wholly-owned foreign subsidiaries, Bio-logic Systems Corp.,
Ltd. and Bio-logic FSC International Corp. As of February 28, 2002,
Bio-logic `83 Research Corp. and Bio-logic FSC International Corp. had
been dissolved. All significant intercompany balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents - Cash equivalents include all highly liquid
investments purchased with maturities of three months or less.
Accounts Receivable - The majority of the Company's accounts receivable
are due from companies in the medical and health care industries.
Credit is extended based on evaluation of a customers' financial
condition and, generally, collateral is not required. Accounts
receivable are due within 30 days and are stated at amounts due from
customers net of an allowance for doubtful accounts. Accounts
outstanding longer than the contractual payment terms are considered
past due. The Company determines its allowance by considering a number
of factors, including the length of time trade accounts receivable are
past due and the Company's previous loss history. The Company writes
off accounts receivable when they become uncollectable, and payments
subsequently received on such receivables are credited to the allowance
for doubtful accounts.
Inventories - Inventories, consisting principally of components, parts
and supplies, are stated at the lower of cost, determined by the
first-in, first-out method, or market.
Property, Plant and Equipment - Property, plant and equipment are
stated at cost. The cost of maintenance and repairs is charged to
income as incurred. Significant renewals and betterments are
capitalized. Depreciation is provided using straight-line and
accelerated methods over the estimated useful lives of the assets.
Other Assets - Other assets consist primarily of capitalized software
costs for research and development, patent costs and the premiums paid
on split-dollar life insurance
F-7
policies. Capitalized software development costs are recorded in
accordance with Financial Accounting Standard 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,"
with costs being amortized over a five-year period. On an ongoing
basis, management reviews the valuation of other assets to determine
if there has been impairment by comparing the related assets' carrying
value to the undiscounted estimated future cash flows and/or operating
income from related operations.
The last payments made by the Company on the split-dollar life
insurance policies were in fiscal 1997.
Long-Lived Assets - The company regularly reviews long-lived assets for
impairment in accordance with SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets." No impairment was realized for the
fiscal years 2003, 2002 and 2001.
Revenue Recognition - The Company recognizes revenue when it is
realized or realizable and earned. The Company considers revenue
realized or realizable and earned when it has persuasive evidence of an
arrangement, the product has been shipped, or the services have been
provided to the customer, the sales price is fixed or determinable and
collectability is reasonably assured.
Revenue Recognition for Research and Development Contracts - Revenue
from research and development contracts is recognized as related costs
are incurred.
Advertising - Advertising costs are expensed as incurred.
Research and Development Costs - Research and development costs are
expensed as incurred.
Income Taxes - Deferred tax assets and liabilities are computed
annually for differences between financial statement basis and tax
basis of assets and liabilities using enacted tax rates for the years
in which the differences are expected to become recoverable. A
valuation allowance is established where necessary to reduce deferred
tax assets to the amount expected to be realized.
Deferred federal income taxes are not provided for the undistributed
earnings of the Company's foreign subsidiary. Undistributed foreign
earnings were $2,784,678 and $2,771,368 as of February 28, 2003 and
2002, respectively.
Use of Estimates - In preparing financial statements in conformity with
accounting principles generally accepted in the United States of
America, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-8
Fair Value of Financial Instruments - The Company's financial
instruments include cash equivalents, marketable securities, accounts
receivable, and accounts payable. The carrying value of cash
equivalents, short-term marketable securities, accounts receivable and
accounts payable approximate their fair value because of the short-term
nature of these instruments
Stock-Based Compensation - The Company maintains a stock incentive
plan. See Note 10 for additional information regarding this plan. The
Company accounts for this plan under the recognition and measurement
principles of Accounting Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. No compensation
costs are recognized for stock option grants. All options granted under
the Company's plan have an exercise price equal to or greater than the
market value of the underlying common stock on the date of the grant.
The following table illustrates the effect of net income and earnings
per share if the Company had applied the fair value recognition
provisions of Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," to stock-based compensation. The following
table also provides the amount of stock-based compensation cost
included in net income as reported.
2003 2002 2001
---- ---- ----
Net Income
As Reported $ 1,450,060 $ 1,501,703 $ 448,932
Pro Forma $ 864,860 $ 921,430 $ 113,552
Net Income Per Share
As Reported - Basic $ 0.35 $ 0.36 $ 0.11
- Diluted $ 0.34 $ 0.35 $ 0.11
Pro Forma - Basic $ 0.21 $ 0.22 $ 0.03
- Diluted $ 0.20 $ 0.21 $ 0.03
Earnings per Share - Basic earnings per share is based on the weighted
average number of shares outstanding during the year. Diluted earnings
per share is based on the combination of weighted average number of
shares outstanding and dilutive potential shares.
Comprehensive Income - SFAS No. 130 requires disclosure of the
components of and total comprehensive income in the period in which
they are recognized in the financial statements. Comprehensive income
is defined as the change in equity (net assets) of a business
enterprise arising from transactions and other events and circumstances
from non-owner sources. It includes all changes in shareholders' equity
during the reporting period except those resulting from investments by
owners and distributions to owners. The Company does not have changes
in shareholders' equity other than those resulting from investments by
and distributions to owners. The functional currency for the Company's
international operations is the U.S. dollar.
Segment Information - SFAS No. 131 requires disclosures of certain
segment information based on the way management evaluates segments for
making decisions and assessing performance. It also requires disclosure
of certain information about products and services, the geographic
areas in which the Company operates and major customers. The Company
operates in a single reportable segment: the design, development,
assembly and distribution of computerized medical electro-diagnostic
systems for use in the health care field.
New Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." The provisions of this statement are
effective for exit or disposal activities initiated after December 31,
2002. The adoption of SFAS 146 is not expected
F-9
to have a material impact on our financial position and results of
operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Other." This
interpretation addresses the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligation under
guarantees. This interpretation also clarifies the requirements related
to the recognition of a liability by a guarantor at the inception of a
guarantee for the obligations the guarantor has undertaken in issuing
that guarantee. The initial recognition and measurement provisions of
this statement shall be applied only on a prospective basis to
guarantees issued or modified after December 31, 2002 irrespective of
the guarantors fiscal year-end. The disclosure requirements are
effective for financial statements of interim or annual periods ending
after December 31, 2002. The adoption of FIN 45 did not have a material
impact on the Company's financial position and results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure an amendment of FASB
Statement No. 123". This statement provides alternative methods of
transition for an entity that voluntarily changes to the fair value
based method of accounting for stock-based employee compensation. It
also amends Accounting Principles Board ("APB") Opinion No. 28,
"Interim Financial Reporting", to require disclosure about those
effects in interim financial information. The provisions of this
statement are effective for financial statements for fiscal years
ending after December 15, 2002 and for interim periods beginning after
December 15, 2002. The adoption of SFAS 148 is not expected to have a
material impact on the Company's financial position and results of
operations.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities." This interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities. The provisions of
this interpretation are effective immediately for all variable interest
entities created after January 31, 2003; for the first fiscal year or
interim period beginning after June 15, 2003 for variable interest
entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of Fin No. 46 is not
expected to have a material impact on the Company's financial position
and results of operations.
Reclassifications - Certain reclassifications were made to the
Consolidated Statement of Earnings for fiscal 2002 to conform to the
financial statement's presentation for fiscal 2003.
F-10
3. ACCOUNTS RECEIVABLE
Receivables (in thousands) consist of the following:
2003 2002
------- -------
Trade Receivables $ 6,069 $ 7,637
Allowance for Doubtful Accounts (500) (578)
------- -------
Net Receivables $ 5,569 $ 7,059
======= =======
Changes (in thousands) in allowance for doubtful accounts are as follows:
2003 2002 2001
------ ------- -------
Beginning Balance $ 578 $ 362 $ 361
Bad Debt Expense 93 235 115
Accounts Written-off (204) (19) (114)
Recoveries 33 -- --
------ ------- -------
Ending Balance $ 500 $ 578 $ 362
====== ======= =======
4. INVENTORIES
Inventories (in thousands) consist of the following:
2003 2002
------- -------
Raw Materials $ 1,692 $ 2,627
Work In process 1,547 1,923
Finished Goods 384 320
------- -------
Total Gross Inventory 3,623 4,870
Less Reserves 562 743
------- -------
Net Inventory $ 3,061 $ 4,127
======= =======
During fiscal 2002, the Company recorded a one-time provision for
inventory obsolescence of approximately $1 million related to the
technological obsolescence of certain inventory, based on the Company's
introduction of new models into the marketplace.
F-11
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (in thousands) is comprised of the
following at February 28, 2003 and 2002:
Estimated
Useful Lives
2003 2002 (in Years)
-------- ------- ------------
Land $ 676 $ 676
Building 1,118 1,118 40
Machinery and equipment 1,895 1,868 5
Booths and exhibits 174 174 5
Office furniture and computers 2,171 2,087 7
Transportation equipment 209 209 3
Building improvements 193 193 15
-------- -------
Total 6,436 6,325
Less accumulated depreciation 4,361 3,970
-------- -------
Property, plant and equipment - net $ 2,075 $ 2,355
-------- -------
Depreciation expense (in thousands) amounted to $391, $435 and $347 for
2003, 2002, and 2001, respectively.
6. CAPITALIZED RESEARCH AND DEVELOPMENT COSTS
Capitalized research and development consists of costs incurred from
when the product is determined to be technologically feasible to the
time the product is available for general release to customers. These
costs consist of software development expenditures from both internal
resources as well as contractors, and include the creation of
engineering prototypes necessary in the final design of new products.
Capitalized research and development costs are amortized over a 5-year
period, which approximates the expected life of the product.
Unamortized research and development costs (in thousands) amounted to
$1,323, $910 and $78 as of February 28, 2003, 2002, and 2001
respectively. Amortization expense (in thousands) amounted to $172, $78
and $117 in 2003, 2002, and 2001 respectively.
F-12
7. OPERATING LEASES
The Company leases office and assembly facilities under long-term
operating leases expiring from 2003 to 2007. Total rental expense (in
thousands) amounted to $113, $119,and $100, for 2003, 2002 and 2001,
respectively.
Future minimum annual rental commitments (in thousands) under these
leases for the years ending after February 28, 2003 are as follows:
2004 $ 106
2005 80
2006 77
2007 77
8. LONG-TERM DEBT
Borrowings of $1.6 million under the Industrial Development Bond,
Series 1985 (the "Bond") were due in varying monthly installments
through December 2001. The interest rate on the Bond was 80 percent of
the prime rate at the end of each fiscal year. Under the terms of the
Bond, the Company was to maintain average available non-interest
bearing deposits in amounts not less than 10% of the unpaid balance of
the Bond at the bank that purchased the Bond. The Company was also
required to maintain certain minimum working capital and net worth
ratios. The Bond agreement restricted the payment or declaration of
dividends (other than dividends payable in stock) without the prior
consent of the holder of the Bond. In fiscal 2002, annual maturities of
the Bond was $136,506. The bond was paid in full as of February 28,
2002.
The Company has obtained a commitment, renewed annually, for an
unsecured $1,000,000 bank line of credit with interest at the bank's
prime rate. No borrowings have been made under the line of credit as of
either February 28, 2003 or 2002.
F-13
9. INCOME TAXES
The provision for income taxes (in thousands) is as follows:
2003 2002 2001
------ ------ ------
Current:
Federal $ 677 $ 898 $ (202)
State 130 158 (62)
Foreign 39 (17) 86
------ ------ ------
Total current expense/(benefit) 846 1,039 (178)
Deferred (benefit) (190) (72) (200)
------ ------ ------
Total income tax provision/(benefit) $ 656 $ 967 $ (378)
------ ------ ------
The provision for income taxes differs from the U.S. Federal statutory rate
as follows:
2003 2002 2001
---- ------ ------
U.S. Federal statutory rate 34.0% 34.0% 34.0%
Difference in foreign tax rate -- 1.6 (257.2)
Permanent differences:
Meals and entertainment 1.3 1.1 --
Foreign operations (3.6) (4.2) (218.0)
Other permanent differences 0.6 -- --
State income taxes,
net of federal income tax benefit 4.0 4.2 (87.3)
Deferred taxes
State (1.1) -- --
Foreign (4.0) -- --
Other (0.2) 2.5 (3.6)
------ ------ ------
Effective income tax (benefit) rate 31.0% 39.2% (532.1)%
====== ====== ======
F-14
Deferred tax assets and liabilities (in thousands) as of February 28, 2003
and 2002 and consist of the following:
2003 2002
------ ------
Deferred tax assets:
Accounts receivable $ 223 $ 224
Inventory 244 312
Accrued expenses 399 418
Warranty 500 164
------ ------
Total deferred tax assets 1,366 1,118
Deferred tax liabilities:
Depreciation & amortization 166 255
R&D 514 367
------ ------
Total deferred tax liabilities 680 622
------ ------
Net deferred tax asset $ 686 $ 496
====== ======
The net deferred tax asset is classified in the balance sheet as follows:
2003 2002
------ ------
Deferred tax current asset $1,366 $1,118
Deferred tax long-term liability 680 622
------ ------
Net deferred tax asset $ 686 $ 496
====== ======
10. STOCK OPTIONS
The Company's 1994 Incentive Stock Option Plan (the "Plan") permits the
granting of both incentive stock options and nonqualified options for
option periods not to exceed ten years. The Plan provides for the
granting of up to 1,600,000 shares of incentive stock options at a per
share price not less than 100 percent of the fair market value on the
date determined by the Board of Directors or the Stock Option Committee
on the date of grant, but not less than par value. Currently,
outstanding options become exercisable one to five years from the grant
date and expire five to ten years after the grant date.
F-15
The Company has adopted the disclosure provisions only of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not recognize compensation
expense for its stock-based compensation plans when options are granted at fair
value at the date of grant. If the Company had elected to recognize compensation
expense based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS No. 123, the Company's net
income and earnings per share would be reduced to the pro forma amounts
indicated below:
2003 2002 2001
---- ---- ----
Net Income
As Reported $1,450,060 $1,501,703 $448,932
Pro Forma $ 864,860 $ 921,430 $113,552
Net Income Per Share
As Reported - Basic $ 0.35 $ 0.36 $ 0.11
- Diluted $ 0.34 $ 0.35 $ 0.11
Pro Forma - Basic $ 0.21 $ 0.22 $ 0.03
- Diluted $ 0.20 $ 0.21 $ 0.03
The fair values of these options were estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended February 28,
2003 2002 2001
---- ---- ----
Expected dividend yield - - -
Expected stock price volatility 60.1% 84.0% 79.0%
Risk free interest rate 3.5% 4.5% 5.9%
Expected life of options (years) 5.7 5.0 10.0
F-16
The following table summarizes information about stock options weighted average
exercise price and fair value:
2003 2002 2001
---- ---- ----
Where exercise price exceeds
market price:
Exercise Price 4.83 4.95 5.64
Fair Value 2.27 3.05 4.76
Where exercise price equals
market price:
Exercise Price 3.60 3.78 4.28
Fair Value 2.06 2.60 4.00
Where exercise price is below
market price:
Exercise Price - 4.87 -
Fair Value - 3.55 -
The following tables summarize information concerning outstanding and
exercisable stock options as of February 28, 2003:
Weighted Average
Remaining
Range of Number Weighted Average Contractual Life
Exercise Price Outstanding Exercise Price (Years)
- -------------- ----------- -------------- ----------------
$1.50-$2.50 31,625 $2.32 3.58
$2.51-$4.50 611,350 $3.44 7.68
$4.51-$6.50 239,250 $4.91 5.68
$6.51-$8.00 106,500 $7.13 6.59
-----------
988,725
===========
Range of Number Weighted Average
Exercise Price Exercisable Exercise Price
----------- --------------
$1.50-$2.50 28,875 $2.30
$2.51-$4.50 189,775 $3.25
$4.51-$6.50 76,188 $4.91
$6.51-$8.00 79,750 $7.14
-----------
374,588
===========
F-17
Additional information with respect to the Company's Plan at February
28, 2003, 2002, and 2001 is as follows:
FISCAL 2003
-----------
Weighted Average
Shares Exercise Price
----------- --------------
Shares Under Option:
Outstanding at beginning of year 807,175 $ 4.21
Granted 254,100 $ 3.92
Exercised (12,250) $ 2.91
Forfeited (60,300) $ 4.42
-----------
Outstanding at end of year 988,725 $ 4.16
===========
Options exercisable at year-end 374,588 $ 4.32
===========
Weighted average fair value for
stock options granted during 2003 $2.14
FISCAL 2002
-----------
Weighted Average
Shares Exercise Price
----------- --------------
Shares Under Option:
Outstanding at beginning of year 434,175 $ 4.50
Granted 455,150 $ 3.89
Exercised (30,725) $ 2.92
Forfeited (51,425) $ 3.58
-----------
Outstanding at end of year 807,175 $ 4.21
===========
Options exercisable at year-end 225,702 $ 3.97
===========
Weighted average fair value for
stock options granted during 2002 $2.57
F-18
FISCAL 2001
-----------
Weighted Average
Shares Exercise Price
----------- --------------
Shares Under Option:
Outstanding at beginning of year 442,075 $4.14
Granted 65,000 $4.38
Exercised (51,025) $2.06
Forfeited (21,875) $2.70
-----------
Outstanding at end of year 434,175 $4.50
===========
Options exercisable at year-end 182,883 $3.18
===========
Weighted average fair value for
stock options granted during 2001 $3.67
11. EXPORT SALES
Net foreign export sales (in thousands) are summarized as
follows:
2003 2002 2001
------ ------ ------
Europe $1,541 $ 812 $ 859
Far East 1,718 2,335 2,469
Other 1,445 848 1,498
------ ------ ------
Total $4,704 $3,995 $4,826
====== ====== ======
No significant sales were made by foreign subsidiaries in 2003, 2002 and
2001.
12. EMPLOYEE BENEFIT PLAN
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code, which allows employees to defer a portion of their income on
a pretax basis through contributions to the plan. The Company at varying
rates matches employee contributions. The Company may also make
discretionary contributions to the plan. The Company made total
contributions (in thousands) of $111, $112 and $159 in 2003, 2002, and
2001 respectively.
F-19
13. CONTINGENCIES
From time to time third parties have made claims that Company products
infringe their third-party proprietary rights. In the event of a successful
claim of infringement against us, we may be required to pay substantial
damages, stop using our technologies and methods, develop non-infringing
products or methods and/or obtain one or more licenses from third parties.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below is a summary of the Company's unaudited quarterly results
for each quarter during fiscal 2003 and 2002. It is management's opinion
that these results have been prepared on the same basis as the audited
financial statements contained elsewhere herein and include all
adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of the information for the periods when read in
conjunction with the financial statements and notes thereto.
Fiscal 2003 by Quarter
---------------------------------------
First Second Third Fourth
----- ------ ----- ------
(In thousands except per share amounts)
---------------------------------------
Net Sales $ 7,232 $ 7,174 $ 7,559 $ 7,300
Gross profit 4,926 4,904 5,010 4,829
Operating Income 612 189 902 297
Net income 388 136 580 347
Basic earnings per share $ 0.09 $ 0.03 $ 0.14 $ 0.08
Diluted earnings per share $ 0.09 $ 0.03 $ 0.14 $ 0.08
Fiscal 2002 by Quarter
---------------------------------------
First Second Third Fourth
----- ------ ----- ------
(In thousands except per share amounts)
---------------------------------------
Net Sales $ 8,714 $ 7,192 $ 6,333 $ 7,618
Gross profit 5,274 4,626 4,277 4,750
Operating Income 885 557 617 292
Net income 529 376 400 196
Basic earnings per share $ 0.13 $ 0.09 $ 0.10 $ 0.05
Diluted earnings per share $ 0.12 $ 0.09 $ 0.09 $ 0.04
F-20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIO-LOGIC SYSTEMS CORP.
Date: May 29, 2003
By: /s/ Gabriel Raviv
------------------------------------
Gabriel Raviv, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
/s/ Gabriel Raviv Chairman, Chief Executive May 29, 2003
- ----------------------------------- Officer, Director (Principal
Gabriel Raviv Executive Officer)
/s/ Roderick G. Johnson President, Chief Operating May 29, 2003
- ------------------------------------ Officer, Director
Roderick G. Johnson
/s/ Michael J. Hanley Corporate Controller May 29, 2003
- ------------------------------------ (Principal Financial Officer)
Michael J. Hanley
/s/ Charles Z. Weingarten Director May 29, 2003
- ------------------------------------
Charles Z. Weingarten, M.D.
/s/ Gil Raviv Director May 29, 2003
- ------------------------------------
Gil Raviv
/s/ Albert Milstein Director May 29, 2003
- ------------------------------------
Albert Milstein
/s/ Craig W. Moore Director May 29, 2003
- ------------------------------------
Craig W. Moore
/s/ Lawrence D. Damron Director May 29, 2003
- ------------------------------------
Lawrence D. Damron
Certifications
I, Gabriel Raviv, certify that:
1. I have reviewed this annual report on Form 10-K of Bio-logic Systems Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 29, 2003
/s/ Gabriel Raviv
- -------------------------------
Gabriel Raviv
Chief Executive Officer
Certifications
I, Michael J. Hanley, certify that:
1. I have reviewed this annual report on Form 10-K of Bio-logic Systems Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 29, 2003
/s/ Michael J. Hanley
- -----------------------------------
Michael J. Hanley
Principal Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Certificate of Incorporation, Certificate of Amendment to
Certificate of Incorporation, Agreement of Merger and Certificate
of Merger and By-Laws (1)
3.2 Certificate of Amendment to Certificate of Incorporation (7)
10.1 Lease between the Company and Harris Trust & Savings Bank dated
August 9, 1983 (2)
10.2 Technology License Agreement between the Company and Neurographic
Technologies dated August 13, 1984 (3)
10.3 Real Estate Sale Contract between the Company and First National
Bank of Lake Forest, as Trustee, dated December 23, 1985 (4)
10.4 Loan Agreement between the Company and Village of Mundelein,
Illinois dated as of December 1, 1985 (4)
10.5 Mortgage and Security Agreement between the Company and Village of
Mundelein, Illinois dated December 1, 1985 (4)
10.6 Bond Purchase Agreement between the Company and First American
Bank of Dundee dated December 1, 1985 (4)
10.7 Agreement among Gabriel Raviv, Gil Raviv, Charles Z. Weingarten
and the Company (5)
10.8 Employment Agreement between the Company and Gabriel Raviv (5)
10.9 Employment Agreement between the Company and Gil Raviv (5)
10.10 Form of Export Property Sale, Commission and Lease Agreement
between the Company and Bio-logic International Corporation (6)
10.11 Agreement and General Release between the Company and Gil Raviv
(8)
10.12 Letter dated May 2, 1994 from First American Bank to the Company
(9)
10.13 Letter of Intent dated June 30, 1994 by and among the Company,
Luther Medical Products, Inc. and Neuro Diagnostics, Inc. (10)
10.14 Asset Purchase Agreement dated as of July 1, 1994 by and among the
Company, NDI Acquisition Corp., Luther Medical Products, Inc. and
Neuro Diagnostics, Inc. (11)
10.15 Employment Agreement between the Company and Roderick G. Johnson
(12)
21. Subsidiaries of the Company
23.1 Consent of Independent Auditors
99.1 Certification of CEO & CFO
- ---------------------------------
(1) Incorporated by reference from the Company's Registration
Statement on Form S-18 filed on August 7, 1981 (File No.
2-73587-C).
(2) Incorporated by reference from the Company's Report on Form 10-Q
for the quarter ended August 31, 1983.
(3) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended February 28, 1985.
(4) Incorporated by reference from the Company's Report on Form 10-Q
for the quarter ended November 30, 1985.
(5) Incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 33-5471).
(6) Incorporated by reference from the Company's Report on Form 10-Q
for the quarter ended May 31, 1986.
(7) Incorporated by reference from the Company's Annual Report on Form
10-K for the Fiscal Year ended February 28, 1987.
(8) Incorporated by reference from the Company's Annual Report on Form
10-K for the Fiscal Year ended February 28, 1993.
(9) Incorporated by reference from the Company's Annual Report on Form
10-K for the Fiscal Year ended February 28, 1994.
(10) Incorporated by reference from the Company's Report on Form 10-Q
for the quarter ended May 31, 1994.
(11) Incorporated by reference from the Company's Report on Form 10-Q
for the quarter ended August 31, 1994.
(12) Incorporated by reference from the Company's Report on Form 10-Q
for the quarter ended August 31, 1999.