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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly period ended May 31, 2003

For the transition period from              to             

Commission File No. 0-12240

                        BIO-LOGIC SYSTEMS CORP.                        

(Exact Name of Registrant as Specified in its Charter)

Registrant’s Telephone Number, Including Area Code (847-949-5200)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report):         not applicable

Indicate by check ü 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   ü             NO       

Indicate by check ü whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES                   NO   ü 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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TABLE OF CONTENTS

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Part 1.    Financial Information

Item 1.    Financial Statements

Bio-logic Systems Corp.

Condensed Consolidated Balance Sheets

Unaudited

In Thousands

The accompanying notes are an integral part of these statements.

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Bio-logic Systems Corp.

Condensed Consolidated Statement of Operations and Retained Earnings

Unaudited

In Thousands, Except Per Share Data

The accompanying notes are an integral part of these statements.

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Condensed Consolidated Statement of Cash Flows

Unaudited

In Thousands

The accompanying notes are an integral part of these statements.

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Notes to Condensed Consolidated Financial Statements

Consolidation – The consolidated financial statements include the Company and its wholly-owned domestic subsidiaries, Neuro Diagnostics, Inc., and Bio-logic International Corp., and its wholly-owned foreign subsidiary, Bio-logic Systems Corp., Ltd. 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 customer’s 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 determined 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 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 quarters ended May 31, 2003 and 2002.

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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 $2,622,455 and $2,784,678 as of May 31 and February 28, 2003, 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.

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. 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:

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Earnings Per Share – Basic earnings per share is based on the weighted average outstanding number of shares 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 did not 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

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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 guarantor’s 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 the interim disclosure provisions of SFAS 148 did not 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 did not have a material impact on the Company’s financial position and results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”), which improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150, which is effective for interim periods beginning after June 15, 2003, requires that those instruments be classified as liabilities in statements of financial position. The Company is currently evaluating the effect of SFAS 150 on the balance sheet, results of operations, and cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Prospective investors are cautioned that the statements in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 the Company’s financial statements and accompanying notes. Actual results could differ materially

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from those estimates. The items in the Company’s financial statements requiring significant estimates and assumptions 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.

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.

Dollar amounts in the following discussion are in thousands except for per share amounts and where noted.

Liquidity and Capital Resources

As of May 31, 2003, the Company had working capital of $15,231. Total cash and cash equivalents were $9,841 and accounts receivable net of reserves was $5,844.

Net cash utilized by operating activities during the first quarter of fiscal 2004 was $811, due primarily to the Company’s satisfaction of several of its financial obligations. The $275 increase in net accounts receivable at May 31 from February 28, 2003 levels was mainly offset by continued improvement in the Company’s inventory position over the same three month period, primarily due to better management of raw material and service stock levels.

Net cash utilized in investing activities during the first quarter of fiscal 2004 was $35, primarily the result of capital additions.

Net cash provided by financing activities during the first quarter of fiscal 2004 was $9, related to the exercise of stock options. Pursuant to the Company’s stock repurchase program initiated in November, 2002, the Company purchased

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80,700 shares of its common stock at an aggregate purchase price of $390, of which 5,700 shares were retired as of May 31, 2003.

The Company has no interest bearing debt, and believes its liquidity and capital requirements for the foreseeable future will be satisfied by internally generated funds. To the extent the Company’s capital and liquidity requirements cannot be 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.

Results of Operations

The following is a discussion of the Company’s results of operations:

Net sales for the three-month period ended May 31, 2003 (the “fiscal 2004 first quarter”) decreased by approximately 13% to $6,319 from $7,232 for the three-month period ended May 31, 2002 (the “fiscal 2003 first quarter”). Domestic sales (including Canada) for the fiscal 2004 first quarter, representing 82% of net sales for such period, decreased by 15% to $5,202 compared to $6,143 for the fiscal 2003 first quarter. The decrease was primarily due to shortfalls in the Company’s neurology systems and supply sales. Hearing system sales for the fiscal 2004 first quarter were essentially unchanged from the fiscal 2003 first quarter. However, hearing supply sales continue to show steady growth; the Company experienced a 21% increase in hearing supply sales in the fiscal 2004 first quarter compared to the fiscal 2003 first quarter. Foreign sales increased approximately 3% to $1,117 for the fiscal 2004 first quarter from $1,088 in the fiscal 2003 first quarter. Foreign sales represented 18% and 15% of the Company’s net sales for the fiscal 2004 and 2003 first quarters, respectively.

Cost of sales decreased to $1,942 during the fiscal 2004 first quarter compared to $2,306 for the fiscal 2003 first quarter, due primarily to the reduction in sales volume between the two quarters. Cost of sales as a percentage of net sales improved in the fiscal 2004 first quarter to 30.7% of net sales, compared to 31.8% for the fiscal 2003 first quarter, reflective of favorable shifts in product mix.

Selling, general and administrative (SG&A) expenses decreased $483, or 15%, to $2,854 for the fiscal 2004 first quarter compared to $3,337 for the fiscal 2003 first quarter, due to reduced selling expenses and to an overall reduction in other operating expenses. SG&A as a percent of sales also decreased to 45% for the fiscal 2004 first quarter from 46% for the fiscal 2003 first quarter.

Research and development (R&D) costs increased 17% to $1,144 or 18% of net sales in the fiscal 2004 first quarter, compared to $977 or 14% of net sales in the fiscal 2003 first quarter. Although the Company’s gross investment in R&D activities remained essentially unchanged between the two quarters, significantly all of the change in expense was associated with a reduction in the amount of software development costs eligible for capitalization. The Company capitalized software development costs, net of amortization, of $19 in the fiscal 2004 first quarter compared to $192 of net capitalized costs in the fiscal 2003 first quarter. The fact that software amortization in fiscal 2003 did not begin until the second fiscal quarter also contributed to the difference in net capitalized costs between these two fiscal first quarters.

Operating income was $379 for the fiscal 2004 first quarter compared to $612 for the fiscal 2003 first quarter. The decrease in the fiscal 2004 first quarter is attributable to the decrease in sales volume and reduced net capitalizable software development costs, offset by reduced selling expenses and other administrative expenses.

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Net interest income for the fiscal 2004 first quarter decreased to $16 from $37 for the fiscal 2003 first quarter, primarily driven by lower interest rates on cash and marketable securities. This decrease was partly offset by increases in cash balances due to better asset management.

Income tax expense was $123 for the fiscal 2004 first quarter compared to $259 for the fiscal 2003 third quarter. The Company’s income tax rate reflects the combination of federal and state effective tax rates, adjusted for the favorable impact of deferred tax assets.

Net income for the fiscal 2004 first quarter was $274 or $0.06 per diluted share, compared to $388 or $0.09 per diluted share for the fiscal 2003 first quarter. The Company attributes the decrease in the fiscal 2004 first quarter to lower sales volume and lower capitalized software development costs, offset by improvements in selling and administrative expenses and related income tax provisions.

Item 3. 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 impacted 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; lack of acceptance of new technology by clinicians and other healthcare professionals; and the speed and breadth of 510(k) clearances issued by the FDA.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures, 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 disclosure controls and procedures, and as of March 31, 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 subsequent to March 31, 2003 that would significantly affect these controls and procedures.

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.

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(b) Reports on Form 8-K

During the three months ended May 31, 2003, the Registrant filed an 8-K Report on May 16, 2003 relating to its press release of annual results for the fiscal year ended February 28, 2003.

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Signatures

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Certifications

I, Gabriel Raviv, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bio-logic Systems Corp.;

2. Based on my knowledge, this quarterly 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 quarterly 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 quarterly 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 we have:

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):

6. The registrant’s other certifying officers and I have indicated in this quarterly 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.

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Certifications

I, Michael J. Hanley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bio-logic Systems Corp.;

2. Based on my knowledge, this quarterly 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 quarterly 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 quarterly 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 we have:

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):

6. The registrant’s other certifying officers and I have indicated in this quarterly 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.

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