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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
September 30, 1996
For the fiscal year ended_____________________________________
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period
from______________________________to__________________________________
Commission File 1-10285
Number_________________________________________________________________
BIOMAGNETIC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-2647755
(I.R.S. Employer Identification Number)
9727 Pacific Heights Boulevard, San Diego, California 92121-3719
(Address of principal executive offices) (zip code)
(619) 453-6300
Registrant's telephone number, including area code____________________
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
NO PAR VALUE PER SHARE
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [x] Yes [ ] No
The aggregate market value of the voting stock (which consists solely of
shares of Common Stock) held by non-affiliates of the registrant as of
December 31, 1996 was $23,845,912, based on the closing price on that date on
the Nasdaq National Market.
The number of shares outstanding of the registrant's Common Stock, no par
value, as of December 31, 1996 was 47,691,824 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of Registrant's Proxy Statement and Notice of Annual
Meeting to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, in connection with the Annual
Meeting of Shareholders to be held March 18, 1997 are incorporated by
reference into Part III of this report.
2. Registrant's Annual Report of its Employee Stock Purchase Plan for the
fiscal year ended September 30, 1996 is included as Exhibit 99.1.
3. Items contained in the above-referenced documents which are not
specifically incorporated by reference are not included in this report.
BIOMAGNETIC TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
INDEX
PAGE
PART I
Item 1. Business 1
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters 20
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 28
PART III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 30
Signatures 34
PART I
ITEM 1. BUSINESS.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences are discussed in greater detail in "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this report. The Company does not undertake to update the results discussed
herein as a result of changes in risks or operating results.
In December 1996, the Company reported a restructuring of its operations due
to lower short-term market projections for its MSI systems. As part of the
restructuring, D. Scott Buchanan, Ph.D., assumed the responsibilities of
President and COO, reporting to Chairman and CEO President James Schumacher.
The restructuring resulted in an immediate reduction of 16 employees which is
expected to be followed by additional reductions of approximately 28 persons
after completion of the final development phases of its Magnes 2500 WH system
over the next several months. As a result of the restructuring, the Company
also expects to reduce its program costs in non-personnel related areas.
In fiscal 1995, BTi announced development of the Magnes -Registered
Trademark-2500 WH, an expansion of the existing Magnes I and Magnes II
systems product line. Development of the Magnes 2500 WH hardware was
substantially completed in fiscal year 1996. The Magnes 2500 WH allows
simultaneous examination of the entire brain and is designed for evaluating
ambulatory or critically ill patients in seated or fully reclined position.
The Company commenced shipments of its Magnes 2500 WH prior to the end of
fiscal year 1996, however, there were no final acceptances received from the
customers. Furthermore, although the Company received provisional acceptance
from two customers, no final acceptances were received in the first quarter
of fiscal year 1997 which ended December 31, 1996. The delay in receipt of
customer final acceptances is primarily due to a pending hardware upgrade,
the need for which was not discovered to be necessary prior to installing the
systems at customer sites, and additional software development required to
meet customer contractual requirements.
COMPANY OVERVIEW
Biomagnetic Technologies, Inc. (the "Company" or "BTi") was established in
1970 to produce specialized instruments for ultra-sensitive magnetic field
and low temperature measurements. These products were supplied to physicists
for basic research. The Company has been developing its core magnetic
sensing technologies since the early 1970s and incorporated those
technologies into its magnetic source imaging ("MSI") system, an instrument
designed to assist in the noninvasive diagnosis of a broad range of medical
disorders.
The MSI system developed by the Company uses advanced superconducting
technology to measure and locate the source of magnetic fields, generated by
the human body, which are one billion times smaller than the earth's
magnetic field. While traditional medical imaging methods provide anatomical
detail, the measurement of the body's magnetic fields by MSI provides
information about normal and abnormal function of the brain, heart and other
organs. The Company is focusing the development of its
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technology on large potential commercial market applications such as mapping
of functional cortex at risk during surgery for tumors and other lesions, the
diagnosis and planning for surgical treatment of epilepsy and is continuing
to investigate the potential applications of its technology to problems of
the heart.
MSI differs significantly from other existing functional and anatomical
imaging methods. The Company believes MSI is the only method that can
precisely capture and locate rapid changes in organ function without the
injection of radioactive isotopes or costly invasive procedures such as
surgical placement of electrodes into the body. Other functional imaging
methods such as electroencephalography ("EEG") or positron emission
tomography ("PET") either require invasive procedures to provide the needed
accuracy of locating functional areas or respond too slowly to follow
transient physiological events. Anatomy oriented diagnostic methods such as
computed tomography ("CT") and magnetic resonance imaging ("MRI") produce
anatomical images showing cross-sectional slices of various parts of the
body. The Company's MSI system, when used in conjunction with anatomy
oriented diagnostic methods, provides the clinician with an image that links
anatomy with function to give a more complete picture of the patient's
condition without the use of radioactive isotopes or costly invasive
procedures.
The Company's MSI system is currently being used by physicians for planning
the surgical removal of brain tumors and vascular malformations to reduce the
risk of neurological injury resulting in paralysis and expensive
rehabilitation therapy. The Company's MSI system is also being used to
assist physicians specializing in epilepsy to evaluate whether the surgical
treatment of drug-resistant epileptic seizures is appropriate by helping to
locate brain tissue that triggers such seizures. Other potential
neurological applications for the Company's MSI system include certain
stroke, trauma, psychiatric and mental disorders. The Company's MSI system
has also been used to investigate certain cardiac applications including the
assessment of risk for lethal arrhythmias and the location of the tissue
responsible for the arrhythmias as a guide for subsequent therapy. In
addition, the Company is focusing its internal research efforts on developing
and expanding its proprietary technology into more cost-effective products.
Several leading medical centers worldwide have performed more than 5,000
clinical examinations on patients and control subjects with the Company's MSI
systems for the purpose of developing the clinical applications, either
independently or in collaboration with BTi. Since the first third-party
reimbursement was received in September 1993, 75 insurance companies and
other health care providers have approved reimbursement for certain MSI
procedures performed with the Company's Magnes MSI system. Magnes systems
are installed in 16 medical and research institutions worldwide as of
September 30, 1996. These sites include the Scripps Clinic & Research
Foundation in La Jolla, California ("Scripps"), New York University Medical
Center ("NYU"), the University of Tokyo ("UT"), the University of California,
San Francisco Medical Center ("UCSF"), Karolinska Hospital in Sweden,
Institute of Medicine in Julich, Germany, and the University of Magdeburg in
Magdeburg, Germany. In addition, two Magnes 2500 WH systems were in the
process of installation on September 30, 1996 at the Max Planck Institute in
Leipzig, Germany and the Communications Research Laboratory in Tokyo, Japan.
Patients have been referred to collaborating domestic sites from more than 50
leading medical institutions throughout the United States.
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According to statistics issued by the National Institutes of Health ("NIH"),
the annual cost associated with neurological and mental illness disorders in
the U.S. is more than $285 billion. This amount includes the direct cost of
health care and, in the case of most neurological disorders, the indirect
cost of income lost due to illness. The Company currently is directing its
sales efforts toward the more than 150 medical centers in the U.S., Asia and
Europe where clinical applications for MSI may be developed. The potential
commercial clinical market in the U.S. consists of more than 1,200 large
hospitals and independent imaging centers.
CURRENT MEDICAL IMAGING TECHNOLOGY
Most debilitating or life threatening disorders of the body, such as stroke,
seizures, dementia, movement disorders, mental illness, cardiac arrhythmias
and gastrointestinal disorders, involve a disruption of function. Because
electrical activity plays a critical role in many functions of the body, such
activity is frequently monitored as a means to diagnose functional disorders.
The electrocardiogram ("ECG") and EEG are recordings of electrical activity
of the heart and brain used to obtain information about heart and brain
function, respectively. Similarly, electrical activity is often recorded to
diagnose functional disorders of skeletal muscles and peripheral nerves.
In the diagnosis and treatment of certain disorders, knowledge of the
specific location of the malfunctioning tissue is a key factor. Numerous
medical imaging technologies have been developed in response to this need.
These include imaging technologies oriented toward organ structure and
anatomy, such as CT and MRI, and imaging technologies oriented toward
function, such as PET, single-photon emission computed tomography ("SPECT")
and functional MRI ("fMRI")..
CT and MRI produce anatomical images showing cross-sectional slices of
various parts of the body. These anatomical imaging methods help in locating
structural malformations and assessing physical organ damage. Their
applications are limited, however, in that many functional disorders have no
corresponding structural abnormality.
Other imaging technologies have been developed specifically to show the
location of certain functional areas. PET and SPECT produce cross-sectional
pictures showing the location of certain radioactively labeled substances
that have been injected into the body. Relative levels of metabolic activity
and regional blood flow, two measures of cell function, are determined by
measuring the amount of radiation emitted by different tissues.
An adaptation of conventional MRI known as fMRI is used to create images
related to localized changes in blood flow in the brain. While fMRI has the
advantage compared with PET and SPECT in that it does not involve injecting
radioactive substances into the body, fMRI, PET and SPECT all have a
relatively long response time that prevents observation of rapidly changing
activities. Much of the valuable diagnostic information observed in brain
and cardiac electrical activity occurs in intervals much less than one
second, typically tens of milliseconds, and is spontaneous in nature.
Because the physiological response time of PET, SPECT and fMRI is several
seconds at best, critical information about the sequence of activity, which
is essential for understanding disorders such as epilepsy and cardiac
arrhythmias, is unavailable from these technologies.
3
Conventional ECG and EEG have a faster response time than fMRI, PET and
SPECT, and provide critical information about the sequence of electrical
activity but, in many cases, lack the ability to locate the source of such
activity with sufficient accuracy to guide therapy. Locational accuracy is
lost because the electrical activity is distorted as it passes through body
tissues between the electrical source in the brain or heart and the
electrodes on the body's surface. For this reason, electrodes are commonly
inserted into the body in an attempt to obtain accurate localization of
functional abnormalities in the brain or heart prior to ablation procedures.
This procedure is invasive, very costly and involves risk and discomfort.
MSI TECHNOLOGY
MSI is based on a measurement of the magnetic fields produced by
intracellular electrical activity which, as discussed above, is associated
with many of the body's most critical functions. Unlike electrical activity
generated by the body, the corresponding magnetic fields pass through the
body without distortion and without obscuring the location of the source. By
measuring the magnetic fields and analyzing them to extract locational
information, MSI can noninvasively provide information about the location of
the origin of normal and abnormal electrical activity with a combination of
millimeter spatial resolution and millisecond time response that has
otherwise been available only from highly invasive procedures. The Company
believes that MSI has a unique capability to obtain such information without
introducing radioactive or other tracer substances into the body or use of
other invasive procedures.
THE MAGNES MSI SYSTEM
The Company's current MSI systems, the single sensor Magnes I, the dual
sensor Magnes II and the Magnes 2500 WH MSI system (Magnes 2500 WH), are
integrated systems capable of measuring, analyzing and locating magnetic
fields associated with the body's electrical activity in millisecond time
frames. The Magnes II was announced in fiscal 1994 and is an enhancement of
the Company's original Magnes I MSI system. Magnes II employs two sensors,
each containing an array of 37 magnetic detectors (for a total of 74
detectors, each consisting of a superconducting detection coil and an
amplifier called a superconducting quantum interference device ("SQUID")).
Magnes I and Magnes II systems have been used in both neurological and
cardiac applications and incorporate a number of unique technologies which
are discussed later under the caption "Proprietary Core Technologies".
The Magnes 2500 WH employs a total of 148 magnetic detectors incorporated
into a sensor with a helmet shaped recess that is placed over the patient's
head and is limited to neurological applications. This design allows
simultaneous examination of the entire brain and is designed for evaluating
both ambulatory and critically ill patients in a seated or fully reclined
position.
The Company has received 510(k) clearance from the United States Food and
Drug Administration (the "FDA") of the Magnes I and the Magnes II for
applications relating to the brain. The Magnes I system received approval
from the Japanese Ministry of Health and Welfare ("JMHW") in 1992 for sale in
Japan as a clinical device and the dual sensor Magnes II system received
similar JMHW approval in 1995. The Company filed a 510(k) premarket
notification for the Magnes 2500 WH in June, 1996.
4
MEDICAL APPLICATIONS
The Company believes its Magnes systems have significant commercial potential
in the diagnosis and treatment of neurological disorders. However, as a new
medical technology, the Magnes system faces several challenges to commercial
success. Medical applications for the Magnes system must be developed that
result in better patient care than existing technologies, and regulatory
approval, which has been applied for, must still be obtained to sell the
Magnes 2500 WH system as a clinical device. The Company has regulatory
approval to sell its Magnes I and Magnes II systems as clinical devices. In
general, reimbursement for MSI procedures must be obtained from third party
payors and the Magnes system must provide an economic benefit to the health
care provider.
Currently, the Company believes there are two medically accepted applications
for the Magnes, presurgical functional mapping and assistance in the
diagnosis and treatment planning for epilepsy. Reimbursement from a number
of insurance companies has been obtained for both of these procedures,
however, the expected volume of such procedures at most hospital sites under
current standard treatment practices does not currently provide sufficient
operating revenue to offset the investment and operating cost of a Magnes
system. The Company is currently primarily focused on the development of MSI
applications for functional mapping and for epilepsy and is also
investigating potential applications in cardiology. The Company is also
pursuing programs to increase awareness of MSI technology to its target
market of neurosurgeons, neurocardiologists, neurologists and epileptologists.
The Company's Magnes I and Magnes II systems have, to date, been cleared by
the FDA for applications relating to the brain and filed a 510(k) premarket
notification for the Magnes 2500 WH system in June 1996. The Company
believes the systems are appropriate for presurgical functional mapping and
epilepsy surgery, significant applications development and clinical testing
must be conducted before these systems can be deemed appropriate for the
other applications described below. Notwithstanding the size of the potential
markets, there is no assurance the Company's systems will be accepted for
commercial use in any of the areas mentioned.
NEUROLOGICAL APPLICATIONS
Research at leading medical centers has demonstrated that the Company's MSI
system can be used by physicians to noninvasively locate specific functional
regions of the brain in preparation for surgery. In addition, research has
shown that the Company's MSI system can assist physicians to noninvasively
locate brain tissue suspected of triggering epileptic seizures and abnormal
neurological activity associated with closed head injury and trauma, ischemic
disorders and stroke.
PRESURGICAL FUNCTIONAL MAPPING: Approximately 100,000 brain surgeries are
performed annually in the U.S. These procedures include tumor resection,
surgical correction of epilepsy and removal of vascular malformations. The
precise locations of functional regions vary even among healthy individuals
and more widely among patients with large brain lesions, and the locations
cannot reliably be determined solely from anatomical imaging such as MRI. By
relating information about the primary sensory function areas provided by the
Company's MSI systems to MRI-generated anatomical images, however, a function
map of the brain can be obtained and presented on a screen or recorded on
film. Thus, images produced with the Company's MSI systems allow the surgeon
to reliably estimate the risk of
5
damage to the identified function areas arising from the surgery itself and
to select the best surgical approach, such as where to open the head, and
from which direction to access the targeted area to minimize the risk.
Using the Company's MSI systems, reliable and practical methods of providing
a functional map have been developed, verified and reported in several
medical journals. The Company's MSI systems allow the surgeon, hospital,
insurer and patient to more accurately assess the risk of a proposed surgery
and the possibility of improving the outcome of the surgery.
EPILEPSY SURGERY: There are approximately 1.2 million people in the United
States with recurrent epileptic seizures, and approximately 150,000 new cases
emerge each year. The seizures for many of these people can be controlled
with drugs, but a number require alternative treatments. There are at least
100,000 people in the United States alone that could benefit from surgical
intervention, although, based on the most recent data published in 1993 only
about 2,500 such procedures are performed each year due to limited facilities
needed to perform the presurgical evaluations.
Over the past decade, a number of research studies have demonstrated that
information produced by MSI can noninvasively locate brain tissue suspected
of triggering epileptic seizures. Locating epileptic tissue is vital in the
evaluation of patients for epilepsy surgery. In the absence of a noninvasive
method, it has often been necessary to implant an array of electrodes
directly on or into the brain to locate this tissue. The invasive approach
requires lengthy hospitalization in facilities that are equipped for
long-term intensive monitoring of patients, 24-hour nursing care and
participation of a highly trained team of specialists. To date, the cost and
relative scarcity of appropriate facilities for this long-term monitoring
procedure severely limit the number of patients who can benefit from a
surgical approach to epilepsy treatment.
Recent medical literature shows that MSI provides additional information
which is useful for locating epileptic tissue and could, in many cases, avoid
invasive evaluation procedures. The Company believes the necessary
information can be obtained with its MSI systems in a clinically acceptable
time frame and at a cost that will allow for routine use in evaluating
patients for epilepsy surgery. The results to date suggest that, in a large
number of cases, the use of the Company's MSI system would be a
cost-effective alternative to currently used invasive evaluation procedures.
CLOSED HEAD INJURY AND TRAUMA: The National Institute of Neurological
Disorders and Stroke and the National Head Injury Foundation estimate that
there are approximately 500,000 incidents of closed head injury per year,
about 10% of which result in lingering brain damage. Currently, clinicians
primarily use MRI or CT scans which provide only anatomical images to
determine the nature and extent of brain damage following a closed head
injury. These anatomical images are often normal even though the patient
shows severe neurological symptoms.
Research studies conducted at the Company's cooperating clinical sites show
that the Company's MSI systems are sensitive detectors for abnormal brain
activity accompanying traumatic injury while also providing a map of the
abnormality as it relates to anatomy. Researchers believe the information
provided by the Company's MSI systems could prove valuable in enabling the
trauma physician to
6
assess the severity and potential consequences of the
physical damage and to help determine the appropriate course of treatment.
ISCHEMIC DISORDERS AND STROKE: Ischemia and stroke are common neurological
disorders resulting from the disruption of blood supply to the brain. The
total direct cost to the U.S. health care system for treatment and
rehabilitation of stroke exceeds $10 billion per year. MSI may potentially
assist physicians treating stroke by identifying damaged brain areas before
they are detectable by CT or MRI scans. Also, as an indicator of
neurological function, MSI may be useful to monitor rehabilitation and
treatment of stroke patients.
CARDIAC APPLICATIONS
Each year more than 300,000 Americans die from arrhythmias, or irregular
heart rhythms, that stop the heart from pumping enough blood through the
body. Arrhythmias result from electrical disturbances in damaged heart
tissue. Two of the great challenges facing cardiologists today are
identifying people at risk for arrhythmias and treating those people once
they are identified. Early results of measurements on subjects with a wide
range of cardiac disorders suggest that the Company's MSI system can help
address both challenges.
Current techniques for reliably identifying people at risk for lethal
arrhythmias require the cardiologists to insert a catheter into the heart to
perform an electrophysiological test. Patterns of electrical stimuli are
then introduced into the heart in an attempt to artificially induce the
arrhythmia. This test lasts about two hours and requires a specially equipped
catheterization laboratory. In 1993, approximately $615 million was spent in
the United States on 246,000 electrophysiological tests performed for this
purpose.
Although the use of the Company's MSI system for magnetic field detection
related to cardiac arrhythmias is in the very early stages, the Company
believes that a noninvasive cardiac arrhythmia risk assessment test could be
developed using its MSI system based on detecting the magnetic fields of the
damaged heart tissues that produce arrhythmias. If successful, such a test
would be far less expensive than the current electrophysiological test
because it would not require a cardiologist to be present and could be
completed in about 30 minutes. The availability of a reliable, inexpensive
and noninvasive test would greatly facilitate the selection of antiarrhythmic
drugs and the dosage appropriate to each patient. The Company has
applications pending with the FDA for clearance to market the Magnes I system
for applications relating to the heart.
CLINICAL COLLABORATIONS
The Company's primary near-term objective is to accelerate the use of its MSI
systems by cooperating with researchers and physicians at key medical centers
selected by the Company. The Company's MSI systems must be established by
clinical researchers as an effective tool suitable for mainstream clinical
applications in order to establish a large commercial market. Accordingly,
the early clinical research sales and collaborations with clinical sites are
strategically important to the Company's overall market development plan.
7
As of September 30, 1996, the Company's MSI systems are installed for
neurological use at 16 sites worldwide listed in Table 1, with 2 additional
systems in process of installation. The Company also has established programs
for the development of cardiac applications and cardiac test protocols at two
of these sites. The Company provides technical support to all of these
sites. While the sites listed in Table 1 below do not all have formalized
clinical applications development agreements with BTi, the Company benefits
from the extensive research conducted at these sites through the clinical
results disseminated to the medical community and from potential future
applications that may be developed. To date, the findings of BTi and its
collaborators have been presented in more than 75 published papers.
TABLE 1
NAME OF INSTITUTION LOCATION
The Scripps Clinic & Research Foundation* United States
U.C. San Francisco Medical Center* United States
New York University Medical Center United States
University of Tokyo Hospital Japan
National Institute for Physiological Sciences Japan
Kyushu University Hospital Japan
National Epilepsy Center Japan
Sumitomo Research Center Japan
National Chubu Hospital Japan
University of Muenster Germany
Institute of Medicine-KFA Juelich Germany
University of Erlangen Germany
University of Vienna General Hospital Austria
University of Rennes France
Karolinska Hospital Sweden
Max Planck Institute, Leipzig Germany
(in process of installation)
University of Magdeburg Germany
Communications Research Laboratory Japan
(in process of installation)
* Represents equipment on loan under a collaboration agreement
MARKETING, SALES AND DISTRIBUTION
MARKET DESCRIPTION
The overall market for the Company's Magnes systems can be divided into three
overlapping segments: the basic research market, the clinical applications
development market and the commercial clinical market. Customers in each
market segment are identified by the focus of their work, the source of
purchase funds and other characteristics, as described below.
The basic research market consists of scientists working in university and
government laboratories to discover new information about organ function and
to make fundamental advances in their scientific
8
fields. Patient treatment is not their principal concern. Equipment used by
these scientists generally is purchased with funds provided by government and
private research grants. The basic research market continues to be the
source of the majority of the Company's sales.
The clinical applications development market consists primarily of teaching
medical centers where the majority of clinical applications development work
for new medical technologies and procedures is conducted. Because of their
size, buying power, prestige and early involvement in assessing and using new
medical technologies, teaching medical centers continue to be the primary
focus of the Company's near-term marketing plans. The Company has identified
more than 150 key members of this group in the U.S., Europe and Asia, which
are centers of excellence in (i) neurosurgery, neurology and neurophysiology,
(ii) neuroradiology and radiology and (iii) cardiology.
The commercial clinical market for MSI systems includes hospitals and clinics
that would use the MSI systems in routine diagnosis and therapeutic
monitoring of patients. The primary commercial clinical market in the United
States consists of approximately 450 major medical centers with 500 or more
beds and approximately 780 hospitals with between 300 and 500 beds. In
addition, independent imaging centers in major metropolitan areas have often
been among the first buyers of new imaging technologies, and the Company
believes this pattern may be repeated for its MSI systems. Of the top 25
neurology centers in the United States, 24 have significant and growing
epilepsy centers. There are approximately 200 epilepsy surgery centers in
the United States, Western Europe, and Asia that could be candidates for the
Company's MSI system. Multiple sales at the same site are not likely in the
near term. Sales to the commercial clinical market are expected to develop
when regulatory approvals are obtained, adequate third-party reimbursement
for MSI tests becomes routine, and MSI procedure costs decline. Therefore,
growth in this market depends on the development of effective, regulatory
approved clinical applications that qualify for third-party reimbursement and
are accepted by physicians such as neurosurgeons, neurologists, cardiologists
and radiologists.
The NIH has estimated that there are approximately 90 million cases annually
of neurological and mental illness disorders in the U.S. Each case
represents a separate incident of such disorders and not separate patients.
In most cases, diagnostic methods for these disorders remain inadequate.
According to NIH estimates, the annual cost associated with these
neurological and mental illness disorders in the U.S. is more than $285
billion. This amount includes the direct cost of health care and, in the
case of neurological disorders, the indirect cost of income lost due to
illness. The majority of these disorders are functional in nature and are a
major cause of disability and death. In most cases, no noninvasive test
exists to help physicians diagnose or effectively monitor the functional
activity associated with these neurological and mental illness disorders.
The Magnes systems are designed to address this need.
There is substantial medical evidence supporting the view that a significant
percentage of mental illness disorders have a physiological origin which may
be treated by pharmaceuticals. In most cases, however, it has not been
possible to detect physiological dysfunctions clearly associated with the
symptoms of mental illness. There has been no objective measure to use for
the diagnosis of mental illness, for the prescription of therapy or for
measuring the effectiveness of the therapy on the patient. MSI has
demonstrated the ability to provide accurate spatio-temporal maps of
neurophysiological function which may serve as an objective measure and, the
Company believes, the Magnes systems could fulfill a major need of physicians
dealing with mental disorders. Researchers are in the early
9
stages of investigating MSI applications for mental illness and therefore no
reliable estimates can be made of the number of patients that might be aided
by data provided by the Magnes system.
MARKETING STRATEGIES
In order to promote sales in both the clinical applications development and
commercial clinical markets, the Company's fundamental marketing strategy is
to accelerate clinical applications development for the Magnes systems by
collaborating with and promoting the work of a core group of influential
medical centers engaged in applications development. The Company plans to
continue implementation of this strategy by (i) encouraging physicians
developing applications for the Magnes to publish their results in
professional journals, (ii) participating in key medical meetings to generate
interest among targeted medical specialists, (iii) direct mailings to
encourage communication between research groups working with the Magnes
systems, (iv) site visits by key customers, (iv) public relations activities,
and (v) continuing its patient referral program.
DISTRIBUTION
The Company has a small direct sales organization with the specialized skills
needed to sell the Company's MSI system in the United States. The European
and Asian markets are served, respectively, by the Company's subsidiary in
Germany and by the biomedical division of Sumitomo Metal Industries, LTD.
("SMI") in Japan. In March 1990, the Company entered into a distribution
agreement granting SMI the exclusive rights to market, sell, distribute and
service the Company's MSI products in certain regions of Asia and in
Australia and New Zealand for an initial period of seven years. The
agreement establishes a minimum number of units to be purchased by SMI during
the period and grants to SMI a right of first refusal to negotiate a license
to manufacture and sell the Company's MSI products in certain regions of Asia
and in Australia and New Zealand. An extension of the distribution agreement
with SMI which expires January 1997 is currently in negotiation.
REIMBURSEMENT
The Company's long-term commercial success in the United States is dependent
upon obtaining approval of routine payment for clinical MSI procedures by
Medicare and third-party payors. The Health Care Financing Administration,
which is responsible for the administration of Medicare, and most third-party
payors follow similar guidelines for determining whether a specific procedure
or health care technology is "reasonable" and "necessary" and, therefore,
reimbursable under Medicare or private insurance coverage. These guidelines
generally include consideration of whether (i) the procedure or technology is
more or less costly than an alternative already covered by insurance, (ii)
the added benefit of the procedure or technology is significant enough to
justify the expense, and (iii) the procedure or technology provides
significant medical benefits not otherwise available from other procedures or
technologies.
Substantial data is already available to support the use of MSI and the
Company's Magnes systems for presurgical functional mapping and epileptic
foci localization. This includes a number of publications in NEUROSURGERY,
AMERICAN JOURNAL OF NEURORADIOLOGY, and the THE JOURNAL OF EPILEPSY AND
BRAIN. The
10
data have been successfully used by several medical centers to
receive third-party reimbursement on a case-by-case basis. Since the first
reimbursement was received in September 1993, more than 75 insurance
companies and other healthcare providers have now approved reimbursement for
certain MSI procedures. Although initial results are encouraging and a number
third-party payors have approved reimbursement, there is no assurance that
third-party reimbursement will become widely available.
In Japan, a large number of hospitals are government funded and operated.
These hospitals are paid by the JMHW only for procedures that have been
approved by a reimbursement board of the JMHW. The JMHW follows guidelines
similar to those followed by third-party payors in the U.S. in determining
whether a new medical procedure will be reimbursed by the Japanese
government. Once reimbursement for a procedure is approved by the JMHW, all
hospitals, both public and private, are reimbursed for the procedure at the
same reimbursement rate. Since January 1992, when the Magnes system received
approval from the JMHW for sales in Japan as a clinical device, Japanese
public and private hospitals may purchase the system for clinical use on
patients. Reimbursement is not yet available from the Japanese government or
third-party payors, but private Japanese hospitals are allowed to charge
patients for procedures with the Magnes system. The Kyushu University Magnes
system and the National Epilepsy Center Magnes system in Shizuoka have been
designated as Highly Advanced Medical Technology Sites by the Japanese
government. This designation is required for application to the JMHW for
reimbursement. SMI, with assistance from the Company, continues to work with
medical centers in Japan in an effort to have the JMHW establish a
reimbursement level for Magnes system procedures that will help support
future purchases of the Magnes system.
In Europe, the Magnes sites have concentrated primarily on research and have
not pursued governmental or private approval for reimbursement of MSI
procedures.
PRODUCT PRICES AND TERMS OF SALE
The current prices for the Company's MSI systems range from $1.5-$2.5 million,
depending upon system configuration. Standard terms of sale provide for
payment of 40% of the purchase price upon placement of the order, 40% upon
shipment and the remaining 20% when installation is completed and final
acceptance is obtained from the customer. Typically for sales to European
customers who receive their funding from governmental agencies, the Company
is required to provide a bank guarantee for the amount of the deposit which
usually is released upon shipment and/or acceptance by the customer. The
Company may also enter into special collaboration and sale arrangements with
medical centers to promote clinical applications development. The time
between placement of an order and installation typically ranges between six
and twelve months.
INSTALLATION, SERVICE AND TRAINING
In the medical device market, the ability to provide comprehensive and timely
service is a key competitive advantage and important for establishing
customer confidence. Installation and service for the Company's products in
the United States and Europe is provided from its San Diego headquarters and
from the Company's subsidiary in Germany, both of which maintain customer
service departments
11
capable of performing sophisticated systems installation and equipment
maintenance. SMI has its own service capabilities in Japan to service MSI
systems sold in their distribution area.
Installation and a service agreement for the first year are provided as part
of the standard terms of sale in the United States and Europe. Thereafter,
service and maintenance are available on a time and materials basis or
pursuant to a yearly service agreement for an annual fee.
Initial customer training in the operation of the Company's MSI systems is
provided by the Company's personnel at the customer's site and is included in
the selling price of the system. Physician training in interpreting the
clinical significance of MSI information is currently provided at the
Company's cooperating United States clinical sites.
COMPETITION
The Company operates in an industry characterized by rapid technological
change. New products using other technologies or improvements to existing
products may reduce the size of the potential markets for the Company's
products, and may render them obsolete or non-competitive. Competitors may
develop new or different products using technology or imaging modalities that
may provide or be perceived as providing greater value than the Company's
products. Any such development would have a material adverse effect on the
Company's financial condition and results of operation.
Additionally, there has been recently, and continues to be, ongoing
significant price competition from the Company's competitors for the
currently limited number of whole head systems being purchased worldwide.
This aggressive competition is likely to affect potential profitability of
the Company's whole head system, the extent of which is not presently
determinable.
Companies known to BTi that have manufactured an integrated large-array MSI
system are CTF Systems Inc., a Canadian company, Neuromag Ltd., a Finnish
company, Siemens AG, a German company, Phillips N.V., a Netherlands company,
and Shimadzu and Daikin, both Japanese companies. To the best of the
Company's knowledge, as of October 31, 1996 Neuromag Ltd. has received FDA
clearance for marketing its system as a clinical device in the United States.
An MSI system produced by CTF Systems, Inc. has been cleared for sale as a
clinical device in Japan by the JMHW and their distributor, Aloka, is
currently soliciting orders for the CTF system. The Company believes that
Siemens AG and Phillips N.V. do not currently manufacture or market
integrated large-array MSI systems. The Company believes that Magnes
systems compete favorably with other MSI systems on the basis of performance
for detecting magnetic fields.
The Japanese government funded an extensive long-term program to develop a
MSI system by a consortium of Japanese companies coordinated by the Japan
Ministry of International Trade and Industry ("MITI") This program
terminated in 1996. Other large multinational corporations with substantial
resources available for research and development activities, including GE
Corporation, a United States company, have initiated product investigation
programs in magnetic source imaging. The Company's ability to compete
successfully against any of its current or potential future competitors will
depend upon various factors, including its ability to continue its
technological and market development leadership role and to raise the
necessary capital for further development and commercialization.
12
BACKLOG
As of September 30, 1996, the aggregate amount of firm backlog orders for the
Company's products was $16,254,000 of which the Company expects to fill
approximately $14,000,000 before September 30, 1997. The backlog is composed
primarily of orders for the new Magnes 2500 WH. As sales of the Company's
systems typically involve transactions of $1 million or more, the backlog is
expected to fluctuate significantly from year to year depending upon orders
received and installations completed during the reporting period.
PROPRIETARY CORE TECHNOLOGIES
BTi has pioneered the development of technologies associated with MSI.
Several core technologies that have been developed by and are proprietary to
the Company, such as superconducting MSI detectors, magnetic noise reduction,
data analysis and clinically useful displays, represent areas where the
Company believes it has established a leadership position in MSI.
SUPERCONDUCTING MSI DETECTORS
The Company's MSI detectors consist of a superconducting detection coil and
an extraordinarily sensitive amplifier called a SQUID. Superconductivity
describes the ability of certain materials, when refrigerated to near
absolute zero (-460 DEG. F or -273 DEG. C), to carry electricity without
electrical resistance. This property enables the detection coil to act as a
noise-free antenna to pick up magnetic fields and transfer them to the SQUID.
The SQUID utilizes other unique electrical properties of superconductors to
generate readily measured voltage changes in response to very small magnetic
field changes. Together, the superconducting detection coil and SQUID
amplifier are able to detect magnetic fields that are at least 1,000 times
smaller than is possible with other magnetic field detectors.
BTi has developed proprietary processes for fabricating highly reliable
superconducting magnetic field detectors and integrating a large number of
such detectors into complex sensors that measure magnetic fields generated by
electrical activity in the body. Sensors are comprised of the MSI detectors
and the components required to refrigerate them to their operating
temperature. The MSI detectors are refrigerated to a near absolute zero
temperature with liquid helium. Novel methods have been developed by the
Company to accomplish the necessary refrigeration without the requirement of
immersing the MSI detectors directly in liquid helium. Without this
requirement, the magnetic field detectors can be used in any orientation with
respect to the body, thereby overcoming limitations of previous designs that
have prevented simultaneous measurements on the entire brain of a patient
lying in a horizontal position. BTi believes this unique ability may provide
a significant competitive advantage for the Company's future MSI systems.
This construction technique and subsequent system design have received U.S.
patent numbers 5,494,033, 5,441,107, and 5,471,985. The Company has applied
for foreign patents.
The Company has also developed proprietary processes for fabricating
detection coils and SQUIDs from materials that become superconducting at the
temperature of liquid nitrogen, which is significantly higher than the
temperature of liquid helium. The availability of superconducting detection
coils and SQUIDs refrigerated with liquid nitrogen would greatly simplify the
design and reduce the costs to
13
build and operate an MSI system. The Company has built and tested
experimental magnetic detectors fabricated from superconductors operating at
liquid nitrogen temperature. While their noise properties are currently less
favorable than those obtained by using liquid helium superconductors, further
improvements may make them suitable for certain MSI applications. The
Company believes its novel high-temperature SQUID fabrication process is the
only process having the reliability and reproducibility required of a
commercial manufacturing process.
MAGNETIC NOISE REDUCTION
The ability to detect the weak magnetic fields created by the body depends
upon the elimination or reduction of magnetic noise generally present in the
environment. The magnetic fields generated by the electrical activity of the
body can easily be overwhelmed by the stronger magnetic fields generated by
automobile traffic, elevators, electrical machinery or even an ordinary wrist
watch worn by a patient. The Company has developed techniques to reduce
interference from magnetic noise. The Company houses its MSI systems in a
shielded room constructed according to the Company's specifications from
special alloys that reduce magnetic noise. All equipment used in the
shielded room is selected or fabricated to avoid contaminating this low-noise
environment. In addition, the configuration of the detection coils in the
Company's Magnes I and Magnes II systems sharply reduces their sensitivity to
magnetic fields from sources located more than about 10 inches from the
sensor, which allows the Company to focus the sensors on the specific portion
of the body being measured.
Finally, the Company's MSI sensor contains additional detectors to measure
the magnetic noise in the vicinity of the patient. Signal processing
algorithms have been developed that use this information to remove magnetic
interference in the recorded fields. The Company is investigating whether
its noise reducing algorithms could allow a reduction in magnetic shielding
requirements which could substantially lower the cost of future MSI systems.
DATA ANALYSIS
The Company has developed techniques to automate the collecting and
processing of reliable clinical data according to standardized protocols.
The use of standardized protocols enables the Company's MSI system to be
operated by a trained technician and helps to ensure the reliability of the
results. BTi's proprietary software has dramatically reduced the time to
compute specific sources of electrical activity. These developments have been
critical factors in the Company's efforts at making its MSI system suitable
for routine clinical use.
In analyzing a patient's magnetic field data, it is usually assumed that the
magnetic field at any instant of time is generated by a very small region of
electrically active tissue. There are situations of potential clinical
interest in which the assumption of a single focal source of electrical
activity cannot be used, and new analysis techniques are needed. The Company
has developed and is testing techniques to extend the analysis to multi-focal
and spatially extended sources of electrical activity to address this need.
14
CLINICALLY USEFUL DISPLAYS
Effective display of the results of an MSI examination is required to allow
the technician operator to assess the data quality and to allow the physician
to interpret the significance of the MSI results relative to the patient's
condition. The Company provides a number of displays ranging from temporal
displays, which allow the physician to determine the time sequence of events
to overlay displays, which estimate the location of the analyzed functions
relative to the patient's anatomical images provided by MRI or CT. The
Company has developed or has access to data interfaces compatible with a wide
variety of MRI and CT scanners.
RESEARCH AND DEVELOPMENT
The Company has funded its research and development of its technology
programs primarily through revenues from product sales and product-related
services, through capital raised by venture capital financing and from its
public and private sales of stock. During fiscal 1996, 1995 and 1994, the
Company's internally funded research and development expenses were
$7,767,000, $5,507,000 and $6,735,000, respectively. In view of the fact
that the Company has commenced production and shipment of the new Magnes 2500
WH system, expenditures for research and development in fiscal year 1997 are
currently expected to decrease from fiscal year 1996. However, there can be
no assurance that a reduction in expense will be realized.
MANUFACTURING AND MATERIALS
The Company engineers and manufactures every major component of the Magnes
system, other than the host computer and its peripherals, the magnetically
shielded room that houses the sensor, and the sensor position indicator
hardware used to determine how the sensor is oriented to the body. The
Company currently is also purchasing its SQUID requirements from a vendor.
However, the Company has complete facilities to fabricate SQUIDs from
materials that become superconductive at liquid helium and liquid nitrogen
temperatures.
Of the major components of the Magnes system not manufactured by the Company,
the host computer and peripherals are widely available standard items. The
other major purchased components are constructed in accordance with Company
specifications that ensure compatibility with its MSI system. The
magnetically shielded rooms for Magnes systems sold in the United States and
Europe are currently supplied by two European manufacturers. In 1991, the
Company completed development of a magnetically shielded room of its own
design in cooperation with SMI and retains an option to manufacture the room
or purchase it from SMI for sales outside the SMI distribution area. In June
1994, the Company also entered into an agreement with a United States company
to develop and manufacture a lower cost alternative to existing magnetically
shielded rooms, the development of which has been completed. The Company
believes it has adequate alternate sources of supply for this major system
component from these four sources.
The Company believes its current manufacturing capacity is sufficient to
satisfy present demand. In order to achieve its long-term objectives,
however, the Company will be required to expand production
15
capabilities, mainly through additional personnel. There can be no assurance
that the Company will be able to increase its level of output. The Company
believes that its control over the development and manufacture of its MSI
system will enable it to modify its devices to address specific needs of
anticipated clinical applications without significant dependence upon outside
suppliers, manufacturers or providers of technology.
GOVERNMENTAL REGULATION
The Company is subject to various regulations of the FDA and the California
Health Services. In particular, the FDA and the California Health Services
have promulgated regulations to which the Company must adhere relating to the
manufacturing standards, effectiveness and safety of the Company's diagnostic
products. The FDA regulates marketing of medical devices, requiring
premarket clearance or premarket approval based upon review of information
submitted by the Company relating to intended product use and product
labeling, safety and efficacy. The premarket clearance or approval processes
are based upon risk class and degree of equivalence to devices already
marketed that are proven to be safe and effective.
The Company filed a Section 510(k) premarket notification with the FDA in
March 1990 for applications of the Magnes I system relating to the brain. In
June 1990, it received clearance from the FDA to market the Magnes I system
based upon that 510(k) premarket notification. That clearance enables the
Company to market the Magnes I MSI system as a diagnostic device rather than
as research equipment. The Company has also received clearance of a 510(k)
premarket notification for applications of its Magnes II systems relating to
the brain from the FDA and is currently seeking FDA clearance of a 510(k)
premarket notification for its new Magnes 2500 WH system relating to the
brain. A Section 510(k) premarket notification with the FDA for applications
of the Magnes I system relating to the heart is still pending.
Medical devices are placed in one of three classes, depending upon their use
or the degree to which they provide functions critical to sustaining life.
Class I devices are subject to general controls, including Good Manufacturing
Practice regulations, and examples of such devices are tongue depressors and
hot water bottles. Class II devices are subject to general performance
standards not yet established by regulation. General controls of Class I
presently apply to Class II devices, because no performance standards have
been developed or promulgated by the FDA for Class II devices. Examples of
Class II devices are ECG and EEG. Class III devices consist of "critical
devices," those represented to be life sustaining or life supporting,
implanted in the body or presenting potential unreasonable risk of illness or
injury. Safety and efficacy must be demonstrated and supported by clinical
data submitted to the FDA for "premarket approval." Examples are kidney
dialysis systems and cardiac pacemakers. Class I and II devices may be
marketed by demonstration of "substantial equivalence" to existing devices
via a Section 510(k) premarket notification, and subsequent FDA clearance to
market. The Magnes I and Magnes II systems have been determined under the
510(k) process to be substantially equivalent to BTi's prior Model 607
Neuromagnetometer and to EEG. The currently pending application for the
Company's Magnes 2500 WH system has been determined to be substantially
equivalent to BTi's Magnes I and Magnes II systems. The Company's Magnes MSI
systems are classified as Class II, and therefore are subject to the general
controls of Class I and to performance standards that have not yet been
defined for Class II devices.
16
The Company's continued compliance with applicable governmental regulations
is assessed by internal audits and by audits of manufacturing operations and
procedures conducted by the FDA and California Health Services. These
agencies have the authority, among other things, to limit or stop product
shipments and require product recall should a failure to comply with
regulations be observed. The Company has registered with the FDA and the
California Health Services as a medical device manufacturer. California
Health Services has completed an inspection of the Company's facilities and
manufacturing processes and has issued the Company a license which permits it
to manufacture, sell and ship the Magnes systems as medical devices for
diagnostic purposes. The FDA conducted an audit of the Company to federal
current Good Manufacturing Practices ("cGMP") regulation requirements in July
1996. All areas of the Company's internal cGMP program were observed to be
in compliance with the regulations.
In addition, in order to export its products, the Company must comply with
United States export control regulations, which restrict the export of
devices containing certain of the Company's technology to certain foreign
nations. Although the export control regulations have not prohibited the
Company from exporting its MSI systems to foreign nations, there can be no
assurance that the Company will continue to be able to obtain the necessary
export licenses in the future. The Company is currently allowed to export
the Magnes system to many foreign countries, including all Western European
countries and Japan, under a general license that requires no additional
approval prior to shipment.
While Western Europe and Japan have regulatory agencies that are somewhat
similar to the FDA, each country's regulatory requirements for product
acceptance are unique and will require the expenditure of substantial time,
money and effort to obtain regulatory acceptance for marketing for clinical
use. There can be no assurance that the Company will be able to obtain such
approvals. The Magnes I system received approval in Japan from the JMHW in
1992 for sale as a clinical device and Magnes II received similar JMHW
approval in 1995.
PATENTS AND PROPRIETARY INFORMATION
The Company significantly relies on proprietary technology and seeks to
maintain confidentiality of its trade secrets, unpatented proprietary
know-how and other proprietary information and to obtain patent protection
when appropriate. As of September 30, 1996, the Company held 40 patents in
the United States. One of these had counterpart patents issued in the United
Kingdom, France, Germany, the Netherlands and Canada and three others have
counterpart patents granted by the European Patent Organization. As of
September 30, 1996 the Company had filed 6 U.S. patent applications that are
in various stages of the patent prosecution process. The Company has also
filed 8 applications with the European Patent Organization for patent
protection in Western Europe, 14 applications in Japan and three in Canada.
The Company anticipates that patents, if issued, will be issued (i) within
two to 20 months with respect to the pending patent applications in the U.S.,
and (ii) within three years with respect to the pending patent applications
in Western Europe. The Company has reserved its priority with respect to
receiving patents on its applications in Japan, and may pursue those
applications in due course.
17
The Company's patents protect several fundamental aspects of the technology
used in its products. Patents have been issued with respect to
superconducting devices, ultra-low-noise electronics circuits,
biomagnetometer design, biomagnetic signal processing, magnetic shielding
techniques, noise suppression methodologies, cryogenic apparatus construction
techniques, and system design concepts. Patent applications have been filed
with respect to a new process for fabrication of electronic devices using
high-temperature superconducting materials, superconducting device designs,
magnetic shielding technology, cryogenic refrigeration, ultra-low-noise
electronic circuits, patient handling equipment and biomagnetic signal
processing and data analysis. The Company currently is considering
additional patent applications covering inventions already made in these and
related fields of technology. BTi is not aware of any infringement by any of
its products on patents issued to others.
Magnes-Registered Trademark- and Neuromagnetometer-Registered Trademark- are
registered trademarks of the Company. Ferritometer-TM-, Biomagnetic
Technologies-TM- (with and without the design) and BTi-TM- are
trademarks/service marks of the Company either by registration with the State
of California or by application for registration with the U.S. Patent and
Trademark Office.
HUMAN RESOURCES
As of September 30, 1996, the Company employed 95 full-time employees at its
facilities in San Diego, California and Germany. None of the Company's
employees is covered by a collective bargaining agreement and the Company has
experienced no work stoppages. The Company believes that it maintains good
relationships with its employees. In December 1996, the Company reduced its
workforce from 95 full-time employees to 79 full-time employees.
FINANCIAL INFORMATION
Additional financial information concerning revenues related to foreign
operations and sales to certain customers is included in Note 3 of the Notes
to Consolidated Financial Statements included in Part II, Item 8 of this
report.
ITEM 2. PROPERTIES.
The Company's executive offices and manufacturing facilities are located in a
55,000 square foot facility at 9727 Pacific Heights Boulevard, San Diego,
California. All domestic operations of the Company are conducted from this
facility, which was first occupied in December 1989. The Company leases this
facility pursuant to an eight-and-one-half-year lease agreement which expires
in February 1998. Average monthly lease payments over the term of the lease
are approximately $39,500. The Company's subsidiary in Germany leases
approximately 3,000 square feet at Gruener Weg 82, D-5100 Aachen, Germany
pursuant to a year-to-year lease agreement. Monthly lease payments are
approximately $1,700. Sales and service for the Company's European operations
are conducted from the German facility.
18
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor its subsidiary are involved in any litigation which
is expected to have a material adverse effect on the Company's business,
consolidated financial position, results of operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "BTIX". The following table sets forth the range of high and low
closing sales prices by quarter for the Company's Common Stock as reported by
the Nasdaq National Market for the last two fiscal years.
FISCAL YEAR 1996 HIGH LOW
--------------- -------- --------
1st Quarter $1- 7/8 $1
2nd Quarter $1-15/16 $1-5/16
3rd Quarter $1-17/32 $1-1/32
4th Quarter $1- 7/16 $ 3/4
FISCAL YEAR 1995 HIGH LOW
---------------- -------- --------
1st Quarter $1- 5/8 $ 5/8
2nd Quarter $1- 3/16 $ 5/8
3rd Quarter $1- 1/8 $ 11/16
4th Quarter $2- 1/8 $ 13/16
As of December 31, 1996, there were approximately 264 holders of record of
the Company's Common Stock.
The Company has never declared or paid dividends on its Common Stock. The
Company does not anticipate declaring any dividends on its Common Stock in
the foreseeable future and intends to retain its earnings, if any, for the
development of its business.
During August 1996, the Company entered into an agreement with a principal
shareholder, Dassesta International S.A. ("Dassesta"), for an unsecured
working capital loan of $3,000,000. The note evidencing the loan was issued
under Regulation S, promulgated under the Securities Act of 1933, as amended.
This loan matures February 14, 1997 and bears interest at 9% per annum. The
principal amount of the loan, and any accrued interest thereon, was
convertible at the option of the Company into common stock at any time during
the six months at $.40 per share, and was convertible at the option of the
noteholder at the end of the six months or upon default under the note at
$.40 per share. The Company elected to convert the $3,000,000 loan and the
accrued interest thereon of $87,040 into 7,717,602 shares of common stock of
the Company on December 31, 1996.
20
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below with respect to BTi's
consolidated statements of operations for each of the three years in the
period ended September 30, 1996 and with respect to the consolidated balance
sheets at September 30, 1996 and 1995, are derived from the audited
consolidated financial statements which are included elsewhere in this
document. The statement of operations data for the years ended September 30,
1993 and 1992 and the balance sheet data at September 30, 1994, 1993 and 1992
are derived from audited consolidated financial statements not included in
this document. The data set forth below should be read in conjunction with
the consolidated financial statements and related notes included elsewhere in
this document. Dollars are stated in thousands, except per-share amounts.
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1996 1995 1994 1993 1992
------- ------- ------- ------- --------
Total revenues $ 1,422 $9,196 $ 3,344 $ 4,327 $10,048
Net loss (14,816) (6,673) (10,313) (10,989) (8,700)
Net loss per share (1) (0.37) (0.27) (1.03) (1.11) (0.98)
Shares used in computing
per share amounts (1) 39,950 24,783 9,977 9,912 8,907
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
BALANCE SHEET DATA: 1996 1995 1994 1993 1992
------- ------- ------- ------- --------
Working capital $(3,031) $10,274 $(2,114) $ 7,115 $17,562
Total assets 16,250 20,124 9,419 14,434 26,429
Long term obligations 48 493 459 650 548
Shareholders' equity (1,396) 13,368 2,283 11,970 22,787
(1) See Note 1 of Notes to Consolidated Financial Statements describing
shares used in calculating net loss per share.
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
BACKLOG DATA: (2) 1996 1995 1994 1993 1992
------- ------- ------- ------- --------
$16,254 $9,300 $6,444 $3,138 $3,773
(2) Backlog of Business is derived from Company data not subject to audit.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, but are not specifically limited to, failure to satisfy
performance obligations, timely product development, changes in economic
conditions in various markets the Company serves, and uncertainty regarding
the Company's patents and propriety rights, as well as the other risks
detailed in this section. The Company does not undertake to update the
results discussed herein as a result of changes in risks or operating results.
OVERVIEW
Since 1984, the primary business of the Company has been the development of
MSI systems that measure magnetic fields generated by the human body and
assist in the noninvasive diagnosis of a broad range of medical disorders.
The measurement of the body's magnetic fields by MSI provides information
about the normal and abnormal functions of the brain, heart and other organs.
BTi is focusing the development of its MSI system on large potential
commercial market applications such as brain surgery, the diagnosis and
surgical planning for treatment of epilepsy and life-threatening cardiac
arrhythmias.
Sixteen (16) Magnes systems were installed in medical and research
institutions worldwide at the end of fiscal 1996. To date, more than 5,000
MSI examinations have been performed on patients and control subjects at the
Company's application development sites. Related findings by BTi and its
collaborators have been published in more than 75 scientific and medical
papers. Since the first reimbursement for MSI procedures was received in
September 1993, 75 insurance companies have approved reimbursement for
certain MSI procedures performed with the Company's Magnes MSI systems.
In fiscal 1995, BTi announced development of the Magnes 2500 WH, an expansion
of the existing Magnes I and Magnes II systems product line. Development of
the Magnes 2500 WH hardware was substantially completed in fiscal year 1996.
The Magnes 2500 WH allows simultaneous examination of the entire brain and is
designed for evaluating ambulatory or critically ill patients in a seated or
fully reclined position. The Company commenced shipments of its Magnes 2500
WH prior to the end of fiscal year 1996; however, there were no final
acceptances received from customers. Furthermore, although the Company
received provisional acceptance from two customers, no final acceptances were
received in the first quarter of fiscal year 1997 which ended December 31,
1996. The delay in receipt of customer final acceptances is primarily due to
a pending hardware upgrade, the need for which was not discovered to be
necessary prior to installing the systems at customer sites, and additional
software development required to meet customer contractual requirements.
The current price of BTi's MSI systems ranges from approximately $1.5 to
$2.5 million, depending upon system configuration. A significant portion of
the Company's sales have been, and are expected to continue to be in foreign
markets. The Company generally prices its European sales in the currency of
the country in which the product is sold and the prices of such products in
dollars will vary as the value
22
of the dollar fluctuates against the quoted foreign currency price. There
can be no assurance that currency fluctuations will not reduce the dollar
return to the Company on such sales. The Company periodically enters into
forward exchange contracts to hedge such foreign currency exposure.
Due to substantial research and product development expenses and low unit
sales, the Company has incurred net losses every year since fiscal 1982.
Since concentrating on the development of its MSI systems in 1984, the
Company's corporate strategy and commitment of resources have focused on
long-term product applications and market development rather than near-term
operating performance. Although considerable progress has been achieved, the
Company expects to continue to incur significant product and applications
development expenses in the foreseeable future and anticipates incurring
operating losses at least through fiscal 1997.
In December 1996, the Company reported a restructuring of its operations due
to lower short-term market projections for its MSI systems. As part of the
restructuring, D. Scott Buchanan, Ph.D. assumed the responsibilities of
President and COO, reporting to Chairman and CEO James Schumacher. The
restructuring resulted in an immediate reduction of 16 employees which is
expected to be followed by additional reductions of approximately 28 persons
after completion of the final development phases of its Magnes 2500 WH system
over the next several months. As a result of the restructuring, the Company
also expects to reduce its program costs in non-personnel related areas.
The Company believes the relatively small number of proven medical
applications for the Magnes system, lack of routine reimbursement for MSI
procedures and uncertainty of product acceptance in the U.S. market, have
limited system sales. Additionally, it is not possible to reliably predict
the timing and extent of future product sales. The Company does not
anticipate multiple sales to the same end-user and at current sales volumes,
the sale of one Magnes system may have a significant impact on the results of
operations of the Company during any reporting period. As a result,
quarterly and annual operating performance will continue to fluctuate.
The consolidated financial statements and notes thereto which appear in Part
II, Item 8 should be read in conjunction with the following review.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
As a result of delays in completion of the Magnes 2500 WH system development,
no systems sales were made during fiscal year 1996, which contributed to the
$8,143,000 increase in the Company's net loss as compared to fiscal 1995.
Research and development expenses increased by $2,260,000 from the prior year
as a result of increased efforts to substantially complete the development of
the Magnes 2500 WH system. In addition, marketing and sales expenditures
increased in fiscal 1996 as compared to fiscal 1995 as a result of the
Company's increased efforts to obtain additional sales contracts in the
highly competitive and limited market in which the Company operates. General
and administrative expenses increased primarily as the result of the $319,000
write-off of certain patent costs related to the Company's Magnes II system
that had been previously capitalized but are no longer considered to have
value due to the Company's decision to focus primarily on the production of
the Magnes 2500 WH
23
system. The Company will, however, produce Magnes II systems in the future as
orders are received. There can be no assurance that any such orders will be
received in the future.
Revenue from product sales and service decreased 92% in fiscal 1996 to
$733,000 from $8,981,000 in fiscal 1995. Revenue in fiscal 1996 consisted of
service and components revenue and no Magnes system sales, as compared to
fiscal 1995, in which revenue consisted of both service and component
revenue and four Magnes II systems sales. Sales to SMI represented
approximately 8% and 19% of total sales for fiscal years 1996 and 1995,
respectively.
The $2,398,000 excess of production costs over product sales is primarily
attributable to an approximate $900,000 increase in the Company's provision
for obsolescence associated with the Magnes II systems. This provision was
made in light of the Company's decision to focus primarily on the production
of the Magnes 2500 WH system. The Company will, however, produce Magnes II
systems in the future as orders are received. There can be no assurance that
any such orders will be received in the future.
Research and development expenses increased by 41% in fiscal 1996 to
$7,767,000 from $5,507,000 in fiscal 1995. This increase was primarily
attributable to the Company's decision to substantially complete development
of the Magnes 2500 WH system, which included development of a prototype unit
that was installed at Scripps in July 1996. Additionally, $554,000 was
incurred in fiscal 1996 under collaborative agreements with UCSF and Scripps
for applications development performed on behalf of the Company. The Company
anticipates that future expenditures under these collaborative agreements
will be reduced to less than $150,000 on an annual basis.
Marketing and sales expenses increased 18% in fiscal 1996 to $2,798,000 from
$2,370,000 in fiscal 1995. This increase was attributable to higher
expenditures for sales support and marketing activities, including an
increase in salary, travel and trade show expenses.
General and administrative expenses increased 29% in fiscal 1996 to
$2,958,000 from $2,300,000 in fiscal 1995. This increase was primarily the
result of the write-off of $319,000 in patent costs that related to the
Magnes II system previously included in other assets determined to no longer
have value due to the Company's decision to focus primarily on the production
of the Magnes 2500 WH system. The Company will, however, produce Magnes II
systems in the future as orders are received. There can be no assurance that
any such orders will be received in the future.
Interest expense decreased 93% in fiscal 1996 to $38,000 from $573,000 in
fiscal 1995 as a result of the conversion of short-term notes in exchange for
the issuance of common stock that occurred in fiscal 1995. The Company also
executed a $3,000,000 working capital loan in the last quarter of fiscal
1996; however, the loan plus accrued interest was converted into 7,717,602
shares of common stock on December 31, 1996.
The Company recorded a net loss of $14,816,000 in fiscal 1996 and $6,673,000
in fiscal 1995. The increased loss was primarily due to lack of system
acceptances, increased research and development expenses, increased marketing
and sales expenses, and additional production costs, including the increase
in the Company's provision for inventory obsolescence as well as the
write-off of patent costs.
24
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1994
Fiscal 1995 results of operations improved from fiscal 1994 levels primarily
as a result of the increased volume of Magnes product sales and reduced
research and development expenses. The improvement in operating results was
partially offset by higher sales and marketing expenses, higher interest
expense on short-term debt and the extraordinary loss resulting from the
conversion of certain short-term debt to equity.
Revenues from product sales and service increased in fiscal 1995 to
$8,981,000 from $3,119,000 in fiscal 1994 as a result of four Magnes system
sales in 1995 compared to a single Magnes system sale in fiscal 1994.
Product sales in both fiscal years were composed of Magnes MSI systems and
Magnes components. Sales to SMI represented approximately 19% and 28% of the
total sales for fiscal years 1995 and 1994, respectively. In fiscal 1994
sales to one customer represented 68% of total sales.
The gross profit margin on product sales in fiscal 1995 was 47%, a 28%
increase over 1994. The improvement in gross margin was primarily the result
of volume related manufacturing efficiencies and reduction in production
costs.
Research and development expenses declined 18% in fiscal 1995 to $5,507,000
from $6,735,000 in fiscal 1994. The decline is primarily the result of lower
overhead costs associated with research and development activities and the
transfer of several people from research and development projects to sales
support and marketing activities. The decline in research and development
was partially offset by an increase in materials spending associated with the
Magnes WH development program.
Marketing and sales plus general and administrative expenses in fiscal 1995
totaled $4,670,000 versus $3,959,000 in the prior fiscal year. These
expenses represented 51% and 118% of total revenues in fiscal 1995 and 1994,
respectively. General and administrative expenses totaled $2,300,000 in
fiscal 1995, representing a slight decline from fiscal 1994. Fiscal 1994
general and administrative expenses included nonrecurring expenses of
$423,000 related to an uncompleted public offering of common stock.
Considering only recurring expenses, the increase from fiscal 1994 to 1995 in
general and administrative expenses resulted primarily from higher personnel
costs and higher insurance costs. Total marketing and sales expenses
increased $740,000 over the prior year as a result of higher expenditures for
sales support and marketing activities. This included the addition of a Vice
President of Sales and Marketing, the transfer of personnel noted above and
associated program expenses.
Interest expense increased to $573,000 in fiscal 1995 from $391,000 in the
prior fiscal year as a result of continued short-term debt financing and an
increase in short-term borrowing.
LIQUIDITY AND CAPITAL RESOURCES
BTi has financed its operations largely through private and public sales of
equity and debt securities. During July 1996, the Company completed
negotiations with a principal shareholder, Dassesta, for an unsecured working
capital loan of $3,000,000. This loan matures February 14, 1997 and bears
interest at 9% per annum. The principal amount of the loan and any accrued
interest thereon, is convertible at the option of the Company into common
stock at any time during the six month term at $.40 per share, and is
convertible at the option of the noteholder at the end of the six month term
or upon default under the
25
note at $.40 per share. As of September 30, 1996, the Company had
borrowed the entire $3,000,000 under the terms of the above loan agreement.
The Company elected to convert the $3,000,000 loan and the $87,040 of accrued
interest into 7,717,602 shares of common stock of the Company on December 31,
1996.
At September 30, 1996, the Company's current liabilities exceeded current
assets, resulting in a working capital deficiency of $3,031,000. At September
30, 1995, the Company had working capital of $10,274,000. The decrease in
working capital is primarily due to the fiscal 1996 net loss incurred by the
Company as a result of efforts to complete the development of the Magnes 2500
WH system. Restricted cash increased from $2,621,000 to $6,085,000 as a
result of the increase in customer deposits received by the Company which are
legally restricted as to withdrawal. Cash, cash equivalents and short-term
investments, exclusive of any restricted cash, declined by $7,712,000 to
$2,496,000 at September 30, 1996. The Company's operations were funded by
existing cash and short-term investment resources and the Dassesta working
capital loan discussed above.
Capital equipment expenditures were $577,000 in fiscal 1996 compared to
$453,000 in fiscal 1995. The Company anticipates capital equipment
expenditures will amount to approximately $250,000 in fiscal 1997.
Based on the Company's current operating plans, capital and working capital
expenditures necessary to support the on-going development and
commercialization of the Company's products through September 30, 1997 are
expected to substantially exceed cash expected to be generated from
operations and will result in a further decline in the Company's liquidity.
The Company's backlog at September 30, 1996 of $16,254,000 is composed
primarily of orders for the new Magnes 2500 WH system.
The Company believes that the development of the Magnes 2500 WH system may be
completed in the second quarter fiscal 1997. Although significant effort is
being expended to complete development and obtain customer final system
acceptances commencing in the second quarter of fiscal 1997, there can be no
assurance that this will be accomplished. In the event such development and
acceptances are not obtained as anticipated, revenue reporting and cash
collections could be further delayed with possible negative effects on the
cash flow and cash resources of the Company.
The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000
for the years ended September 30, 1996, 1995, and 1994, respectively. In
addition, at September 30, 1996 the Company has an accumulated deficit of
$79,863,000 and its current liabilities exceed its current assets, resulting
in a working capital deficiency. Management anticipates that capital and
working capital expenditures in fiscal 1997 will substantially exceed cash
generated by operations.
Management is currently concentrating on completing installation of and
obtaining final customer acceptances for its Magnes 2500 WH systems; however,
there is no assurance that this will be achieved. In the event that such
final acceptances are not obtained, the Company will experience further
negative effects on usable cash resources of the Company. Management is also
continuing to seek additional sources of debt or equity financing. The
Company anticipates that existing capital resources, the reduction in the
scope of its operations, and the additional debt or equity financing, will be
sufficient to provide operating capital required to meet its obligations in
the normal course of business through fiscal
26
1997; however, there can be no assurances that the Company will be able to
obtain the additional debt or equity financing that is required. If such
additional debt or equity financing is not obtained, the Company will be
required to further reduce the scope of its operations. The consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
RISK AND UNCERTAINTIES
The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000
for the years ended September 30, 1996, 1995, and 1994, respectively. In
addition, at September 30, 1996 the Company has an accumulated deficit of
$79,863,309 and its current liabilities exceed its current assets, resulting
in a working capital deficiency. Management anticipates that capital and
working capital expenditures in fiscal 1997 will substantially exceed cash
generated by operations.
Management is currently concentrating on completing the installation of and
obtaining final customer acceptances for its Magnes 2500 WH systems; however,
there is no assurance that this will be achieved. In the event that such
final acceptances are not obtained, the Company will experience further
negative effects on usable cash resources of the Company. Management is also
continuing to seek additional sources of debt or equity financing. The
Company anticipates that existing capital resources, the reduction in the
scope of its operations, and the additional debt or equity financing, will be
sufficient to provide operating capital required to meet its obligations in
the normal course of business through fiscal 1997; however, there can be no
assurances that the Company will be able to obtain the additional debt or
equity financing that is required. If such additional debt or equity
financing is not obtained, the Company will be required to further reduce the
scope of its operations. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
Although the Company commenced shipments of its Magnes 2500 WH prior to the
end of fiscal year 1996 there were no final acceptances received from
customers. Furthermore, although the Company received provisional acceptance
from two customers, there were no final acceptances received from customers
during the first quarter of fiscal year 1997. The delay in receipt of
customer acceptances is primarily due to a pending hardware upgrade, the need
for which was not discovered to be necessary prior to installing the systems
at customer sites, and additional software development required to meet
customer contractual requirements. Although the Company anticipates that the
additional system hardware upgrade and software development required by the
contracts will be completed prior to the second quarter of fiscal year 1997,
there can be no assurances that this will be accomplished. In the event that
the hardware upgrade and software development are not completed as
anticipated, customer final acceptances could be further delayed, which could
have a material adverse effect on the cash flow and cash resources of the
Company.
To date the Company has been engaged principally in research and development
activities, and has made only low volume sales to research and medical
institutions primarily in Europe and Japan, and has not made any MSI system
sales for commercial/clinical use in the U.S. Such sales require prior FDA
approval. The Company has received 510(k) clearance to market its Magnes I
and Magnes II systems in the U.S., and has recently applied for 510(k)
clearance for its Magnes 2500 WH system for applications relating to the
brain. There can, however, be no assurance that the Company will receive
such clearance
27
in the near future or at all. Failure to receive such clearances to market
would have a material adverse effect on the Company's financial condition and
results of operations.
The Company is dependent on its Magnes systems as its principal product for
which there are currently limited clinical applications. Additional clinical
applications development needs to be conducted with the MSI system at major
medical centers before the Company can begin to penetrate the commercial
clinical market. There can be no assurance that a commercial market will
develop for diagnostic or monitoring uses of the MSI system.
The Company's commercial success is highly dependent on the availability of
reimbursement for procedures using the MSI system. To date reimbursements
from third party payors are on a case-by-case basis. As of December 31,
1996, there have been a total of 153 reimbursements from 75 different third
party payors in the U.S. Although the number of third party payors making
reimbursements has increased from the September 30, 1995 total of 49 payors,
there is no assurance that third party reimbursements will become widely
available. Reimbursements are not currently provided for such procedures by
the United States government, nor is there any assurance that the U.S.
government will authorize or budget for such procedures in the future. The
Company also cannot predict what legislation relating to its business or the
health care industry may be enacted in the future, including legislation
relating to third party reimbursement, or what effect such legislation may
have on the results of its operations.
The Company operates in an industry characterized by rapid technological
change. New products using other technologies or improvements to existing
products may reduce the size of the potential markets for the Company's
products, and may render them obsolete or non-competitive. Competitors' may
develop new or different products using technology or imaging modalities that
may provide or be perceived as providing greater value than the Company's
products. Any such development would have a material adverse effect on the
Company's financial condition and results of operations.
Additionally, there has been recently, and continues to be, ongoing
significant price competition from the Company's competitors for the
currently limited number of whole head systems being purchased worldwide.
This aggressive competition is likely to affect potential profitability of
the Company's whole head system, the extent of which is not presently
determinable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements as of September 30, 1996 and
1995, and for each of the three years in the period ended September 30, 1996
and the report of independent accountants are included in this report as
listed in the index on page 30 of this report ( Item 14 (a)).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required for this item with respect to directors and executive
officers is set forth in the sections entitled "Election of Directors",
"Security Ownership of Management-Business Experience of Executive Officers"
and "Compliance with Section 16(a) of the Exchange Act" in the Company's
Proxy Statement and Notice of Annual Meeting of Shareholders to be held March
18, 1997 (the "Proxy Statement"), to be filed with the Commission within 120
days of the Company's fiscal year end, which sections are incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required for this item is set forth in the section entitled
"Executive Compensation and Other Information" in the Proxy Statement, which
section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required for this item is set forth in the section entitled
"Security Ownership of Management" and "Principal Shareholders" in the Proxy
Statement, which sections are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required for this item is set forth in the sections entitled
"Executive Compensation and Other Information" and "Certain Transactions" in
the Proxy Statement, which sections are incorporated herein by reference.
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Accountants...........................36
Consolidated Balance Sheets at September 30, 1996 and 1995..37
Consolidated Statements of Operations for the three years
ended September 30, 1996....................................38
Consolidated Statement of Shareholders' (Deficit) Equity
for the three years ended September 30, 1996................39
Consolidated Statements of Cash Flows for the three years
ended September 30, 1996....................................40
Notes to Consolidated Financial Statements..................41
(2) Financial Statement Schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable
or the required information is shown in the consolidated
financial statements or notes thereto
(3) Exhibits
The Exhibits listed in the accompanying Exhibit Index are filed
or incorporated by reference as part of this report.
(b) Reports on Form 8-K during the fourth quarter:
None
(c) Exhibits
The following documents are exhibits to this Form 10-K:
30
Exhibit
No. Description of Document
3.1 (1) Articles of Incorporation of the Company, as amended.
3.2 (1) Bylaws of the Company, as amended.
3.3 (10) Amendment to the Articles of Incorporation (numbered originally
as 10.73)
+10.6 (4) The Company's 1987 Stock Option Plan, as amended.
+10.7 (4) Form of Incentive Stock Option and related exercise documents.
+10.8 (1) The Company's 1985 Incentive Stock Option Plan, as amended.
+10.9 (1) Form of Incentive Stock Option and related exercise documents.
+10.10 (1) The Company's 1985 Non-Qualified Stock Option Plan, as amended.
+10.11 (1) Form of Non-Qualified Stock Option and related exercise
documents.
+10.12 (1) The Company's 1984 Incentive Stock Option Plan, as amended.
+10.13 (1) Form of Incentive Stock Option and related exercise documents.
10.17 (1) Option Agreement dated July 16, 1986 between the Company and
Quantum Design, Inc.
10.22 (1) Agreement to subordinate debt of S.H.E. GmbH.
+10.36 (1) Form of Indemnification Agreements for directors and officers.
10.39 (2) Purchase and Distributorship Agreement dated January 22, 1990
between the Company and Sumitomo Metal Industries, Ltd.
(with certain confidential portions omitted).
10.40 (2) Two Sets Purchase Agreement dated January 22, 1990 between the
Company and Sumitomo Metal Industries, Ltd. (with certain
confidential portions omitted).
10.41 (2) License and R & D Agreement dated January 22, 1990 between the
Company and Sumitomo Metal Industries, Ltd.
10.42 (2) Stock Purchase Agreement dated January 22, 1990 between the
Company and Sumitomo Metal Industries, Ltd.
10.43 (2) Registration Rights Agreement dated January 22, 1990 between the
Company and Sumitomo Metal Industries, Ltd.
10.45 (3) Memorandum of Understanding dated January 18, 1991 between the
Company and Sumitomo Metal Industries, Ltd. (with certain
confidential portions omitted).
10.46 (3) New R & D Program for Small MSR (Supplementary Agreement to
License and R & D Agreement) dated February 28, 1991 between
the Company and Sumitomo Metal Industries, Ltd., and Memorandum
(not dated) modifying the agreement.
10.48 (3) Exclusive Patent and Technology License Agreement dated July 15,
1991 between the Company and Stanford University (with certain
confidential portions omitted).
31
No. Description of Document
+10.49 (7) Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan.
Exhibit
+10.55 (6) Employment Agreement, dated July 12, 1993, between the Company
and James V. Schumacher.
+10.56 (6) Form of Trust Agreement between the Company and James V.
Schumacher.
+10.57 (8) Amendment to Option Agreements between the Company and Stephen O.
James (numbered originally as Exhibit 10.3).
10.58 (6) Real Estate Lease, dated April 3, 1989, between the Company and
Cornerstone Income Properties, plus First and Second Amendments
to the Real Estate Lease.
10.64 (9) Form of Purchase Option Agreement, as amended.
10.67 (9) Magnetically Shielded Room (MSR) Development and Production
Program Agreement, dated June 6, 1994 (with certain
confidential portions omitted).
10.68 (6) Letter Agreement between the Company and Dassesta International
S.A. regarding the purchase of 25,000,000 Shares of Common
Stock of the Company.
10.69 (6) Loan and Security Agreement with a bank dated December 13, 1994.
10.70 (6) Schedule to Loan and Security Agreement dated December 13, 1994.
10.71 (11) Offshore Subscription Agreement between the Company and Dassesta
International S.A. (Numbered originally as Exhibit 2.1).
10.72 (11) Form of Offer Letter to Holders of 10% Secured Promissory Notes
(Numbered originally as Exhibit 2.2).
10.73 Offshore Note Purchase Agreement between the Company and Dassesta
International, S.A. dated August 13, 1996.
10.74 Convertible Advance Promissory Note with Dassesta
International S.A.
21 Subsidiary of the Company (Biomagnetic Technologies GmbH).
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
99.1 Annual Report of the Biomagnetic Technologies, Inc. 1992 Employee
Stock Purchase Plan.
32
(1) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-1, Registration Statement No. 33-29095,
filed June 7, 1989, as amended by Amendment No. 1, filed June 13, 1989,
Amendment No. 2, filed July 21, 1989 and Amendment No. 3, filed July 28,
1989.
(2) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1990 Form 10-K.
(3) These exhibits were previously filed as a part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1991 Form 10-K.
(4) These exhibits were previously filed as part of, and are hereby
incorporated by, reference to the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1992 Form 10-K.
(5) These exhibits were previously filed as part of, and are hereby
incorporated by, reference to the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1993 Form 10-K.
(6) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1994 Form 10-K.
(7) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-1, Registration Statement No. 33-46758,
filed March 26, 1992, as amended by Amendment No. 1, filed May 8, 1992.
(8) These exhibits were previously filed as part of, and are hereby
incorporated by reference to the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-8, Registration Statement No. 33-68136
filed August 27, 1993.
(9) These exhibits were previously filed as part of, and are hereby
incorporated by reference to the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-1, Registration Statement No. 33-81294,
filed July 8, 1994.
(10)These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in Fiscal 1995 Form 10-K
(11)These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in form 8-K, filed April 14, 1995.
+ Management contract or compensatory plan or arrangement.
SUPPLEMENTAL INFORMATION
Proxy materials have not been sent to shareholders as of the date of this
report. The Proxy materials will be furnished to the Company's shareholders
subsequent to the filing of this report and the Company will furnish such
material to the Securities and Exchange Commission at that time.
33
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.
BIOMAGNETIC TECHNOLOGIES, INC.
By /S/JAMES V. SCHUMACHER JANUARY 21, 1997
---------------------- ----------------
James V. Schumacher Date
Chairman, Chief Executive Officer
34
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /S/ JAMES V. SCHUMACHER JANUARY 21, 1997
----------------------------- ----------------
James V. Schumacher, Chairman, Date
Chief Executive Officer and Director
By /S/ HERMAN BERGMAN JANUARY 21, 1997
----------------------------- ----------------
Herman Bergman, Date
Vice President Finance, Chief
Financial Officer, Corporate Secretary
By * JANUARY 21, 1997
----------------------------- ----------------
R. Scott Asen, Director Date
By * JANUARY 21, 1997
----------------------------- ----------------
Jerry C. Benjamin, Director Date
By * JANUARY 21, 1997
----------------------------- ----------------
William C. Black, Jr., Director Date
By * JANUARY 21, 1997
----------------------------- ----------------
Martin P. Egli, Director Date
By * JANUARY 21, 1997
----------------------------- ----------------
Gerald D. Knudson, Director Date
By *
JANUARY 21, 1997
----------------------------- ----------------
Enrique Maso, Director Date
*By
-----------------------------
James V. Schumacher
(Attorney-in-Fact)
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Biomagnetic Technologies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) and (2) on page 30 present fairly, in all
material respects, the financial position of Biomagnetic Technologies, Inc.
and its subsidiary at September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has an accumulated deficit that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ PRICE WATERHOUSE LLP
San Diego, California
January 10, 1997
36
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
-------------------------
1996 1995
----------- -----------
ASSETS
Cash and cash equivalents $1,752,092 $2,313,928
Short-term investments 744,138 7,894,280
Restricted cash and short-term investments 6,084,555 2,621,422
Accounts receivable (less allowance for doubtful
accounts: 1996, $10,420; 1995, $20,115) 16,731 774,619
Inventories 5,627,515 2,476,794
Prepaid expenses and other current assets 337,792 456,106
----------- -----------
Total current assets 14,562,823 16,537,149
Property and equipment -- at cost 9,477,775 9,818,678
Less accumulated depreciation and amortization (8,569,811) (7,894,133)
----------- -----------
Net property and equipment 907,964 1,924,545
Restricted cash 500,000 1,100,000
Other assets 278,814 562,556
----------- -----------
TOTAL ASSETS $16,249,601 $20,124,250
=========== ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Accounts payable $2,632,917 $786,553
Accrued liabilities 1,896,245 1,009,430
Accrued salaries and employee benefits 860,155 610,573
Customer deposits 9,204,326 3,856,187
Note payable-related party 3,000,000
----------- -----------
Total current liabilities 17,593,643 6,262,743
Other liabilities 48,070 493,413
----------- -----------
Total liabilities 17,641,713 6,756,156
COMMITMENTS AND CONTINGENCIES (Notes 2, 7 and 9)
SHAREHOLDERS' (DEFICIT) EQUITY
Common stock -- no par value, 60,000,000 shares
authorized; 39,974,222 and 39,921,174 shares
issued and outstanding 78,467,197 78,415,590
Accumulated deficit (79,863,309) (65,047,496)
----------- -----------
Total shareholders' (deficit) equity (1,396,112) 13,368,094
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
(DEFICIT) EQUITY $ 16,245,601 $ 20,124,250
============ ============
See Notes to Consolidated Financial Statements.
37
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
Product sales $ 167,684 $8,771,502 $2,956,125
Service revenue 564,921 209,756 162,851
Interest income 524,895 528,987 175,742
Other income (expense) 164,623 (314,234) 49,414
------------ ------------ ------------
Total revenues 1,422,123 9,196,011 3,344,132
Production costs 2,565,454 4,454,992 2,513,590
Service costs 111,173 68,854 58,117
Research and development 7,767,199 5,507,054 6,735,130
Marketing and sales 2,798,248 2,369,974 1,629,823
General and administrative 2,957,571 2,299,974 2,329,124
Interest expense 38,291 573,261 391,460
------------ ------------ ------------
Total expenses 16,237,936 15,274,109 13,657,244
------------ ------------ ------------
Loss before extraordinary loss (14,815,813) (6,078,098) (10,313,112)
============ =========== ============
Extraordinary loss from extinguishment
of short-term debt (594,715)
------------ ------------ ------------
NET LOSS $(14,815,813) $(6,672,813) $(10,313,112)
============ =========== ============
NET LOSS PER SHARE
Loss before extraordinary loss $(.37) $(.25) $(1.03)
Extraordinary loss (.02)
------------ ------------ ------------
Net loss $(.37) $(.27) $(1.03)
============ =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 39,950,047 24,782,800 9,977,192
============ =========== ============
See Notes to Consolidated Financial Statements.
38
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
Common Stock
--------------------------- Accumulated
Shares Amount Deficit Total
------------ ------------- ------------- ------------
BALANCE, SEPTEMBER 30, 1993 9,924,356 $60,031,699 $(48,061,571) $ 11,970,128
Exercise of stock options 15,573 20,687 20,687
Stock issued to Employee Stock Purchase
Plan participants 87,768 205,158 205,158
Issuance of options to purchase equity securities 400,000 400,000
Net loss (10,313,112) (10,313,112)
------------ ------------- ------------- ------------
BALANCE, SEPTEMBER 30, 1994 10,027,697 60,657,544 (58,374,683) 2,282,861
Exercise of stock options 33,000 18,480 18,480
Sale of common stock, net of issuance costs 25,000,000 14,790,880 14,790,880
Common stock issued upon debt extinguishment 4,860,477 2,948,686 2,948,686
Net loss (6,672,813) (6,672,813)
------------ ----------- ------------ ------------
BALANCE, SEPTEMBER 30, 1995 39,921,174 78,415,590 (65,047,496) 13,368,094
Exercise of stock options 26,765 17,965 17,965
Stock issued to Employee Stock Purchase
Plan participants 26,283 33,642 33,642
Net loss (14,815,813) (14,815,813)
------------ ------------- ------------- ------------
BALANCE, SEPTEMBER 30, 1996 39,974,222 $78,467,197 $(79,863,309) $ (1,396,112)
============ ============= =============
See Notes to Consolidated Financial Statements.
39
BIOMAGNETIC TECHNOLOGIES , INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
-----------------------------------------------
1996 1995 1994
------------- ------------ ------------
OPERATING ACTIVITIES
Net loss $(14,815,813) $ (6,672,813) $(10,313,112)
Adjustments to reconcile net loss to net
cash used by operating activities:
Loss on write-off of assets 345,677
Extraordinary loss 594,715
Depreciation and amortization 1,248,141 1,275,891 1,944,423
Amortization of debt issue costs 265,000 135,000
Changes in operating assets and liabilities:
Restricted cash (5,484,555) (1,104,583) (1,516,839)
Accounts receivable 757,888 (651,757) 362,261
Inventories (3,150,721) (279,117) 1,694,965
Prepaid expenses and other current assets 118,314 (36,668) (208,699)
Other assets 283,742 (51,215) (31,607)
Accounts payable 2,435,363 (303,897) 620,216
Accrued salaries and employee benefits 249,582 82,262 60,496
Accrued liabilities (311,674) 146,031 226,771
Customer deposits 5,352,139 2,299,951 1,556,236
Other liabilities 164,147 33,960 (190,571)
------------- ------------ ------------
Net cash used for operating activities (12,807,770) (4,402,240) (5,660,460)
INVESTING ACTIVITIES
Change in short-term investments, net 9,771,564 (7,894,280) 3,925,251
Payments for property and equipment (577,237) (452,732) (941,691)
------------- ------------ ------------
Net cash provided by (used for) investing activities 9,194,327 (8,347,012) 2,983,560
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs 51,607 14,809,360 225,845
Proceeds from notes payable 3,000,000 2,318,182 2,710,000
Principal repayments on notes payable (2,818,182) (45,734)
Net cash provided by financing activities 3,051,607 14,309,360 2,890,111
------------- ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (561,836) 1,560,108 213,211
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,313,928 753,820 540,609
------------- ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,752,092 $ 2,313,928 $ 753,820
============= ============ ============
See Notes to Consolidated Financial Statements.
40
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Biomagnetic Technologies, Inc. (the "Company"), founded in 1970 as a
California corporation, is engaged primarily in the business of developing,
manufacturing and selling innovative medical imaging systems, for sale
currently to medical research centers located in the United States, Europe
and Asia. The magnetic source imaging ("MSI") systems developed by the
Company measure magnetic fields created by the human body for the noninvasive
diagnosis of a broad range of disorders.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
Biomagnetic Technologies GmbH, a wholly owned foreign subsidiary located in
Germany. The subsidiary was formed in 1978 primarily to market the Company's
products. All material intercompany balances and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents, short-term
investments, trade accounts receivable and financial instruments used in
hedging activities. The Company places its cash equivalents and short-term
investments with high quality financial institutions, and such instruments
are invested primarily in high grade short-term investments. Concentrations
of credit risk with respect to trade accounts receivable are limited due to
the geographically diverse customers that comprise the Company's customer
base, thus spreading the trade credit risk. The counterparties to the
agreements relating to the Company's foreign exchange instruments consist of
a high credit quality financial institution. While the notional amounts of
financial instruments are often used to express the volume of these
transactions, the potential accounting loss on these transactions, if any, is
limited to the fluctuation in the applicable foreign currency exchange rate.
41
FOREIGN CURRENCY REMEASUREMENT
The functional currency of the Company's foreign subsidiary is the U.S.
dollar. The monetary assets and liabilities of the foreign subsidiary are
translated into U.S. dollars at the exchange rate in effect at the balance
sheet date while nonmonetary items are translated at historical rates.
Revenue and expenses are translated at the average exchange rate for the
period, except cost of sales and depreciation, which are translated at
historical rates. Remeasurement gains or losses of the foreign subsidiary
are recognized currently in consolidated operations. For the years ended
September 30, 1996, 1995 and 1994 such gains (losses) totaled approximately
$136,000, $(96,400) and $4,600, respectively.
OFF-BALANCE SHEET RISK
The Company has a $5,000,000 letter of credit and foreign exchange credit
facility with a bank which is secured by restricted cash and short-term
investments. The Company utilizes standby letters of credit to secure
European bank guarantees issued to European customers for advance deposits on
sales. At September 30, 1996 and 1995 there were outstanding letters of
credit amounting to approximately $3,128,000 and $2,621,000, respectively.
These amounts are secured by an equal amount included in restricted cash and
short-term investments.
The Company periodically enters into forward exchange contracts to hedge
foreign currency exposure associated with certain identifiable foreign
currency commitments entered into in the ordinary course of business. Gains
and losses incurred on forward contracts associated with sales orders are
deferred and included in the basis of the underlying sales transaction. Gains
and losses are recognized when the offsetting gains and losses are recognized
in the related hedged items. At September 30, 1996 and 1995, the Company had
forward exchange contracts to purchase approximately $5,995,000 and
$5,289,000 respectively, with Deutsche marks and French francs at varying
maturities generally within one year and had incurred $100,136 in unrealized
gains and $197,000 in unrealized losses which had been deferred at
September 30, 1996 and 1995, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term highly liquid investments
purchased with a maturity of three months or less. Cash equivalents are
stated at cost, which approximates market value.
INVESTMENT SECURITIES
Management determines the appropriate classification of its debt securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. The Company has classified its debt securities as
"available-for-sale" at September 30, 1996 and "held-to maturity" at
September 30, 1995 and has recorded them at fair value and amortized cost,
respectively. At September 30, 1996 and 1995, the Company had classified
$3,872,271 and $10,515,702 in debt securities as available-for-sale and
held-to-
42
maturity, respectively. Gross unrealized gains and losses on the
Company's available-for-sale securities were not significant.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
on the first-in, first-out basis.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets on an
exception basis when there is evidence that events or changes in
circumstances have made recovery of the asset's carrying value unlikely. An
impairment loss would be recognized when the sum of the expected future net
cash flows is less than the carrying amount of the asset.
REVENUE RECOGNITION
Revenue from product sales is generally recognized at the time of customer
acceptance. Standard terms of sale include a one year service period
following the sale. The Company defers and recognizes service revenues over
the related service period.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the
differences in the financial reporting and tax basis of assets and
liabilities. Deferred income tax expense is the change during the year in
the deferred income tax asset or liability (Note 5). Valuation allowances
are established when necessary, to reduce deferred tax assets to the amount
more likely than not to be realized.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is generally computed using the straight-line method over
estimated useful lives of three to ten years. Leasehold improvements are
amortized over the related lease term.
FAIR VALUE OF FINANCIAL INSTRUMENTS
It is management's belief that the carrying amounts shown for the Company's
financial instruments are reasonable estimates of their related fair values.
43
STOCK-BASED COMPENSATION ACCOUNTING
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation." The Company has not elected early adoption of
FAS 123. Upon adoption of FAS 123, the Company will continue to measure
compensation expenses for its stock-based employee compensation plans using
the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and will provide pro forma disclosures as if the
fair value based method prescribed by FAS 123 had been utilized. The
disclosures under this standard will be required beginning in 1997.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
common stock outstanding. Common stock equivalents are antidilutive and are
excluded from the computation of net loss per share.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to current year
presentation.
Note 2. OPERATIONS AND CAPITAL RESOURCES
The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000
for the years ended September 30, 1996, 1995, and 1994, respectively. In
addition, at September 30, 1996 the Company has an accumulated deficit of
$79,863,000 and its current liabilities exceed its current assets, resulting
in a working capital deficiency. Management anticipates that capital and
working capital expenditures in fiscal 1997 will substantially exceed cash
generated from operations.
Management is currently concentrating on completing installation of and
obtaining final customer acceptances for its Magnes 2500 WH systems; however,
there is no assurance that this will be achieved. In the event that such
final acceptances are not obtained, the Company will experience further
negative effects on usable cash resources of the Company. Management is also
continuing to seek additional sources of debt or equity financing. The
Company anticipates that existing capital resources, the reduction in the
scope of its operations, and the additional debt or equity financing, will be
sufficient to provide operating capital required to meet its obligations in
the normal course of business through fiscal 1997; however, there can be no
assurances that the Company will be able to obtain the additional debt or
equity financing that is required. If such additional debt or equity
financing is not obtained, the Company will be required to further reduce
the scope of its operations. The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
44
NOTE 3. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment which includes developing,
manufacturing and selling magnetic source imaging products. The following
represents information about operations in different geographic areas.
Information under the caption "U.S." represents domestic operations and
information under the caption "Europe" represents the activities of the
Company's foreign subsidiary. Revenues under the captions "Asia" represent
export sales from the Company's domestic operations.
Sales to Sumitomo Metal Industries, Ltd., the Company's exclusive distributor
for certain portions of the Asian market, represented approximately 8%, 19%,
and 28% of total Company sales for fiscal years 1996, 1995 and 1994,
respectively. Years Ended September 30, 1996 1995 1994
Revenues
U.S. $ 198,351 $ 318,630 $ 53,129
Europe 449,895 7,062,483 2,137,144
Asia 84,359 1,600,145 928,703
Interest 524,895 528,987 175,742
Other income (expense) 164,623 (314,234) 49,414
------------ ------------ ------------
$ 1,422,123 $ 9,196,011 $ 3,344,132
============ ============ ============
Net loss
U.S. $(13,143,993) $ (6,439,051) $ (9,938,530)
Europe (1,671,820) (233,762) (374,582)
------------ ------------ ------------
$(14,815,813) $ (6,672,813) $(10,313,112)
============ ============ ============
Identifiable assets
U.S. $11,628,478 $17,041,388 $ 6,823,137
Europe 4,621,123 3,082,862 2,596,231
------------ ------------ ------------
$16,249,601 $20,124,250 $ 9,419,368
============ ============ ============
45
NOTE 4. FINANCIAL STATEMENT INFORMATION
The composition of certain financial statement captions are summarized
below.
Inventories:
1996 1995
---------- ----------
Finished goods $1,725,052 $620,990
Work-in-process 3,356,106 1,620,147
Raw materials 546,357 235,657
---------- ----------
$5,627,515 $2,476,794
========== ==========
Inventories include an allowance for obsolescence of approximately $1,650,659
and $1,016,000 at September 30, 1996 and 1995, respectively. At September
30, 1996, $3,330,816 of the total inventory balance was related to Magnes
2500 WH systems located at customer sites pending final customer system
acceptance. The Company has not recognized revenue on these systems.
Property and equipment:
1996 1995
---------- ----------
Machinery and equipment $8,880,428 $6,578,793
Office furniture and equipment 253,328 2,880,774
Leasehold improvements 341,801 340,313
Construction-in-process 2,218 18,798
---------- ----------
$9,477,775 $9,818,678
========== ==========
Accrued liabilities:
1996 1995
---------- ----------
Deferred revenue $ 84,257 $ 401,269
Customer obligations 112,216 319,336
Accrued employment agreement costs 600,000
Other 1,099,772 288,825
---------- ----------
$1,896,245 $1,009,430
========== ==========
Supplemental Disclosure of Cash Flow Information:
In fiscal 1995, the Company issued 4,882,477 shares of common stock and
options to purchase common stock in a non-cash transaction to certain holders
of short-term debt in exchange for extinguishment of the obligations under
the debt instruments (Note 6).
During the years ended September 30, 1996, 1995 and 1994, the Company paid
interest of $38,166, $94,430 and $251,270 respectively.
46
NOTE 5. INCOME TAXES
The Company has not recorded provisions for income taxes in fiscal 1996, 1995
and 1994 due to net operating losses for reporting purposes.
The components of deferred tax assets at September 30, 1996 and 1995 are as
follows:
1996 1995
------------ -----------
Net operating loss carryforwards $ 9,321,000 $ 4,302,000
Research and development credits 672,000 528,000
Capitalized research and development costs 1,491,000 896,000
Allowances 1,055,000 524,000
Other 554,000 525,000
------------ -----------
13,093,000 6,775,000
Valuation allowance (13,093,000) (6,775,000)
------------ -----------
Deferred tax assets $ -- $ --
------------ -----------
A full valuation allowance for deferred tax assets has been provided because
realization of such future tax benefits cannot be assured. The Company has
approximately $24,273,000 and $13,609,000 of Federal and State net operating
loss carryforwards which will begin to expire in 1997 if not utilized. As a
result of an ownership change (as defined by Section 382 of the Internal
Revenue Code of 1986, as amended) which occurred in fiscal 1995, the
Company's tax loss carryforwards were limited to a total $11,964,213 of which
approximately $556,000 can be utilized per year. As a result of this
limitation , net operating loss carryforwards were reduced by $12,171,749 and
research and development credits were reduced by $1,663,903 in fiscal 1995.
NOTE 6. DEBT
In August 1996, the Company entered into a loan agreement with Dassesta
International S.A. ("Dassesta") for $3,000,000 that bears interest at 9% per
annum and matures in February 1997. The note plus accrued interest is
convertible into common shares at the option of the Company at $.40 per share
at any time and under certain conditions at the option of Dassesta. As of
September 30, 1996 the Company had borrowed the entire $3,000,000 ( Note 10).
In March and April 1995, the Company executed agreements with the holders of
$2,210,000 of short-term notes (including $850,000 to related parties)
providing for the extinguishment of the note principal plus accrued interest
in exchange for the issuance of common stock in connection with the
completion of the sale of common stock to Dassesta (Note 8). The conversion
agreements provided for i) a 10% increase in the principal balance of the
notes for purposes of conversion to common stock, ii) issuance of common
stock at a price per share utilized in the Dassesta financing less 10% and
iii) a 10% increase in the number of shares of common stock subject to
purchase under previously issued option agreements.
47
In April 1995, the Company issued 4,882,477 shares of common stock in
accordance with the conversion agreements. In fiscal 1995, the Company
recorded an extraordinary loss of $594,715, representing the excess of the
fair value of common stock and options issued in connection with the
conversion over the net carrying value of the notes at conversion.
NOTE 7. LEASE OBLIGATIONS
The Company leases its office and production facilities and certain equipment
under noncancelable operating leases. In March 1993, the Company
renegotiated certain portions of the facility lease, extended the term
through February 1998 and received an allowance for leasehold improvements.
Under the previous facility lease, the Company recorded a deferred credit to
reflect the excess of rent expense incurred over cash payments due to certain
rent free periods. The amount of the deferred rent credit at March 1993,
totaling approximately $306,000, is being amortized over the remaining lease
term as a reduction of future rent expense. The new facility lease agreement
contains two renewal options of five years each.
Future minimum cash payments under operating leases are as follows:
Years Ending September 30,
1997 $552,469
1998 228,565
--------
$781,034
========
Total rent expense under noncancelable operating leases was $607,192,
$579,706 and $535,508 for the years ended September 30, 1996, 1995 and 1994,
respectively.
NOTE 8. SHAREHOLDERS' EQUITY
COMMON STOCK
In March 1995, the Company completed the private sale of 25 million shares of
common stock to Dassesta resulting in net proceeds of $14,790,880 after
deducting $209,120 of issuance costs. Dassesta provided a $1,500,000
short-term loan prior to the completion of the stock sale, which was repaid
at the closing of the transaction.
In April 1995, the Company issued 4,882,477 shares of common stock and
certain options to purchase common stock in connection with the
extinguishment of $2,210,000 of short-term debt (Note 6). The Company issued
five-year options to purchase 486,200 shares of common stock of the Company
at $0.60 per share that replace options previously issued in connection with
the issuance of short-term debt in fiscal 1994. At September 30, 1996,
options to purchase 464,200 shares of common stock remain outstanding and
exercisable.
48
STOCK OPTION PLANS
The Company has various incentive and non-qualified stock option plans which
provide that options to purchase up to 5,000,000 shares of common stock may
be granted to key employees and others at an option price of at least fair
market value at the date of grant which vest over a maximum period of four
years from date of grant. The exercise period for each option is not to
exceed 10 years from the date of grant. At September 30, 1996 options to
purchase 1,146,248 shares of the Company's common stock are exercisable and
509,130 shares are available for future grants under the plans.
The following table summarizes common stock option plan activity:
Years Ended September 30,
--------------------------------------------
1996 1995 1994
------------ ------------ -------------
Outstanding at beginning of period 1,854,966 1,389,097 1,452,763
Granted 2,480,400 1,606,238 20,500
Canceled (75,134) (1,140,369) (68,593)
Exercised (4,765) ---- (15,573)
Outstanding at end of period 4,255,467 1,854,966 1,389,097
------------ ------------ -------------
Price range of options exercised $1.00-$1.50 ------ $1.20- $1.50
Price range of outstanding options $1.00-$1.50 $1.00-$6.75 $1.20-$11.50
49
EMPLOYEE STOCK PURCHASE PLAN
The Company has established an Employee Stock Purchase Plan in which eligible
employees may use funds from accumulated payroll deductions to purchase
shares of common stock at the end of designated purchase periods. Employees
may contribute up to 15% of their base salary toward such purchases, not to
exceed $25,000 per calendar year. The purchase price is the lesser of 85% of
the fair market value of common stock determined at the beginning or end of
the purchase period. For the purchase period ended March 31, 1994 the
Company issued 87,768 shares of common stock to employees at an average price
of $2.34 per share. For purchase period ended March 31, 1996 the Company
issued 26,283 shares of common stock to employees at an average price of
$1.28 per share. A total of 212,232 shares of common stock have been
authorized for future purchases under the Employee Stock Purchase Plan.
NOTE 9. EMPLOYMENT AGREEMENT
In June 1993, the Board of Directors and the Chief Executive Officer and then
President agreed to certain terms of employment. The agreement includes a
potential future payment to the Chief Executive Officer of up to $600,000 in
June 1997 based upon the price of the Company's common stock at that date and
the realized and unrealized gains on stock options granted to him. The
Company accrued compensation of approximately $256,500, $150,000 and $163,000
during fiscal 1996, 1995 and 1994, respectively, which represents the
estimated value of compensation earned based upon the price of the Company's
common stock during the fiscal year. As of September 30, 1996 and 1995,
$600,000 and $343,750 in accrued compensation was included in accrued
liabilities and other liabilities, respectively. In addition, the employment
agreement provides for the continuation of base salary payments for two years
under certain circumstances. Pursuant to terms of the employment agreement,
the Company secured these potential future payments by placing $1,100,000 in
a trust established on behalf of the Chief Executive Officer which is
reported as restricted cash in the financial statements. The $600,000 of
potential future payout to the Chief Executive Officer in June 1997 is
included in the restricted cash and short-term investments balance as of
September 30, 1996.
NOTE 10. SUBSEQUENT EVENT
On December 31, 1996, the Company exercised its option to convert the
$3,000,000 related party note payable plus accrued interest into 7,717,602
shares of common stock.
50
BIOMAGNETIC TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Balance at Charged to Balance at
Beginning Costs and End of
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------- ----------- ----------- -----------
Allowance for doubtful
accounts on accounts
receivable:
Fiscal Year 1996 $20,115 --- $9,695(A) $10,420
Fiscal Year 1995 $11,886 $9,695 $1,466(A) $20,115
Fiscal Year 1994 $17,216 --- $ 5,330(A) $11,886
(A) Uncollectible accounts charged against allowance
_______________
Allowance for obsolete
and slow moving
inventory:
Fiscal Year 1996 $1,015,692 $918,522 $283,555(B) $1,650,659
Fiscal Year 1995 $656,149 $499,281 $139,738(B) $1,015,692
Fiscal Year 1994 $592,149 $134,882 $70,882(B) $656,149
(B) Sale or disposal of items under allowance
51