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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC, 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
September 30, 1998
For the fiscal year ended__________________________________________________
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period
from______________________________to__________________________________
1-10285
Commission File
Number_____________________________________________________________________
BIOMAGNETIC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
California 95-2647755
_______________________________________________________________________________
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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 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
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. [ ]
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 17,
1998 was $ 5,337,000, based on the closing price on that date on the Nasdaq Over
the Counter Bulletin Board. Shares of Common Stock held by each officer,
director, and holder of 10% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of the registrant's Common Stock, no par value,
as of December 17, 1998 was 83,367,112 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of Registrant's Proxy Statement and Notice of Annual
Meeting, to be filed not later than 120 days after September 30, 1998
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, in connection with the 1999 Annual Meeting of shareholders to
be held are incorporated by reference into Part III of this report where
indicated.
2. Certain Exhibits filed with the Registrant's prior registration
statements and reports are incorporated herein by reference into Part IV
of this report.
BIOMAGNETIC TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
INDEX
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 18
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . 19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk. . . . . 24
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . 24
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 24
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 24
Item 12. Security Ownership of Certain Beneficial Owners and Management . . 24
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
PART I
ITEM 1. BUSINESS.
Except for the historical information contained herein, the following discussion
may contain forward-looking statements that involve substantial 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 under "Risks and Uncertainties" on pages 15 through
17 and under Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations". The Company does not undertake to update the results
discussed herein as a result of changes in risks or operating results.
Company Overview
Biomagnetic Technologies, Inc., a California corporation, (the "Company", "BTi",
"we" "us" and "our") 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 has
incorporated these technologies into its magnetic source imaging ("MSI")
systems. Since 1984, the primary business of the Company has been the
development of MSI systems to assist in the noninvasive diagnosis of a broad
range of medical disorders.
The MSI systems developed by the Company use advanced superconducting technology
to measure and locate the source of magnetic fields generated by the human body
as it functions. These fields are one billion times smaller than the earth's
magnetic fields. While traditional medical imaging methods such as X-ray,
magnetic resonance imaging ("MRI"), and computed tomography ("CT") 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 technology for potential
commercial market applications such as mapping of functional cortex at risk
during surgery for tumors and other lesions, and the diagnosis and planning for
surgical treatment of epilepsy. The Company is continuing to investigate
potential applications of its technology for disorders of the heart, spine and
gastrointestinal system, as well as disorders of the brain such as closed-head
trauma, schizophrenia and other neuro-psychiatric problems.
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 brain. Other functional imaging methods such as electroencephalography
("EEG") or positron emission tomography ("PET") or functional MRI ("fMRI")
either require invasive procedures to provide the needed accuracy in locating
functional areas or respond too slowly to capture transient physiological events
such as those that occur with epilepsy. Anatomically oriented diagnostic
methods such as CT and MRI produce images showing cross-sectional slices of
various parts of the body. The Company's MSI system, when used in conjunction
with anatomically 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.
As part of its development strategy, the Company has targeted pre-surgical
function mapping ("PSFM") and the pre-surgical evaluation of epilepsy as the
near-term clinical and commercial applications for MSI. In the United States
alone there are 119 tertiary care epilepsy centers which the Company has
identified and believes could benefit from the use of MSI technology. The
Company is currently directing its marketing and sales efforts toward the
development of these centers as potential customers for MSI systems in the U.S.
In addition to the 119 centers in the U.S., the Company believes that there are
likely to be an approximate equal number of epilepsy centers with similar needs
throughout the rest
1
of the world. There is no assurance that the Company's MSI systems will be
accepted for commercial use in these hospitals and imaging centers.
As part of the market development for its technology, the Company has been
seeking to obtain reimbursement for MSI technology from insurers and other
health care providers. Since the first third party reimbursement was received
in September 1993, more than 130 insurance companies and other health care
providers have approved reimbursement for certain MSI procedures performed with
the Company's Magnes MSI systems. Expanding this reimbursement acceptance will
be a priority for the company over the next fiscal year. The Company will work
with leading institutions in the treatment of epilepsy to establish the efficacy
of MSI in the surgical evaluation of epilepsy patients as well as in PSFM.
There can be no guarantee regarding the outcomes of these efforts.
Magnes systems were installed in twenty one medical and research institutions
worldwide as of September 30, 1998. Ten sites located in the United
States, Germany, Japan and France operate the Company's latest 148 channel
Magnes 2500 WH system. Ten sites located in the United States, Germany,
France, Austria and Japan operate the Company's 37 channel Magnes I and 74
channel Magnes II systems, and one site located in Germany operates a Magnes
1300 C cardiothoracic system.
Most of the Company's Magnes I, Magnes II and Magnes 2500 WH MSI systems are
currently being used by physicians in clinical applications such as planning the
surgical removal of brain tumors and vascular malformations in order to reduce
the risk of neurological injury resulting in paralysis and expensive
rehabilitation therapy. The Company's MSI systems are 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 systems include stroke, trauma, neuro-psychiatric
disorders, and learning disorders. The Company's MSI systems have also been used
to investigate certain cardiac applications. A new model of the Company's
systems, the Magnes 1300C, was developed specifically for a research institute
in Germany for measurements of heart function. Preliminary studies using the
Magnes 1300C indicate that it may also be useful for measurements of
gastrointestinal and spinal cord activity.
The Company has received 510(k) premarket notification clearance from the Food
and Drug Administration, ("FDA") for its Magnes I, Magnes II and Magnes 2500 WH
systems allowing the marketing of the Company's systems in the United States. In
addition, the Company has received similar clearance for sale of these systems
as a clinical device from the Japanese Ministry of Health and Welfare ("JMHW").
The Company has not yet applied to the FDA or similar regulatory agencies to
obtain clearance for sale of the Magnes 1300C. There can be no assurance that
such clearance will be obtained, if applied for.
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 functions,
respectively. Electrical activity is also recorded to diagnose functional
disorders of skeletal muscles, the spine 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 fMRI.
2
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 or multiple structural problems which
may make the identification of the problematic location difficult.
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 where certain radioactively labeled substances
have accumulated after having been injected into the body. Two measures of
cell function, relative levels of metabolic activity and regional blood
flow, are determined by measuring the amount of radiation emitted by
different tissues.
Functional Magnetic Resonance Imaging is used to create images related to
localized changes in blood flow and oxygenation in the brain. While fMRI has
an 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 which prevents observation of rapidly
changing activities. Much of the valuable diagnostic information observed in
electrical activity in the body 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, is unavailable
from these technologies.
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 generally
inserted into the brain in an attempt to obtain accurate localization of
functional abnormalities in the brain prior to surgery or in the heart prior
to ablation procedures. These procedures are invasive, very costly and
involve risk and discomfort to the patient.
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 information about
the location of the source, MSI can noninvasively provide information about
the location of the origin of normal and abnormal electrical activity. MSI
can do this with a combination of millimeter spatial resolution and
millisecond time resolution which 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 the use of other costly, invasive
procedures.
THE MAGNES MSI SYSTEMS
The Company's current MSI systems, the single sensor Magnes I, the dual
sensor Magnes II, the whole-head Magnes 2500, and the cardiothoracic Magnes
1300C, are integrated systems capable of measuring, analyzing and locating
magnetic fields associated with the body's electrical activity in millisecond
time scales. The Magnes II was announced in fiscal 1994 and is an
enhancement of the Company's original Magnes I system. The Magnes II system
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
3
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 system employs a total of 148 magnetic detectors
incorporated into a sensor with a helmet shaped recess which 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 fully seated or
fully reclined positions.
The Magnes 1300C system employs 67 magnetic detectors installed in a sensor
with a shallow concave lower surface designed to fit the human chest, abdomen
or lower back.
The Company has received 510(k) premarket notification clearance from the FDA
for its Magnes I, Magnes II and Magnes 2500 WH systems for marketing the
Company's systems in the United States. In addition, the Magnes I, Magnes II and
Magnes 2500 WH systems have received similar approval from the JMHW for sale in
Japan as a clinical device. The Company has not yet applied to the FDA or
similar regulatory agencies to obtain clearance for the sale of the Magnes
1300C. There can be no assurance that such clearance will be obtained, if
applied for.
MEDICAL APPLICATIONS
The Company believes its Magnes systems have commercial potential in the
diagnosis and treatment of neurological and other disorders. However, as a
developing medical technology, the Magnes systems face several challenges to
commercial success. Medical applications for the Magnes systems must be
developed that result in better patient care than existing technologies. The
Company has regulatory approval to market its Magnes I, Magnes II and Magnes
2500 WH systems for applications relating to the brain. However, in general,
reimbursement for MSI procedures must be obtained from third party payors, and
the use of Magnes systems must, therefore, provide a demonstrated economic
benefit to the health care provider.
Currently, the Company believes there are two medically accepted applications
for its Magnes systems, namely, presurgical functional mapping of the brain
("PSFM") and assistance in the diagnosis and surgical treatment planning for
epilepsy. To date, reimbursements from more than 130 insurance companies have
been obtained for both procedures on a case - by- case basis. However, the
expected volume of such procedures at most hospitals under current standard
treatment practices may not provide sufficient operating revenue to completely
offset the investment and operating cost of a Magnes system.
The Company believes the systems are appropriate for presurgical functional
mapping and epilepsy surgery; however, significant applications development and
clinical testing must be conducted before these systems can be deemed
appropriate for the other applications described below. The Company is primarily
focused on establishing the clinical and functional efficacy of MSI applications
for functional mapping and epilepsy. The Company is pursuing programs to
increase awareness of MSI technology to its target market of neurosurgeons,
electrophysiologists, neurologists, psychologists, epileptologists, and
gastroenterologists. There can be no assurance that the Company's systems will
be accepted for commercial use in any of the areas mentioned in the foreseeable
future.
NEUROLOGICAL APPLICATIONS
Research at leading medical centers has demonstrated that the Company's MSI
systems 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 systems 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.
4
PRESURGICAL FUNCTIONAL MAPPING: The Company believes that currently
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 can not be reliably determined
solely from anatomical imaging such as MRI. However, by relating information
about the primary sensory function areas provided by the Company's MSI
systems to MRI generated anatomical images, 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 damage to the identified functional areas which might
arise from the surgery itself. These images also help the surgeon 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 surgical risk.
Using the Company's MSI systems, reliable and practical methods of providing a
functional map of the brain have been developed and verified. These results
have been 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. It is estimated that there
are at least 100,000 people in the United States who could benefit from surgical
intervention, although, based on the most recent data published in 1993, it is
believed that only about 2,500 such procedures are being performed annually. It
is the Company's opinion that the small number of surgical procedures for
epilepsy being performed annually, is primarily due to limitations of
facilities available for such surgeries, and the small number of trained
clinicians expert in the area.
Over the past decade, a number of research studies have demonstrated that MSI
can noninvasively locate brain tissue suspected of triggering epileptic
seizures. It is this tissue which is the target of the surgery. In the absence
of a noninvasive method, it is often necessary to implant an array of electrodes
directly on or into the brain to locate this tissue. The invasive evaluation
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 the information provided by MSI 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 the
use of the Company's MSI system would be a cost-effective alternative to
currently used invasive evaluation procedures. The company is currently working
with three epilepsy centers in the U.S. to look at the effectiveness of MSI in
epilepsy in a prospective clinical trial.
ISCHEMIC DISORDERS, STROKE AND OTHER BRAIN APPLICATIONS: 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 $30 billion per year, according to the
Annals of Internal Medicine published in 1994. MSI may potentially assist
physicians treating stroke by identifying damaged brain areas before they are
detectable by CT or MRI scans. As an indicator of neurological function, MSI may
be useful to monitor rehabilitation and treatment of stroke patients. Studies
have also suggested that the Company's MSI systems could be beneficial in the
diagnosis of brain disorders such as Alzheimer's disease, dyslexia, autism and
schizophrenia.
5
APPLICATIONS IN THE BODY: The Magnes 1300 C system could be beneficial in
evaluating various parts of the body, including applications to gastrointestinal
ischemia, spinal cord function and fetal heart monitoring. The Company has not
applied to the FDA or similar regulatory agencies to obtain clearance for the
marketing of the Magnes 1300C. There can be no assurance that such clearance
will be obtained, if applied for.
CLINICAL COLLABORATIONS
The Company's primary near term objective is to accelerate the development, use
and commercialization of its MSI systems by cooperating with researchers and
physicians at key medical centers. 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 commercial market. Accordingly, the early
clinical research sales and collaborations with clinical sites are strategically
important to the Company's overall market development plan.
As of September 30, 1998, the Company's MSI systems are installed for
neurological research at twenty (20) sites and non-neurological research at one
(1) site worldwide, listed in Table 1. 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
SYSTEM INSTALLED NAME OF INSTITUTION LOCATION
- -----------------------------------------------------------------------------------
Magnes I University of Colorado United States
Magnes II University of California, San Francisco United States
Magnes 2500 WH The Scripps Clinic & Research Foundation (1) United States
Magnes 2500 WH New York University Medical Center United States
Magnes 2500 WH University of Texas, Houston United States
Magnes I Kyushu University Hospital Japan
Magnes II National Institute for Physiological Sciences Japan
Magnes II National Epilepsy Center Japan
Magnes II National Chubu Hospital Japan
Magnes 2500 WH Tokyo Medical and Dental University Japan
Magnes 2500 WH Communications Research Laboratory Japan
Magnes I University of Munster Germany
Magnes I University of Rennes France
Magnes II University of Erlangen Germany
Magnes II University of Vienna General Hospital Austria
Magnes 2500 WH Institute of Medicine-KFA Julich Germany
Magnes 2500 WH University of Magdeburg Germany
Magnes 2500 WH Max Planck Institute, Leipzig Germany
Magnes 2500 WH University of Konstantz Germany
Magnes 2500 WH FORENAP Institute for Research in France
Neuroscience and Psychiatry
Magnes 1300 C University of Bochum (2) Germany
(1) Company equipment used as beta site.
(2) Represents non-neurological site.
6
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 research 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 fields. Patient treatment is not
their principal concern. Equipment used by these scientists is generally
purchased with funds provided by government and private research grants. The
basic research market has been to date, and continues to represent the majority
of the Company's sales.
The clinical research 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 potential commercial clinical market for MSI systems if applications for
various neurological diseases in addition to epilepsy could be developed,
includes hospitals and clinics that could 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 each with 500 or more beds and approximately 780 hospitals each 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 applicable 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 which could be
candidates for the Company's MSI systems. Multiple sales at the same site are
not likely in the near term. Sales to the commercial clinical market are
expected to develop when further regulatory approvals are obtained, adequate
third-party reimbursement for MSI tests becomes routine, MSI procedure costs
decline, and physician and decision makers in medical institutions conclude that
MSI procedures are more beneficial and economical than existing diagnosis and
treatment methods . If the Company is unable to gain general market acceptance
of its MSI systems, the Company's business, financial position and results of
operations will be materially adversely affected.
The National Institute of Health (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,
7
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 stages of investigating MSI applications for mental illness and
therefore no reliable estimates can be made of the number of patients who
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 Company's Magnes systems 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, (v) public relations
activities, and (vi) 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 systems in the United States. The European and
Asian markets are served, respectively, by the Company's branch office in
Aachen, 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 established
a minimum number of units to be purchased by SMI during the period and granted
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, Australia and New
Zealand. This distribution agreement with SMI was extended for an additional
five (5) years on January 23, 1997 with the modification that SMI's distribution
rights outside of Japan would be non-exclusive. BTi is currently seeking
additional representation in other areas of Asia, such as Korea and Taiwan.
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 other 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, EPILEPSIA, ANNALS OF NEUROLOGY and THE
JOURNAL OF EPILEPSY AND BRAIN, among others. The data have been successfully
used by a number of medical centers to receive third-party reimbursement on a
case-by-case basis. Since the first reimbursement was
8
received in September 1993, more than 130 insurance companies and other
healthcare providers have now approved reimbursement for certain MSI
procedures. Although initial results are encouraging and a number of
third-party payors have approved reimbursement, there is no assurance that
third-party reimbursement will become widely accepted.
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 the Japanese
government will reimburse a new medical procedure. 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 the
Company's Magnes I, Magnes II and Magnes 2500 WH systems received approval from
the JMHW for sales in Japan as clinical devices, Japanese public and private
hospitals may purchase the systems for clinical use on patients. Reimbursement
is not yet available from the Japanese government or Japanese third-party
payors, but private Japanese hospitals are allowed to charge individual patients
privately for procedures with the Magnes systems. The Kyushu University Magnes
I system and the National Epilepsy Center Magnes II 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 which will help support future purchases of
the Magnes system in Japan.
In Europe, the current 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 approximately
$1.0-$2.5 million, depending upon system configuration. Standard terms of
sale provide for payments 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. For European customers
who receive their funding from governmental agencies, the Company is
generally required to provide a bank guarantee for the amount of the deposit
which is usually released upon shipment and/or acceptance by the customer.
The time between placement of an order and installation typically ranges
between six and twelve months. The Company also enters into special
collaboration and sale arrangements with certain medical centers to promote
clinical applications development.
INSTALLATION, SERVICE AND TRAINING
In the medical device market, the ability to provide comprehensive and timely
service is a key competitive advantage and is 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, California headquarters
and from the Company's branch office in Aachen, Germany, both of which maintain
customer service departments 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 areas.
Installation and a service agreement for the first year is included 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
9
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 competing
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 position and results of operations.
Additionally, there continues to be significant price competition from the
Company's main competitors for the limited number of whole head systems
purchased worldwide. This aggressive competition has and will affect profit
margins on sales 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 Yokagawa, Shimadzu and Daikin, all three Japanese companies. Neuromag
Ltd. has received FDA clearance for marketing one of its systems as a
clinical device in the United States. It is being marketed by Picker, Inc.
in the United States and Europe, and by Elekta in Asia. An MSI system
produced by CTF Systems, Inc. has been cleared for sale as a clinical device
in Japan by the JMHW. Yokagawa has installed one system in the United States
and three additional systems in Japan. 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
Company's ability to compete successfully, particularly in the Japanese
market, may be negatively affected by the emergence of Japanese based
competitors providing similar equipment.
Other large multinational corporations, including GE Corporation, a United
States company, have initiated product investigation programs in magnetic source
imaging. The Company's ability to compete successfully, particularly against
any of its current or potential future competitors, many of which have
significantly greater financial, manufacturing, distribution, and technical
resources than the Company, will depend upon various factors, including BTi's
ability to continue its technological and market development leadership role and
BTi's ability to raise necessary capital for further development and
commercialization.
BACKLOG
As of September 30, 1998, the aggregate amount of firm backlog orders for
Company products and services was approximately $5,312,000, of which the
Company expects to fill approximately $4,581,000 before September 30, 1999. The
backlog is composed primarily of an order for a Magnes 2500 WH which was
shipped, but not yet accepted by the customer prior to September 30, 1998, an
order for an expanded 248-channel sensor, orders for a 2500 WH system and a
1300C cardiac system, and deferred service revenues on systems accepted before
September 30, 1998. Future cash proceeds to the Company pertaining to backlog as
of September 30, 1998 total approximately $1,559,000. As sales of the Company's
systems typically involve transactions of $1 million or more, backlog is
expected to fluctuate significantly from year to year depending upon timing of
orders received, installations completed and customer acceptances received
during the reporting period.
10
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, include superconducting magnetic field detectors, magnetic noise
reduction, data analysis and clinically useful displays. The Company believes it
has established an industry leadership position in MSI.
SUPERCONDUCTING MAGNETIC FIELD DETECTORS
The Company's magnetic field 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 (-460EF or -273EC), 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 which measure magnetic fields generated by
electrical activity in the body. Sensors are comprised of the magnetic field
detectors and the components required to refrigerate them to their operating
temperature. The magnetic field 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 magnetic field detectors directly in liquid helium. Because of
this innovation, 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
competitive advantage for the Company's future MSI systems. This construction
technique and the subsequent system design have received U.S. patent numbers
4,827,217; 5,494,101; 5,494,033; 5,497,828; 5,441,107; 5,471,985 and Canadian
patent number 2,155,076. The Company has also applied for additional patents
covering innovative work.
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 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. The use of those processes has been licensed to
Magnesensors, a related party, for applications other than in medical equipment.
MAGNETIC NOISE REDUCTION
The ability to detect 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
11
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,
reference coils, and supporting software processing algorithms in the
Company's Magnes 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. 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 a very
small region of electrically active tissue generates the magnetic field at any
instant of time. There are situations of potential clinical interest in which
the assumption of this single focal source of electrical activity cannot be
used, and new analysis techniques are needed. The Company has developed, and
is working with other third parties to develop techniques to extend the analysis
to multi-focal and spatially extended sources of electrical activity to address
this need.
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 product research and development primarily through
public and private sales of stock, and revenues from product sales and
product-related services. During fiscal 1998, 1997 and 1996, the Company's
research and development expenses totaled $1,756,000, $2,953,000 and
$7,767,000, respectively. The Company substantially completed the design of
its Magnes 2500 WH system in fiscal 1996 and decreased expenditures in 1997
and 1998 as part of the Company's restructuring and focus on developing a
market for sale of the Company's Magnes 2500 WH system.
MANUFACTURING AND MATERIALS
The Company engineers and manufactures every major component of its Magnes
systems, other than the host computer and its peripherals, the magnetically
shielded room which houses the sensor, and the sensor position indicator
hardware used to determine how the sensor is oriented to the body. The
Company is also currently purchasing its SQUID production requirements.
However, through the Company's joint ownership of Magnesensors, Inc., the
Company has the ability to fabricate SQUIDS from materials that become
superconductive at liquid helium and liquid nitrogen temperatures should such
a need arise.
12
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 and a third U.S. based
manufacturer has recently delivered its first room. 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. The Company believes it
has adequate alternate sources of supply for this major system component from
these 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 capabilities, mainly through
additional manufacturing personnel and by potential subcontracting assembly of
certain system components. 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 systems 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 California Health
Services. In particular, the FDA and California Health Services have
promulgated regulations to which the Company must adhere including, but not
limited to, minimum manufacturing standards, product operating effectiveness and
functional 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, 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.
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 Quality System Regulations
(QSR, formally known as Good Manufacturing Practice), 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 devices 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 Magnes 2500 WH system has been found to be substantially equivalent to
the Magnes II system. The Company's Magnes MSI systems are classified as Class
II devices, and therefore are subject to the general controls of Class I devices
and to performance standards that have not yet been defined for Class II
devices. The Company believes that its Magnes 1300C system will be found
substantially equivalent to previous Magnes devices. However, the FDA has made
no such determination, nor is the Company pursuing such clearance at this time.
The Company has filed, and subsequently received clearance, for Section 510(k)
premarket notifications with the FDA for applications of the Magnes I, Magnes II
and Magnes 2500 WH systems relating to the brain. This clearance enables the
Company to market the Magnes I, Magnes II and Magnes 2500 WH
13
systems as diagnostic devices for clinical use relating to applications of
the brain rather than research equipment. The Company has not yet applied to
the FDA or similar regulatory agencies to obtain clearance for sale of the
Magnes 1300C.
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 rights, 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
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 for
compliance with 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 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 systems 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 and maintain regulatory acceptance for marketing
for clinical use. There can be no assurance that the Company will be able to
obtain and maintain such approvals. The Magnes I system, Magnes II system
and Magnes 2500 WH systems have all received JMHW approval.
PATENTS AND PROPRIETARY INFORMATION
The Company 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, 1998, the Company held forty two (42)
patents in the United States of which four (4) pertain to the Company's
current whole head system Eight (8) of the forty two (42) patents had
counterpart patents issued in certain members of the European Patent
Organization, in Canada and in Japan. As of September 30, 1998 the Company
had filed three (3) U.S. patent applications that are in various stages of
the patent prosecution process. The Company has also filed five (5)
applications with the European Patent Organization for patent protection in
Western Europe, ten (10) applications in Japan and two (2) 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.
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
14
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. Rights to
certain of the Company's patents associated with the application of so-called
high temperature superconductors have been assigned to Magnesensors, Inc.,
partially owned by BTi and Quantum Magnetics.
Magnes-Registered Trademark- and Biomagnetic Technologies-TM- (with and
without the design) and BTi-TM- are registered trademarks of the Company by
registration with the State of California and by registration with the U.S.
Patent and Trademark Office.
HUMAN RESOURCES
As of September 30, 1998, the Company employed 59 full-time employees at its
facilities in San Diego, California and Aachen, Germany combined. None of
the Company's employees are 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.
RISKS AND UNCERTAINTIES
HISTORICAL OPERATING LOSSES AND ACCUMULATED DEFICIT
Our financial position reflects that we have been principally focused on
research and development with only low volume sales to medical research
institutions. For example, our net losses in the last three years have been
as follows:
* $4,968,000 of losses in fiscal 1998,
* $5,242,000 of losses in fiscal 1997, and
* $15,566,000 of losses in fiscal 1996.
In the last three years, our negative cash flows from operations have been as
follows:
* $5,360,000 in fiscal 1998,
* $2,032,000 in fiscal 1997, and
* $12,808,000 in fiscal 1996.
At September 30, 1998, our accumulated deficit was $90,823,000 with working
capital of $11,139,000. Our working capital at September 30, 1998 resulted
primarily from the sale of 30,000,000 shares of common stock for proceeds of
$15,000,000 during August 1998. We believe that cash projected to be generated
from operations alone will not be sufficient to meet our capital and working
capital requirements in fiscal 1999.
DEPENDENCE ON MEETING CUSTOMER REQUIREMENTS
Our success may be limited by our ability to satisfy customer performance
requirements for our systems; as well as our ability to complete, in a timely
fashion, product developments and enhancements to satisfy customer
requirements.
FUTURE CAPITAL NEEDS AND UNCERTAINTIES OF ADDITIONAL FUNDING
If we achieve the projections in our current business plan, we believe that we
will be able to meet our business obligations through June 2000. However, we
may not meet our sales projections due to the current limited and competitive
market for MSI systems. If we do not meet our sales projections, we may not
have sufficient available funds and cash flows from operations to meet our
business obligations through June 2000. Even if we meet our business plan
projections, we will likely seek additional financing in fiscal 2000 to fund
operations. We may not find such financing on terms acceptable to us, if at
all. For more information, you should also read the "Liquidity and Capital
Resources" section starting on page 22.
15
DEPENDENCE UPON A SINGLE PRODUCT AND UNCERTAINTY WITH RESPECT TO THE
DEVELOPMENT OF ADDITIONAL PRODUCTS OR APPLICATIONS
Our future success may be limited by our dependence on one product, our
Magnes 2500 WH system, which currently has limited clinical applications.
Before we can penetrate the commercial clinical market, we need to develop
additional clinical applications for our MSI system by experimenting with its
diagnostic and monitoring uses at major medical centers. We cannot assure
you that a commercial market will develop for these uses of our MSI system.
Our financial position will be materially adversely affected if we do not
develop additional clinical applications or if we are not able to develop a
commercial market for our Magnes 2500 WH system.
DEPENDENCE ON AND UNCERTAINTY WITH RESPECT TO THIRD PARTY REIMBURSEMENT AND
HEALTHCARE REFORM
Our commercial success is also highly dependent on reimbursement for
procedures using the MSI system. Currently, Medicare, insurance companies
and other healthcare providers approve payment for MSI procedures on a
case-by-case basis. As of September 30, 1998, these third party payors have
only approved limited reimbursements in the United States. Although third
party payors have increasingly approved reimbursements, we cannot assure you
that third party reimbursements will become widely available. The United
States government does not currently reimburse for MSI procedures. If
reimbursement does not become more widely available, our financial position
will be materially adversely affected. Further, if the Federal government or
any state legislature enacts legislation relating to our business or the
health care industry, including legislation relating to third party
reimbursement, our financial position could be negatively affected. In
addition, there is currently no reimbursement for MSI procedures outside of
the United States.
RISK OF TECHNOLOGICAL OBSOLESCENCE
Our industry is characterized by rapid technological change, which may also
impact our commercial success. Competitors may develop products using other
technologies or may improve existing products. This competition may reduce
the size of the potential market for our products or make them obsolete or
non-competitive. Competitors may also develop new or different products
using technology or imaging modalities that provide, or are perceived as
providing, greater value than the Company's products. Our financial position
will be materially adversely affected if such competitive developments occur.
COMPETITION
Our industry is also characterized by ongoing significant price competition.
Our competitors compete with us aggressively for the currently limited number
of whole head systems being purchased worldwide. The future profitability of
our Magnes 2500 WH system may be affected by this aggressive competition, but
we cannot presently determine the extent.
FOREIGN EXCHANGE AND RELATED RISK
A significant portion of our sales to date have been in foreign markets.
Revenues from export sales represented 71% of our revenues of MSI systems for
the year ended September 30, 1998 compared to 77% of similar revenues for the
prior year. We expect that revenues from international sales will continue to
represent a significant portion of our annual revenues. Because we sell in
foreign markets, we are exposed to potential risks of increases and decreases
in foreign currency exchange rates. Although at September 30, 1998 and 1997
we did not have any open forward exchange contracts, on occasion, we enter
into forward exchange contracts to partially hedge ( or protect) against such
foreign currency exchange risks. Nonetheless, these fluctuations may reduce
the return in U.S. dollars that we actually receive on our sales. We price
our Japanese sales in U.S. dollars. We generally price our European sales in
the currency of the country in which our MSI systems are sold. The prices of
our products in U.S. dollars will vary as the value of the U.S. dollar
fluctuates against the quoted foreign
16
currency price.
YEAR 2000 ASSESSMENT
Many currently installed computer systems and software products are coded to
accept only 2 digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept 4 digit entries to
distinguish 21st century dates from the 20th century dates. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
Year 2000 requirements.
The Company is utilizing both internal and external resources as applicable,
to identify, correct or reprogram, and test its internal systems for Year
2000 compliance. The total cost of compliance and its effect on the
Company's future results of operations is being determined as part of the
detailed conversion process. The Company has preliminarily determined that
it may be necessary to acquire new Year 2000 compliant hardware and software
systems for its accounting, purchasing , production control and inventory
management systems. Current estimates indicate potential costs may amount to
approximately $250,000 for expenditures, including hardware, software and
systems conversions, plus additional, yet to be quantified internal and
external labor costs for systems conversions and implementation.
The Company is currently seeking to ensure that the software and operating
systems included in its Magnes 2500WH are Year 2000 compliant. Failure or
perceived failure of such product to be Year 2000 compliant could
significantly adversely affect sales of the Company. Year 2000 issues could
cause potential customers to reevaluate their current system needs and as a
result consider deferring purchase of the Company's Magnes systems.
Additionally, the Company could have potential warranty or other claims with
existing Magnes systems placed with customers if such systems are not year
2000 compliant. Any of the foregoing could result in a material adverse
effect on the Company's business, operating results, and financial condition.
The Company is also in the process of requesting information and assurances
from its major vendors, service providers and customers about their state of
Year 2000 compliance and readiness. In the event that significant Year 2000
issues are identified with such parties, the Company will identify
contingency plans such as the use of alternate vendors or manual systems.
As of September 30, 1998, the Company has spent approximately $40,000 in
addressing Year 2000 issues including consultant and in-house labor costs.
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 a five year lease agreement which expires in February 2003.
Average monthly lease payments over the term of the lease approximate $50,700.
The Company's branch office in Germany leases approximately 3,000 square feet at
Gruener Weg 82, D-5100 Aachen, Germany pursuant to a year-to-year lease
agreement expiring in December 1998, which the Company is in the process of
renewing. Monthly lease payments are approximately $2,000. Sales and service
for the Company's European operations are conducted from the German facility.
17
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor its German subsidiary are involved in any litigation
which is expected to have a material adverse effect on the Company's business,
consolidated financial position, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS.
The Company's Common Stock, formerly traded on the Nasdaq National Market under
the symbol "BTIX", was delisted as of March 10, 1997 for lack of then
compliance with the net tangible assets requirement of $4 million dollars. The
Company's stock is currently trading on the Nasdaq Over the Counter Bulletin
Board. 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 Nasdaq. Such
quotations represent inter-dealer prices without retail markup, markdown or
commission and may not necessarily represent actual transactions.
Fiscal Year 1998 High Low
---------------- ----- -----
1st Quarter $1.50 $0.37
2nd Quarter $0.68 $0.38
3rd Quarter $0.42 $0.28
4th Quarter $0.64 $0.26
Fiscal Year 1997 High Low
---------------- ----- -----
1st Quarter $1.00 $0.47
2nd Quarter $0.44 $0.16
3rd Quarter $0.73 $0.20
4th Quarter $0.74 $0.36
As of December 17, 1998, there were approximately 269 holders of record of
the Company's Common Stock. The last reported closing price for the Company's
Common Stock on the Nasdaq Over the Counter Bulletin Board on December 17,
1998 was $.18 per share.
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 earnings, if any, for the development
of its business.
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, 1998 and with respect to the consolidated balance sheets at
September 30, 1998 and 1997, 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, 1995 and 1994 and the balance
sheet data at September 30, 1996, 1995 and 1994 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
18
related notes included elsewhere in this document. Dollars are stated in
thousands, except per-share amounts.
Years Ended September 30,
--------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994
-------- -------- --------- -------- ---------
Total revenues $ 2,839 $10,592 $ 733 $ 8,981 $ 3,119
Operating loss (4,898) (3,318) (15,467) (5,720) (10,147)
Net loss (4,968) (5,242) (15,566) (6,673) (10,313)
Basic and diluted net loss per share (.09) (.11) (.39) (.27) (1.03)
Shares used in computing
basic and diluted net loss 56,430 45,790 39,950 24,783 9,977
per share
September 30,
--------------------------------------------------------------------
BALANCE SHEET DATA: 1998 1997 1996 1995 1994
------- -------- -------- ------- --------
Working capital (deficiency) $11,139 $(2,284) $ (785) $10,274 $(2,114)
Total assets 17,343 6,002 16,250 20,124 9,419
Long term obligations 216 219 48 493 459
Shareholders' equity (deficit) 11,569 (1,286) 854 13,368 2,283
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Except for the historical information contained herein, the following discussion
may contain 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, 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. The Company
is focusing on the development of its technology for potential commercial market
applications such as mapping of functional cortex at risk during surgery for
tumors and other lesions, and the diagnosis and planning for surgical treatment
of epilepsy. The Company is continuing to investigate the potential applications
of its technology for problems of the heart, spine, and gastrointestinal system,
as well as for disorders of the brain such as closed-head trauma, schizophrenia
and other neuro-psychiatric disorders.
Twenty one (21) Magnes systems were installed in medical and research
institutions worldwide at the end of fiscal 1998. 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,
more than 130 insurance companies have approved reimbursement on a case-by-case
basis for certain MSI procedures performed with the Company's Magnes MSI
systems.
19
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 seated or
fully reclined positions. As of September 30, 1998, the Company had shipped
ten Magnes 2500 WH systems and received nine final acceptances from
customers.
The current price of BTi's MSI systems ranges from approximately $1.0 to $2.5
million, depending upon system configuration. A portion of the Company's
sales have been in foreign markets. The Company has previously priced
certain of its European sales in the currency of the country in which the
product was sold and the prices of such products in dollars varied as the
value of the dollar fluctuated 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, if made in the future. Although
at September 30, 1998 and 1997, the Company did not have any open forward
exchange contracts. The Company may in the future enter into forward
exchange contracts to partially hedge such foreign currency exposure, if
appropriate.
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 continued product development rather than
near-term operating performance. Since the development of the Magnes 2500 WH
system was substantially completed in fiscal year 1996, the Company has
significantly reduced product and applications development expenses and
expects that such expenditures may continue at comparatively reduced levels
in 1999.
In December 1996, the Company reported a restructuring of its operations due
to lower short-term market projections for its MSI systems. The
restructuring resulted in a reduction of 44 employees.
The Company believes that the relatively small number of proven medical
applications for the Magnes systems, the lack of routine reimbursement for
MSI procedures, and the uncertainty of product acceptance in the U.S. market
have limited system sales through fiscal 1998. Additionally, it is not
possible to reliably predict the timing and extent of future product sales
due to the uncertainties of medical applications, reimbursement and product
acceptance. The Company does not anticipate multiple sales to the same
end-user at current sales volumes, and the sale of one Magnes system may have
a significant impact on the Company's financial position and results of
operations during any reporting period. As a result, quarterly and annual
operating performance will continue to fluctuate.
RESULTS OF OPERATIONS
The consolidated financial statements and notes thereto which appear in Part II,
Item 8 should be read in conjunction with the following review:
FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Results of operations in fiscal 1998 declined as compared to fiscal 1997
primarily due to having only two final customer acceptances consisting of a
Magnes 2500 WH system and a Magnes II system in fiscal 1998, as compared to
seven final customer acceptances of Magnes 2500 WH systems in fiscal 1997.
However, as a result of the restructuring of the Company which commenced in
December 1996, additional cost savings were realized in general and
administrative, marketing and sales, and research and development expenses.
Product revenues for fiscal 1998 totaled $2,103,000 as compared to $10,131,000
in fiscal 1997. Decreased product revenues is the result of only two final
customer acceptances of systems in fiscal 1998 as compared to seven final
customer acceptances of systems in fiscal 1997.
20
Product costs totaled $1,935,000 in fiscal 1998 as compared to $6,333,000 in
fiscal 1997. Product costs decreased due to the sale of two systems in
fiscal 1998 as compared to seven systems in fiscal year 1997. Product costs
as a percentage of product revenues amounted to 92% in fiscal 1998 as
compared to 63% in fiscal 1997. The decreased margin is primarily the result
of fixed production expenses being absorbed over fewer units in fiscal 1998
as compared to fiscal 1997.
Service revenues for fiscal 1998 totaled $498,000 as compared to $395,000 in
fiscal 1997. The increase of 26% is attributable to customer acceptances of
seven systems in fiscal 1997, resulting in service revenues in fiscal 1998
inherent in the first year service contracts.
Research and development expenses totaled $1,756,000 in fiscal 1998 compared
to $2,953,000 in fiscal 1997. The decrease of 41% is the result of reduced
payroll and related research and development costs which commenced with the
Company's restructuring in December 1996. The Company also reduced research
and development expenditures in fiscal 1998 to preserve cash flows for other
uses including market development for the Company's systems.
Marketing and sales expenses amounted to $1,281,000 in fiscal 1998 as
compared to $1,902,000 in fiscal 1997, a decrease of 33%. This decrease is
attributed to the general reduction of marketing and sales expenses due to
the restructuring of operations which commenced in December 1996.
General and administrative expenses totaled $1,721,000 in fiscal 1998, a
reduction of 21% from $2,190,000 in fiscal 1997. This reduction was
primarily due to the restructuring of the Company's operations, including
reductions in administrative personnel.
Interest expense totaled $72,000 for fiscal 1998 as compared to $2,339,000 in
fiscal 1997. Interest expense of $2,339,000 in fiscal 1997 consisted
primarily of a non-cash charge of $2,250,000 pertaining to the conversion
feature of a note payable to shareholder.
Loss on equity investment in fiscal 1998 represents the Company's portion of
net losses incurred by Magnesensors, Inc. of approximately $78,000 and a
write down of the Company's remaining equity investment of approximately
$82,000. Magnesensors, Inc. is 38% owned by the Company.
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Results of operations improved in fiscal 1997 compared to fiscal 1996
primarily due to the receipt of seven final customer acceptances of Magnes
2500 WH systems and the Company's restructuring which began in December 1996.
The restructuring reduced headcount by 44 employees, resulting in scaling
back and cost savings in general and administrative, marketing and sales, and
research and development expenses.
Product revenues for fiscal 1997 totaled $10,131,000 as compared to $168,000
in fiscal 1996. Increased product revenues in fiscal 1997 resulted primarily
from customer acceptances of seven Magnes 2500 WH systems. The Company's
product revenues in fiscal 1996 consisted solely of Magnes components as no
Magnes systems were accepted by customers.
Service revenues for fiscal 1997 totaled $395,000 as compared to $565,000 in
fiscal 1996, a decrease of 30%. The reduction in service revenues is the
result of first year service contracts on Magnes I and Magnes II systems
having been substantially completed in 1996 for units shipped in 1995.
Service contracts pertaining to the Magnes 2500 WH systems did not commence
until final customer acceptances were received in the second quarter of
fiscal 1997.
Product costs totaled $6,333,000 in fiscal 1997 as compared to $2,565,000 in
fiscal 1996. Product costs increased due to sales of seven Magnes systems in
fiscal 1997 as compared to no system sales in fiscal 1996.
21
Research and development expenses totaled $2,953,000 as compared to
$7,767,000 in fiscal 1996. The decrease of 62% is related to substantial
completion of the development of the Magnes 2500 WH system in fiscal 1996 and
the Company's restructuring in fiscal 1997 which resulted in reduced payroll
and related research and development costs.
Marketing and sales expenses totaled $1,902,000 in fiscal 1997 as compared
to $2,798,000 in fiscal 1996, a decrease of 32%. The decrease was primarily
due to the restructuring of operations, including a reduction in marketing
and sales personnel, which commenced in December 1996.
General and administrative expenses totaled $2,190,000 for fiscal 1997 as
compared to $2,958,000 for fiscal 1996, a decrease of 26% attributed to the
restructuring of the Company's operations and reduction of administrative
personnel.
Interest expense totaled $2,339,000 for fiscal 1997 as compared to $788,000
for fiscal 1996. Interest expense consisted primarily of a non-cash charge
of $2,250,000 and $750,000 in fiscal 1997 and 1996 respectively, pertaining
to the conversion feature of a note payable to shareholder.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998 the Company had working capital of $11,139,000. At
September 30, 1997, the Company's current liabilities exceeded current
assets, resulting in a working capital deficiency of $2,284,000. The net
increase in working capital is primarily due to the sale of 30,000,000 shares
of common stock to offshore investors at $.50 per share for a total of
$15,000,000 during August 1998. Accordingly, cash and cash equivalents and
short-term investments, exclusive of any restricted cash, increased
$11,136,000 from September 30, 1997 to $12,365,000 at September 30, 1998.
Capital equipment expenditures totaled $95,000 in fiscal 1998, $145,000 in
fiscal 1997 and $577,000 in fiscal 1996. The Company anticipates that capital
equipment expenditures will amount to less than $100,000 in fiscal 1999.
BTi has financed its operations largely through private and public sales of
equity and debt securities. In August 1996, the Company entered into a loan
agreement with Dassesta International S.A. ("Dassesta") for $3,000,000
bearing interest at 9% per annum, maturing in February 1997. Under the terms
of the agreement, the note plus accrued interest was convertible at the
option of the company into common shares upon execution of the agreement at
$.40 per share or by Dassesta upon the earlier of maturity, default, or
significant change in ownership of BTi at $.40 per share. The Company
converted the $3,000,000 loan principal and related accrued interest of
$87,040 into 7,717,602 shares of the Company's common stock on December 31,
1996.
In May 1997, the Company entered into a loan facility with Dassesta
International, S.A. ("Dassesta"), the Company's then controlling shareholder.
The loan facility provided for maximum borrowings of $1,700,000 and expired
on December 31, 1998. Interest accrued on outstanding principal at 10% and
was payable on December 31, 1997 and 1998. The loan was collateralized by
certain of the Company's accounts receivable and required principal repayment
upon collection of such receivables. As of September 30, 1997, the Company
had $975,000 outstanding under the loan which was repaid in 1998.
In December 1997, the Company sold 4,000,000 unregistered shares of common
stock to Dassesta and 1,500,000 additional unregistered shares of common
stock to Bank Leu under Regulation S at $.50 per share. Consideration
received by the Company in relation to the common stock sales consisted of
cash totaling $793,000 and cancellation of its then outstanding loan
principal of $1,700,000, related accrued interest of $38,000 and accounts
payable of $219,000, all owed to Dassesta.
22
In the period January 1998 through July 1998 the Company borrowed a total of
$2,000,000 from Dassesta International S.A., a major shareholder of the
Company to meet working capital needs. In August 1998 the Company concluded
the sale of 30,000,000 shares of unregistered common stock to overseas
investors pursuant to Regulation S. Dassesta, which first became an investor
in the Company in March 1995, purchased 10,000,000 shares, "La Caixa", Caja
de Ahorras y Pensiones de Barcelona, a leading Spanish financial institution,
purchased 10,000,000 shares, and the balance of the additional 10,000,000
shares were purchased by Experta Bil, Bank Leu and LGT Bank Luxembourg. The
sale of the entire 30,000,000 shares was consummated at $.50 per share,
yielding $15,000,000. The Company immediately repaid Dassesta the $2,000,000
of working capital loans plus $35,824 of accrued interest, and retained
proceeds of $12,964,176, of which $10,100,000 was invested in short term
U.S. Treasury Notes as of September 30, 1998.
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, 1999 are
expected to substantially exceed cash projected to be generated from
operations. However, the Company believes that its current cash and
short-term investments exclusive of restricted cash are sufficient to support
its operating needs through June 2000 based upon the Company's current
business plan. The realization of this business plan is dependent upon the
Company' ability to successfully capture a number of Magnes 2500 WH system
sales in the current highly competitive market for the limited number of
systems being purchased worldwide. There can be no assurance that sufficient
numbers of Magnes 2500WH systems sales will be made by the Company in order
to realize the current business plan. If these sales are not achieved as
planned, the Company's available funds and projected cash flows from
operations may not be sufficient to meet operating needs through June 2000.
In either case, the Company will likely seek additional financing in fiscal
2000, or prior thereto, to continue to fund operating needs. There can be no
assurance that such financing will be available on terms acceptable to the
Company, if at all. See "Risks and Uncertainties".
YEAR 2000 ASSESSMENT
Many currently installed computer systems and software products are coded to
accept only 2 digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept 4 digit entries to
distinguish 21st century dates from the 20th century dates. Systems that do
not properly recognize such information could generate erroneous data or
cause a system to fail. As a result, in less than two years, computer systems
and/or software used by many companies may need to be upgraded to comply with
Year 2000 requirements.
The Company is utilizing both internal and external resources as applicable,
to identify, correct or reprogram, and test its internal systems for Year
2000 compliance. The total cost of compliance and its effect on the
Company's future results of operations is being determined as part of the
detailed conversion process. The Company has preliminarily determined that
it may be necessary to acquire new Year 2000 compliant hardware and software
systems for its accounting, purchasing , production control and inventory
management systems. Current estimates indicate potential costs may amount to
approximately $250,000 for expenditures, including hardware, software and
systems conversions, plus additional, yet to be quantified internal and
external labor costs for systems conversions and implementation.
The Company is currently seeking to ensure that the software and operating
systems included in its Magnes 2500WH are Year 2000 compliant. Failure or
perceived failure of such product to be Year 2000 compliant could
significantly adversely affect sales of the Company. Year 2000 issues could
cause potential customers to reevaluate their current system needs and as a
result consider deferring purchase of the Company's Magnes systems.
Additionally, the Company could have potential warranty or other claims with
existing Magnes systems placed with customers if such systems are not year
2000 compliant. Any of the foregoing could result in a material adverse
effect on the Company's business, operating results, and financial condition.
23
The Company is also in the process of requesting information and assurances
from its major vendors, service providers and customers about their state of
Year 2000 compliance and readiness. In the event that significant Year 2000
issues are identified with such parties, the Company will identify
contingency plans such as the use of alternate vendors or manual systems.
As of September 30, 1998, the Company has spent approximately $40,000 in
addressing Year 2000 issues including consultant and in-house labor costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements as of September 30, 1998 and
1997, and for each of the three years in the period ended September 30, 1998
and the reports of independent accountants are included in this report as
listed in the index on page 26 of this report ( Item 14 (a)).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Information required for this item is set forth in Form 8-K dated September
26, 1997 and filed with the Securities and Exchange Commission on October 2,
1997 and is incorporated by reference as part of this report.
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 "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement and Notice of Annual Meeting of Shareholders the
"Proxy Statement" to be filed with the Commission within 120 days of the
Company's fiscal year end and delivered to shareholders in connection with
the 1999 Annual Meeting of Shareholders, 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.
24
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 Relationships and
Related Transactions" in the Proxy Statement, which sections are incorporated
herein by reference.
25
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
Reports of Independent Accountants . . . . . . . . . . . . . . . 32
Consolidated Balance Sheets at September 30, 1998 and 1997 . . . 35
Consolidated Statements of Operations for the three years
ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . 36
Consolidated Statement of Shareholders' Equity (Deficit) for
the three years ended September 30, 1998 . . . . . . . . . . . . 37
Consolidated Statements of Cash Flows for the three years
ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . 38
Notes to Consolidated Financial Statements . . . . . . . . . . . 39
(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:
26
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) Certificate of Amendment of Fourth Restated 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.
+10.36 (1) Form of Indemnification Agreements for directors and officers.
10.41 (2) License and R & D 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, as amended,
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).
+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.
27
Exhibit
No. Description of Document
+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).
10.75 (11) Purchase and Distributorship Agreement dated January 23, 1997
between the Company and Sumitomo Metal Industries, Ltd. (with
certain confidential portions omitted).
10.76 Form of Offshore Stock Subscription Agreements for August 1998
Sale of Company Common Stock
10.77 Joint Venture Agreement with Magnesensors
23.1 Consent of Arthur Andersen LLP
23.2 Consent of PricewaterhouseCoopers LLP
24 Power of Attorney
27 Financial Data Schedule
(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.
28
(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 1994 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 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.
(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-8, Registration Statement No. 33-68136
filed August 27, 1993.
(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-1, Registration Statement No. 33-81294,
filed July 8, 1994.
(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 Fiscal 1995 Form 10-K
(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 form 8-K, filed April 14, 1995.
(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 Fiscal 1997 Form
10-K
+ 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.
29
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/D. Scott Buchanan December 24, 1998
------------------------- --------------------
D. Scott Buchanan Date
President, Chief Executive Officer
30
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/D. Scott Buchanan December 24 , 1998
----------------------------------- -------------------
D. Scott Buchanan Date
President, Chief Executive Officer
Director
By /s/ Herman Bergman December 24 , 1998
----------------------------------- -------------------
Herman Bergman Date
Vice President Finance, Chief Financial Officer,
Chief Accounting Officer, Corporate Secretary
Director
By * December 24, 1998
----------------------------------- -------------------
Rodolfo Llinas, Director Date
By * December 24, 1998
----------------------------------- -------------------
Martin P. Egli, Director Date
By * December 24, 1998
----------------------------------- -------------------
Enrique Maso, Chairman of the Board Date
By * December 24, 1998
----------------------------------- -------------------
Galleon Graetz, Director Date
*By /s/ D. Scott Buchanan
-----------------------------------
D. Scott Buchanan
(Attorney-in-Fact)
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Biomagnetic Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
Biomagnetic Technologies, Inc. (a California Corporation) and subsidiary as
of September 30, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the Company has
historically reported net losses and negative cash flows from operations.
Currently, the Company anticipates that it will seek additional financing to
allow it to execute its business plan through the year 2000. For a
discussion of management's plans in this regard, see Note 1.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Biomagnetic Technologies,
Inc. and subsidiary as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II-Valuation and Qualifying
Accounts is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial
statements. The schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects, as of and for the years ended
September 30, 1998 and 1997 the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
San Diego, California
November 13, 1998
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Biomagnetic Technologies, Inc.:
In our opinion, the consolidated statements of operations, of changes in
shareholders' equity (deficit) and of cash flows for the year ended September
30, 1996 (appearing on pages 36 through 38 of the Biomagnetic Technologies,
Inc. Form 10-K) present fairly, in all material respects, the results of
operations and cash flows of Biomagnetic Technologies, Inc. and its
subsidiary for the year 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 audit. We conducted
our audit 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 audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of
Biomagnetic Technologies, Inc. for any period subsequent to September 30,
1996.
The accompanying consolidated financial statements referred to above have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 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 discussed in Note 1. The
consolidated financial statements referred to above do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PRICEWATERHOUSECOOPERS LLP
San Diego, California
January 10, 1997, except as to the
last paragraph of Note 8, which is
as of December 19, 1997
33
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Biomagnetic Technologies, Inc.:
Our audit of the consolidated financial statements of Biomagnetic
Technologies, Inc. and its subsidiary referred to in our report dated January
10, 1997, except as to the last paragraph of Note 8, which is as of December
19, 1997 appearing on page 33 of this Form 10-K also included an audit of
the Financial Statement Schedule II of Biomagnetic Technologies, Inc. and its
subsidiary for the year ended September 30, 1996 appearing on page 53. In
our opinion, this Financial Statement Schedule of Biomagnetic Technologies,
Inc. and its subsidiary presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/PRICEWATERHOUSECOOPERS LLP
San Diego, California
January 10, 1997, except as to
the last paragraph of Note 8, which is
as of December 19, 1997
34
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
1998 1997
---------- ----------
ASSETS
Cash and cash equivalents $2,282,002 $1,228,734
Short-term investments 10,082,500 -
Restricted cash 137,747 500,181
Accounts receivable, less allowance for doubtful
accounts of $10,420 in 1998 and 1997 932,161 398,454
Inventories 2,990,759 2,387,975
Prepaid expenses and other current assets 271,095 269,457
----------- ----------
Total current assets 16,696,264 4,784,801
----------- ----------
Net property and equipment 303,874 526,444
Investment in Magnesensors - 160,000
Restricted cash 186,601 192,020
Other assets 155,839 339,063
----------- ----------
TOTAL ASSETS $17,342,578 $6,002,328
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable $782,664 $1,340,992
Accrued liabilities 747,978 934,012
Accrued salaries and employee benefits 460,482 511,843
Customer deposits 2,909,100 2,172,160
Deferred revenue 656,800 1,134,938
Note payable to shareholder - 975,000
----------- ----------
Total current liabilities 5,557,024 7,068,945
Other long-term liabilities 216,183 219,489
----------- ----------
Total liabilities 5,773,207 7,288,434
----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock -- no par value, 100,000,000 shares authorized;
Shares issued and outstanding 83,367,112 in 1998 and
47,720,887 in 1997 99,391,882 81,568,769
Additional paid-in capital 3,000,000 3,000,000
Accumulated deficit (90,822,511) (85,854,875)
----------- ----------
Total shareholders' equity (deficit) 11,569,371 (1,286,106)
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $17,342,578 $6,002,328
----------- ----------
----------- ----------
See Notes to Consolidated Financial Statements.
35
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
1998 1997 1996
----------- ----------- ------------
REVENUES
Products $2,102,967 $10,130,727 $167,684
Product services 497,988 395,327 564,921
Contract research 238,053 65,838 -
----------- ----------- ------------
2,839,008 10,591,892 732,605
COST OF REVENUES
Products 1,935,049 6,333,270 2,565,454
Product services 809,599 466,763 111,173
Contract research 233,860 64,771 -
----------- ----------- ------------
2,978,508 6,864,804 2,676,627
----------- ----------- ------------
GROSS MARGIN (139,500) 3,727,088 (1,944,022)
OPERATING EXPENSES
Research and development 1,755,756 2,953,009 7,767,199
Marketing and sales 1,281,428 1,902,157 2,798,248
General and administrative 1,721,032 2,189,878 2,957,571
----------- ----------- ------------
4,758,216 7,045,044 13,523,018
----------- ----------- ------------
OPERATING LOSS (4,897,716) (3,317,956) (15,467,040)
Interest expense (72,129) (2,339,439) (788,291)
Interest income 99,894 223,565 524,895
Other income, net 63,115 193,064 164,623
Loss on equity investment (160,000) - -
----------- ----------- ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,966,836) (5,240,766) (15,565,813)
Provision for Income Taxes 800 800 -
----------- ----------- ------------
NET LOSS $(4,967,636) $(5,241,566) $(15,565,813)
----------- ----------- ------------
----------- ----------- ------------
BASIC AND DILUTED NET LOSS PER SHARE $(.09) $(.11) $(.39)
----------- ----------- ------------
----------- ----------- ------------
Weighted Average Number of
Common Shares Outstanding 56,429,913 45,789,916 39,950,047
----------- ----------- ------------
----------- ----------- ------------
See Notes to Consolidated Financial Statements.
36
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Accumulated
Shares Amount Paid-In Capital Deficit Total
---------- ----------- --------------- ------------- -----------
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
Interest cost for conversion feature of note
payable to shareholder - - 3,000,000 - 3,000,000
Net loss - - - (15,565,813) (15,565,813)
---------- ----------- --------------- ------------- -----------
BALANCE, SEPTEMBER 30, 1996 39,974,222 78,467,197 3,000,000 (80,613,309) 853,888
Exercise of stock options 29,063 14,532 - - 14,532
Conversion of note payable to shareholder
and related accrued interest to common stock 7,717,602 3,087,040 - - 3,087,040
Net loss - - - (5,241,566) (5,241,566)
---------- ----------- --------------- ------------- -----------
BALANCE, SEPTEMBER 30, 1997 47,720,887 81,568,769 3,000,000 (85,854,875) (1,286,106)
Exercise of stock options 146,225 73,113 - - 73,113
Conversion of note payable to shareholder,
related accrued interest and accounts payable
to common stock 3,914,000 1,957,000 - - 1,957,000
Sale of common stock 31,586,000 15,793,000 - - 15,793,000
Net loss - - - (4,967,636) (4,967,636)
---------- ----------- --------------- ------------- -----------
BALANCE, SEPTEMBER 30, 1998 83,367,112 $99,391,882 $3,000,000 $(90,822,511) $11,569,371
---------- ----------- --------------- ------------- -----------
---------- ----------- --------------- ------------- -----------
See Notes to Consolidated Financial Statements
37
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
1998 1997 1996
------------ ------------ -------------
OPERATING ACTIVITIES
Net loss $(4,967,636) $(5,241,566) $(15,565,813)
Adjustments to reconcile net loss to net
cash used in operating activities:
Interest cost for conversion feature
of note payable to shareholder - 2,250,000 750,000
Loss on disposition of assets 10,752 9,401 345,677
Loss on equity investment 160,000 - -
Depreciation and amortization 307,163 437,552 1,248,141
Changes in operating assets and liabilities:
Restricted cash 367,853 5,892,354 (5,484,555)
Accounts receivable (533,707) (381,723) 757,888
Inventories (602,784) 3,239,540 (3,150,721)
Prepaid expenses and other current assets (1,638) 68,335 118,314
Other assets 183,224 (60,249) 283,742
Accounts payable (339,328) (1,291,925) 2,435,363
Accrued liabilities (148,034) (875,193) (311,674)
Accrued salaries and employee benefits (51,361) (348,312) 249,582
Customer deposits 736,940 (7,036,166) 5,352,139
Deferred revenue (471,955) 1,344,938 -
Other liabilities (9,489) (38,581) 164,147
------------ ------------ -------------
Net cash used in operating activities (5,360,000) (2,031,595) (12,807,770)
------------ ------------ -------------
INVESTING ACTIVITIES
Investment in Magnesensors - (80,000) -
Change in short-term investments, net (10,082,500) 744,138 9,771,564
Payments for property and equipment (95,345) (145,433) (577,237)
------------ ------------ -------------
Net cash (used in) provided by investing activities (10,177,845) 518,705 9,194,327
------------ ------------ -------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 15,866,113 14,532 51,607
Payment of notes payable to shareholder (2,000,000) - -
Proceeds from notes payable to shareholder 2,725,000 975,000 3,000,000
------------ ------------ -------------
Net cash provided by financing activities 16,591,113 989,532 3,051,607
------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,053,268 (523,358) (561,836)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,228,734 1,752,092 2,313,928
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $2,282,002 $1,228,734 $1,752,092
------------ ------------ -------------
------------ ------------ -------------
See Notes to Consolidated Financial Statements.
38
NOTE 1. BUSINESS, RISKS AND UNCERTAINTIES
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 to medical
institutions located in the United States, Europe and Japan. 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.
To date, the Company has been engaged principally in research and development
activities, and has made only low volume sales to medical research
institutions. The Company is dependent on its current Magnes 2500WH system 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. A continued lack of clinical applications and commercial
market for the Company's Magnes 2500WH system would have a material adverse
impact on the Company's financial position, results of operations and cash
flows.
The Company's commercial success is also 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
September 30, 1998, there have been limited reimbursement from third party
payors in the US. Although the number of third party payors making
reimbursements has increased, there is no assurance that third party
reimbursements will become widely available. Reimbursements are not
currently provided for MSI procedures by the United States government, nor is
there any assurance that the US government will authorize or budget for such
procedures in the future. If widespread availability of reimbursement from
the government and private insurers is not achieved, the Company's financial
position, results of operations and cash flows would be materially adversely
affected. 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 its financial position, results of operations and
cash flows.
The industry in which the Company operates is 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 could have a material adverse
effect on the Company's financial condition, results of operations and cash
flows.
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 future
profitability of the Company's Magnes 2500WH system, the extent of which is
not presently determinable.
39
The Company incurred net losses of $4,968,000, $5,242,000, and $15,566,000 in
fiscal 1998, 1997 and 1996, respectively. The Company had negative cash flow
from operations of $5,360,000, $2,032,000, and $12,808,000 in fiscal 1998,
1997 and 1996, respectively. At September 30, 1998, the Company has an
accumulated deficit of $90,823,000, net capital of $11,569,000 and working
capital of $11,139,000. Management anticipates that capital and working
capital requirements in fiscal 1999 will substantially exceed cash projected
to be generated by operations.
In August 1998, the Company received total proceeds of $15,000,000 from the
sale of 30,000,000 unregistered shares of common stock at $.50 per share to
offshore investors pursuant to Regulation S. Dassesta International S.A., a
major shareholder of BTi since March 1995 purchased 10,000,000 shares. "La
Caixa", Caja de Ahorros y Pensiones de Barcelona, one of the leading
financial institutions of the Kingdom of Spain purchased 10,000,000 shares.
A total of 2,000,000 shares were sold to Swisspartners Investment Network
Ltd, and the remaining 8,000,000 shares were purchased by two European banks
under the same terms and conditions.
As of July 1998, the Company had borrowed $2,000,000 from Dassesta
International, S.A. The loan was a 180 day unsecured loan bearing interest
at 8%. In August 1998, the Company paid off the total principal of $2,000,000
owed to Dassesta plus $36,000 of related accrued interest using proceeds from
the August 1998 financing of $15,000,000.
In February 1998, the Company discounted two customer notes for a net amount
of $355,000 received from Dassesta International S.A. The face amount of
these notes was 2,200,000 French Francs, equal to approximately $366,000 at
the then current exchange rate.
In December 1997, the Company sold 4,000,000 unregistered shares of common
stock to Dassesta and an additional 1,500,000 unregistered shares of common
stock to Bank Leu under Regulation S at $.50 per share. Consideration
received by the Company in relation to the common stock sales consisted of
cash totaling $793,000 and cancellation of its then outstanding loan
principal of $1,700,000, related accrued interest of $38,000 and accounts
payable of $219,000, all owed to Dassesta.
The Company currently anticipates that its existing capital resources,
including the net proceeds from the August 1998 sales of 30,000,000 shares
of common stock to offshore investors will be sufficient to provide operating
capital required to meet its obligations in the normal course of business
through June 2000, based upon the Company's current business plan. There can
be no assurance, however, that sales of the Company's systems projected in
the current business plan will be achieved in the current limited and
competitive market for its systems. If these sales are not achieved as
planned, the Company's available funds may not be sufficient to meet
operating capital needs through June 2000. Additionally, the Company will
likely seek additional financing in fiscal 2000 or prior thereto, to continue
to fund operating capital requirements at that time. There can be no
assurance that such financing will be available on terms acceptable to the
company, if at all.
40
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. All material intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term highly liquid investments
purchased with original maturities of three months or less. Cash
equivalents are stated at cost, which approximates market value.
SHORT-TERM INVESTMENTS
Management determines the appropriate classification of its short-term
investments at the time of purchase and reevaluates such designation as of
each balance sheet date. The Company has classified its short-term
investments as "available-for-sale". At September 30 1998, short-term
investments are stated at cost which approximates market, and consist of U.S.
Treasury Notes, maturing in December 1998 and March 1999. The Company had no
realized gains or losses on short-term investments in fiscal 1998, 1997 and
1996.
RESTRICTED CASH
Restricted cash consists of cash balances required to be held under
contractual obligation to provide future services pertaining to sales of MSI
systems and amounts held in trust for executive termination costs.
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.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
on the first-in, first-out basis.
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
41
improvements are amortized over the lesser of their estimated useful life or
the related lease term. Maintenance and repairs are charged to expense as
incurred and the costs of additions and betterments that increase the useful
lives of related assets are capitalized.
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.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting For Income
Taxes." Deferred income tax assets or liabilities are recognized based on the
temporary differences between financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the years in
which the differences are expected to reverse. Deferred income tax expenses
or credits are based on the changes in the deferred income tax assets or
liabilities from period to period.
REVENUE RECOGNITION
Standard terms of product sales provide for payment of 40% of the purchase
price upon placement of the order, 40% upon shipment and the remaining 20%
upon final customer acceptance. Revenue from product sales is recognized at
the time of customer acceptance. Standard terms of sale also include a one
year service period following the sale. The Company defers and recognizes
service revenues over the related service period.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION ACCOUNTING
The Company accounts for stock-based compensation in accordance with SFAS
No. 123 "Accounting for Stock-Based Compensation." The Company has elected to
measure compensation expense 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 has provided pro forma
disclosures as if the fair value based method prescribed by SFAS No. 123 had
been utilized.
42
NET LOSS PER SHARE
Basic and diluted net loss per share is computed in accordance with SFAS
No. 128 "Earnings Per Share," based upon the weighted average number of
common shares outstanding. Common stock equivalents are anti-dilutive and are
excluded from the computation of basic and diluted net loss per share.
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 average exchange rates 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, 1998, 1997 and 1996 such gains (losses) totaled approximately
$79,000, $(17,000) and $136,000, respectively.
OFF-BALANCE SHEET RISK
The Company has periodically entered 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, 1998 and 1997, the Company
did not have any open forward exchange contracts.
RECENT AUTHORITATIVE PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting of comprehensive income and its components in a full
set of general purpose financial statements. SFAS No. 131 requires reporting
certain information about operating segments in condensed financial
statements of interim periods issued to shareholders. The Company adopted
SFAS No. 130 in fiscal 1998 which had no impact on the Company's financial
position or results of operations as presented as the Company has no
components of comprehensive income. SFAS No. 131 is required to be adopted
during fiscal 1999. The adoption of this standard will not have a material
effect on the Company's financial position or results of operations as it
pertains to disclosure only.
In March 1998, the Accounting Standards Executive Committee (AcSEC) issued
AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement provides
guidance on accounting for the costs of computer software developed or
obtained for internal use and identifies characteristics to be used in
determining when computer software is for internal use. SOP 98-1 is
effective for fiscal years beginning after December 15,
43
1998, with earlier application permitted. The Company anticipates that SOP
98-1 will not have a material impact on the Company's financial position or
results of operations.
In April 1998, the AcSEC issued AICPA SOP 98-5, "Reporting on the Costs of
Start-Up Activities." This statement provides guidance on the financial
reporting of start-up costs and organization costs and requires that such
costs of start-up activities be expensed as incurred. SOP 98-5 is effective
for fiscal years beginning after December 15, 1998, with earlier application
permitted. The Company anticipates that the adoption of SOP 98-5 will not
have a material impact on the Company's financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS No. 133 is effective for fiscal quarters
beginning after June 15, 1999. As of September 30, 1998 and 1997, the
Company had not entered into any derivative instrument arrangements.
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.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 3. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment which includes developing,
manufacturing and selling magnetic source imaging products. The overall
market for the Company's operations can be further divided into three
overlapping segments: the basic research market, the clinical applications
development market, and the commercial clinical market. Substantially all of
the Company' revenues have been derived from, and substantially all of the
Company's assets have been devoted to, the basic research market. The
following represents information about operations in different geographic
areas pertaining to the basic research market:
44
Years Ended September 30,
1998 1997 1996
---- ---- ----
Revenues
United States $814,052 $2,401,984 $198,351
Germany 542,956 6,995,299 449,895
France 1,482,000 - -
Japan - 1,194,609 84,359
----------- ----------- ------------
$2,839,008 $10,591,892 $732 ,605
----------- ----------- ------------
----------- ----------- ------------
Net loss
United States $(4,311,817) $(5,588,919) $(13,893,993)
Germany (655,819) 347,353 (1,671,820)
----------- ----------- ------------
$(4,967,636) $(5,241,566) $(15,565,813)
----------- ----------- ------------
----------- ----------- ------------
Identifiable assets
United States $16,154,310 $3,162,666 $11,628,478
Germany 1,188,268 2,839,662 4,621,123
----------- ----------- ------------
$17,342,578 $6,002,328 $16,249,601
----------- ----------- ------------
----------- ----------- ------------
NOTE 4. CUSTOMER CONCENTRATIONS
On average, the Company's MSI systems sell for approximately $1.0 - $2.5
million, resulting in significant concentrations of revenues and accounts
receivable. As of September 30, 1998 and 1997, 77% and 84%, respectively,
of accounts receivable pertained to 2 customers. As of September 30, 1998,
the Company has foreign currency denominated accounts receivable of 2,500,000
French Francs, equal to $446,000 at September 30, 1998. For the years ended
September 30, 1998, 1997 and 1996 total product revenues were derived from 2,
9 and 4 customers, respectively.
NOTE 5. FINANCIAL STATEMENT INFORMATION
Inventories consist of the following:
1998 1997
---- ----
Finished goods $ 500,030 $578,702
Work-in-process 2,328,003 1,527,828
Raw materials 162,726 281,445
---------- ----------
$2,990,759 $2,387,975
---------- ----------
---------- ----------
Net property and equipment consists of the following:
1998 1997
---- ----
Machinery and equipment $7,279,453 $7,192,248
Office furniture and equipment 253,513 258,376
Leasehold improvements 359,731 357,480
---------- ----------
7,892,697 7,808,104
Less Accumulated Depreciation (7,588,823) (7,281,660)
---------- ----------
$ 303,874 $ 526,444
---------- ----------
---------- ----------
45
Accrued liabilities consist of the following:
1998 1997
---- ----
Warranty allowance $350,000 $ 350,000
Customer obligations 300,000 450,000
Other 97,978 134,012
-------- ---------
$747,978 $ 934,012
-------- ---------
-------- ---------
Supplemental Disclosure of Cash Flow Information:
In December 1997, the Company exchanged common stock with a value of
$1,957,000 for cancellation of a note payable to shareholder of $1,700,000,
related accrued interest of $38,000 and accounts payable of $219,000, all
owed to Dassesta.
In June 1997, the Company contributed fixed assets with a net book value of
$80,000 as part of its investment in Magnesensors.
On December 31, 1996, the Company converted principal outstanding under a
note payable to shareholder of $3,000,000 and related accrued interest of
$87,040 into 7,717,602 shares of common stock.
During the years ended September 30, 1998, 1997 and 1996, the Company paid
approximately the following for :
1998 1997 1996
---- ---- ----
Interest $72,000 $89,000 $ 38,000
Income Taxes $ 800 $ 800 $ 800
NOTE 6. INVESTMENT IN MAGNESENSORS
In June 1997, BTi entered into a collaboration with Quantum Magnetics, Inc.,
a private company, to form a new company called Magnesensors, Inc. BTi and
Quantum Magnetics each own 38% of the outstanding stock of the new company
and 24% of the outstanding stock is owned by the management of Magnesensors.
BTi licensed certain technology, assigned certain patents and contributed
cash and certain fixed assets in connection with the formation of
Magnesensors. Magnesensors will continue the development of applications and
products using high temperature superconductors. BTi will receive
royalty-free licenses to any technology developed by Magnesensors.
BTi accounts for its investment in Magnesensors under the equity method.
During fiscal 1998 and 1997, BTi paid Magnesensors $160,000 and $36,000,
respectively, for certain services rendered. As of September 30, 1998, the
Company's equity investment in Magnesensors has been reduced to zero by
recording the Company's portion of Magnesensors' losses for fiscal 1998 of
approximately $78,000 and writing off the remaining balance of approximately
$82,000 based upon current estimates of future cash flows and profitability
of Magnesensors.
46
BTi and Quantum Magnetics have agreed to guarantee a working capital line of
credit up to $200,000 through June 2000 upon the attainment of such line of
credit by Magnesensors.
NOTE 7. INCOME TAXES
The Company's provision for income taxes in fiscal 1998, 1997 and 1996
consists of minimum state taxes.
The components of deferred tax assets at September 30, 1998 and 1997 are as
follows:
1998 1997
---- ----
Net operating loss carryforwards $7,090,000 $ 5,330,000
Tax credits 830,000 780,000
Capitalized research and development costs 941,000 1,771,000
Allowances 1,310,000 1,063,000
Other 339,000 397,000
---------- ------------
10,510,000 9,341,000
Valuation allowance (10,510,000) (9,341,000)
---------- ------------
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 $19,200,000 and $6,200,000 of Federal and State net operating
loss carryforwards which will expire at various dates through 2013. As a
result of ownership changes (as defined by Section 382 of the Internal
Revenue Code of 1986, as amended) which occurred in fiscal 1995 and fiscal
1997, the Company's tax loss carryforwards generated prior to fiscal 1998
have been limited to a total of approximately $18,650,000 of which
approximately $930,000 can be utilized per year as of September 30, 1998.
The provision for income taxes reconciles to the amount computed by applying
the federal statutory rate to income before taxes as follows:
1998 1997 1996
---- ---- ----
Computed expected federal tax benefit $(1,688,996) $(1,834,268) $(5,448,035)
State taxes, net of federal benefit (287,558) (319,687) (1,266,451)
Change in valuation reserve 1,169,000 (3,730,000) 6,318,000
Limitation of net operating loss
carryforwards and tax benefits 830,000 4,719,000 _
Interest cost for conversion feature of
note payable to shareholder - 924,750 332,250
Other (21,646) 241,005 64,236
----------- ----------- -----------
Provision for income taxes $ 800 $ 800 $ -
----------- ----------- -----------
----------- ----------- -----------
NOTE 8. DEBT
During 1998, the Company borrowed a total of $2,725,000 from Dassesta
International, S.A. at an interest rate of 8%. In December 1997 the Company
issued common stock for cancellation of loan
47
principal due Dassesta of $1,700,000 and repaid additional loan principal
during 1998 totaling $2,000,000. Interest expense in 1998 related to Dassesta
was approximately $72,000.
In February 1998, the Company discounted two customer notes for a net amount
of $355,000 received from Dassesta International, S.A., a principal
shareholder. The face amount of these notes was 2,200,000 French Francs,
equal to approximately $366,000 at the then current exchange rate.
In May 1997, the Company entered into a loan facility with Dassesta
International, S.A. ("Dassesta"), the Company's then controlling shareholder.
The loan facility provided for maximum borrowings of $1,700,000 expiring on
December 31, 1998. Interest accrued on outstanding principal at 10%. The
loan was collateralized by certain of the Company's accounts receivable and
required principal repayment upon collection of such receivables. Interest
expense in 1997 related to loans from Dassesta was approximately $2,339,000.
In August 1996, the Company entered into a loan agreement with Dassesta for
$3,000,000 bearing interest at 9% per annum, maturing in February 1997.
Under the terms of the agreement, the note plus accrued interest was
convertible at the option of the company into common shares upon execution
of the agreement at $.40 per share or by Dassesta upon the earlier of
maturity, default, or significant change in ownership of BTi at $.40 per
share. The Company converted the $3,000,000 loan principal and related
accrued interest of $87,040 into 7,717,602 shares of the Company's common
stock on December 31, 1996.
Upon execution of the convertible note in August 1996, the closing quoted
market price of the Company's common stock was $.94 per share, and the
conversion price to common stock under the note payable was $.40, a $.54
discount from market. As a result, under the provisions of Topic D-60, the
intrinsic value of the conversion feature was equal to the face value of the
note and was required to be originally recorded as debt discount and
additional paid-in capital, and amortized to interest expense from the date
of the note to the earliest conversion date by Dassesta. This resulted in
non-cash interest expense of $2,250,000 and $750,000 being charged to
operations in 1997 and 1996, respectively.
NOTE 9. LEASE OBLIGATIONS
The Company leases its office and production facilities and certain equipment
under noncancelable operating leases expiring at various dates through
February 2003. The Company's main facility lease agreement expires in
February 2003. Approximate future minimum cash payments under operating
leases are as follows:
Year Ending September 30,
1999 $ 637,000
2000 618,000
2001 618,000
2002 613,000
2003 253,000
----------
$2,739,000
----------
----------
48
Total rent expense under noncancelable operating leases was approximately
$604,000, $580,000 and $608,000 for the years ended September 30, 1998, 1997
and 1996, respectively.
NOTE 10. SHAREHOLDERS' EQUITY
COMMON STOCK
On August 5, 1998, the Company received $15,000,000 from the sale of
30,000,000 shares of common stock at $.50 per share to offshore investors
pursuant to Regulation S. Of the total 30,000,000 shares, 10,000,000 shares
were sold to "La Caixa", Caja de Ahorros y Pensiones de Barcelona, one of
the leading financial institutions of the Kingdom of Spain, 10,000,000 shares
were sold to Dassesta International S.A., a major shareholder of BTi,
2,000,000 shares were sold to Swisspartners Investment Network Ltd., and
8,000,000 shares to other European banks.
In December 1997, the Company sold 4,000,000 unregistered shares of common
stock to Dassesta and an additional 1,500,000 unregistered shares of common
stock to Bank Leu under Regulation S at $.50 per share. Consideration
received by the Company in relation to the common stock sales consisted of
cash totaling $793,000 and cancellation of its then outstanding loan
principal of $1,700,000, related accrued interest of $38,000 and accounts
payable of $219,000, all owed to Dassesta.
During August 1996, the Company completed negotiations with its then
controlling shareholder, Dassesta for an unsecured working capital loan of
$3,000,000 which was to mature on February 14, 1997, bearing interest at 9%
per annum. The principal amount of the loan and any accrued interest was
convertible at the option of the Company upon execution of the agreement at
$.40 per share or at the option of Dassesta upon the earlier of maturity,
default, or significant change in ownership of BTi at $.40 per share. The
Company elected to convert the $3,000,000 loan and related accrued interest
of $87,040 into 7,717,602 shares of common stock on December 31, 1996.
STOCK OPTION PLANS
The Company has various incentive and non-qualified stock option plans which
provide that options to purchase 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 and 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. On December 31, 1996, the Company's 1987 Incentive Stock
Option Plan which provided options to purchase up to 5,000,000 shares of
common stock expired. At January 1, 1997, a new 1997 Incentive Stock Option
Plan was approved by the Board of Directors, authorizing options to purchase
3,000,000 shares of common stock. At September 30 1998, options to purchase
2,645,038 shares of the Company's common stock are exercisable and 365,600
shares are available for future grants under the plans. Options outstanding
at September 30, 1998 have exercise prices between $6.00 and $.28 per share.
49
On December 18 1996, the Board of Directors authorized the revaluation of all
then outstanding options under its stock option plans to an exercise price of
$.50 per share, the closing market value of the Company's stock on that day.
The following table summarizes common stock option plan activity:
Weighted Average
Options Exercise Price
----------- ----------------
Outstanding at September 30, 1995 1,854,966 $ 1.64
Granted 2,480,400 1.33
Canceled (75,134) 1.38
Exercised (4,765) 1.50
--------- --------
Outstanding at September 30, 1996 4,255,467 $ 1.46
Granted 1,510,400 .50
Canceled (1,409,327) 1.25
Exercised (29,063) 1.00
--------- --------
Outstanding at September 30, 1997 4,327,477 $ 1.18
Granted 2,510,000 .45
Canceled (1,946,422) 1.55
Exercised (146,225) .50
--------- --------
Outstanding at September 30, 1998 4,744,830 $ .66
--------- --------
--------- --------
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" under which no compensation cost
has been recognized for employee stock options. If the Company had elected
to recognize compensation costs based on the fair value on the date of grant
for awards in 1998, 1997 and 1996, consistent with the provisions of SFAS No.
123, net loss and net loss per share would have been increased to the
following amounts:
1998 1997 1996
------------ ------------ -------------
Pro forma net loss $(6,093,477) $(6,138,480) $(16,124,427)
Pro forma net loss per share $ (.11) $ (.13) $ (.40)
The pro forma effect on net loss for fiscal years 1998, 1997 and 1996 may
not be representative of the pro forma effect on net loss of future years
because the SFAS No. 123 method of accounting for pro forma compensation
expense has not been applied to options granted prior to December 15, 1995.
The weighted-average fair values at date of grant for options granted during
fiscal 1998 and 1997 were between $.58 and $.28 and were estimated using the
Black-Scholes option pricing model. The following
50
assumptions were applied: (i) expected dividend yield of 0%, (ii) expected
volatility rate of 2.28, (iii) expected life of 8 years, and (iv) risk-free
interest rates ranging from 4.67% to 6.88%.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's employee stock-based compensation plan has
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, the Company believes that the existing option valuation
models do not necessarily provide a reliable single measure of the fair value
of awards from those plans.
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, 1996, the
Company issued 26,283 shares of common stock to employees at an average price
of $1.28 per share. For the purchase period ended March 31, 1998, no shares
were issued. A total of 635,949 shares of common stock have been authorized
for future purchases under the Employee Stock Purchase Plan as of September
30, 1998.
NOTE 11. EMPLOYMENT AGREEMENT
In June 1993, the Company and its former Chief Executive Officer entered into an
employment agreement that provided for the continuation of base salary payments
upon termination for two years under certain circumstances. Pursuant to terms
of the employment agreement, the Company secured potential future payments in a
trust fund established on behalf of the Chief Executive Officer. At September
30, 1998, the Company is contingently liable for approximately $186,000 of
continuation salary which is reflected as part of restricted cash in the
accompanying balance sheets at September 30, 1998 and 1997.
51
NOTE 12. SELECTED QUARTERLY DATA (UNAUDITED)
Unaudited quarterly data for fiscal 1998 and 1997 is presented below:
(In thousands, except per share) First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998
----
Net revenues $ 324 $ 1,736 $ 616 $ 163
Gross margin 58 488 203 (889)
Net loss (1,285) (597) (1,026) (2,060)
Basic and diluted net loss per share (.03) (.01) (.02) (.03)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1997
----
Net revenues $ 168 $ 1,555 $ 5,289 $ 3,580
Gross margin 68 499 2,385 775
Net income (loss) (4,615) (1,178) 766 (215)
Basic and diluted net income
(loss) per share (.12) (.03) .02 .00
52
BIOMAGNETIC TECHNOLOGIES, INC.
SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS
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 1998 $10,420 ---- ---- $10,420
Fiscal Year 1997 $10,420 ---- ---- $10,420
Fiscal Year 1996 $20,115 ---- $ 9,695(A) $10,420
(A) Uncollectible accounts charged against allowance
_______________
Allowance for obsolete
and slow moving
inventory:
Fiscal Year 1998 $1,710,659 $840,191 $250,256(B) $2,300,594
Fiscal Year 1997 $1,650,659 $ 60,000 ---- $1,710,659
Fiscal Year 1996 $1,015,692 $918,522 $283,555(B) $1,650,659
(B) Sale or disposal of items under allowance
53