-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A+tVvDbi7PSB62qpk0AHmOfTU4KnDatNxTxMjj0GAVNVWUStkRoFE+Lym5Wifsm/ 6k7dXlxk1knMZ87vRpmk3Q== 0000912057-97-001460.txt : 19970123 0000912057-97-001460.hdr.sgml : 19970123 ACCESSION NUMBER: 0000912057-97-001460 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19970122 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOMAGNETIC TECHNOLOGIES INC CENTRAL INDEX KEY: 0000729330 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 952647755 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19632 FILM NUMBER: 97509142 BUSINESS ADDRESS: STREET 1: 9727 PACIFIC HEIGHTS BLVD CITY: SAN DIEGO STATE: CA ZIP: 92121-3719 BUSINESS PHONE: 6194536300 MAIL ADDRESS: STREET 1: 9727 PACIFIC HEIGHTS BLVD CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: SHE CORP DATE OF NAME CHANGE: 19850127 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) September 30, 1996 For the fiscal year ended_____________________________________ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from______________________________to__________________________________ Commission File 1-10285 Number_________________________________________________________________ BIOMAGNETIC TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) California (State or other jurisdiction of incorporation or organization) 95-2647755 (I.R.S. Employer Identification Number) 9727 Pacific Heights Boulevard, San Diego, California 92121-3719 (Address of principal executive offices) (zip code) (619) 453-6300 Registrant's telephone number, including area code____________________ Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE PER SHARE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No The aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of December 31, 1996 was $23,845,912, based on the closing price on that date on the Nasdaq National Market. The number of shares outstanding of the registrant's Common Stock, no par value, as of December 31, 1996 was 47,691,824 shares. DOCUMENTS INCORPORATED BY REFERENCE 1. Certain portions of Registrant's Proxy Statement and Notice of Annual Meeting to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with the Annual Meeting of Shareholders to be held March 18, 1997 are incorporated by reference into Part III of this report. 2. Registrant's Annual Report of its Employee Stock Purchase Plan for the fiscal year ended September 30, 1996 is included as Exhibit 99.1. 3. Items contained in the above-referenced documents which are not specifically incorporated by reference are not included in this report. BIOMAGNETIC TECHNOLOGIES, INC. FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 INDEX PAGE PART I Item 1. Business 1 Item 2. Properties 18 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters 20 Item 6. Selected Financial Data 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 8. Financial Statements and Supplementary Data 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 PART III Item 10. Directors and Executive Officers of the Registrant 29 Item 11. Executive Compensation 29 Item 12. Security Ownership of Certain Beneficial Owners and Management 29 Item 13. Certain Relationships and Related Transactions 29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 30 Signatures 34 PART I ITEM 1. BUSINESS. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's future results could differ materially from those discussed here. Factors that could cause or contribute to such differences are discussed in greater detail in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report. The Company does not undertake to update the results discussed herein as a result of changes in risks or operating results. In December 1996, the Company reported a restructuring of its operations due to lower short-term market projections for its MSI systems. As part of the restructuring, D. Scott Buchanan, Ph.D., assumed the responsibilities of President and COO, reporting to Chairman and CEO President James Schumacher. The restructuring resulted in an immediate reduction of 16 employees which is expected to be followed by additional reductions of approximately 28 persons after completion of the final development phases of its Magnes 2500 WH system over the next several months. As a result of the restructuring, the Company also expects to reduce its program costs in non-personnel related areas. In fiscal 1995, BTi announced development of the Magnes -Registered Trademark-2500 WH, an expansion of the existing Magnes I and Magnes II systems product line. Development of the Magnes 2500 WH hardware was substantially completed in fiscal year 1996. The Magnes 2500 WH allows simultaneous examination of the entire brain and is designed for evaluating ambulatory or critically ill patients in seated or fully reclined position. The Company commenced shipments of its Magnes 2500 WH prior to the end of fiscal year 1996, however, there were no final acceptances received from the customers. Furthermore, although the Company received provisional acceptance from two customers, no final acceptances were received in the first quarter of fiscal year 1997 which ended December 31, 1996. The delay in receipt of customer final acceptances is primarily due to a pending hardware upgrade, the need for which was not discovered to be necessary prior to installing the systems at customer sites, and additional software development required to meet customer contractual requirements. COMPANY OVERVIEW Biomagnetic Technologies, Inc. (the "Company" or "BTi") was established in 1970 to produce specialized instruments for ultra-sensitive magnetic field and low temperature measurements. These products were supplied to physicists for basic research. The Company has been developing its core magnetic sensing technologies since the early 1970s and incorporated those technologies into its magnetic source imaging ("MSI") system, an instrument designed to assist in the noninvasive diagnosis of a broad range of medical disorders. The MSI system developed by the Company uses advanced superconducting technology to measure and locate the source of magnetic fields, generated by the human body, which are one billion times smaller than the earth's magnetic field. While traditional medical imaging methods provide anatomical detail, the measurement of the body's magnetic fields by MSI provides information about normal and abnormal function of the brain, heart and other organs. The Company is focusing the development of its 1 technology on large potential commercial market applications such as mapping of functional cortex at risk during surgery for tumors and other lesions, the diagnosis and planning for surgical treatment of epilepsy and is continuing to investigate the potential applications of its technology to problems of the heart. MSI differs significantly from other existing functional and anatomical imaging methods. The Company believes MSI is the only method that can precisely capture and locate rapid changes in organ function without the injection of radioactive isotopes or costly invasive procedures such as surgical placement of electrodes into the body. Other functional imaging methods such as electroencephalography ("EEG") or positron emission tomography ("PET") either require invasive procedures to provide the needed accuracy of locating functional areas or respond too slowly to follow transient physiological events. Anatomy oriented diagnostic methods such as computed tomography ("CT") and magnetic resonance imaging ("MRI") produce anatomical images showing cross-sectional slices of various parts of the body. The Company's MSI system, when used in conjunction with anatomy oriented diagnostic methods, provides the clinician with an image that links anatomy with function to give a more complete picture of the patient's condition without the use of radioactive isotopes or costly invasive procedures. The Company's MSI system is currently being used by physicians for planning the surgical removal of brain tumors and vascular malformations to reduce the risk of neurological injury resulting in paralysis and expensive rehabilitation therapy. The Company's MSI system is also being used to assist physicians specializing in epilepsy to evaluate whether the surgical treatment of drug-resistant epileptic seizures is appropriate by helping to locate brain tissue that triggers such seizures. Other potential neurological applications for the Company's MSI system include certain stroke, trauma, psychiatric and mental disorders. The Company's MSI system has also been used to investigate certain cardiac applications including the assessment of risk for lethal arrhythmias and the location of the tissue responsible for the arrhythmias as a guide for subsequent therapy. In addition, the Company is focusing its internal research efforts on developing and expanding its proprietary technology into more cost-effective products. Several leading medical centers worldwide have performed more than 5,000 clinical examinations on patients and control subjects with the Company's MSI systems for the purpose of developing the clinical applications, either independently or in collaboration with BTi. Since the first third-party reimbursement was received in September 1993, 75 insurance companies and other health care providers have approved reimbursement for certain MSI procedures performed with the Company's Magnes MSI system. Magnes systems are installed in 16 medical and research institutions worldwide as of September 30, 1996. These sites include the Scripps Clinic & Research Foundation in La Jolla, California ("Scripps"), New York University Medical Center ("NYU"), the University of Tokyo ("UT"), the University of California, San Francisco Medical Center ("UCSF"), Karolinska Hospital in Sweden, Institute of Medicine in Julich, Germany, and the University of Magdeburg in Magdeburg, Germany. In addition, two Magnes 2500 WH systems were in the process of installation on September 30, 1996 at the Max Planck Institute in Leipzig, Germany and the Communications Research Laboratory in Tokyo, Japan. Patients have been referred to collaborating domestic sites from more than 50 leading medical institutions throughout the United States. 2 According to statistics issued by the National Institutes of Health ("NIH"), the annual cost associated with neurological and mental illness disorders in the U.S. is more than $285 billion. This amount includes the direct cost of health care and, in the case of most neurological disorders, the indirect cost of income lost due to illness. The Company currently is directing its sales efforts toward the more than 150 medical centers in the U.S., Asia and Europe where clinical applications for MSI may be developed. The potential commercial clinical market in the U.S. consists of more than 1,200 large hospitals and independent imaging centers. CURRENT MEDICAL IMAGING TECHNOLOGY Most debilitating or life threatening disorders of the body, such as stroke, seizures, dementia, movement disorders, mental illness, cardiac arrhythmias and gastrointestinal disorders, involve a disruption of function. Because electrical activity plays a critical role in many functions of the body, such activity is frequently monitored as a means to diagnose functional disorders. The electrocardiogram ("ECG") and EEG are recordings of electrical activity of the heart and brain used to obtain information about heart and brain function, respectively. Similarly, electrical activity is often recorded to diagnose functional disorders of skeletal muscles and peripheral nerves. In the diagnosis and treatment of certain disorders, knowledge of the specific location of the malfunctioning tissue is a key factor. Numerous medical imaging technologies have been developed in response to this need. These include imaging technologies oriented toward organ structure and anatomy, such as CT and MRI, and imaging technologies oriented toward function, such as PET, single-photon emission computed tomography ("SPECT") and functional MRI ("fMRI").. CT and MRI produce anatomical images showing cross-sectional slices of various parts of the body. These anatomical imaging methods help in locating structural malformations and assessing physical organ damage. Their applications are limited, however, in that many functional disorders have no corresponding structural abnormality. Other imaging technologies have been developed specifically to show the location of certain functional areas. PET and SPECT produce cross-sectional pictures showing the location of certain radioactively labeled substances that have been injected into the body. Relative levels of metabolic activity and regional blood flow, two measures of cell function, are determined by measuring the amount of radiation emitted by different tissues. An adaptation of conventional MRI known as fMRI is used to create images related to localized changes in blood flow in the brain. While fMRI has the advantage compared with PET and SPECT in that it does not involve injecting radioactive substances into the body, fMRI, PET and SPECT all have a relatively long response time that prevents observation of rapidly changing activities. Much of the valuable diagnostic information observed in brain and cardiac electrical activity occurs in intervals much less than one second, typically tens of milliseconds, and is spontaneous in nature. Because the physiological response time of PET, SPECT and fMRI is several seconds at best, critical information about the sequence of activity, which is essential for understanding disorders such as epilepsy and cardiac arrhythmias, is unavailable from these technologies. 3 Conventional ECG and EEG have a faster response time than fMRI, PET and SPECT, and provide critical information about the sequence of electrical activity but, in many cases, lack the ability to locate the source of such activity with sufficient accuracy to guide therapy. Locational accuracy is lost because the electrical activity is distorted as it passes through body tissues between the electrical source in the brain or heart and the electrodes on the body's surface. For this reason, electrodes are commonly inserted into the body in an attempt to obtain accurate localization of functional abnormalities in the brain or heart prior to ablation procedures. This procedure is invasive, very costly and involves risk and discomfort. MSI TECHNOLOGY MSI is based on a measurement of the magnetic fields produced by intracellular electrical activity which, as discussed above, is associated with many of the body's most critical functions. Unlike electrical activity generated by the body, the corresponding magnetic fields pass through the body without distortion and without obscuring the location of the source. By measuring the magnetic fields and analyzing them to extract locational information, MSI can noninvasively provide information about the location of the origin of normal and abnormal electrical activity with a combination of millimeter spatial resolution and millisecond time response that has otherwise been available only from highly invasive procedures. The Company believes that MSI has a unique capability to obtain such information without introducing radioactive or other tracer substances into the body or use of other invasive procedures. THE MAGNES MSI SYSTEM The Company's current MSI systems, the single sensor Magnes I, the dual sensor Magnes II and the Magnes 2500 WH MSI system (Magnes 2500 WH), are integrated systems capable of measuring, analyzing and locating magnetic fields associated with the body's electrical activity in millisecond time frames. The Magnes II was announced in fiscal 1994 and is an enhancement of the Company's original Magnes I MSI system. Magnes II employs two sensors, each containing an array of 37 magnetic detectors (for a total of 74 detectors, each consisting of a superconducting detection coil and an amplifier called a superconducting quantum interference device ("SQUID")). Magnes I and Magnes II systems have been used in both neurological and cardiac applications and incorporate a number of unique technologies which are discussed later under the caption "Proprietary Core Technologies". The Magnes 2500 WH employs a total of 148 magnetic detectors incorporated into a sensor with a helmet shaped recess that is placed over the patient's head and is limited to neurological applications. This design allows simultaneous examination of the entire brain and is designed for evaluating both ambulatory and critically ill patients in a seated or fully reclined position. The Company has received 510(k) clearance from the United States Food and Drug Administration (the "FDA") of the Magnes I and the Magnes II for applications relating to the brain. The Magnes I system received approval from the Japanese Ministry of Health and Welfare ("JMHW") in 1992 for sale in Japan as a clinical device and the dual sensor Magnes II system received similar JMHW approval in 1995. The Company filed a 510(k) premarket notification for the Magnes 2500 WH in June, 1996. 4 MEDICAL APPLICATIONS The Company believes its Magnes systems have significant commercial potential in the diagnosis and treatment of neurological disorders. However, as a new medical technology, the Magnes system faces several challenges to commercial success. Medical applications for the Magnes system must be developed that result in better patient care than existing technologies, and regulatory approval, which has been applied for, must still be obtained to sell the Magnes 2500 WH system as a clinical device. The Company has regulatory approval to sell its Magnes I and Magnes II systems as clinical devices. In general, reimbursement for MSI procedures must be obtained from third party payors and the Magnes system must provide an economic benefit to the health care provider. Currently, the Company believes there are two medically accepted applications for the Magnes, presurgical functional mapping and assistance in the diagnosis and treatment planning for epilepsy. Reimbursement from a number of insurance companies has been obtained for both of these procedures, however, the expected volume of such procedures at most hospital sites under current standard treatment practices does not currently provide sufficient operating revenue to offset the investment and operating cost of a Magnes system. The Company is currently primarily focused on the development of MSI applications for functional mapping and for epilepsy and is also investigating potential applications in cardiology. The Company is also pursuing programs to increase awareness of MSI technology to its target market of neurosurgeons, neurocardiologists, neurologists and epileptologists. The Company's Magnes I and Magnes II systems have, to date, been cleared by the FDA for applications relating to the brain and filed a 510(k) premarket notification for the Magnes 2500 WH system in June 1996. The Company believes the systems are appropriate for presurgical functional mapping and epilepsy surgery, significant applications development and clinical testing must be conducted before these systems can be deemed appropriate for the other applications described below. Notwithstanding the size of the potential markets, there is no assurance the Company's systems will be accepted for commercial use in any of the areas mentioned. NEUROLOGICAL APPLICATIONS Research at leading medical centers has demonstrated that the Company's MSI system can be used by physicians to noninvasively locate specific functional regions of the brain in preparation for surgery. In addition, research has shown that the Company's MSI system can assist physicians to noninvasively locate brain tissue suspected of triggering epileptic seizures and abnormal neurological activity associated with closed head injury and trauma, ischemic disorders and stroke. PRESURGICAL FUNCTIONAL MAPPING: Approximately 100,000 brain surgeries are performed annually in the U.S. These procedures include tumor resection, surgical correction of epilepsy and removal of vascular malformations. The precise locations of functional regions vary even among healthy individuals and more widely among patients with large brain lesions, and the locations cannot reliably be determined solely from anatomical imaging such as MRI. By relating information about the primary sensory function areas provided by the Company's MSI systems to MRI-generated anatomical images, however, a function map of the brain can be obtained and presented on a screen or recorded on film. Thus, images produced with the Company's MSI systems allow the surgeon to reliably estimate the risk of 5 damage to the identified function areas arising from the surgery itself and to select the best surgical approach, such as where to open the head, and from which direction to access the targeted area to minimize the risk. Using the Company's MSI systems, reliable and practical methods of providing a functional map have been developed, verified and reported in several medical journals. The Company's MSI systems allow the surgeon, hospital, insurer and patient to more accurately assess the risk of a proposed surgery and the possibility of improving the outcome of the surgery. EPILEPSY SURGERY: There are approximately 1.2 million people in the United States with recurrent epileptic seizures, and approximately 150,000 new cases emerge each year. The seizures for many of these people can be controlled with drugs, but a number require alternative treatments. There are at least 100,000 people in the United States alone that could benefit from surgical intervention, although, based on the most recent data published in 1993 only about 2,500 such procedures are performed each year due to limited facilities needed to perform the presurgical evaluations. Over the past decade, a number of research studies have demonstrated that information produced by MSI can noninvasively locate brain tissue suspected of triggering epileptic seizures. Locating epileptic tissue is vital in the evaluation of patients for epilepsy surgery. In the absence of a noninvasive method, it has often been necessary to implant an array of electrodes directly on or into the brain to locate this tissue. The invasive approach requires lengthy hospitalization in facilities that are equipped for long-term intensive monitoring of patients, 24-hour nursing care and participation of a highly trained team of specialists. To date, the cost and relative scarcity of appropriate facilities for this long-term monitoring procedure severely limit the number of patients who can benefit from a surgical approach to epilepsy treatment. Recent medical literature shows that MSI provides additional information which is useful for locating epileptic tissue and could, in many cases, avoid invasive evaluation procedures. The Company believes the necessary information can be obtained with its MSI systems in a clinically acceptable time frame and at a cost that will allow for routine use in evaluating patients for epilepsy surgery. The results to date suggest that, in a large number of cases, the use of the Company's MSI system would be a cost-effective alternative to currently used invasive evaluation procedures. CLOSED HEAD INJURY AND TRAUMA: The National Institute of Neurological Disorders and Stroke and the National Head Injury Foundation estimate that there are approximately 500,000 incidents of closed head injury per year, about 10% of which result in lingering brain damage. Currently, clinicians primarily use MRI or CT scans which provide only anatomical images to determine the nature and extent of brain damage following a closed head injury. These anatomical images are often normal even though the patient shows severe neurological symptoms. Research studies conducted at the Company's cooperating clinical sites show that the Company's MSI systems are sensitive detectors for abnormal brain activity accompanying traumatic injury while also providing a map of the abnormality as it relates to anatomy. Researchers believe the information provided by the Company's MSI systems could prove valuable in enabling the trauma physician to 6 assess the severity and potential consequences of the physical damage and to help determine the appropriate course of treatment. ISCHEMIC DISORDERS AND STROKE: Ischemia and stroke are common neurological disorders resulting from the disruption of blood supply to the brain. The total direct cost to the U.S. health care system for treatment and rehabilitation of stroke exceeds $10 billion per year. MSI may potentially assist physicians treating stroke by identifying damaged brain areas before they are detectable by CT or MRI scans. Also, as an indicator of neurological function, MSI may be useful to monitor rehabilitation and treatment of stroke patients. CARDIAC APPLICATIONS Each year more than 300,000 Americans die from arrhythmias, or irregular heart rhythms, that stop the heart from pumping enough blood through the body. Arrhythmias result from electrical disturbances in damaged heart tissue. Two of the great challenges facing cardiologists today are identifying people at risk for arrhythmias and treating those people once they are identified. Early results of measurements on subjects with a wide range of cardiac disorders suggest that the Company's MSI system can help address both challenges. Current techniques for reliably identifying people at risk for lethal arrhythmias require the cardiologists to insert a catheter into the heart to perform an electrophysiological test. Patterns of electrical stimuli are then introduced into the heart in an attempt to artificially induce the arrhythmia. This test lasts about two hours and requires a specially equipped catheterization laboratory. In 1993, approximately $615 million was spent in the United States on 246,000 electrophysiological tests performed for this purpose. Although the use of the Company's MSI system for magnetic field detection related to cardiac arrhythmias is in the very early stages, the Company believes that a noninvasive cardiac arrhythmia risk assessment test could be developed using its MSI system based on detecting the magnetic fields of the damaged heart tissues that produce arrhythmias. If successful, such a test would be far less expensive than the current electrophysiological test because it would not require a cardiologist to be present and could be completed in about 30 minutes. The availability of a reliable, inexpensive and noninvasive test would greatly facilitate the selection of antiarrhythmic drugs and the dosage appropriate to each patient. The Company has applications pending with the FDA for clearance to market the Magnes I system for applications relating to the heart. CLINICAL COLLABORATIONS The Company's primary near-term objective is to accelerate the use of its MSI systems by cooperating with researchers and physicians at key medical centers selected by the Company. The Company's MSI systems must be established by clinical researchers as an effective tool suitable for mainstream clinical applications in order to establish a large commercial market. Accordingly, the early clinical research sales and collaborations with clinical sites are strategically important to the Company's overall market development plan. 7 As of September 30, 1996, the Company's MSI systems are installed for neurological use at 16 sites worldwide listed in Table 1, with 2 additional systems in process of installation. The Company also has established programs for the development of cardiac applications and cardiac test protocols at two of these sites. The Company provides technical support to all of these sites. While the sites listed in Table 1 below do not all have formalized clinical applications development agreements with BTi, the Company benefits from the extensive research conducted at these sites through the clinical results disseminated to the medical community and from potential future applications that may be developed. To date, the findings of BTi and its collaborators have been presented in more than 75 published papers. TABLE 1
NAME OF INSTITUTION LOCATION The Scripps Clinic & Research Foundation* United States U.C. San Francisco Medical Center* United States New York University Medical Center United States University of Tokyo Hospital Japan National Institute for Physiological Sciences Japan Kyushu University Hospital Japan National Epilepsy Center Japan Sumitomo Research Center Japan National Chubu Hospital Japan University of Muenster Germany Institute of Medicine-KFA Juelich Germany University of Erlangen Germany University of Vienna General Hospital Austria University of Rennes France Karolinska Hospital Sweden Max Planck Institute, Leipzig Germany (in process of installation) University of Magdeburg Germany Communications Research Laboratory Japan (in process of installation) * Represents equipment on loan under a collaboration agreement
MARKETING, SALES AND DISTRIBUTION MARKET DESCRIPTION The overall market for the Company's Magnes systems can be divided into three overlapping segments: the basic research market, the clinical applications development market and the commercial clinical market. Customers in each market segment are identified by the focus of their work, the source of purchase funds and other characteristics, as described below. The basic research market consists of scientists working in university and government laboratories to discover new information about organ function and to make fundamental advances in their scientific 8 fields. Patient treatment is not their principal concern. Equipment used by these scientists generally is purchased with funds provided by government and private research grants. The basic research market continues to be the source of the majority of the Company's sales. The clinical applications development market consists primarily of teaching medical centers where the majority of clinical applications development work for new medical technologies and procedures is conducted. Because of their size, buying power, prestige and early involvement in assessing and using new medical technologies, teaching medical centers continue to be the primary focus of the Company's near-term marketing plans. The Company has identified more than 150 key members of this group in the U.S., Europe and Asia, which are centers of excellence in (i) neurosurgery, neurology and neurophysiology, (ii) neuroradiology and radiology and (iii) cardiology. The commercial clinical market for MSI systems includes hospitals and clinics that would use the MSI systems in routine diagnosis and therapeutic monitoring of patients. The primary commercial clinical market in the United States consists of approximately 450 major medical centers with 500 or more beds and approximately 780 hospitals with between 300 and 500 beds. In addition, independent imaging centers in major metropolitan areas have often been among the first buyers of new imaging technologies, and the Company believes this pattern may be repeated for its MSI systems. Of the top 25 neurology centers in the United States, 24 have significant and growing epilepsy centers. There are approximately 200 epilepsy surgery centers in the United States, Western Europe, and Asia that could be candidates for the Company's MSI system. Multiple sales at the same site are not likely in the near term. Sales to the commercial clinical market are expected to develop when regulatory approvals are obtained, adequate third-party reimbursement for MSI tests becomes routine, and MSI procedure costs decline. Therefore, growth in this market depends on the development of effective, regulatory approved clinical applications that qualify for third-party reimbursement and are accepted by physicians such as neurosurgeons, neurologists, cardiologists and radiologists. The NIH has estimated that there are approximately 90 million cases annually of neurological and mental illness disorders in the U.S. Each case represents a separate incident of such disorders and not separate patients. In most cases, diagnostic methods for these disorders remain inadequate. According to NIH estimates, the annual cost associated with these neurological and mental illness disorders in the U.S. is more than $285 billion. This amount includes the direct cost of health care and, in the case of neurological disorders, the indirect cost of income lost due to illness. The majority of these disorders are functional in nature and are a major cause of disability and death. In most cases, no noninvasive test exists to help physicians diagnose or effectively monitor the functional activity associated with these neurological and mental illness disorders. The Magnes systems are designed to address this need. There is substantial medical evidence supporting the view that a significant percentage of mental illness disorders have a physiological origin which may be treated by pharmaceuticals. In most cases, however, it has not been possible to detect physiological dysfunctions clearly associated with the symptoms of mental illness. There has been no objective measure to use for the diagnosis of mental illness, for the prescription of therapy or for measuring the effectiveness of the therapy on the patient. MSI has demonstrated the ability to provide accurate spatio-temporal maps of neurophysiological function which may serve as an objective measure and, the Company believes, the Magnes systems could fulfill a major need of physicians dealing with mental disorders. Researchers are in the early 9 stages of investigating MSI applications for mental illness and therefore no reliable estimates can be made of the number of patients that might be aided by data provided by the Magnes system. MARKETING STRATEGIES In order to promote sales in both the clinical applications development and commercial clinical markets, the Company's fundamental marketing strategy is to accelerate clinical applications development for the Magnes systems by collaborating with and promoting the work of a core group of influential medical centers engaged in applications development. The Company plans to continue implementation of this strategy by (i) encouraging physicians developing applications for the Magnes to publish their results in professional journals, (ii) participating in key medical meetings to generate interest among targeted medical specialists, (iii) direct mailings to encourage communication between research groups working with the Magnes systems, (iv) site visits by key customers, (iv) public relations activities, and (v) continuing its patient referral program. DISTRIBUTION The Company has a small direct sales organization with the specialized skills needed to sell the Company's MSI system in the United States. The European and Asian markets are served, respectively, by the Company's subsidiary in Germany and by the biomedical division of Sumitomo Metal Industries, LTD. ("SMI") in Japan. In March 1990, the Company entered into a distribution agreement granting SMI the exclusive rights to market, sell, distribute and service the Company's MSI products in certain regions of Asia and in Australia and New Zealand for an initial period of seven years. The agreement establishes a minimum number of units to be purchased by SMI during the period and grants to SMI a right of first refusal to negotiate a license to manufacture and sell the Company's MSI products in certain regions of Asia and in Australia and New Zealand. An extension of the distribution agreement with SMI which expires January 1997 is currently in negotiation. REIMBURSEMENT The Company's long-term commercial success in the United States is dependent upon obtaining approval of routine payment for clinical MSI procedures by Medicare and third-party payors. The Health Care Financing Administration, which is responsible for the administration of Medicare, and most third-party payors follow similar guidelines for determining whether a specific procedure or health care technology is "reasonable" and "necessary" and, therefore, reimbursable under Medicare or private insurance coverage. These guidelines generally include consideration of whether (i) the procedure or technology is more or less costly than an alternative already covered by insurance, (ii) the added benefit of the procedure or technology is significant enough to justify the expense, and (iii) the procedure or technology provides significant medical benefits not otherwise available from other procedures or technologies. Substantial data is already available to support the use of MSI and the Company's Magnes systems for presurgical functional mapping and epileptic foci localization. This includes a number of publications in NEUROSURGERY, AMERICAN JOURNAL OF NEURORADIOLOGY, and the THE JOURNAL OF EPILEPSY AND BRAIN. The 10 data have been successfully used by several medical centers to receive third-party reimbursement on a case-by-case basis. Since the first reimbursement was received in September 1993, more than 75 insurance companies and other healthcare providers have now approved reimbursement for certain MSI procedures. Although initial results are encouraging and a number third-party payors have approved reimbursement, there is no assurance that third-party reimbursement will become widely available. In Japan, a large number of hospitals are government funded and operated. These hospitals are paid by the JMHW only for procedures that have been approved by a reimbursement board of the JMHW. The JMHW follows guidelines similar to those followed by third-party payors in the U.S. in determining whether a new medical procedure will be reimbursed by the Japanese government. Once reimbursement for a procedure is approved by the JMHW, all hospitals, both public and private, are reimbursed for the procedure at the same reimbursement rate. Since January 1992, when the Magnes system received approval from the JMHW for sales in Japan as a clinical device, Japanese public and private hospitals may purchase the system for clinical use on patients. Reimbursement is not yet available from the Japanese government or third-party payors, but private Japanese hospitals are allowed to charge patients for procedures with the Magnes system. The Kyushu University Magnes system and the National Epilepsy Center Magnes system in Shizuoka have been designated as Highly Advanced Medical Technology Sites by the Japanese government. This designation is required for application to the JMHW for reimbursement. SMI, with assistance from the Company, continues to work with medical centers in Japan in an effort to have the JMHW establish a reimbursement level for Magnes system procedures that will help support future purchases of the Magnes system. In Europe, the Magnes sites have concentrated primarily on research and have not pursued governmental or private approval for reimbursement of MSI procedures. PRODUCT PRICES AND TERMS OF SALE The current prices for the Company's MSI systems range from $1.5-$2.5 million, depending upon system configuration. Standard terms of sale provide for payment of 40% of the purchase price upon placement of the order, 40% upon shipment and the remaining 20% when installation is completed and final acceptance is obtained from the customer. Typically for sales to European customers who receive their funding from governmental agencies, the Company is required to provide a bank guarantee for the amount of the deposit which usually is released upon shipment and/or acceptance by the customer. The Company may also enter into special collaboration and sale arrangements with medical centers to promote clinical applications development. The time between placement of an order and installation typically ranges between six and twelve months. INSTALLATION, SERVICE AND TRAINING In the medical device market, the ability to provide comprehensive and timely service is a key competitive advantage and important for establishing customer confidence. Installation and service for the Company's products in the United States and Europe is provided from its San Diego headquarters and from the Company's subsidiary in Germany, both of which maintain customer service departments 11 capable of performing sophisticated systems installation and equipment maintenance. SMI has its own service capabilities in Japan to service MSI systems sold in their distribution area. Installation and a service agreement for the first year are provided as part of the standard terms of sale in the United States and Europe. Thereafter, service and maintenance are available on a time and materials basis or pursuant to a yearly service agreement for an annual fee. Initial customer training in the operation of the Company's MSI systems is provided by the Company's personnel at the customer's site and is included in the selling price of the system. Physician training in interpreting the clinical significance of MSI information is currently provided at the Company's cooperating United States clinical sites. COMPETITION The Company operates in an industry characterized by rapid technological change. New products using other technologies or improvements to existing products may reduce the size of the potential markets for the Company's products, and may render them obsolete or non-competitive. Competitors may develop new or different products using technology or imaging modalities that may provide or be perceived as providing greater value than the Company's products. Any such development would have a material adverse effect on the Company's financial condition and results of operation. Additionally, there has been recently, and continues to be, ongoing significant price competition from the Company's competitors for the currently limited number of whole head systems being purchased worldwide. This aggressive competition is likely to affect potential profitability of the Company's whole head system, the extent of which is not presently determinable. Companies known to BTi that have manufactured an integrated large-array MSI system are CTF Systems Inc., a Canadian company, Neuromag Ltd., a Finnish company, Siemens AG, a German company, Phillips N.V., a Netherlands company, and Shimadzu and Daikin, both Japanese companies. To the best of the Company's knowledge, as of October 31, 1996 Neuromag Ltd. has received FDA clearance for marketing its system as a clinical device in the United States. An MSI system produced by CTF Systems, Inc. has been cleared for sale as a clinical device in Japan by the JMHW and their distributor, Aloka, is currently soliciting orders for the CTF system. The Company believes that Siemens AG and Phillips N.V. do not currently manufacture or market integrated large-array MSI systems. The Company believes that Magnes systems compete favorably with other MSI systems on the basis of performance for detecting magnetic fields. The Japanese government funded an extensive long-term program to develop a MSI system by a consortium of Japanese companies coordinated by the Japan Ministry of International Trade and Industry ("MITI") This program terminated in 1996. Other large multinational corporations with substantial resources available for research and development activities, including GE Corporation, a United States company, have initiated product investigation programs in magnetic source imaging. The Company's ability to compete successfully against any of its current or potential future competitors will depend upon various factors, including its ability to continue its technological and market development leadership role and to raise the necessary capital for further development and commercialization. 12 BACKLOG As of September 30, 1996, the aggregate amount of firm backlog orders for the Company's products was $16,254,000 of which the Company expects to fill approximately $14,000,000 before September 30, 1997. The backlog is composed primarily of orders for the new Magnes 2500 WH. As sales of the Company's systems typically involve transactions of $1 million or more, the backlog is expected to fluctuate significantly from year to year depending upon orders received and installations completed during the reporting period. PROPRIETARY CORE TECHNOLOGIES BTi has pioneered the development of technologies associated with MSI. Several core technologies that have been developed by and are proprietary to the Company, such as superconducting MSI detectors, magnetic noise reduction, data analysis and clinically useful displays, represent areas where the Company believes it has established a leadership position in MSI. SUPERCONDUCTING MSI DETECTORS The Company's MSI detectors consist of a superconducting detection coil and an extraordinarily sensitive amplifier called a SQUID. Superconductivity describes the ability of certain materials, when refrigerated to near absolute zero (-460 DEG. F or -273 DEG. C), to carry electricity without electrical resistance. This property enables the detection coil to act as a noise-free antenna to pick up magnetic fields and transfer them to the SQUID. The SQUID utilizes other unique electrical properties of superconductors to generate readily measured voltage changes in response to very small magnetic field changes. Together, the superconducting detection coil and SQUID amplifier are able to detect magnetic fields that are at least 1,000 times smaller than is possible with other magnetic field detectors. BTi has developed proprietary processes for fabricating highly reliable superconducting magnetic field detectors and integrating a large number of such detectors into complex sensors that measure magnetic fields generated by electrical activity in the body. Sensors are comprised of the MSI detectors and the components required to refrigerate them to their operating temperature. The MSI detectors are refrigerated to a near absolute zero temperature with liquid helium. Novel methods have been developed by the Company to accomplish the necessary refrigeration without the requirement of immersing the MSI detectors directly in liquid helium. Without this requirement, the magnetic field detectors can be used in any orientation with respect to the body, thereby overcoming limitations of previous designs that have prevented simultaneous measurements on the entire brain of a patient lying in a horizontal position. BTi believes this unique ability may provide a significant competitive advantage for the Company's future MSI systems. This construction technique and subsequent system design have received U.S. patent numbers 5,494,033, 5,441,107, and 5,471,985. The Company has applied for foreign patents. The Company has also developed proprietary processes for fabricating detection coils and SQUIDs from materials that become superconducting at the temperature of liquid nitrogen, which is significantly higher than the temperature of liquid helium. The availability of superconducting detection coils and SQUIDs refrigerated with liquid nitrogen would greatly simplify the design and reduce the costs to 13 build and operate an MSI system. The Company has built and tested experimental magnetic detectors fabricated from superconductors operating at liquid nitrogen temperature. While their noise properties are currently less favorable than those obtained by using liquid helium superconductors, further improvements may make them suitable for certain MSI applications. The Company believes its novel high-temperature SQUID fabrication process is the only process having the reliability and reproducibility required of a commercial manufacturing process. MAGNETIC NOISE REDUCTION The ability to detect the weak magnetic fields created by the body depends upon the elimination or reduction of magnetic noise generally present in the environment. The magnetic fields generated by the electrical activity of the body can easily be overwhelmed by the stronger magnetic fields generated by automobile traffic, elevators, electrical machinery or even an ordinary wrist watch worn by a patient. The Company has developed techniques to reduce interference from magnetic noise. The Company houses its MSI systems in a shielded room constructed according to the Company's specifications from special alloys that reduce magnetic noise. All equipment used in the shielded room is selected or fabricated to avoid contaminating this low-noise environment. In addition, the configuration of the detection coils in the Company's Magnes I and Magnes II systems sharply reduces their sensitivity to magnetic fields from sources located more than about 10 inches from the sensor, which allows the Company to focus the sensors on the specific portion of the body being measured. Finally, the Company's MSI sensor contains additional detectors to measure the magnetic noise in the vicinity of the patient. Signal processing algorithms have been developed that use this information to remove magnetic interference in the recorded fields. The Company is investigating whether its noise reducing algorithms could allow a reduction in magnetic shielding requirements which could substantially lower the cost of future MSI systems. DATA ANALYSIS The Company has developed techniques to automate the collecting and processing of reliable clinical data according to standardized protocols. The use of standardized protocols enables the Company's MSI system to be operated by a trained technician and helps to ensure the reliability of the results. BTi's proprietary software has dramatically reduced the time to compute specific sources of electrical activity. These developments have been critical factors in the Company's efforts at making its MSI system suitable for routine clinical use. In analyzing a patient's magnetic field data, it is usually assumed that the magnetic field at any instant of time is generated by a very small region of electrically active tissue. There are situations of potential clinical interest in which the assumption of a single focal source of electrical activity cannot be used, and new analysis techniques are needed. The Company has developed and is testing techniques to extend the analysis to multi-focal and spatially extended sources of electrical activity to address this need. 14 CLINICALLY USEFUL DISPLAYS Effective display of the results of an MSI examination is required to allow the technician operator to assess the data quality and to allow the physician to interpret the significance of the MSI results relative to the patient's condition. The Company provides a number of displays ranging from temporal displays, which allow the physician to determine the time sequence of events to overlay displays, which estimate the location of the analyzed functions relative to the patient's anatomical images provided by MRI or CT. The Company has developed or has access to data interfaces compatible with a wide variety of MRI and CT scanners. RESEARCH AND DEVELOPMENT The Company has funded its research and development of its technology programs primarily through revenues from product sales and product-related services, through capital raised by venture capital financing and from its public and private sales of stock. During fiscal 1996, 1995 and 1994, the Company's internally funded research and development expenses were $7,767,000, $5,507,000 and $6,735,000, respectively. In view of the fact that the Company has commenced production and shipment of the new Magnes 2500 WH system, expenditures for research and development in fiscal year 1997 are currently expected to decrease from fiscal year 1996. However, there can be no assurance that a reduction in expense will be realized. MANUFACTURING AND MATERIALS The Company engineers and manufactures every major component of the Magnes system, other than the host computer and its peripherals, the magnetically shielded room that houses the sensor, and the sensor position indicator hardware used to determine how the sensor is oriented to the body. The Company currently is also purchasing its SQUID requirements from a vendor. However, the Company has complete facilities to fabricate SQUIDs from materials that become superconductive at liquid helium and liquid nitrogen temperatures. Of the major components of the Magnes system not manufactured by the Company, the host computer and peripherals are widely available standard items. The other major purchased components are constructed in accordance with Company specifications that ensure compatibility with its MSI system. The magnetically shielded rooms for Magnes systems sold in the United States and Europe are currently supplied by two European manufacturers. In 1991, the Company completed development of a magnetically shielded room of its own design in cooperation with SMI and retains an option to manufacture the room or purchase it from SMI for sales outside the SMI distribution area. In June 1994, the Company also entered into an agreement with a United States company to develop and manufacture a lower cost alternative to existing magnetically shielded rooms, the development of which has been completed. The Company believes it has adequate alternate sources of supply for this major system component from these four sources. The Company believes its current manufacturing capacity is sufficient to satisfy present demand. In order to achieve its long-term objectives, however, the Company will be required to expand production 15 capabilities, mainly through additional personnel. There can be no assurance that the Company will be able to increase its level of output. The Company believes that its control over the development and manufacture of its MSI system will enable it to modify its devices to address specific needs of anticipated clinical applications without significant dependence upon outside suppliers, manufacturers or providers of technology. GOVERNMENTAL REGULATION The Company is subject to various regulations of the FDA and the California Health Services. In particular, the FDA and the California Health Services have promulgated regulations to which the Company must adhere relating to the manufacturing standards, effectiveness and safety of the Company's diagnostic products. The FDA regulates marketing of medical devices, requiring premarket clearance or premarket approval based upon review of information submitted by the Company relating to intended product use and product labeling, safety and efficacy. The premarket clearance or approval processes are based upon risk class and degree of equivalence to devices already marketed that are proven to be safe and effective. The Company filed a Section 510(k) premarket notification with the FDA in March 1990 for applications of the Magnes I system relating to the brain. In June 1990, it received clearance from the FDA to market the Magnes I system based upon that 510(k) premarket notification. That clearance enables the Company to market the Magnes I MSI system as a diagnostic device rather than as research equipment. The Company has also received clearance of a 510(k) premarket notification for applications of its Magnes II systems relating to the brain from the FDA and is currently seeking FDA clearance of a 510(k) premarket notification for its new Magnes 2500 WH system relating to the brain. A Section 510(k) premarket notification with the FDA for applications of the Magnes I system relating to the heart is still pending. Medical devices are placed in one of three classes, depending upon their use or the degree to which they provide functions critical to sustaining life. Class I devices are subject to general controls, including Good Manufacturing Practice regulations, and examples of such devices are tongue depressors and hot water bottles. Class II devices are subject to general performance standards not yet established by regulation. General controls of Class I presently apply to Class II devices, because no performance standards have been developed or promulgated by the FDA for Class II devices. Examples of Class II devices are ECG and EEG. Class III devices consist of "critical devices," those represented to be life sustaining or life supporting, implanted in the body or presenting potential unreasonable risk of illness or injury. Safety and efficacy must be demonstrated and supported by clinical data submitted to the FDA for "premarket approval." Examples are kidney dialysis systems and cardiac pacemakers. Class I and II devices may be marketed by demonstration of "substantial equivalence" to existing devices via a Section 510(k) premarket notification, and subsequent FDA clearance to market. The Magnes I and Magnes II systems have been determined under the 510(k) process to be substantially equivalent to BTi's prior Model 607 Neuromagnetometer and to EEG. The currently pending application for the Company's Magnes 2500 WH system has been determined to be substantially equivalent to BTi's Magnes I and Magnes II systems. The Company's Magnes MSI systems are classified as Class II, and therefore are subject to the general controls of Class I and to performance standards that have not yet been defined for Class II devices. 16 The Company's continued compliance with applicable governmental regulations is assessed by internal audits and by audits of manufacturing operations and procedures conducted by the FDA and California Health Services. These agencies have the authority, among other things, to limit or stop product shipments and require product recall should a failure to comply with regulations be observed. The Company has registered with the FDA and the California Health Services as a medical device manufacturer. California Health Services has completed an inspection of the Company's facilities and manufacturing processes and has issued the Company a license which permits it to manufacture, sell and ship the Magnes systems as medical devices for diagnostic purposes. The FDA conducted an audit of the Company to federal current Good Manufacturing Practices ("cGMP") regulation requirements in July 1996. All areas of the Company's internal cGMP program were observed to be in compliance with the regulations. In addition, in order to export its products, the Company must comply with United States export control regulations, which restrict the export of devices containing certain of the Company's technology to certain foreign nations. Although the export control regulations have not prohibited the Company from exporting its MSI systems to foreign nations, there can be no assurance that the Company will continue to be able to obtain the necessary export licenses in the future. The Company is currently allowed to export the Magnes system to many foreign countries, including all Western European countries and Japan, under a general license that requires no additional approval prior to shipment. While Western Europe and Japan have regulatory agencies that are somewhat similar to the FDA, each country's regulatory requirements for product acceptance are unique and will require the expenditure of substantial time, money and effort to obtain regulatory acceptance for marketing for clinical use. There can be no assurance that the Company will be able to obtain such approvals. The Magnes I system received approval in Japan from the JMHW in 1992 for sale as a clinical device and Magnes II received similar JMHW approval in 1995. PATENTS AND PROPRIETARY INFORMATION The Company significantly relies on proprietary technology and seeks to maintain confidentiality of its trade secrets, unpatented proprietary know-how and other proprietary information and to obtain patent protection when appropriate. As of September 30, 1996, the Company held 40 patents in the United States. One of these had counterpart patents issued in the United Kingdom, France, Germany, the Netherlands and Canada and three others have counterpart patents granted by the European Patent Organization. As of September 30, 1996 the Company had filed 6 U.S. patent applications that are in various stages of the patent prosecution process. The Company has also filed 8 applications with the European Patent Organization for patent protection in Western Europe, 14 applications in Japan and three in Canada. The Company anticipates that patents, if issued, will be issued (i) within two to 20 months with respect to the pending patent applications in the U.S., and (ii) within three years with respect to the pending patent applications in Western Europe. The Company has reserved its priority with respect to receiving patents on its applications in Japan, and may pursue those applications in due course. 17 The Company's patents protect several fundamental aspects of the technology used in its products. Patents have been issued with respect to superconducting devices, ultra-low-noise electronics circuits, biomagnetometer design, biomagnetic signal processing, magnetic shielding techniques, noise suppression methodologies, cryogenic apparatus construction techniques, and system design concepts. Patent applications have been filed with respect to a new process for fabrication of electronic devices using high-temperature superconducting materials, superconducting device designs, magnetic shielding technology, cryogenic refrigeration, ultra-low-noise electronic circuits, patient handling equipment and biomagnetic signal processing and data analysis. The Company currently is considering additional patent applications covering inventions already made in these and related fields of technology. BTi is not aware of any infringement by any of its products on patents issued to others. Magnes-Registered Trademark- and Neuromagnetometer-Registered Trademark- are registered trademarks of the Company. Ferritometer-TM-, Biomagnetic Technologies-TM- (with and without the design) and BTi-TM- are trademarks/service marks of the Company either by registration with the State of California or by application for registration with the U.S. Patent and Trademark Office. HUMAN RESOURCES As of September 30, 1996, the Company employed 95 full-time employees at its facilities in San Diego, California and Germany. None of the Company's employees is covered by a collective bargaining agreement and the Company has experienced no work stoppages. The Company believes that it maintains good relationships with its employees. In December 1996, the Company reduced its workforce from 95 full-time employees to 79 full-time employees. FINANCIAL INFORMATION Additional financial information concerning revenues related to foreign operations and sales to certain customers is included in Note 3 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. ITEM 2. PROPERTIES. The Company's executive offices and manufacturing facilities are located in a 55,000 square foot facility at 9727 Pacific Heights Boulevard, San Diego, California. All domestic operations of the Company are conducted from this facility, which was first occupied in December 1989. The Company leases this facility pursuant to an eight-and-one-half-year lease agreement which expires in February 1998. Average monthly lease payments over the term of the lease are approximately $39,500. The Company's subsidiary in Germany leases approximately 3,000 square feet at Gruener Weg 82, D-5100 Aachen, Germany pursuant to a year-to-year lease agreement. Monthly lease payments are approximately $1,700. Sales and service for the Company's European operations are conducted from the German facility. 18 ITEM 3. LEGAL PROCEEDINGS. Neither the Company nor its subsidiary are involved in any litigation which is expected to have a material adverse effect on the Company's business, consolidated financial position, results of operations and cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "BTIX". The following table sets forth the range of high and low closing sales prices by quarter for the Company's Common Stock as reported by the Nasdaq National Market for the last two fiscal years. FISCAL YEAR 1996 HIGH LOW --------------- -------- -------- 1st Quarter $1- 7/8 $1 2nd Quarter $1-15/16 $1-5/16 3rd Quarter $1-17/32 $1-1/32 4th Quarter $1- 7/16 $ 3/4 FISCAL YEAR 1995 HIGH LOW ---------------- -------- -------- 1st Quarter $1- 5/8 $ 5/8 2nd Quarter $1- 3/16 $ 5/8 3rd Quarter $1- 1/8 $ 11/16 4th Quarter $2- 1/8 $ 13/16 As of December 31, 1996, there were approximately 264 holders of record of the Company's Common Stock. The Company has never declared or paid dividends on its Common Stock. The Company does not anticipate declaring any dividends on its Common Stock in the foreseeable future and intends to retain its earnings, if any, for the development of its business. During August 1996, the Company entered into an agreement with a principal shareholder, Dassesta International S.A. ("Dassesta"), for an unsecured working capital loan of $3,000,000. The note evidencing the loan was issued under Regulation S, promulgated under the Securities Act of 1933, as amended. This loan matures February 14, 1997 and bears interest at 9% per annum. The principal amount of the loan, and any accrued interest thereon, was convertible at the option of the Company into common stock at any time during the six months at $.40 per share, and was convertible at the option of the noteholder at the end of the six months or upon default under the note at $.40 per share. The Company elected to convert the $3,000,000 loan and the accrued interest thereon of $87,040 into 7,717,602 shares of common stock of the Company on December 31, 1996. 20 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth below with respect to BTi's consolidated statements of operations for each of the three years in the period ended September 30, 1996 and with respect to the consolidated balance sheets at September 30, 1996 and 1995, are derived from the audited consolidated financial statements which are included elsewhere in this document. The statement of operations data for the years ended September 30, 1993 and 1992 and the balance sheet data at September 30, 1994, 1993 and 1992 are derived from audited consolidated financial statements not included in this document. The data set forth below should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this document. Dollars are stated in thousands, except per-share amounts.
YEARS ENDED SEPTEMBER 30, -------------------------------------------------- STATEMENT OF OPERATIONS DATA: 1996 1995 1994 1993 1992 ------- ------- ------- ------- -------- Total revenues $ 1,422 $9,196 $ 3,344 $ 4,327 $10,048 Net loss (14,816) (6,673) (10,313) (10,989) (8,700) Net loss per share (1) (0.37) (0.27) (1.03) (1.11) (0.98) Shares used in computing per share amounts (1) 39,950 24,783 9,977 9,912 8,907
YEARS ENDED SEPTEMBER 30, -------------------------------------------------- BALANCE SHEET DATA: 1996 1995 1994 1993 1992 ------- ------- ------- ------- -------- Working capital $(3,031) $10,274 $(2,114) $ 7,115 $17,562 Total assets 16,250 20,124 9,419 14,434 26,429 Long term obligations 48 493 459 650 548 Shareholders' equity (1,396) 13,368 2,283 11,970 22,787
(1) See Note 1 of Notes to Consolidated Financial Statements describing shares used in calculating net loss per share.
YEARS ENDED SEPTEMBER 30, -------------------------------------------------- BACKLOG DATA: (2) 1996 1995 1994 1993 1992 ------- ------- ------- ------- -------- $16,254 $9,300 $6,444 $3,138 $3,773
(2) Backlog of Business is derived from Company data not subject to audit. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's future results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not specifically limited to, failure to satisfy performance obligations, timely product development, changes in economic conditions in various markets the Company serves, and uncertainty regarding the Company's patents and propriety rights, as well as the other risks detailed in this section. The Company does not undertake to update the results discussed herein as a result of changes in risks or operating results. OVERVIEW Since 1984, the primary business of the Company has been the development of MSI systems that measure magnetic fields generated by the human body and assist in the noninvasive diagnosis of a broad range of medical disorders. The measurement of the body's magnetic fields by MSI provides information about the normal and abnormal functions of the brain, heart and other organs. BTi is focusing the development of its MSI system on large potential commercial market applications such as brain surgery, the diagnosis and surgical planning for treatment of epilepsy and life-threatening cardiac arrhythmias. Sixteen (16) Magnes systems were installed in medical and research institutions worldwide at the end of fiscal 1996. To date, more than 5,000 MSI examinations have been performed on patients and control subjects at the Company's application development sites. Related findings by BTi and its collaborators have been published in more than 75 scientific and medical papers. Since the first reimbursement for MSI procedures was received in September 1993, 75 insurance companies have approved reimbursement for certain MSI procedures performed with the Company's Magnes MSI systems. In fiscal 1995, BTi announced development of the Magnes 2500 WH, an expansion of the existing Magnes I and Magnes II systems product line. Development of the Magnes 2500 WH hardware was substantially completed in fiscal year 1996. The Magnes 2500 WH allows simultaneous examination of the entire brain and is designed for evaluating ambulatory or critically ill patients in a seated or fully reclined position. The Company commenced shipments of its Magnes 2500 WH prior to the end of fiscal year 1996; however, there were no final acceptances received from customers. Furthermore, although the Company received provisional acceptance from two customers, no final acceptances were received in the first quarter of fiscal year 1997 which ended December 31, 1996. The delay in receipt of customer final acceptances is primarily due to a pending hardware upgrade, the need for which was not discovered to be necessary prior to installing the systems at customer sites, and additional software development required to meet customer contractual requirements. The current price of BTi's MSI systems ranges from approximately $1.5 to $2.5 million, depending upon system configuration. A significant portion of the Company's sales have been, and are expected to continue to be in foreign markets. The Company generally prices its European sales in the currency of the country in which the product is sold and the prices of such products in dollars will vary as the value 22 of the dollar fluctuates against the quoted foreign currency price. There can be no assurance that currency fluctuations will not reduce the dollar return to the Company on such sales. The Company periodically enters into forward exchange contracts to hedge such foreign currency exposure. Due to substantial research and product development expenses and low unit sales, the Company has incurred net losses every year since fiscal 1982. Since concentrating on the development of its MSI systems in 1984, the Company's corporate strategy and commitment of resources have focused on long-term product applications and market development rather than near-term operating performance. Although considerable progress has been achieved, the Company expects to continue to incur significant product and applications development expenses in the foreseeable future and anticipates incurring operating losses at least through fiscal 1997. In December 1996, the Company reported a restructuring of its operations due to lower short-term market projections for its MSI systems. As part of the restructuring, D. Scott Buchanan, Ph.D. assumed the responsibilities of President and COO, reporting to Chairman and CEO James Schumacher. The restructuring resulted in an immediate reduction of 16 employees which is expected to be followed by additional reductions of approximately 28 persons after completion of the final development phases of its Magnes 2500 WH system over the next several months. As a result of the restructuring, the Company also expects to reduce its program costs in non-personnel related areas. The Company believes the relatively small number of proven medical applications for the Magnes system, lack of routine reimbursement for MSI procedures and uncertainty of product acceptance in the U.S. market, have limited system sales. Additionally, it is not possible to reliably predict the timing and extent of future product sales. The Company does not anticipate multiple sales to the same end-user and at current sales volumes, the sale of one Magnes system may have a significant impact on the results of operations of the Company during any reporting period. As a result, quarterly and annual operating performance will continue to fluctuate. The consolidated financial statements and notes thereto which appear in Part II, Item 8 should be read in conjunction with the following review. RESULTS OF OPERATIONS FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 As a result of delays in completion of the Magnes 2500 WH system development, no systems sales were made during fiscal year 1996, which contributed to the $8,143,000 increase in the Company's net loss as compared to fiscal 1995. Research and development expenses increased by $2,260,000 from the prior year as a result of increased efforts to substantially complete the development of the Magnes 2500 WH system. In addition, marketing and sales expenditures increased in fiscal 1996 as compared to fiscal 1995 as a result of the Company's increased efforts to obtain additional sales contracts in the highly competitive and limited market in which the Company operates. General and administrative expenses increased primarily as the result of the $319,000 write-off of certain patent costs related to the Company's Magnes II system that had been previously capitalized but are no longer considered to have value due to the Company's decision to focus primarily on the production of the Magnes 2500 WH 23 system. The Company will, however, produce Magnes II systems in the future as orders are received. There can be no assurance that any such orders will be received in the future. Revenue from product sales and service decreased 92% in fiscal 1996 to $733,000 from $8,981,000 in fiscal 1995. Revenue in fiscal 1996 consisted of service and components revenue and no Magnes system sales, as compared to fiscal 1995, in which revenue consisted of both service and component revenue and four Magnes II systems sales. Sales to SMI represented approximately 8% and 19% of total sales for fiscal years 1996 and 1995, respectively. The $2,398,000 excess of production costs over product sales is primarily attributable to an approximate $900,000 increase in the Company's provision for obsolescence associated with the Magnes II systems. This provision was made in light of the Company's decision to focus primarily on the production of the Magnes 2500 WH system. The Company will, however, produce Magnes II systems in the future as orders are received. There can be no assurance that any such orders will be received in the future. Research and development expenses increased by 41% in fiscal 1996 to $7,767,000 from $5,507,000 in fiscal 1995. This increase was primarily attributable to the Company's decision to substantially complete development of the Magnes 2500 WH system, which included development of a prototype unit that was installed at Scripps in July 1996. Additionally, $554,000 was incurred in fiscal 1996 under collaborative agreements with UCSF and Scripps for applications development performed on behalf of the Company. The Company anticipates that future expenditures under these collaborative agreements will be reduced to less than $150,000 on an annual basis. Marketing and sales expenses increased 18% in fiscal 1996 to $2,798,000 from $2,370,000 in fiscal 1995. This increase was attributable to higher expenditures for sales support and marketing activities, including an increase in salary, travel and trade show expenses. General and administrative expenses increased 29% in fiscal 1996 to $2,958,000 from $2,300,000 in fiscal 1995. This increase was primarily the result of the write-off of $319,000 in patent costs that related to the Magnes II system previously included in other assets determined to no longer have value due to the Company's decision to focus primarily on the production of the Magnes 2500 WH system. The Company will, however, produce Magnes II systems in the future as orders are received. There can be no assurance that any such orders will be received in the future. Interest expense decreased 93% in fiscal 1996 to $38,000 from $573,000 in fiscal 1995 as a result of the conversion of short-term notes in exchange for the issuance of common stock that occurred in fiscal 1995. The Company also executed a $3,000,000 working capital loan in the last quarter of fiscal 1996; however, the loan plus accrued interest was converted into 7,717,602 shares of common stock on December 31, 1996. The Company recorded a net loss of $14,816,000 in fiscal 1996 and $6,673,000 in fiscal 1995. The increased loss was primarily due to lack of system acceptances, increased research and development expenses, increased marketing and sales expenses, and additional production costs, including the increase in the Company's provision for inventory obsolescence as well as the write-off of patent costs. 24 FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1994 Fiscal 1995 results of operations improved from fiscal 1994 levels primarily as a result of the increased volume of Magnes product sales and reduced research and development expenses. The improvement in operating results was partially offset by higher sales and marketing expenses, higher interest expense on short-term debt and the extraordinary loss resulting from the conversion of certain short-term debt to equity. Revenues from product sales and service increased in fiscal 1995 to $8,981,000 from $3,119,000 in fiscal 1994 as a result of four Magnes system sales in 1995 compared to a single Magnes system sale in fiscal 1994. Product sales in both fiscal years were composed of Magnes MSI systems and Magnes components. Sales to SMI represented approximately 19% and 28% of the total sales for fiscal years 1995 and 1994, respectively. In fiscal 1994 sales to one customer represented 68% of total sales. The gross profit margin on product sales in fiscal 1995 was 47%, a 28% increase over 1994. The improvement in gross margin was primarily the result of volume related manufacturing efficiencies and reduction in production costs. Research and development expenses declined 18% in fiscal 1995 to $5,507,000 from $6,735,000 in fiscal 1994. The decline is primarily the result of lower overhead costs associated with research and development activities and the transfer of several people from research and development projects to sales support and marketing activities. The decline in research and development was partially offset by an increase in materials spending associated with the Magnes WH development program. Marketing and sales plus general and administrative expenses in fiscal 1995 totaled $4,670,000 versus $3,959,000 in the prior fiscal year. These expenses represented 51% and 118% of total revenues in fiscal 1995 and 1994, respectively. General and administrative expenses totaled $2,300,000 in fiscal 1995, representing a slight decline from fiscal 1994. Fiscal 1994 general and administrative expenses included nonrecurring expenses of $423,000 related to an uncompleted public offering of common stock. Considering only recurring expenses, the increase from fiscal 1994 to 1995 in general and administrative expenses resulted primarily from higher personnel costs and higher insurance costs. Total marketing and sales expenses increased $740,000 over the prior year as a result of higher expenditures for sales support and marketing activities. This included the addition of a Vice President of Sales and Marketing, the transfer of personnel noted above and associated program expenses. Interest expense increased to $573,000 in fiscal 1995 from $391,000 in the prior fiscal year as a result of continued short-term debt financing and an increase in short-term borrowing. LIQUIDITY AND CAPITAL RESOURCES BTi has financed its operations largely through private and public sales of equity and debt securities. During July 1996, the Company completed negotiations with a principal shareholder, Dassesta, for an unsecured working capital loan of $3,000,000. This loan matures February 14, 1997 and bears interest at 9% per annum. The principal amount of the loan and any accrued interest thereon, is convertible at the option of the Company into common stock at any time during the six month term at $.40 per share, and is convertible at the option of the noteholder at the end of the six month term or upon default under the 25 note at $.40 per share. As of September 30, 1996, the Company had borrowed the entire $3,000,000 under the terms of the above loan agreement. The Company elected to convert the $3,000,000 loan and the $87,040 of accrued interest into 7,717,602 shares of common stock of the Company on December 31, 1996. At September 30, 1996, the Company's current liabilities exceeded current assets, resulting in a working capital deficiency of $3,031,000. At September 30, 1995, the Company had working capital of $10,274,000. The decrease in working capital is primarily due to the fiscal 1996 net loss incurred by the Company as a result of efforts to complete the development of the Magnes 2500 WH system. Restricted cash increased from $2,621,000 to $6,085,000 as a result of the increase in customer deposits received by the Company which are legally restricted as to withdrawal. Cash, cash equivalents and short-term investments, exclusive of any restricted cash, declined by $7,712,000 to $2,496,000 at September 30, 1996. The Company's operations were funded by existing cash and short-term investment resources and the Dassesta working capital loan discussed above. Capital equipment expenditures were $577,000 in fiscal 1996 compared to $453,000 in fiscal 1995. The Company anticipates capital equipment expenditures will amount to approximately $250,000 in fiscal 1997. Based on the Company's current operating plans, capital and working capital expenditures necessary to support the on-going development and commercialization of the Company's products through September 30, 1997 are expected to substantially exceed cash expected to be generated from operations and will result in a further decline in the Company's liquidity. The Company's backlog at September 30, 1996 of $16,254,000 is composed primarily of orders for the new Magnes 2500 WH system. The Company believes that the development of the Magnes 2500 WH system may be completed in the second quarter fiscal 1997. Although significant effort is being expended to complete development and obtain customer final system acceptances commencing in the second quarter of fiscal 1997, there can be no assurance that this will be accomplished. In the event such development and acceptances are not obtained as anticipated, revenue reporting and cash collections could be further delayed with possible negative effects on the cash flow and cash resources of the Company. The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000 for the years ended September 30, 1996, 1995, and 1994, respectively. In addition, at September 30, 1996 the Company has an accumulated deficit of $79,863,000 and its current liabilities exceed its current assets, resulting in a working capital deficiency. Management anticipates that capital and working capital expenditures in fiscal 1997 will substantially exceed cash generated by operations. Management is currently concentrating on completing installation of and obtaining final customer acceptances for its Magnes 2500 WH systems; however, there is no assurance that this will be achieved. In the event that such final acceptances are not obtained, the Company will experience further negative effects on usable cash resources of the Company. Management is also continuing to seek additional sources of debt or equity financing. The Company anticipates that existing capital resources, the reduction in the scope of its operations, and the additional debt or equity financing, will be sufficient to provide operating capital required to meet its obligations in the normal course of business through fiscal 26 1997; however, there can be no assurances that the Company will be able to obtain the additional debt or equity financing that is required. If such additional debt or equity financing is not obtained, the Company will be required to further reduce the scope of its operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. RISK AND UNCERTAINTIES The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000 for the years ended September 30, 1996, 1995, and 1994, respectively. In addition, at September 30, 1996 the Company has an accumulated deficit of $79,863,309 and its current liabilities exceed its current assets, resulting in a working capital deficiency. Management anticipates that capital and working capital expenditures in fiscal 1997 will substantially exceed cash generated by operations. Management is currently concentrating on completing the installation of and obtaining final customer acceptances for its Magnes 2500 WH systems; however, there is no assurance that this will be achieved. In the event that such final acceptances are not obtained, the Company will experience further negative effects on usable cash resources of the Company. Management is also continuing to seek additional sources of debt or equity financing. The Company anticipates that existing capital resources, the reduction in the scope of its operations, and the additional debt or equity financing, will be sufficient to provide operating capital required to meet its obligations in the normal course of business through fiscal 1997; however, there can be no assurances that the Company will be able to obtain the additional debt or equity financing that is required. If such additional debt or equity financing is not obtained, the Company will be required to further reduce the scope of its operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Although the Company commenced shipments of its Magnes 2500 WH prior to the end of fiscal year 1996 there were no final acceptances received from customers. Furthermore, although the Company received provisional acceptance from two customers, there were no final acceptances received from customers during the first quarter of fiscal year 1997. The delay in receipt of customer acceptances is primarily due to a pending hardware upgrade, the need for which was not discovered to be necessary prior to installing the systems at customer sites, and additional software development required to meet customer contractual requirements. Although the Company anticipates that the additional system hardware upgrade and software development required by the contracts will be completed prior to the second quarter of fiscal year 1997, there can be no assurances that this will be accomplished. In the event that the hardware upgrade and software development are not completed as anticipated, customer final acceptances could be further delayed, which could have a material adverse effect on the cash flow and cash resources of the Company. To date the Company has been engaged principally in research and development activities, and has made only low volume sales to research and medical institutions primarily in Europe and Japan, and has not made any MSI system sales for commercial/clinical use in the U.S. Such sales require prior FDA approval. The Company has received 510(k) clearance to market its Magnes I and Magnes II systems in the U.S., and has recently applied for 510(k) clearance for its Magnes 2500 WH system for applications relating to the brain. There can, however, be no assurance that the Company will receive such clearance 27 in the near future or at all. Failure to receive such clearances to market would have a material adverse effect on the Company's financial condition and results of operations. The Company is dependent on its Magnes systems as its principal product for which there are currently limited clinical applications. Additional clinical applications development needs to be conducted with the MSI system at major medical centers before the Company can begin to penetrate the commercial clinical market. There can be no assurance that a commercial market will develop for diagnostic or monitoring uses of the MSI system. The Company's commercial success is highly dependent on the availability of reimbursement for procedures using the MSI system. To date reimbursements from third party payors are on a case-by-case basis. As of December 31, 1996, there have been a total of 153 reimbursements from 75 different third party payors in the U.S. Although the number of third party payors making reimbursements has increased from the September 30, 1995 total of 49 payors, there is no assurance that third party reimbursements will become widely available. Reimbursements are not currently provided for such procedures by the United States government, nor is there any assurance that the U.S. government will authorize or budget for such procedures in the future. The Company also cannot predict what legislation relating to its business or the health care industry may be enacted in the future, including legislation relating to third party reimbursement, or what effect such legislation may have on the results of its operations. The Company operates in an industry characterized by rapid technological change. New products using other technologies or improvements to existing products may reduce the size of the potential markets for the Company's products, and may render them obsolete or non-competitive. Competitors' may develop new or different products using technology or imaging modalities that may provide or be perceived as providing greater value than the Company's products. Any such development would have a material adverse effect on the Company's financial condition and results of operations. Additionally, there has been recently, and continues to be, ongoing significant price competition from the Company's competitors for the currently limited number of whole head systems being purchased worldwide. This aggressive competition is likely to affect potential profitability of the Company's whole head system, the extent of which is not presently determinable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements as of September 30, 1996 and 1995, and for each of the three years in the period ended September 30, 1996 and the report of independent accountants are included in this report as listed in the index on page 30 of this report ( Item 14 (a)). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required for this item with respect to directors and executive officers is set forth in the sections entitled "Election of Directors", "Security Ownership of Management-Business Experience of Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" in the Company's Proxy Statement and Notice of Annual Meeting of Shareholders to be held March 18, 1997 (the "Proxy Statement"), to be filed with the Commission within 120 days of the Company's fiscal year end, which sections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required for this item is set forth in the section entitled "Executive Compensation and Other Information" in the Proxy Statement, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required for this item is set forth in the section entitled "Security Ownership of Management" and "Principal Shareholders" in the Proxy Statement, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required for this item is set forth in the sections entitled "Executive Compensation and Other Information" and "Certain Transactions" in the Proxy Statement, which sections are incorporated herein by reference. 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements Report of Independent Accountants...........................36 Consolidated Balance Sheets at September 30, 1996 and 1995..37 Consolidated Statements of Operations for the three years ended September 30, 1996....................................38 Consolidated Statement of Shareholders' (Deficit) Equity for the three years ended September 30, 1996................39 Consolidated Statements of Cash Flows for the three years ended September 30, 1996....................................40 Notes to Consolidated Financial Statements..................41 (2) Financial Statement Schedule Schedule II - Consolidated Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto (3) Exhibits The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report. (b) Reports on Form 8-K during the fourth quarter: None (c) Exhibits The following documents are exhibits to this Form 10-K: 30 Exhibit No. Description of Document 3.1 (1) Articles of Incorporation of the Company, as amended. 3.2 (1) Bylaws of the Company, as amended. 3.3 (10) Amendment to the Articles of Incorporation (numbered originally as 10.73) +10.6 (4) The Company's 1987 Stock Option Plan, as amended. +10.7 (4) Form of Incentive Stock Option and related exercise documents. +10.8 (1) The Company's 1985 Incentive Stock Option Plan, as amended. +10.9 (1) Form of Incentive Stock Option and related exercise documents. +10.10 (1) The Company's 1985 Non-Qualified Stock Option Plan, as amended. +10.11 (1) Form of Non-Qualified Stock Option and related exercise documents. +10.12 (1) The Company's 1984 Incentive Stock Option Plan, as amended. +10.13 (1) Form of Incentive Stock Option and related exercise documents. 10.17 (1) Option Agreement dated July 16, 1986 between the Company and Quantum Design, Inc. 10.22 (1) Agreement to subordinate debt of S.H.E. GmbH. +10.36 (1) Form of Indemnification Agreements for directors and officers. 10.39 (2) Purchase and Distributorship Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. (with certain confidential portions omitted). 10.40 (2) Two Sets Purchase Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. (with certain confidential portions omitted). 10.41 (2) License and R & D Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. 10.42 (2) Stock Purchase Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. 10.43 (2) Registration Rights Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. 10.45 (3) Memorandum of Understanding dated January 18, 1991 between the Company and Sumitomo Metal Industries, Ltd. (with certain confidential portions omitted). 10.46 (3) New R & D Program for Small MSR (Supplementary Agreement to License and R & D Agreement) dated February 28, 1991 between the Company and Sumitomo Metal Industries, Ltd., and Memorandum (not dated) modifying the agreement. 10.48 (3) Exclusive Patent and Technology License Agreement dated July 15, 1991 between the Company and Stanford University (with certain confidential portions omitted). 31 No. Description of Document +10.49 (7) Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan. Exhibit +10.55 (6) Employment Agreement, dated July 12, 1993, between the Company and James V. Schumacher. +10.56 (6) Form of Trust Agreement between the Company and James V. Schumacher. +10.57 (8) Amendment to Option Agreements between the Company and Stephen O. James (numbered originally as Exhibit 10.3). 10.58 (6) Real Estate Lease, dated April 3, 1989, between the Company and Cornerstone Income Properties, plus First and Second Amendments to the Real Estate Lease. 10.64 (9) Form of Purchase Option Agreement, as amended. 10.67 (9) Magnetically Shielded Room (MSR) Development and Production Program Agreement, dated June 6, 1994 (with certain confidential portions omitted). 10.68 (6) Letter Agreement between the Company and Dassesta International S.A. regarding the purchase of 25,000,000 Shares of Common Stock of the Company. 10.69 (6) Loan and Security Agreement with a bank dated December 13, 1994. 10.70 (6) Schedule to Loan and Security Agreement dated December 13, 1994. 10.71 (11) Offshore Subscription Agreement between the Company and Dassesta International S.A. (Numbered originally as Exhibit 2.1). 10.72 (11) Form of Offer Letter to Holders of 10% Secured Promissory Notes (Numbered originally as Exhibit 2.2). 10.73 Offshore Note Purchase Agreement between the Company and Dassesta International, S.A. dated August 13, 1996. 10.74 Convertible Advance Promissory Note with Dassesta International S.A. 21 Subsidiary of the Company (Biomagnetic Technologies GmbH). 23 Consent of Independent Accountants. 24 Power of Attorney. 27 Financial Data Schedule. 99.1 Annual Report of the Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan. 32 (1) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-29095, filed June 7, 1989, as amended by Amendment No. 1, filed June 13, 1989, Amendment No. 2, filed July 21, 1989 and Amendment No. 3, filed July 28, 1989. (2) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Fiscal 1990 Form 10-K. (3) These exhibits were previously filed as a part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Fiscal 1991 Form 10-K. (4) These exhibits were previously filed as part of, and are hereby incorporated by, reference to the same numbered exhibits (except as otherwise indicated) in the Fiscal 1992 Form 10-K. (5) These exhibits were previously filed as part of, and are hereby incorporated by, reference to the same numbered exhibits (except as otherwise indicated) in the Fiscal 1993 Form 10-K. (6) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Fiscal 1994 Form 10-K. (7) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-46758, filed March 26, 1992, as amended by Amendment No. 1, filed May 8, 1992. (8) These exhibits were previously filed as part of, and are hereby incorporated by reference to the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-8, Registration Statement No. 33-68136 filed August 27, 1993. (9) These exhibits were previously filed as part of, and are hereby incorporated by reference to the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-81294, filed July 8, 1994. (10)These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in Fiscal 1995 Form 10-K (11)These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in form 8-K, filed April 14, 1995. + Management contract or compensatory plan or arrangement. SUPPLEMENTAL INFORMATION Proxy materials have not been sent to shareholders as of the date of this report. The Proxy materials will be furnished to the Company's shareholders subsequent to the filing of this report and the Company will furnish such material to the Securities and Exchange Commission at that time. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMAGNETIC TECHNOLOGIES, INC. By /S/JAMES V. SCHUMACHER JANUARY 21, 1997 ---------------------- ---------------- James V. Schumacher Date Chairman, Chief Executive Officer 34 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /S/ JAMES V. SCHUMACHER JANUARY 21, 1997 ----------------------------- ---------------- James V. Schumacher, Chairman, Date Chief Executive Officer and Director By /S/ HERMAN BERGMAN JANUARY 21, 1997 ----------------------------- ---------------- Herman Bergman, Date Vice President Finance, Chief Financial Officer, Corporate Secretary By * JANUARY 21, 1997 ----------------------------- ---------------- R. Scott Asen, Director Date By * JANUARY 21, 1997 ----------------------------- ---------------- Jerry C. Benjamin, Director Date By * JANUARY 21, 1997 ----------------------------- ---------------- William C. Black, Jr., Director Date By * JANUARY 21, 1997 ----------------------------- ---------------- Martin P. Egli, Director Date By * JANUARY 21, 1997 ----------------------------- ---------------- Gerald D. Knudson, Director Date By * JANUARY 21, 1997 ----------------------------- ---------------- Enrique Maso, Director Date *By ----------------------------- James V. Schumacher (Attorney-in-Fact) 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Biomagnetic Technologies, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a) (1) and (2) on page 30 present fairly, in all material respects, the financial position of Biomagnetic Technologies, Inc. and its subsidiary at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ PRICE WATERHOUSE LLP San Diego, California January 10, 1997 36 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS
September 30, ------------------------- 1996 1995 ----------- ----------- ASSETS Cash and cash equivalents $1,752,092 $2,313,928 Short-term investments 744,138 7,894,280 Restricted cash and short-term investments 6,084,555 2,621,422 Accounts receivable (less allowance for doubtful accounts: 1996, $10,420; 1995, $20,115) 16,731 774,619 Inventories 5,627,515 2,476,794 Prepaid expenses and other current assets 337,792 456,106 ----------- ----------- Total current assets 14,562,823 16,537,149 Property and equipment -- at cost 9,477,775 9,818,678 Less accumulated depreciation and amortization (8,569,811) (7,894,133) ----------- ----------- Net property and equipment 907,964 1,924,545 Restricted cash 500,000 1,100,000 Other assets 278,814 562,556 ----------- ----------- TOTAL ASSETS $16,249,601 $20,124,250 =========== =========== LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY Accounts payable $2,632,917 $786,553 Accrued liabilities 1,896,245 1,009,430 Accrued salaries and employee benefits 860,155 610,573 Customer deposits 9,204,326 3,856,187 Note payable-related party 3,000,000 ----------- ----------- Total current liabilities 17,593,643 6,262,743 Other liabilities 48,070 493,413 ----------- ----------- Total liabilities 17,641,713 6,756,156 COMMITMENTS AND CONTINGENCIES (Notes 2, 7 and 9) SHAREHOLDERS' (DEFICIT) EQUITY Common stock -- no par value, 60,000,000 shares authorized; 39,974,222 and 39,921,174 shares issued and outstanding 78,467,197 78,415,590 Accumulated deficit (79,863,309) (65,047,496) ----------- ----------- Total shareholders' (deficit) equity (1,396,112) 13,368,094 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY $ 16,245,601 $ 20,124,250 ============ ============
See Notes to Consolidated Financial Statements. 37 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, ------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Product sales $ 167,684 $8,771,502 $2,956,125 Service revenue 564,921 209,756 162,851 Interest income 524,895 528,987 175,742 Other income (expense) 164,623 (314,234) 49,414 ------------ ------------ ------------ Total revenues 1,422,123 9,196,011 3,344,132 Production costs 2,565,454 4,454,992 2,513,590 Service costs 111,173 68,854 58,117 Research and development 7,767,199 5,507,054 6,735,130 Marketing and sales 2,798,248 2,369,974 1,629,823 General and administrative 2,957,571 2,299,974 2,329,124 Interest expense 38,291 573,261 391,460 ------------ ------------ ------------ Total expenses 16,237,936 15,274,109 13,657,244 ------------ ------------ ------------ Loss before extraordinary loss (14,815,813) (6,078,098) (10,313,112) ============ =========== ============ Extraordinary loss from extinguishment of short-term debt (594,715) ------------ ------------ ------------ NET LOSS $(14,815,813) $(6,672,813) $(10,313,112) ============ =========== ============ NET LOSS PER SHARE Loss before extraordinary loss $(.37) $(.25) $(1.03) Extraordinary loss (.02) ------------ ------------ ------------ Net loss $(.37) $(.27) $(1.03) ============ =========== ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 39,950,047 24,782,800 9,977,192 ============ =========== ============
See Notes to Consolidated Financial Statements. 38 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
Common Stock --------------------------- Accumulated Shares Amount Deficit Total ------------ ------------- ------------- ------------ BALANCE, SEPTEMBER 30, 1993 9,924,356 $60,031,699 $(48,061,571) $ 11,970,128 Exercise of stock options 15,573 20,687 20,687 Stock issued to Employee Stock Purchase Plan participants 87,768 205,158 205,158 Issuance of options to purchase equity securities 400,000 400,000 Net loss (10,313,112) (10,313,112) ------------ ------------- ------------- ------------ BALANCE, SEPTEMBER 30, 1994 10,027,697 60,657,544 (58,374,683) 2,282,861 Exercise of stock options 33,000 18,480 18,480 Sale of common stock, net of issuance costs 25,000,000 14,790,880 14,790,880 Common stock issued upon debt extinguishment 4,860,477 2,948,686 2,948,686 Net loss (6,672,813) (6,672,813) ------------ ----------- ------------ ------------ BALANCE, SEPTEMBER 30, 1995 39,921,174 78,415,590 (65,047,496) 13,368,094 Exercise of stock options 26,765 17,965 17,965 Stock issued to Employee Stock Purchase Plan participants 26,283 33,642 33,642 Net loss (14,815,813) (14,815,813) ------------ ------------- ------------- ------------ BALANCE, SEPTEMBER 30, 1996 39,974,222 $78,467,197 $(79,863,309) $ (1,396,112) ============ ============= =============
See Notes to Consolidated Financial Statements. 39 BIOMAGNETIC TECHNOLOGIES , INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, ----------------------------------------------- 1996 1995 1994 ------------- ------------ ------------ OPERATING ACTIVITIES Net loss $(14,815,813) $ (6,672,813) $(10,313,112) Adjustments to reconcile net loss to net cash used by operating activities: Loss on write-off of assets 345,677 Extraordinary loss 594,715 Depreciation and amortization 1,248,141 1,275,891 1,944,423 Amortization of debt issue costs 265,000 135,000 Changes in operating assets and liabilities: Restricted cash (5,484,555) (1,104,583) (1,516,839) Accounts receivable 757,888 (651,757) 362,261 Inventories (3,150,721) (279,117) 1,694,965 Prepaid expenses and other current assets 118,314 (36,668) (208,699) Other assets 283,742 (51,215) (31,607) Accounts payable 2,435,363 (303,897) 620,216 Accrued salaries and employee benefits 249,582 82,262 60,496 Accrued liabilities (311,674) 146,031 226,771 Customer deposits 5,352,139 2,299,951 1,556,236 Other liabilities 164,147 33,960 (190,571) ------------- ------------ ------------ Net cash used for operating activities (12,807,770) (4,402,240) (5,660,460) INVESTING ACTIVITIES Change in short-term investments, net 9,771,564 (7,894,280) 3,925,251 Payments for property and equipment (577,237) (452,732) (941,691) ------------- ------------ ------------ Net cash provided by (used for) investing activities 9,194,327 (8,347,012) 2,983,560 FINANCING ACTIVITIES Proceeds from issuance of common stock, net of issuance costs 51,607 14,809,360 225,845 Proceeds from notes payable 3,000,000 2,318,182 2,710,000 Principal repayments on notes payable (2,818,182) (45,734) Net cash provided by financing activities 3,051,607 14,309,360 2,890,111 ------------- ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (561,836) 1,560,108 213,211 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,313,928 753,820 540,609 ------------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,752,092 $ 2,313,928 $ 753,820 ============= ============ ============
See Notes to Consolidated Financial Statements. 40 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Biomagnetic Technologies, Inc. (the "Company"), founded in 1970 as a California corporation, is engaged primarily in the business of developing, manufacturing and selling innovative medical imaging systems, for sale currently to medical research centers located in the United States, Europe and Asia. The magnetic source imaging ("MSI") systems developed by the Company measure magnetic fields created by the human body for the noninvasive diagnosis of a broad range of disorders. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and Biomagnetic Technologies GmbH, a wholly owned foreign subsidiary located in Germany. The subsidiary was formed in 1978 primarily to market the Company's products. All material intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable and financial instruments used in hedging activities. The Company places its cash equivalents and short-term investments with high quality financial institutions, and such instruments are invested primarily in high grade short-term investments. Concentrations of credit risk with respect to trade accounts receivable are limited due to the geographically diverse customers that comprise the Company's customer base, thus spreading the trade credit risk. The counterparties to the agreements relating to the Company's foreign exchange instruments consist of a high credit quality financial institution. While the notional amounts of financial instruments are often used to express the volume of these transactions, the potential accounting loss on these transactions, if any, is limited to the fluctuation in the applicable foreign currency exchange rate. 41 FOREIGN CURRENCY REMEASUREMENT The functional currency of the Company's foreign subsidiary is the U.S. dollar. The monetary assets and liabilities of the foreign subsidiary are translated into U.S. dollars at the exchange rate in effect at the balance sheet date while nonmonetary items are translated at historical rates. Revenue and expenses are translated at the average exchange rate for the period, except cost of sales and depreciation, which are translated at historical rates. Remeasurement gains or losses of the foreign subsidiary are recognized currently in consolidated operations. For the years ended September 30, 1996, 1995 and 1994 such gains (losses) totaled approximately $136,000, $(96,400) and $4,600, respectively. OFF-BALANCE SHEET RISK The Company has a $5,000,000 letter of credit and foreign exchange credit facility with a bank which is secured by restricted cash and short-term investments. The Company utilizes standby letters of credit to secure European bank guarantees issued to European customers for advance deposits on sales. At September 30, 1996 and 1995 there were outstanding letters of credit amounting to approximately $3,128,000 and $2,621,000, respectively. These amounts are secured by an equal amount included in restricted cash and short-term investments. The Company periodically enters into forward exchange contracts to hedge foreign currency exposure associated with certain identifiable foreign currency commitments entered into in the ordinary course of business. Gains and losses incurred on forward contracts associated with sales orders are deferred and included in the basis of the underlying sales transaction. Gains and losses are recognized when the offsetting gains and losses are recognized in the related hedged items. At September 30, 1996 and 1995, the Company had forward exchange contracts to purchase approximately $5,995,000 and $5,289,000 respectively, with Deutsche marks and French francs at varying maturities generally within one year and had incurred $100,136 in unrealized gains and $197,000 in unrealized losses which had been deferred at September 30, 1996 and 1995, respectively. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term highly liquid investments purchased with a maturity of three months or less. Cash equivalents are stated at cost, which approximates market value. INVESTMENT SECURITIES Management determines the appropriate classification of its debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company has classified its debt securities as "available-for-sale" at September 30, 1996 and "held-to maturity" at September 30, 1995 and has recorded them at fair value and amortized cost, respectively. At September 30, 1996 and 1995, the Company had classified $3,872,271 and $10,515,702 in debt securities as available-for-sale and held-to- 42 maturity, respectively. Gross unrealized gains and losses on the Company's available-for-sale securities were not significant. INVENTORIES Inventories are carried at the lower of cost or market. Cost is determined on the first-in, first-out basis. LONG-LIVED ASSETS The Company assesses potential impairments to its long-lived assets on an exception basis when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. REVENUE RECOGNITION Revenue from product sales is generally recognized at the time of customer acceptance. Standard terms of sale include a one year service period following the sale. The Company defers and recognizes service revenues over the related service period. INCOME TAXES Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences resulting from the differences in the financial reporting and tax basis of assets and liabilities. Deferred income tax expense is the change during the year in the deferred income tax asset or liability (Note 5). Valuation allowances are established when necessary, to reduce deferred tax assets to the amount more likely than not to be realized. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is generally computed using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized over the related lease term. FAIR VALUE OF FINANCIAL INSTRUMENTS It is management's belief that the carrying amounts shown for the Company's financial instruments are reasonable estimates of their related fair values. 43 STOCK-BASED COMPENSATION ACCOUNTING In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation." The Company has not elected early adoption of FAS 123. Upon adoption of FAS 123, the Company will continue to measure compensation expenses for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and will provide pro forma disclosures as if the fair value based method prescribed by FAS 123 had been utilized. The disclosures under this standard will be required beginning in 1997. NET LOSS PER SHARE Net loss per share is based on the weighted average number of shares of common stock outstanding. Common stock equivalents are antidilutive and are excluded from the computation of net loss per share. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to current year presentation. Note 2. OPERATIONS AND CAPITAL RESOURCES The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000 for the years ended September 30, 1996, 1995, and 1994, respectively. In addition, at September 30, 1996 the Company has an accumulated deficit of $79,863,000 and its current liabilities exceed its current assets, resulting in a working capital deficiency. Management anticipates that capital and working capital expenditures in fiscal 1997 will substantially exceed cash generated from operations. Management is currently concentrating on completing installation of and obtaining final customer acceptances for its Magnes 2500 WH systems; however, there is no assurance that this will be achieved. In the event that such final acceptances are not obtained, the Company will experience further negative effects on usable cash resources of the Company. Management is also continuing to seek additional sources of debt or equity financing. The Company anticipates that existing capital resources, the reduction in the scope of its operations, and the additional debt or equity financing, will be sufficient to provide operating capital required to meet its obligations in the normal course of business through fiscal 1997; however, there can be no assurances that the Company will be able to obtain the additional debt or equity financing that is required. If such additional debt or equity financing is not obtained, the Company will be required to further reduce the scope of its operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 44 NOTE 3. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one industry segment which includes developing, manufacturing and selling magnetic source imaging products. The following represents information about operations in different geographic areas. Information under the caption "U.S." represents domestic operations and information under the caption "Europe" represents the activities of the Company's foreign subsidiary. Revenues under the captions "Asia" represent export sales from the Company's domestic operations. Sales to Sumitomo Metal Industries, Ltd., the Company's exclusive distributor for certain portions of the Asian market, represented approximately 8%, 19%, and 28% of total Company sales for fiscal years 1996, 1995 and 1994, respectively. Years Ended September 30, 1996 1995 1994 Revenues U.S. $ 198,351 $ 318,630 $ 53,129 Europe 449,895 7,062,483 2,137,144 Asia 84,359 1,600,145 928,703 Interest 524,895 528,987 175,742 Other income (expense) 164,623 (314,234) 49,414 ------------ ------------ ------------ $ 1,422,123 $ 9,196,011 $ 3,344,132 ============ ============ ============ Net loss U.S. $(13,143,993) $ (6,439,051) $ (9,938,530) Europe (1,671,820) (233,762) (374,582) ------------ ------------ ------------ $(14,815,813) $ (6,672,813) $(10,313,112) ============ ============ ============ Identifiable assets U.S. $11,628,478 $17,041,388 $ 6,823,137 Europe 4,621,123 3,082,862 2,596,231 ------------ ------------ ------------ $16,249,601 $20,124,250 $ 9,419,368 ============ ============ ============ 45 NOTE 4. FINANCIAL STATEMENT INFORMATION The composition of certain financial statement captions are summarized below. Inventories: 1996 1995 ---------- ---------- Finished goods $1,725,052 $620,990 Work-in-process 3,356,106 1,620,147 Raw materials 546,357 235,657 ---------- ---------- $5,627,515 $2,476,794 ========== ========== Inventories include an allowance for obsolescence of approximately $1,650,659 and $1,016,000 at September 30, 1996 and 1995, respectively. At September 30, 1996, $3,330,816 of the total inventory balance was related to Magnes 2500 WH systems located at customer sites pending final customer system acceptance. The Company has not recognized revenue on these systems. Property and equipment: 1996 1995 ---------- ---------- Machinery and equipment $8,880,428 $6,578,793 Office furniture and equipment 253,328 2,880,774 Leasehold improvements 341,801 340,313 Construction-in-process 2,218 18,798 ---------- ---------- $9,477,775 $9,818,678 ========== ========== Accrued liabilities: 1996 1995 ---------- ---------- Deferred revenue $ 84,257 $ 401,269 Customer obligations 112,216 319,336 Accrued employment agreement costs 600,000 Other 1,099,772 288,825 ---------- ---------- $1,896,245 $1,009,430 ========== ========== Supplemental Disclosure of Cash Flow Information: In fiscal 1995, the Company issued 4,882,477 shares of common stock and options to purchase common stock in a non-cash transaction to certain holders of short-term debt in exchange for extinguishment of the obligations under the debt instruments (Note 6). During the years ended September 30, 1996, 1995 and 1994, the Company paid interest of $38,166, $94,430 and $251,270 respectively. 46 NOTE 5. INCOME TAXES The Company has not recorded provisions for income taxes in fiscal 1996, 1995 and 1994 due to net operating losses for reporting purposes. The components of deferred tax assets at September 30, 1996 and 1995 are as follows: 1996 1995 ------------ ----------- Net operating loss carryforwards $ 9,321,000 $ 4,302,000 Research and development credits 672,000 528,000 Capitalized research and development costs 1,491,000 896,000 Allowances 1,055,000 524,000 Other 554,000 525,000 ------------ ----------- 13,093,000 6,775,000 Valuation allowance (13,093,000) (6,775,000) ------------ ----------- Deferred tax assets $ -- $ -- ------------ ----------- A full valuation allowance for deferred tax assets has been provided because realization of such future tax benefits cannot be assured. The Company has approximately $24,273,000 and $13,609,000 of Federal and State net operating loss carryforwards which will begin to expire in 1997 if not utilized. As a result of an ownership change (as defined by Section 382 of the Internal Revenue Code of 1986, as amended) which occurred in fiscal 1995, the Company's tax loss carryforwards were limited to a total $11,964,213 of which approximately $556,000 can be utilized per year. As a result of this limitation , net operating loss carryforwards were reduced by $12,171,749 and research and development credits were reduced by $1,663,903 in fiscal 1995. NOTE 6. DEBT In August 1996, the Company entered into a loan agreement with Dassesta International S.A. ("Dassesta") for $3,000,000 that bears interest at 9% per annum and matures in February 1997. The note plus accrued interest is convertible into common shares at the option of the Company at $.40 per share at any time and under certain conditions at the option of Dassesta. As of September 30, 1996 the Company had borrowed the entire $3,000,000 ( Note 10). In March and April 1995, the Company executed agreements with the holders of $2,210,000 of short-term notes (including $850,000 to related parties) providing for the extinguishment of the note principal plus accrued interest in exchange for the issuance of common stock in connection with the completion of the sale of common stock to Dassesta (Note 8). The conversion agreements provided for i) a 10% increase in the principal balance of the notes for purposes of conversion to common stock, ii) issuance of common stock at a price per share utilized in the Dassesta financing less 10% and iii) a 10% increase in the number of shares of common stock subject to purchase under previously issued option agreements. 47 In April 1995, the Company issued 4,882,477 shares of common stock in accordance with the conversion agreements. In fiscal 1995, the Company recorded an extraordinary loss of $594,715, representing the excess of the fair value of common stock and options issued in connection with the conversion over the net carrying value of the notes at conversion. NOTE 7. LEASE OBLIGATIONS The Company leases its office and production facilities and certain equipment under noncancelable operating leases. In March 1993, the Company renegotiated certain portions of the facility lease, extended the term through February 1998 and received an allowance for leasehold improvements. Under the previous facility lease, the Company recorded a deferred credit to reflect the excess of rent expense incurred over cash payments due to certain rent free periods. The amount of the deferred rent credit at March 1993, totaling approximately $306,000, is being amortized over the remaining lease term as a reduction of future rent expense. The new facility lease agreement contains two renewal options of five years each. Future minimum cash payments under operating leases are as follows: Years Ending September 30, 1997 $552,469 1998 228,565 -------- $781,034 ======== Total rent expense under noncancelable operating leases was $607,192, $579,706 and $535,508 for the years ended September 30, 1996, 1995 and 1994, respectively. NOTE 8. SHAREHOLDERS' EQUITY COMMON STOCK In March 1995, the Company completed the private sale of 25 million shares of common stock to Dassesta resulting in net proceeds of $14,790,880 after deducting $209,120 of issuance costs. Dassesta provided a $1,500,000 short-term loan prior to the completion of the stock sale, which was repaid at the closing of the transaction. In April 1995, the Company issued 4,882,477 shares of common stock and certain options to purchase common stock in connection with the extinguishment of $2,210,000 of short-term debt (Note 6). The Company issued five-year options to purchase 486,200 shares of common stock of the Company at $0.60 per share that replace options previously issued in connection with the issuance of short-term debt in fiscal 1994. At September 30, 1996, options to purchase 464,200 shares of common stock remain outstanding and exercisable. 48 STOCK OPTION PLANS The Company has various incentive and non-qualified stock option plans which provide that options to purchase up to 5,000,000 shares of common stock may be granted to key employees and others at an option price of at least fair market value at the date of grant which vest over a maximum period of four years from date of grant. The exercise period for each option is not to exceed 10 years from the date of grant. At September 30, 1996 options to purchase 1,146,248 shares of the Company's common stock are exercisable and 509,130 shares are available for future grants under the plans. The following table summarizes common stock option plan activity:
Years Ended September 30, -------------------------------------------- 1996 1995 1994 ------------ ------------ ------------- Outstanding at beginning of period 1,854,966 1,389,097 1,452,763 Granted 2,480,400 1,606,238 20,500 Canceled (75,134) (1,140,369) (68,593) Exercised (4,765) ---- (15,573) Outstanding at end of period 4,255,467 1,854,966 1,389,097 ------------ ------------ ------------- Price range of options exercised $1.00-$1.50 ------ $1.20- $1.50 Price range of outstanding options $1.00-$1.50 $1.00-$6.75 $1.20-$11.50
49 EMPLOYEE STOCK PURCHASE PLAN The Company has established an Employee Stock Purchase Plan in which eligible employees may use funds from accumulated payroll deductions to purchase shares of common stock at the end of designated purchase periods. Employees may contribute up to 15% of their base salary toward such purchases, not to exceed $25,000 per calendar year. The purchase price is the lesser of 85% of the fair market value of common stock determined at the beginning or end of the purchase period. For the purchase period ended March 31, 1994 the Company issued 87,768 shares of common stock to employees at an average price of $2.34 per share. For purchase period ended March 31, 1996 the Company issued 26,283 shares of common stock to employees at an average price of $1.28 per share. A total of 212,232 shares of common stock have been authorized for future purchases under the Employee Stock Purchase Plan. NOTE 9. EMPLOYMENT AGREEMENT In June 1993, the Board of Directors and the Chief Executive Officer and then President agreed to certain terms of employment. The agreement includes a potential future payment to the Chief Executive Officer of up to $600,000 in June 1997 based upon the price of the Company's common stock at that date and the realized and unrealized gains on stock options granted to him. The Company accrued compensation of approximately $256,500, $150,000 and $163,000 during fiscal 1996, 1995 and 1994, respectively, which represents the estimated value of compensation earned based upon the price of the Company's common stock during the fiscal year. As of September 30, 1996 and 1995, $600,000 and $343,750 in accrued compensation was included in accrued liabilities and other liabilities, respectively. In addition, the employment agreement provides for the continuation of base salary payments for two years under certain circumstances. Pursuant to terms of the employment agreement, the Company secured these potential future payments by placing $1,100,000 in a trust established on behalf of the Chief Executive Officer which is reported as restricted cash in the financial statements. The $600,000 of potential future payout to the Chief Executive Officer in June 1997 is included in the restricted cash and short-term investments balance as of September 30, 1996. NOTE 10. SUBSEQUENT EVENT On December 31, 1996, the Company exercised its option to convert the $3,000,000 related party note payable plus accrued interest into 7,717,602 shares of common stock. 50 BIOMAGNETIC TECHNOLOGIES, INC. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
Balance at Charged to Balance at Beginning Costs and End of DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD ------------- ----------- ----------- ----------- Allowance for doubtful accounts on accounts receivable: Fiscal Year 1996 $20,115 --- $9,695(A) $10,420 Fiscal Year 1995 $11,886 $9,695 $1,466(A) $20,115 Fiscal Year 1994 $17,216 --- $ 5,330(A) $11,886 (A) Uncollectible accounts charged against allowance _______________ Allowance for obsolete and slow moving inventory: Fiscal Year 1996 $1,015,692 $918,522 $283,555(B) $1,650,659 Fiscal Year 1995 $656,149 $499,281 $139,738(B) $1,015,692 Fiscal Year 1994 $592,149 $134,882 $70,882(B) $656,149
(B) Sale or disposal of items under allowance 51
EX-10.73 2 EXHIBIT 10.73 OFFSHORE NOTE PURCHASE AGREEMENT This Note Purchase Agreement (the "AGREEMENT"), dated August 13, 1996, is entered into by and between Biomagnetic Technologies, Inc., a California corporation (the "COMPANY"), and Dassesta International, S.A., a British Virgin Islands corporation (the "PURCHASER"), in connection with the offer and sale by the Company outside the United States (as that term is defined in Regulation S ("REGULATION S") under the United States Securities Act of 1933, as amended (the "SECURITIES ACT")) of the Note (as deemed below) to the Purchaser. Capitalized terms used herein and not defined herein shall have the meanings ascribed to them in Regulation S. The parties hereto agree as follows: 1. PURCHASE AND SALE OF NOTE. Upon the basis of the representations and warranties, and subject to the terms and conditions, set forth in this Agreement, the Company covenants and agrees to sell to the Purchaser on the Closing Date (as hereinafter defined), at a purchase price of $3,000,000 or such lesser amount as the Holder shall advance to the Company over the term of the Note (as defined below) (the "PURCHASE PRICE"), a convertible advance promissory note, substantially in the form of Annex A (the "NOTE"), convertible pursuant to terms and conditions set forth in the Note into Common Stock (as defined in the Note) (the "NOTE SHARES"). 2. CLOSING. The closing of the purchase and sale of the Note pursuant to Section I hereof shall take place on August 13, 1996, at the offices of Brobeck, Phleger & Harrison LLP located at 550 West C Street, Suite 1300, San Diego, California or at such other date, time and place as the Purchaser and the Company may agree upon in writing (such time and date for the closing, the "CLOSING DATE"). The Note to be purchased by the Purchaser shall be delivered by, or on behalf, of the Company at the above-mentioned offices of Brobeck, Phleger & Harrison LLP, against initial payment of $1,000,000 in immediately available funds by, or on behalf of, the Purchaser to the Company's account (No. 0600682570) at the Silicon Valley Bank. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser understands, and represents and warrants to, and agrees with, the Company, that: (a) The Purchaser is not a U.S. Person. (b) No offer of the Note or the Note Shares ( collectively, the "Securities") was made to the Purchaser in the United States; and at the time the buy order for the Note was originated the Purchaser was located outside the United States. (c) The Purchaser, its affiliates (other than the Company) and any person acting on behalf of the Purchaser or any such affiliates (i) have not engaged in any directed selling efforts, as the term shall have the meaning set forth in Regulation S ("Directed Selling Efforts") with respect to the Securities, (ii) have complied with the offering restrictions requirements of Regulation S ("Offering Restrictions") and (iii) have complied with all other applicable requirements of Regulation S and state law. (d) The transactions contemplated by this Agreement (i) have not been pre-arranged with a purchaser who is located in the United States or is a U.S. Person and (ii) are not part of a plan or scheme to evade the registration provisions of the Securities Act. (e) The Purchaser is purchasing the Securities for its own account for the purpose of investment and not (i) with a view to, or for sale in connection with, any distribution thereof or (ii) for the account or on behalf of any U.S. Person. (f) The Purchaser is aware that the Securities have not been registered and will not be registered under the Securities Act and may only be offered or resold pursuant to registration under the Securities Act or an available exemption therefrom. (g) The Purchaser has consulted with the Company with respect to the transactions pursuant to this Agreement, and no objection has been raised by the Company. (h) The Purchaser understands that no federal or state agency has passed on or made any recommendation or endorsement of the Securities. (i) The Purchaser acknowledges that, in making the decision to purchase the Securities, it has relied solely upon independent investigations made by it and not upon any representations made by the Company with respect to the Company. (j) The Purchaser understands that the Securities are being offered and sold to it in reliance on specific exemptions or non-application from the registration requirements of federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgements and understandings of the Purchaser set forth herein in order to determine the applicability of such exemptions and the suitability of the Purchaser to acquire the Securities. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, the Purchaser that: (a) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of California. (b) This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; and the Company has full corporate power and authority necessary to enter into this Agreement and to perform its obligations hereunder. 2 (c) The Note has been duly authorized by the Company, and when executed and delivered by the Company against payment therefor in accordance with the terms hereof will constitute, a valid and binding agreement enforceable against the Company in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; and the Company has full corporate power and authority necessary to issue and execute the Note and to perform its obligations thereunder. (d) No consent, approval, authorization or order of any court, governmental agency or body or arbitrator having jurisdiction over the Company or any of its affiliates (other than the Purchaser) is required for execution of this Agreement, including, without limitation, the issuance and sale of the Note or the performance of its obligations hereunder. (e) Neither the sale of the Note pursuant to, nor the performance of its obligations under, this Agreement by the Company will: (i) violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice or the lapse of time or both would be reasonably likely to constitute a default) under (A) the articles of incorporation, charter or by-laws of the Company or any subsidiary of the Company, (B) any decree, judgment, order, law, treaty, rule, regulation or determination applicable to the Company or any subsidiary of the Company of any court, governmental agency or body, or arbitrator having jurisdiction over the Company or any subsidiary of the Company or over the properties or assets of the Company or any subsidiary of the Company, (C) the terms of any bond, debenture, note or any other evidence of indebtedness, or any agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which the Company or any subsidiary of the Company is a party, by which the Company or any subsidiary of the Company is bound, or to which any of the properties of the Company or any subsidiary of the Company is subject, or (D) the terms of any "lock-up" or similar provision of any underwriting or similar agreement to which the Company or any subsidiary of the Company is a party; or (ii) result in the creation or imposition of any lien, charge or encumbrance upon the Securities or any of the assets of the Company or any subsidiary of the Company. (f) The Company is a Reporting Issuer, as the term shall have the meaning set forth in Regulation S, and has filed all reports required to be filed by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") during the preceding l2 months and has been subject to such filing requirements for the past 90 days. (g) No offer of the Securities was made by the Company to a person in the United States. (h) The Company, any subsidiary of the Company, and any person acting on behalf of the Company or any such subsidiary (i) have not engaged in any Directed Selling Efforts with respect to the Securities, (ii) have complied with the Offering Restrictions 3 requirements of Regulation S and (iii) have complied with all other applicable requirements of Regulation S and state law. (i) The transactions contemplated by this Agreement (i) have not been pre-arranged with a purchaser who is in the United States or is a U.S. Person and (ii) are not part of a plan or scheme to evade the registration provisions of the Securities Act. (j) The Company has not offered to sell, sold or issued any common stock or warrants or other securities convertible into its common stock in a transaction involving Regulation S in the past year except the Note; and there are no outstanding warrants or other securities convertible into its common stock which have been sold in a transaction involving Regulation S. (k) There is no pending or, to the best knowledge of the Company, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company or any subsidiary of the Company that would materially affect the execution by the Company of, or the performance by the Company of its obligations under, this Agreement. (l) The Company, any person representing the Company, and, to the best knowledge of the Company, any other person selling or offering to sell the Securities in connection with the transaction contemplated by this Agreement, have not made any written communication in connection with the offer or sale of the Securities which contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (m) The Company is not in possession of any material non-public information which has not been disclosed to the Purchaser that, if disclosed, would, or could reasonably be expected to have, an effect on the price of the Securities. (n) The Company's finance committee, comprised of the certain outside directors not affiliated with the Purchaser (the "Finance Committee"), has sought the advice of Brobeck, Phleger & Harrison LLP, counsel to the Company, with respect to all matters under the California law concerning transactions involving a corporation and an interested director and/or a majority shareholder of the corporation, and has in all its actions, meetings and communications followed such advice, including without limitation, following all corporate procedures recommended by Brobeck, Phleger & Harrison LLP. The Company confirms that its decision to enter into this Agreement and to issue the Note has been made in reliance upon its own independent judgment and investigations, based upon the recommendation of the Finance Committee that the transactions contemplated hereby and the Note are fair and equitable to the Company and its minority shareholders and in the best interest of the Company and its minority shareholders, and that the terms and conditions of this Agreement and the terms and conditions of the Note have been negotiated with the Purchaser in good faith and at arm's length, without any coercion or duress on the part of the Purchaser. 4 5. COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees with the Company to: (a) refrain from engaging, and cause its affiliates and any person acting on behalf of the Purchaser or any such affiliates to refrain from engaging, in any Directed Selling Efforts with respect to the Securities; (b) comply, and to cause its affiliates and any person acting on behalf of the Purchaser or any affiliate to comply, with the Offering Restrictions, and any other applicable requirements, of Regulation S; (c) refrain, during the Restricted Period (as defined in Section 6 hereof), from offering or selling the Note or any Note Shares in the United States, to a U.S. Person or for the account or benefit of a U.S. Person other than in accordance with Rule 903 or Rule 904 of Regulation S; (d) refrain from offering or selling the Note in the United States, to a U.S. Person or for the account or benefit of a U.S. Person; and (e) offer, sell, pledge or otherwise transfer the Note Shares after the expiration of the Restricted Period (as hereinafter defined), in each case only pursuant to registration under the Securities Act or an available exemption therefrom and, in any case, in accordance with applicable state securities laws. 6. COVENANTS OF THE COMPANY. The Company covenants and agrees with the Purchaser to: (a) continue to comply with all applicable reporting requirements of the Exchange Act; (b) refrain from engaging, and use its best efforts to insure that none of its affiliates (other than the Purchaser and its affiliates) will engage, in any Directed Selling Efforts with respect to the Securities; (c) ensure that all Offering Restrictions applicable to the sale of the Securities pursuant to this Agreement are thoroughly complied with and satisfied; (d) continue to comply, and to cause its affiliates and any person acting on behalf the Company or any affiliate to comply, with all other applicable requirements of Regulation S and state law with respect to the offer and sale of the Securities (e) refrain from offering to sell or selling any shares of common stock, or warrants or other securities convertible into its common stock, in a transaction involving Regulation S for a period of 180 days following the date hereof; 5 (f) notify the Purchaser promptly if at any time during the period beginning on the date of this Agreement and ending on the date the Note is converted or satisfied in full (i) any event shall have occurred as a result of which any written communication made by the Company, any person representing the Company, or, to the best knowledge of the Company, by any other person in connection with the transactions contemplated by this Agreement would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or (ii) there is any public disclosure of material information regarding the Company or its financial condition or results of operation; (g) reserve and keep available at all times, free from preemptive rights, out of an aggregate of its authorized but unissued common stock or its authorized and issued common stock held in its treasury, for the purpose of enabling it to satisfy any obligation to issue Note Shares upon exercise of the conversion privilege set forth in Section 2 of the Note, the maximum number of shares of common stock which may then be issuable and deliverable upon the exercise of such conversion privilege; (h) within 7 calendar days of the Conversion Date (as defined in the Note), (X) issue the Note Shares into which the Note is convertible and (Y) deliver to the Purchaser a certificate representing the Note Shares, in accordance with Section 2 of the Note, which Note Shares: (i) shall be free and clear of any security interests, liens, claims or other encumbrances; (ii) shall have been duly and validly authorized and on the Conversion Date will be duly and validly issued, fully paid and nonassessable; (iii) will not have been, individually and collectively, issued or sold in violation of any preemptive or other similar rights of the holders of any securities of the Company; (iv) will not subject the holders thereof to personal liability by reason of being such holders; and (v) after the expiration of the period commencing on the Closing Date and ending on the fortieth day thereafter (the "RESTRICTED PERIOD"), shall be quoted on and (if sold in accordance with the provisions of this Agreement) eligible for trading on the National Association of Securities Dealers Automated Quotations system; (i) deliver such certificates in accordance with the instructions of the Purchaser, and in such names as the Purchaser shall instruct, subject to customary settlement procedures; (j) if the Conversion Date falls during the Restricted Period, deliver the certificate representing the Note Shares bearing a Regulation S legend substantially similar to that currently on the Note, it being understood that by so doing the Company agrees to provide, on the day after the expiration of the Restricted Period, to the transfer agent for the Company for the benefit of the holders of Note Shares, any opinion of counsel required by such transfer agent to accept from such holders the legended certificate(s) representing the Note Shares and deliver in its place unlegended certificate(s) representing the Note Shares containing no legend other than the legend described in Section 6(k) below; and (k) if the Conversion Date falls after the expiration of Restricted Period, deliver the certificate(s) representing the Note Shares bearing no legend other than the following: 6 THE SHARES REPRESENTED BY THIS CERTIFICATE, WHILE (1) HELD BY DASSESTA INTERNATIONAL, S.A. ("DASSESTA") AND (2) DASSESTA OWNS TEN PERCENT OR MORE OF THE ISSUED AND OUTSTANDING SHARES OF BTI, CONSTITUTE "CONTROL SECURITIES" AND MAY NOT BE 0FFERED FOR SALE, SOLD OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO REGISTRATION UNDER THE ACT OF AN EXEMPTION THEREFROM AND, WHEN HELD BY ANY PERSON, INCLUDING A PLEDGEE, WHO DOES NOT OWN TEN PERCENT OR MORE OF THE ISSUED AND OUTSTANDING SHARES OF BTI, THE LEGEND SET FORTH IN THIS PARAGRAPH SHALL HAVE NO FURTHER FORCE OR EFFECT AND MAY BE REMOVED UPON PRESENTATION OF THIS CERTIFICATE TO THE TRANSFER AGENT FOR BIOMAGNETIC TECHNOLOGIES, INC. 7. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS. The obligations of the Purchaser hereunder are subject to the performance by the Company of its obligations hereunder and to the satisfaction of the following additional conditions precedent: (a) The representations and warranties made by the Company in this Agreement shall, unless waived by the Purchaser, be true and correct as of the date hereof and at the Closing Date, with the same force and effect as if they had been made on and as of the Closing Date. (b) The Company will provide an opinion of counsel confirming in substance the representations and warranties set out in paragraphs (a), (b), (c), (d), (e) and (f) of Section 4 subject to such counsel's standard opinion exceptions, limitations, restrictions and assumptions. Such counsel will not opine as to laws of foreign countries. 8. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATIONS. The obligations of the Company hereunder are subject to the performance by the Purchaser of its obligations hereunder and to the satisfaction of the additional condition precedent that the representations and warranties made by the Purchaser in this Agreement shall, unless waived by the Company, be true and correct as of the date hereof and at the Closing Date, with the same force and effect as if they had been made on and as of the Closing Date. 9. FEES AND EXPENSES. Each of the Purchaser and the Company agrees to pay its own expenses incident to the performance of its obligations hereunder, including, but not limited to, the fees, expenses and disbursements of such party's counsel. l0. NON-DELIVERY OF THE NOTE SHARES. If, within 7 calendar days of the Conversion Date, the Company shall fail to (i) issue the Note Shares and (ii) deliver to the Purchaser a certificate representing the Note Shares, in accordance with terms of the Note, for any reason other than the failure by the Purchaser to comply with its obligations hereunder or thereunder, then the Company shall hold the Purchaser harmless against any loss, claim or damage arising from or as a result of such failure by the Company (including, without limitation, any such loss, claim or damage resulting from an obligation to resell the Note Shares). 7 11. SURVIVAL OF THE REPRESENTATIONS, WARRANTIES, ETC. The respective agreements, representations, warranties and other statements made by or on behalf of the Company and the Purchaser, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of the other party to this Agreement or any officer, director or employee of, or person controlling or under common control with, such party and will survive delivery of any payment for the Note. 12. NOTICES. All communications hereunder shall be in writing and shall be sufficient in all respects if delivered, sent by registered mail, or by telecopy and confirmed to the Purchaser or Company at the respective address set forth below: Dassesta International, SA Biomagnetic Technologies, Inc. c/o SP Investment Network Ltd. 9727 Pacific Heights Blvd. Am Schanzengraben 23 San Diego, CA 92121 P.O.Box 970 Attention: President 8039 Zurich,Switzerland Telephone: (619) 453-6300 Attention: Martin P. Egli 13. MISCELLANEOUS. (a) This Agreement may be executed in one or more counterparts and it is not necessary that signatures of all parties appear on the same counterpart, but such counterparts together shall constitute but one and the same agreement. (b) This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective successors and each person under common control therewith, and no other person shall have any right or obligation hereunder. (c) This Agreement shall be governed by, and construed in accordance with, the laws of the State of California (without giving effect to conflicts of laws principles). (d) The headings of the sections of this document have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. (e) The provisions of this Agreement are severable, and if any clause or provision shall be held invalid, illegal or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect in that jurisdiction only such clause or provision, or part thereof, and shall not in any manner affect such clause or provision in any other jurisdiction or any other clause or provision of this Agreement in any jurisdiction. l4. TIME OF ESSENCE. Time shall be of the essence in this Agreement. 8 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement, all as of the day and year first above written. DASSESTA INTERNATIONAL, S.A. By: /s/ Martin P. Egli /s/ Rainer H. Moser Name: Martin P. Egli Rainer H. Moser Title: Pres. V.P. BIOMAGNETIC TECHNOLOGIES, INC. By: /s/ James V. Schumacher Name: James V. Schumacher Title: Chairman, President & CEO 9 ANNEX A OFFSHORE CONVERTIBLE NOTE 10 EX-10.74 3 EXHIBIT 10.74 NEITHER THIS CONVERTIBLE PROMISSORY NOTE NOR ANY OF THE UNDERLYING SECURITIES ISSUABLE HEREUNDER HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND SUCH NOTE AND UNDERLYING SECURITIES HAVE BEEN SOLD IN RELIANCE ON THE EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE ACT ("REGULATION S"). DURING THE PERIOD PRIOR TO SEPTEMBER 22, 1996 (THE "RESTRICTED PERIOD"), THIS NOTE AND THE UNDERLYING SECURITIES MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, WITHIN THE UNITED STATES (AS DEFINED IN REGULATION S), TO A U.S. PERSON (AS DEFINED IN REGULATION S) OR FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON. THE PRECEDING SENTENCE SHALL HAVE NO FURTHER EFFECT SUBSEQUENT TO THE EXPIRATION OF THE RESTRICTED PERIOD AND THEREAFTER THIS LEGEND MAY BE REMOVED UPON PRESENTATION OF THE NOTE OR UNDERLYING SECURITIES TO THE TRANSFER AGENT OF BIOMAGNETIC TECHNOLOGIES, INC. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS CONVERTIBLE PROMISSORY NOTE HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA OR ANY OTHER STATE AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SUCH SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE OR SUCH PROVISIONS OF THE CORPORATIONS CODE OF ANY SUCH OTHER STATE. THE RIGHTS OF THE HOLDER OF THIS CONVERTIBLE PROMISSORY NOTE ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. $3,000,000.00 San Diego, California August 13, 1996 BIOMAGNETIC TECHNOLOGIES, INC. CONVERTIBLE ADVANCE PROMISSORY NOTE BIOMAGNETIC TECHNOLOGIES, INC., a California corporation (the "Company"), for value received, hereby promises to pay to DASSESTA INTERNATIONAL S.A., a British Virgin Islands corporation ("Holder"), at c/o Experta Administration Ltd., Am Schanzengraben 23, CH-8002 Zurich, Switzerland, the principal amount of Three Million Dollars (U.S.$3,000,000.00) or such lesser amount as shall -1- equal the balance outstanding of advances made by Holder to the Company hereunder, together with interest on the unpaid amount thereof in accordance with the terms hereof, from the date hereof until paid or converted in accordance with the terms hereof. 1. CONVERTIBLE PROMISSORY NOTE ("NOTE"). 1.1 INTEREST RATE. The rate of interest hereunder ("Interest Rate") shall equal nine percent (9%) per annum, and shall be simple interest computed on the basis of a 365-day year for the actual number of days elapsed. The rate of interest payable hereunder shall in no event exceed the maximum rate permitted by law. 1.2 ADVANCES. Advances hereunder shall be made by Holder at the written request of both the Company's President and Chief Financial Officer in increments of at least Five Hundred Thousand Dollars ($500,000.00), both of whom are authorized to request advances and direct the disposition of such advances until written notice of the revocation of such authority is received by Holder at the address written above. Any such advance shall be conclusively presumed to have been made to or for the benefit of the Company when made in accordance with such requests and directions. The unpaid balance of this obligation at any time shall be the total amounts advanced hereunder by Holder, less the amounts of payments made thereon or for the Company, which balance may be endorsed hereon from time to time by Holder (the "Unpaid Balance"). 1.3 PAYMENT. Subject to the provisions of Section 2 regarding conversion of this Note, the Unpaid Balance plus all accrued but previously unpaid interest thereon (the "Conversion Amount") shall become due and payable in one installment on February 13, 1997 or any extension thereof as agreed to be the Company and Holder (the "Maturity Date"). If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or a public holiday under the laws of the State of California, such payment shall be made on the next succeeding business day. Payment and any prepayment under Section 1.4 below shall be made at the address of the Holder set forth above, or at such other place as the Holder shall have designated to the Company in writing, in lawful money of the United States of America. 1.4 PREPAYMENT. Prepayment may be made by the Company of the entire amount of the Unpaid Balance and all accrued but unpaid interest without penalty at any time. -2- 2. CONVERSION. 2.1 CONVERSION BY THE COMPANY. (a) At any time following the date of this Note and prior to repayment hereunder, the Company, at its sole option, may convert the sum of the Unpaid Balance of this Note plus all accrued but unpaid interest thereon ( the "Conversion Amount") into that number of fully paid and nonassessable shares of common stock, no par value, of the Company ("Common Stock") as is equal to the Conversion Amount divided by $0.40, with any fraction of a share rounded down to the next whole share of Common Stock. (b) If the Company determines to convert the Conversion Amount, the Company shall deliver to the Holder of this Note written notice of such conversion at least ten (10) days in advance of the proposed conversion date (the "Company Conversion Date"). The written notice shall specify (i) the Conversion Amount (calculated as of the Company Conversion Date) and (ii) the Company Conversion Date. 2.2 CONVERSION BY HOLDER. (a) On the earlier of: (i) the Maturity Date, (ii) immediately prior to the occurrence of a Change of Control (as defined below) or (iii) an Event of Default under Section 4 hereof, the Holder, at its sole option, may convert the Conversion Amount into that number of fully paid and nonassessable shares of Common Stock as is equal to the Conversion Amount divided by $0.40, with any fraction of a share rounded down to the next whole share of Common Stock. (b) The Company shall give to Holder notice of a Change of Control no later than ten (10) days prior to the anticipated occurrence of such Change of Control. If the Holder determines to convert the Conversion Amount under this Section 2.2, the Holder shall deliver to the Company written notice of Holder's election to convert at least five (5) days in advance of the proposed conversion date (the "Holder Conversion Date" and collectively, with the Company Conversion Date, the "Conversion Date"). 2.3 TERMINATION OF RIGHTS UPON CONVERSION. Provided notice is given in accordance with Sections 2.1 or 2.2, as the case may be, conversion shall be deemed effective on the Conversion Date and the Holder shall have no further rights under this Note, whether or not this Note is surrendered, and the Holder in whose name the Common Stock shall be issuable upon such conversion shall be deemed to have become the holder of record of the Common Stock represented thereby. The written notices to be delivered pursuant to Sections 2.1 and 2.2 shall constitute a contract between the -3- Holder and the Company, whereby the Holder shall be deemed to subscribe for the number of shares of Common Stock which it will be entitled to receive upon conversion pursuant to Sections 2.1 and 2.2. 2.4 DELIVERY OF STOCK CERTIFICATES. Within seven (7) calendar days of the Conversion Date, the Company at its expense will issue and deliver to the Holder a certificate or certificates evidencing the number of full shares of Common Stock issuable to Holder upon any such conversion. 2.5 CHANGE OF CONTROL. As used herein, "Change of Control" shall mean (a) any consolidation of the Company with, or merger of the Company with or into, any other person (including any individual, partnership, joint venture, corporation, trust or group thereof) other than (i) a consolidation or merger pursuant to which (A) the shareholders of the Company immediately prior to such consolidation or merger own more than 50% of the outstanding securities having power to vote in the election of directors after such consolidation or merger, or (B) any "person" or "group" (within the meaning of Section 13(d) and Section 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) owns more than 30% of the outstanding securities having the power to vote in the election of directors after such consolidation or merger or (ii) a consolidation or merger by the Company with a subsidiary of the Company in which the Company is the continuing corporation; (b) any sale, lease, transfer or conveyance of all or substantially all of the assets of the Company; or (c) the announcement or commencement by an "person" or "group" (with the meaning of Section 13(d) and Section 14(d) of the Exchange Act) other than with respect to a consolidation or merger pursuant to clause (a) above, of a BONA FIDE tender offer or exchange offer in accordance with the rules and regulations of the Exchange Act to purchase, or the acquisition of securities of the Company, such that after such acquisition or proposed purchase, the acquiror "beneficially owns" or would "beneficially own" (as defined in Rule 13d-3 under the Exchange Act) securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities having power to vote in the election of director; PROVIDED, HOWEVER, the initiation of any such activities by Holder, directly or indirectly, shall not constitute a Change of Control within the meaning of this Note. 2.6 REGULATION S. In connection with the conversion of this Note prior to the end of the Restricted Period by the Company or the Holder as provided in this Section 2, the Holder shall be required either (a) to certify that it is not a U.S. Person (as defined in Regulation S) and that the Note is not being converted on behalf of a U.S. Person or (b) to provide an opinion of counsel that the securities issuable upon conversion have been registered or that an exemption from registration is available. Such certification shall be contained in any notice provided by the Holder pursuant to Section 2.2 or shall be provided in a separate letter from the Holder in the event of -4- conversion by the Company pursuant to Section 2.1. This Section 2.6 shall have no further force and effect after the expiration of the Restricted Period. 3. COVENANTS OF THE COMPANY. The Company covenants and agrees that so long as this Note shall be outstanding: 3.1 PAYMENT OF THE NOTE. The Company will punctually pay or cause to be paid the principal of, or interest on, this Note according to the terms hereof. 3.2 NOTICE OF DEFAULT. If any one or more events occur which constitute or which, with the giving of notice or the lapse of time or both, would constitute an Event of Default or if the Holder shall demand payment or take any other action permitted upon the occurrence of any such Event of Default, the Company will forthwith give notice to the Holder, specifying the nature and status of the Event of Default or other event or of such demand or action, as the case may be. 3.3 PAYMENT OF OBLIGATION. The Company will pay and discharge, at or before maturity, all its respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. 3.4 COMPLIANCE WITH LAWS. The Company will comply in all material respects with all applicable laws, ordinances, rules, regulations and requirements of governmental authorities except where the necessity of compliance is contested in good faith by appropriate proceedings or except where the failure to so comply would not result in a material adverse effect on the Company's business or results of operations. 4. EVENTS OF DEFAULT. The Holder may declare the entire amount of the Unpaid Balance of this Note and all accrued but unpaid interest thereon immediately due and payable or may convert this Note pursuant to Section 2 hereof, effective upon written notice to the Company as described above, if any of the following events shall occur (each, an "Event of Default"): 4.1 PAYMENT OF NOTE. Default in the payment of accrued interest and/or principal due and payable under this Note when due. 4.2 BANKRUPTCY, INSOLVENCY, ETC. COMMENCED BY THE COMPANY. If the Company or any subsidiary of the Company: (a) shall commence any proceeding or any other action relating to it in bankruptcy or seek reorganization, arrangement, readjustment of its debts, dissolution, liquidation, winding-up, composition or any other relief under the United -5- States Bankruptcy Act, as amended, or under any other insolvency, reorganization, liquidation, dissolution, arrangement, composition, readjustment of debt or any other similar act or law, of any jurisdiction, domestic or foreign, now or hereafter existing; (b) shall admit its inability to pay its debts as they mature in any petition or pleading in connection with any such proceeding; (c) shall apply for, or consent to or acquiesce in, an appointment of a receiver, conservator, trustee or similar officer for it or for all or substantially all of its assets and properties; (d) shall make a general assignment for the benefit of creditors; or (e) shall admit in writing its inability to pay its debts as they mature. 4.3 BANKRUPTCY, INSOLVENCY, ETC. COMMENCED AGAINST THE COMPANY. If any proceedings are commenced or any other action is taken against the Company or any subsidiary of the Company in bankruptcy or seeking reorganization, arrangement, readjustment of its debts, dissolution, liquidation, winding-up, composition or any other relief under the United States Bankruptcy Act, as amended, or under any other insolvency, reorganization, liquidation, dissolution, arrangement, composition, readjustment of debt or any other similar act or law, of any jurisdiction, domestic or foreign, now or hereafter existing; or a receiver, conservator, trustee or similar officer for the Company or for all or substantially all of its assets and properties is appointed; and in each such case, such event continues for ninety (90) days undismissed, unbounded and undischarged. 4.4 MONEY JUDGMENTS AGAINST THE COMPANY. A final judgment or final judgments for the payment of money shall have been entered by any court or courts of competent jurisdiction against the Company and remains undischarged for a period (during which execution shall be effectively stayed) of ninety (90) days, provided that the aggregate amount of all such judgments at any time outstanding (to the extent not paid or to be paid, as evidenced by a written communication to that effect from the applicable insurer, by insurance) exceeds $50,000. 4.5 CHANGE IN LAW. It becomes unlawful for the Company to perform or comply with its obligations under this Note. 4.6 REMEDIES NOT WAIVED. No course of dealing between the Company and the Holder or any delay in exercising any rights hereunder shall operate as a waiver by the Holder. -6- 5. MISCELLANEOUS 5.1 TRANSFER OF NOTE. This Note shall not be transferable or assignable in any manner and no interest shall be pledged or otherwise encumbered by the Holder without the express written consent of the Company, and any such attempted disposition of this Note or any portion hereof shall be of no force or effect. 5.2 TITLES AND SUBTITLES. The titles and subtitles used in this Note are for convenience only and are not to be considered in construing or interpreting this Note. 5.3 NOTICES. Any notice required or permitted under this Note shall be given in writing at the address set forth above for the Holder or given by the Holder to the Company for the purpose of notice. 5.4 ATTORNEYS' FEES. If any action at law or in equity is necessary to enforce or interpret the terms of this Note, the prevailing party shall be entitled to reasonable attorneys' fees, costs and disbursements in addition to any other relief to which such party may be entitled. 5.5 AMENDMENTS AND WAIVERS. Other than the right to the payment of the Unpaid Balance and all accrued but unpaid interest thereon, which may only be amended or waived with the written consent of the Holder, any other term of this Note may be amended and the observance of any other term of this Note may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the Holder. 5.6 SEVERABILITY. If one or more provisions of this Note are held to be unenforceable under applicable law, such provision shall be excluded from this Note and the balance of the Note shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 5.7 GOVERNING LAW. This Note shall be governed by and construed and enforced in accordance with the laws of the State of California, without giving effect to its conflicts of laws principles. [Remainder of This Page Intentionally Left Blank] -7- 5.8 COUNTERPARTS. This Note may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Date: August 13, 1996 BIOMAGNETIC TECHNOLOGIES, INC., a California corporation By: /s/ James V. Schumacher --------------------------- Title: Chairman, President & CEO -------------------------- ACKNOWLEDGED AND AGREED: DASSESTA INTERNATIONAL S.A. By: /s/ Martin P. Egli /s/ Rainer H. Moser -------------------------------------------- Name: Martin P. Egli Rainer H. Moser ------------------------------------ Its: Pres. V.P. ------------------------------------ [SIGNATURE PAGE TO CONVERTIBLE ADVANCE PROMISSORY NOTE] -8- EX-21 4 EXHIBIT 21 BIOMAGNETIC TECHNOLOGIES, INC. LIST OF SUBSIDIARIES SEPTEMBER 30, 1996 Jurisdiction Percentage of in which Voting Securities Name Incorporated Owned by Parent Biomagnetic Technologies GmbH (A) Germany 100% (A) The subsidiary changed its name in October 1991. It was formerly known as S.H.E. Kryotechnische Instrumente und Systeme GmbH. EX-23 5 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-61057, No. 33-32260, No. 33-33179 and No. 33-68136) of our report dated January 10, 1997 appearing on page 36 of this Form 10-K. /s/PRICE WATERHOUSE LLP San Diego, California January 17, 1997 EX-24 6 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, BIOMAGNETIC TECHNOLOGIES, INC. (the "Corporation") intends to file an Annual Report on Form 10-K with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended. WHEREAS, the undersigned are directors of the Corporation. NOW, THEREFORE, the undersigned hereby constitute and appoint James V. Schumacher and Herman Bergman, or either of them, as their attorneys-in-fact to act in their place and stead and to execute and to file such Annual Report and any amendments or supplements thereto, giving and granting to said attorneys full power and authority to do and perform each and every act whatsoever requisite and necessary to be done in and about the premises, with full power of substitution, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, and hereby ratifying and confirming all that said attorneys may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney this 21st day of January, 1997. /s/ R. Scott Asen /s/ Martin P. Egli ----------------- ------------------ R. Scott Asen Martin P. Egli /s/ Jerry C. Benjamin /s/ Enrique Maso ----------------------- ---------------- Jerry C. Benjamin Enrique Maso /s/ William C. Black Jr. /s/ Gerald D. Knudson ------------------------ --------------------- William C. Black Jr. Gerald D. Knudson EX-99.1 7 EXHIBIT 99.1 ANNUAL REPORT For the fiscal year ended September 30, 1996 BIOMAGNETIC TECHNOLOGIES, INC. 1992 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- (Full title of the plan) Biomagnetic Technologies, Inc. 9727 Pacific Heights Blvd., San Diego, California 92121-3719 ------------------------------------------------------------ (Name of issuer of the securities held pursuant to the plan and the address of its principal executive office) BIOMAGNETIC TECHNOLOGIES, INC. 1992 EMPLOYEE STOCK PURCHASE PLAN INDEX TO FINANCIAL STATEMENTS Page ---- Financial Statements: Report of Independent Accountants F-2 Statement of Net Assets Available for Benefits F-3 at September 30, 1996 and 1995 Statement of Changes in Net Assets Available for Benefits F-4 for the years ended September 30, 1996, 1995 and 1994 Notes to Financial Statements F-5 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Administrative Committee and Participants of the Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the net assets available for benefits of the Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan (the Plan) at September 30, 1996 and 1995 and the changes in net assets available for benefits for each of the three years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Plan's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming the Plan will continue as a going concern. As discussed in Note C to the financial statements, Biomagnetic Technologies, Inc. (the Plan Sponsor) has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about the Plan's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note C. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/PRICE WATERHOUSE LLP San Diego, California January 10, 1997 F-2 BIOMAGNETIC TECHNOLOGIES, INC. 1992 EMPLOYEE STOCK PURCHASE PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS September 30, 1996 1995 ------- -------- Cash and cash equivalents $34,377 $195,649 U.S. Government securities, at fair value 53,246 Participant contributions receivable 6,808 4,598 ------- -------- Net assets available for benefits $94,431 $200,247 ------- -------- ------- -------- See accompanying notes to financial statements F-3 BIOMAGNETIC TECHNOLOGIES, INC. 1992 EMPLOYEE STOCK PURCHASE PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS Year Ended September 30, 1996 1995 1994 -------- -------- -------- Participant contributions $154,912 $144,358 $155,015 Interest revenue 5,984 7,164 5,772 Net depreciation in fair value (263) of U.S. Government securities Benefits paid (266,449) (39,178) (349,594) -------- -------- -------- Net (decrease) increase (105,816) 112,344 (188,807) Net assets available for benefits: Beginning of year 200,247 87,903 276,710 -------- -------- -------- End of year $94,431 $200,247 $87,903 -------- -------- -------- -------- -------- -------- See accompanying notes to financial statements F-4 BIOMAGNETIC TECHNOLOGIES, INC. 1992 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS NOTE A. PLAN DESCRIPTION In January 1992, the shareholders approved the establishment of the Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan (the "Stock Purchase Plan") under Section 423 of the Internal Revenue Code. The Stock Purchase Plan is intended to provide eligible employees with the opportunity to acquire an equity interest in Biomagnetic Technologies, Inc. (the "Company") through the acquisition of purchase rights, implemented in a series of purchase periods as determined by the Plan Administrator. Generally, employees are eligible for participation in the Stock Purchase Plan in the calendar quarter following their first 90 days of continuous employment with the Company. After enrollment, payroll deductions are made to acquire shares under the Stock Purchase Plan up to a maximum of the lesser of 15% of base salary or $25,000 per calendar year. Participants are fully vested at all times in the portion of their account attributable to their contributions. A participant may purchase a maximum of 10,000 shares during any one purchase period and may not acquire more than 5% of the total combined voting power of the Company. In addition, each participant is limited to purchases of $25,000 worth of the Company's stock when combined with any other Company stock purchase plan during any calendar year. The purchase price of the shares is the lesser of 85% of the fair market value of the shares on the date the purchase right is granted or 85% of the fair market value of the shares on the date the purchase period ends. The purchase rights may be terminated by the participant at any time. The balance in the participant's account, including accrued interest, which is credited to the participant's account based on the participant's contributions proportionate to the total contributions of all participants, will be returned to the participant upon such termination. In addition, if the participant's employment is terminated, any outstanding purchase rights are terminated and the balance in the payroll deduction account will be returned to the participant. If the participant dies or is permanently disabled, the participant's estate or the participant has the option to receive the balance in the payroll deduction account or purchase the shares at the end of the purchase period. The Stock Purchase Plan provides for automatic purchase of the shares from the funds deducted from the participant's pay and earnings thereon at the end of the purchase period, subject to a pro-rata allocation if the Stock Purchase Plan is oversubscribed. The Stock Purchase Plan is scheduled to terminate on December 31, 2001, unless terminated sooner. The total number of shares authorized for future purchases under the Stock Purchase Plan is 212,232 at September 30, 1996. The purchase period from April 1, 1994 to March 31, 1996 resulted in an issuance of 26,283 shares of common stock of the Company. The next purchase period is from April 1, 1996 to March 31, 1998. F-5 NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The Stock Purchase Plan's financial statements are prepared on the accrual basis of accounting. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect 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. VALUATION OF INVESTMENTS Investments consist of money market funds valued at cost, which approximates fair value, and U.S. Government treasury securities that are stated at fair value based on quoted market prices. The Stock Purchase Plan's investments are held in a Company administered bank account. INVESTMENT INCOME Income from investments is recorded on the accrual basis. In accordance with the policy of stating investments at fair value, changes in net unrealized appreciation or depreciation in the fair value of investments are reflected in the statement of changes in net assets available for benefits in the year in which such a change in value occurs. ADMINISTRATIVE EXPENSES OF THE PLAN All expenses incurred in the administration of the Stock Purchase Plan are paid by the Company. CONTRIBUTIONS Contributions to the Stock Purchase Plan originate from after-tax payroll deductions of the participants. BENEFITS PAID Benefits paid represent the cost to the participants of the stock acquired under the plan as well as any cash payouts due to terminations or elections by the participants. F-6 INCOME TAXES The Stock Purchase Plan was established under and is operated in compliance with Section 423 of the Internal Revenue Code. Therefore, the Plan Administrator believes the Stock Purchase Plan and earnings of the Plan are tax exempt as of the financial statement date. NOTE C. OPERATIONS AND CAPITAL RESOURCES OF THE PLAN SPONSOR The Company incurred net losses of $14,816,000, $6,673,000, and $10,313,000 for the years ended September 30, 1996, 1995, and 1994, respectively. In addition, at September 30, 1996 the Company has an accumulated deficit of $79,863,000 and its current liabilities exceed its current assets, resulting in a working capital deficiency. Management anticipates that capital and working capital expenditures in fiscal 1997 will substantially exceed cash generated from operations. Management is currently concentrating on completing installation of and obtaining final customer acceptances for its Magnes 2500 WH systems; however, there is no assurance that this will be achieved. In the event that such final acceptances are not obtained, the Company will experience further negative effects on usable cash resources of the Company. Management is also continuing to seek additional sources of debt or equity financing. The Company anticipates that existing capital resources, the reduction in the scope of its operations, and the additional debt or equity financing, will be sufficient to provide operating capital required to meet its obligations in the normal course of business through fiscal 1997; however, there can be no assurances that the Company will be able to obtain the additional debt or equity financing that is required. If such additional debt or equity financing is not obtained, the Company will be required to further reduce the scope of its operations. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. F-7 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrative Committee of the Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan has duly caused this annual report to be signed by the undersigned thereunto duly authorized. BIOMAGNETIC TECHNOLOGIES, INC. 1992 EMPLOYEE STOCK PURCHASE PLAN By: /s/ James V. Schumacher Date: January 21, 1997 -------------------------------- ---------------------- James V. Schumacher Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan Administrative Committee F-8
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