-----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, RULr1OxhQnRcpbcgJuxejw89kq6KJu5e/x8zO+zuL665lrVzxF0iTmtMiPYxE6OJ BIrzsjnMMjdYAx1xlDdKOg== 0000912057-99-010502.txt : 19991224 0000912057-99-010502.hdr.sgml : 19991224 ACCESSION NUMBER: 0000912057-99-010502 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991223 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: SEC FILE NUMBER: 000-19632 FILM NUMBER: 99779992 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, DC, 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 30, 1999 ------------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ------------------------- Commission File Number 1-10285 ---------------------------------------------------------- BIOMAGNETIC TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-2647755 - ---------------------------------------------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number) 9727 PACIFIC HEIGHTS BOULEVARD, SAN DIEGO, CALIFORNIA 92121-3719 - ---------------------------------------------------------------------------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (858) 453-6300 -------------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: NONE ---- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE PER SHARE ------------------------------------
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of December 20, 1999 was $4,059,000, based on the closing price on that date on the Nasdaq Over the Counter Bulletin Board. Shares of Common Stock held by each officer, director, and holder of 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the registrant's Common Stock, no par value, as of December 20, 1999 was 83,367,112 shares. DOCUMENTS INCORPORATED BY REFERENCE 1. Certain portions of Registrant's Proxy Statement and Notice of Annual Meeting, to be filed not later than 120 days after September 30, 1999 pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with the 2000 Annual Meeting of Shareholders are incorporated by reference into Part III of this report where indicated. 2. Certain Exhibits filed with the Registrant's prior registration statements and reports are incorporated herein by reference into Part IV of this report. BIOMAGNETIC TECHNOLOGIES, INC. FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 INDEX PAGE PART I Item 1. Business......................................................... 1 Item 2. Properties....................................................... 17 Item 3. Legal Proceedings................................................ 17 Item 4. Submission of Matters to a Vote of Security Holders.............. 17 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters........................................................ 18 Item 6. Selected Financial Data.......................................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 19 Item 7A. Quantitative and Qualitative Disclosure About Market Risk........ 23 Item 8. Financial Statements and Supplementary Data...................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 24 PART III Item 10. Directors and Executive Officers of the Registrant............... 24 Item 11. Executive Compensation........................................... 24 Item 12. Security Ownership of Certain Beneficial Owners and Management... 24 Item 13. Certain Relationships and Related Transactions................... 24 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 25 Signatures .................................................... 29 PART I ITEM 1. BUSINESS. This Annual Report on Form 10-K may contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from any forward-looking statements and from past performance as a result of such risks and uncertainties. See the "Factors That May Affect Future Results" section of this Annual Report. COMPANY OVERVIEW Biomagnetic Technologies, Inc., a California corporation, (the "Company", "BTi", "we", "us" and "our") was established in 1970 to produce specialized instruments for ultra-sensitive magnetic field and low temperature measurements. These products were supplied to physicists for basic research. The Company has been developing its core magnetic sensing technologies since the early 1970s and has incorporated these technologies into its Magnetic Source Imaging ("MSI") systems. Since 1984, the primary business of the Company has been the development of MSI systems that locate and measure magnetic fields generated by the human body, and assist in the noninvasive diagnosis of a potentially broad range of medical disorders. These measurements provide useful information about the normal and abnormal functioning of the brain, heart, spine and other organs. Currently, the Company is focusing its efforts on MSI applications for the brain. MSI systems use advanced superconducting technology to non-invasively detect and characterize naturally occuring magnetic fields that are one billion times smaller than the earth's magnetic field. This capability can be utilized to measure the typically very rapid changes in these magnetic fields, such as from the brain, effectively in real-time - i.e. thousands of times a second. The Company has successfully identified the commercial usefulness of this technology in the evaluation and planning for surgical treatment of epilepsy, and the identification of important functional areas of the brain, e.g. motor and language-related cortex, that can be at risk during neurological surgery for tumors and other brain lesions. The Company is continuing to investigate the commercial value of the technology for the diagnosis of other disorders of the brain, such as stroke, mild head trauma, schizophrenia, depression and other neuropsychiatric disorders, as well as for problems of the heart, spine, and gastrointestinal system. To date, the Company, its competitors and clinical researchers have identified a limited number of clinically validated diagnostic applications for MSI systems. MSI differs significantly from other anatomical and functional imaging methods. Traditional medical imaging technologies such as X-ray, magnetic resonance imaging (MRI) and computed tomography (CT) provide valuable anatomical detail, but no direct functional information. Functional imaging methods such as electroencephalography (EEG), positron emission tomography (PET), single proton emission tomography (SPECT) and functional MRI (fMRI) have limited spatial or temporal resolution, or require invasive procedures, such as the injection of radioactive isotopes or surgical placement of electrodes into the brain, to locate normally or abnormally functioning areas of the brain. The Company believes that MSI is the only method that can noninvasively characterize the normal and abnormal function of the brain with the high temporal and spatial resolution necessary to be clinically useful in a wide range of applications. The Company's MSI system, when used in conjunction with CT and MRI images, provides the clinician with information that links anatomy with function to provide a more complete picture of the patient's condition without the use of radioactive isotopes or costly invasive procedures. PRODUCT AND MARKET DEVELOPMENT In the mid-1980s, BTi determined that the market for the use of MSI systems in the diagnosis of neurological and neuropsychiatric disorders was potentially very large. In the late `80s and early 90s, we released the first clinically-useful MSI systems, the Magnes I and Magnes II systems. In 1996 we released the Magnes 2500 WH system, our first "whole head" instrument designed for evaluating brain function. This versatile product is appropriate for both clinical and basic research applications. Subsequently we 1 released the Magnes 1300 C, a system for clinical research in the diagnosis of cardiac and other organ diseases. Since then, the Company has developed the advanced Magnes 3600 WH for basic research in neurological and neuropsychiatric disorders. As part of its market development strategy, the Company has targeted as near-term clinical applications for MSI the evaluation of patients with epilepsy who are surgical candidates and pre-surgical functional mapping ("PSFM") of patients who are candidates for surgery that would endanger important functional areas of the brain. MSI systems are being used to assist physicians specializing in epilepsy to evaluate and surgically treat drug-resistant epileptic patients by helping to locate brain tissue that triggers such seizures. The systems are also being used for planning the surgical removal of brain tumors and vascular malformations in order to reduce the risk of neurological injury that might result in paralysis and expensive rehabilitation therapy. In the United States alone there are over 100 tertiary care epilepsy centers that the Company has identified and believes could benefit from the use of MSI technology. The Company is currently directing its marketing and sales efforts towards these centers as potential customers for MSI systems in the U.S. These centers are typically affiliated with academic medical institutions with large neurosurgical programs that would also benefit from the PSFM application. In addition, the Company believes there is an equivalent number of epilepsy/PSFM centers with similar needs throughout the rest of the world. To assist in the development of these market applications, we have in the past two years helped sponsor clinical research efforts to validate the effectiveness of MSI as a diagnostic tool at Henry Ford Hospital in Detroit, Michigan and at Hermann Hospital in Houston, Texas. The Company has been seeking to obtain reimbursement for MSI procedures from insurers and health care providers. Since the initial third party reimbursement was received in September 1993, more than 200 insurance companies and other health care providers have approved reimbursement for certain MSI procedures performed with the Company's Magnes MSI systems. Expanding this reimbursement acceptance will be a priority for the Company over the next fiscal year. The Company will work with leading institutions in the treatment of epilepsy to establish the efficacy of MSI in the surgical evaluation of epilepsy patients as well as in PSFM. There can be no guarantee regarding the outcomes of these efforts. CURRENT MEDICAL IMAGING TECHNOLOGY Many debilitating or life threatening disorders of the body, such as stroke, seizures, dementia, movement disorders, mental illness, cardiac arrhythmias and gastrointestinal disorders involve a disruption of function. Because electrical activity plays a critical role in many functions of the body, such activity is frequently monitored as a means to diagnose functional disorders. The electrocardiogram ("ECG") and EEG are recordings of electrical activity of the heart and brain used to obtain information about heart and brain functions, respectively. Electrical activity is also recorded to diagnose functional disorders of skeletal muscles, the spine and peripheral nerves. In the diagnosis and treatment of certain disorders, knowledge of the specific location of the malfunctioning tissue is a key factor. Numerous medical imaging technologies have been developed in response to this need. These include imaging technologies oriented toward organ structure and anatomy, such as CT and MRI, and imaging technologies oriented toward function, such as PET, SPECT and 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 or there may be multiple structural problems that make the identification of the problematic location difficult. 2 Other imaging technologies have been developed specifically to show the location of certain functional areas. PET and SPECT produce cross-sectional pictures showing the location where certain radioactively labeled substances have accumulated after having been injected into the body. Two measures of cell function, relative levels of metabolic activity and regional blood flow, are determined by measuring the amount of radiation emitted by different tissues after administration of the appropriate radioactive tags by the physician. The technique of fMRI is used to create images related to localized changes in blood flow and oxygenation in the brain. While fMRI has an advantage compared with PET and SPECT in that it does not involve injecting radioactive substances into the body, fMRI, PET and SPECT all have a relatively long physiological response time of one to five seconds, which prevents observation of rapidly changing activities. However, much of the valuable diagnostic information observed in electrical activity in the body occurs in intervals much less than one second, typically milliseconds, and is spontaneous in nature. Because of this technical deficiency, critical information about the sequence of activity, which is essential for understanding functional disorders such as epilepsy, is unavailable from these technologies. Conventional ECG and EEG have a faster response time than fMRI, PET and SPECT, and provide critical information about the sequence of electrical activity, but, in many cases, lack the ability to locate the source of such activity with sufficient accuracy to guide therapy. Locational accuracy is lost because the electrical activity is distorted as it passes through body tissues between the electrical source in the brain or heart and recording electrodes on the body surface. For this reason, electrodes are often surgically implanted into the brain in an attempt to obtain accurate localization of functional abnormalities prior to surgery. In another case catheters may be surgically inserted into the heart prior to ablation procedures. These procedures are invasive, generate patient discomfort, are very costly and involve potentially serious risk of infection and tissue damage. MSI TECHNOLOGY MSI is based on fundamental properties of electro-magnetism. Electrical currents by their nature produce magnetic fields that are perpendicular to flow of current; these fields can in turn be detected by our technology. An MSI instrument detects 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 potentials generated by the body, which EEG and ECG are based upon, the corresponding magnetic fields are physically able to pass through surrounding body tissue undistorted and without obscuring the location of the source. MSI can noninvasively provide information about the location of the origin of normal and abnormal functional activity, by measuring and analyzing these magnetic fields. MSI can do this with a combination of millimeter spatial resolution and millisecond time resolution that has not been previously available without the use of surgically implanted electrodes, introducing radioactive or other tracer substances into the body or the use of other costly, invasive procedures. THE MAGNES MSI SYSTEMS The Company's MSI systems - the whole-head Magnes 2500 WH and the 3600 WH systems, and the Magnes 1300 C that is designed for the rest of the body - are systems consisting of superconducting detection coils and amplifiers called Superconducting Quantum Interference Devices ("SQUIDs"). Integrated with each system is a patient support chair/bed and patient monitoring systems isolated from environmental magnetic fields within a Magnetically Shielded Room ("MSR"), and a control console, electronic components, stimulus generating devices for PSFM and analysis workstations in a surrounding suite. These systems, as well as the older 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 "Patents, Know-How and Proprietary Rights"). The Magnes 2500 WH system employs a total of 148 magnetic detectors incorporated into a sensor with a helmet shaped recess that is placed over the patient's head. Such a system is designed for neurological 3 applications. This design allows simultaneous examination of the entire brain and is designed for evaluating both ambulatory and critically ill patients in seated or fully reclined positions. The Magnes 1300 C system employs 67 magnetic detectors installed in a sensor with a shallow concave lower surface designed to fit the human chest, abdomen or lower back. The Magnes 3600 WH, currently in final development, is almost identical to the 2500 WH except 248 magnetic detectors are incorporated within it. The most recent software enhancements and hardware electronics developed for the 3600 WH are backward-compatible with the 2500 WH. MEDICAL APPLICATIONS The Company believes its Magnes systems have commercial potential in the diagnosis and treatment of a variety of neurological and other disorders. However, as a developing diagnostic technology, MSI technology faces several economic hurdles to commercial success. Sufficient numbers of diagnostic applications capable of generating cost savings or improved patient care as compared to competitive techniques need to be available in order for large numbers of hospitals and clinics to consider purchasing Magnes systems. Reimbursements for MSI procedures must be obtained from third party payors and evidence of routine approvals of reimbursements for clinical MSI procedures by third party payors must be available. Currently, the Company believes there are two medically accepted applications for its Magnes systems, planning of surgical treatment for epilepsy and presurgical functional mapping of the brain. To date, reimbursements from more than 200 insurance companies have been obtained for both procedures on a case-by-case basis. However, the expected volume of such procedures at many hospitals under current standard treatment practices may not provide sufficient operating revenue to completely offset the investment and operating cost of a Magnes system. Significant clinical research needs to be conducted before MSI systems can be deemed appropriate for the other applications described below. The Company has been primarily focused on establishing the clinical and functional efficacy of MSI applications for epilepsy and functional mapping. The Company is pursuing programs to increase awareness of MSI technology in its target markets of neurosurgeons, electrophysiologists, neurologists, psychologists, and epileptologists. There can be no assurance that the Company's systems will be accepted for commercial use in any of the areas mentioned in the foreseeable future. PRESURGICAL FUNCTIONAL MAPPING The Company believes that 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 of the brain vary among healthy individuals and even more widely among patients with large brain lesions, and the locations can not be reliably determined solely from anatomical imaging such as MRI. However, by relating information about the primary sensory function areas provided by the Company's MSI systems to MRI-generated anatomical images, a functional map of the brain can be obtained and presented on a screen or recorded on film. Images thus produced with the Company's MSI systems allow the surgeon to reliably estimate the risk of damage to the identified functional areas that might arise from the surgery itself. These images also help the surgeon to select the best surgical approach, such as where to open the skull, and from which direction to access the targeted area to minimize the surgical risk. Using the Company's MSI systems, reliable and practical methods of providing a functional map of the brain have been developed and verified. The functional areas of the brain that can be localized by MSI include, somatosensory cortex, motor cortex, visual cortex, auditory cortex and language-related cortex. These results have been reported in a number of peer-reviewed medical journals. 4 EPILEPSY SURGERY There are approximately 1.2 million people in the United States with recurrent epileptic seizures, and approximately 150,000 new cases emerge each year. The seizures for many of these people can be controlled with drugs, but a number require alternative treatments. It is estimated that there are at least 300,000 people in the United States who could benefit from surgical intervention, although, in 1993 only about 2,500 such procedures were performed. While there has been no subsequent reliable data published, the Company believes, based on its discussions with practitioners in the field, the rate of surgical interventions has steadily increased and will continue to do so in the near future. Over the past decade, a number of research studies have demonstrated that MSI can noninvasively locate brain tissue suspected of triggering epileptic seizures. It is this tissue which is the target of epilepsy surgery. In the absence of a noninvasive method, it is often necessary to implant an array of electrodes directly on or into the brain to locate this tissue. The invasive evaluation approach requires lengthy hospitalization in facilities that are equipped for long-term intensive monitoring of patients, 24 hour nursing care and participation of a highly trained team of specialists. To date, the cost and relative scarcity of appropriate facilities for this long-term monitoring procedure severely limit the number of patients who can benefit from a surgical approach to epilepsy treatment. Recent medical literature shows that the information provided by MSI could, in many cases, improve or even help 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 Company is currently working with two epilepsy centers in the U.S. to look at the effectiveness of MSI in epilepsy in a prospective clinical trial. OTHER NEUROLOGICAL APPLICATIONS Other applications areas in which MSI may have clinical value include ischemic disease and stroke, mild brain trauma and Alzheimer's disease. 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 $28 billion per year. MSI may potentially assist physicians treating stroke by identifying damaged brain areas before they are detectable by CT or MRI scans. As an indicator of neurological function, MSI may be useful to monitor rehabilitation and treatment of stroke patients. It is estimated that approximately 400,000 people experience mild brain trauma each year in the U.S., of which approximately 300,000 seek medical attention. In mild brain trauma, significant structural changes are rarely seen, and functional EEG changes are typically mild and diffuse. MSI may be more sensitive than EEG and MRI in identifying brain dysfunction in such patients and correlate well with symptomatic recovery. Alzheimer's disease affects an estimated 4,000,000 million people in the U.S. Current diagnostic technologies, PET, SPECT and EEG are not widely accepted as being valid diagnostic or prognostic indicators of the disease. Preliminary indications suggest that MSI may showed altered responses to sensory stimuli in Alzheimer's patients, thus providing a tool for diagnosis and treatment. NEUROPSYCHIATRIC APPLICATIONS Potential neuropsychiatric applications of MSI include schizophrenia and depression. Approximately 3,000,000 people (1 percent of the U.S. population) will develop schizophrenia during the course of their lives, and at any given time approximately 100,000 people are hospitalized in public institutions in the U.S. A number of studies indicate that MSI can detect differences in the brain activity in schizophrenics compared to normal subjects. The variety and robustness of the differences suggest that MSI may eventually provide an objective indicator of the disease and be useful for monitoring treatment. Likewise, depressive illness affects a large number of adults in the U.S., more that 19,000,000 people each year. 5 Preliminary studies suggest that MSI may provide an objective indicator of the disease and lead to more effective treatment. APPLICATIONS TO LEARNING DISORDERS Potential applications in learning disorders include dyslexia and autism. Dyslexia affects between 4 and 10 percent of the population throughout the world. PET and fMRI studies have indicated differences in metabolic activity in dyslexic adults compared to normal subjects, however direct evidence of abnormal neurological function in dyslexia is lacking. Recently, evidence has been presented from research groups in the U.S. and Europe that MSI may provide a sensitive and specific objective indicator of the reading disability in dyslexia. Autism is the third most common developmental disorder and affects nearly 400,000 people in the U.S. Recently, a subpopulation of children with autism has been identified that have normal early development, followed by an autistic regression and who show a distinct MSI pattern of brain activity. The preliminary data suggest that identification of such patients by MSI may lead to therapeutic strategies that lead to significant improvement in language and autistic features. APPLICATIONS IN THE BODY Preliminary studies indicate that MSI could be beneficial in evaluating areas of the body outside the central nervous system. The various parts of the body that might be evaluated with MSI include the gastrointestinal tract (gastrointestinal ischemia), spinal cord function (lower back pain) and adult and fetal heart monitoring (cardiac arrythmias and fetal development). SALES TO DATE; CLINICAL COLLABORATIONS The Company's primary near term objective is to cooperate with researchers and physicians at key medical centers to accelerate the development, use and commercialization of its MSI systems. The use of the Company's MSI systems must continue to be validated by clinical researchers as an effective tool for mainstream clinical applications in order to establish a commercial market. Accordingly, the early clinical research sales and collaborations with clinical sites are strategically important to the Company's overall market development plan. As of December 1999, the Company has installed 24 Magnes systems. Eleven sites located in the United States, Germany, Japan and France operate the Company's 148-channel Magnes 2500 WH system. Eleven sites located in the United States, Germany, France, Austria and Japan operate the Company's 37-channel Magnes I and 74-channel Magnes II systems, and in Germany and Japan, two sites operate a Magnes 1300 C system. Of these sites, neurological clinical research is conducted at twenty-two (22) sites and non-neurological research at two sites worldwide. Table 1 lists the various 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 200 published papers.
TABLE 1 SYSTEM INSTALLED NAME OF INSTITUTION LOCATION - -------------------------------------------------------------------------------- Magnes I University of Colorado United States Magnes II University of California, San Francisco United States Magnes II University of Wisconsin United States Magnes 2500 WH The Scripps Clinic & Research Foundation United States Magnes 2500 WH New York University Medical Center United States Magnes 2500 WH University of Texas, Houston United States Magnes I Kyushu University Hospital Japan Magnes II National Institute for Physiological Sciences Japan 6 TABLE 1 SYSTEM INSTALLED NAME OF INSTITUTION LOCATION - -------------------------------------------------------------------------------- Magnes II National Epilepsy Center Japan Magnes II National Chubu Hospital Japan Magnes 2500 WH Communications Research Laboratory Japan Magnes 2500 WH Okayama Rehabilitation Center Japan Magnes 2500 WH Tokyo Medical and Dental University Japan Magnes 1300 C Okayama Rehabilitation Center Japan Magnes I University of Munster Germany Magnes II University of Erlangen Germany Magnes 2500 WH Institute of Medicine-KFA Julich Germany Magnes 2500 WH University of Magdeburg Germany Magnes 2500 WH Max Planck Institute, Leipzig Germany Magnes 2500 WH University of Konstantz Germany Magnes 1300 C University of Bochum Germany Magnes I University of Rennes France Magnes 2500 WH FORENAP Institute for Research in Neuroscience and Psychiatry France Magnes I University of Vienna General Hospital Austria
MARKETING, SALES AND DISTRIBUTION MARKET DESCRIPTION The overall market for the Company's Magnes systems can be divided into three overlapping segments: the basic research market, the clinical research market and the commercial clinical market. Customers in each market segment are identified by the focus of their work, the source of purchase funds, and other characteristics, as described below. The basic research market consists of scientists working in university and government laboratories to discover new information about organ function and to make fundamental advances in their scientific fields. Patient treatment is not their principal concern. Equipment used by these scientists is generally purchased with funds provided by government and private research grants. The basic research market has been to date, and continues to represent, the majority of the Company's sales. The clinical research market consists primarily of university medical centers where the majority of clinical applications development work for new medical technologies and procedures is normally conducted. Because of their size, buying power, prestige, and early involvement in assessing and using new medical technologies, university 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 that are centers of excellence in neurosurgery, neurology neurophysiology, neuroradiology and psychiatry. The potential commercial clinical market for MSI systems, if applications for various neurological diseases in addition to epilepsy could be developed, includes hospitals and clinics that could use the MSI systems in routine diagnosis and therapeutic monitoring of patients. The primary commercial clinical market in the United States consists of approximately 450 major medical centers each with 500 or more beds and approximately 780 hospitals each with between 300 and 500 beds. In addition, independent imaging centers in major metropolitan areas have often been among the first buyers of new imaging technologies, and the Company believes this pattern may be applicable for its MSI systems. Of the top 25 neurology centers in the United States, 24 have significant and growing epilepsy centers. There are approximately 200 epilepsy surgery centers in the United States, Western Europe and Asia which could be candidates for the Company's MSI systems. Sales to the commercial clinical market are expected to develop when further regulatory approvals are obtained, adequate third-party reimbursement for MSI tests becomes routine, MSI procedure costs decline, and physician and decision makers in medical institutions conclude that MSI procedures are more beneficial and economical than existing diagnosis and treatment methods. 7 If the Company is unable to gain general market acceptance of its MSI systems, the Company's business, financial position and results of operations will be materially adversely affected. The National Institute of Health (NIH) has estimated that there are approximately 90 million cases annually of neurological and mental illness disorders in the U.S. Each case represents a separate incident of such disorders and not necessarily 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 that can be treated by pharmaceuticals or other methods. Currently there are few objective measures of these physiological problems, making diagnosis and treatment, including measuring the effectiveness of the treatement, problematic. MSI has demonstrated the ability to provide accurate spatio-temporal maps of neurophysiological function that might serve as an objective measure, improving the clinical process. The Company believes the Magnes systems could fulfill a major need of physicians dealing with mental disorders. Researchers are in the early stages of investigating MSI applications for mental illness such as schizophrenia and depression Other researchers are investigating learning and behavioral disorders, such as dyslexia and autism. As yet, no reliable estimates can be made of the number of patients in these categories who might be aided by information provided by the Magnes system. However, if the economic value of any one of these indications is demonstrated, a large and significant market could result. MARKETING PROGRAMS In order to promote sales in both the clinical applications development and commercial clinical markets, the Company's fundamental marketing strategy is to accelerate clinical applications development for the Magnes systems by collaborating with and promoting the work of a core group of influential medical centers engaged in applications development. The Company plans to continue implementation of this strategy by (i) encouraging physicians developing applications for the Company's Magnes systems to publish their results in professional journals, (ii) participating in key medical meetings to generate interest among targeted medical specialists, (iii) direct mailings to encourage communication between research groups working with the Magnes systems, (iv) site visits by key customers, and (v) public relations activities. DISTRIBUTION The Company has a small direct-sales organization with the specialized skills needed to sell the Company's MSI systems in the United States. The European and Asian markets are served, respectively, by the Company's branch office in Aachen, Germany and by the biomedical division of Sumitomo Metal Industries, LTD. ("SMI") in Japan. In March 1990, the Company entered into a distribution agreement granting SMI the exclusive rights to market, sell, distribute and service the Company's MSI products in certain regions of Asia and in Australia and New Zealand for an initial period of seven years. The agreement established a minimum number of units to be purchased by SMI during the period and granted to SMI a right of first refusal to negotiate a license to manufacture and sell the Company's MSI products in certain regions of Asia, Australia and New Zealand. This distribution agreement with SMI was extended for three (3) years on January 23, 1997 with the modification that SMI's distribution rights outside of Japan would be non-exclusive. This agreement will terminate in January 2000 and will not be extended or renewed. 8 The Company is currently evaluating other distribution possibilities, including additional representation in other areas of Asia, such as Korea and Taiwan. The lack of continued access to the Japanese market would have a material adverse effect on the Company. REIMBURSEMENT The Company's long-term commercial success in the United States is dependent upon obtaining routine approval of payments for clinical MSI procedures by third-party payors. The Health Care Financing Administration ("HCFA"), which is responsible for the administration of Medicare, and the American Medical Association that administers the use of "CPT" codes by 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 planning for epilepsy surgery. This includes a number of publications in peer-reviewed medical journals. The data have been successfully used by a number of medical centers to receive third-party reimbursement on a case-by-case basis. Since the first reimbursement was received in September 1993, more than 200 insurance companies and other healthcare providers have now approved reimbursement for these MSI procedures. Although initial results are encouraging and a number of third-party payors have approved reimbursement, there is no assurance that third party reimbursement will become widely accepted. In Japan, a large number of hospitals are government funded and operated. These hospitals are paid by the Japanese Ministry of Health and Welfare ("JMHW") only for procedures that have been approved by a reimbursement board of the JMHW. The JMHW follows guidelines similar to those followed by third-party payors in the U.S. in determining whether the Japanese government will reimburse a new medical procedure. Once reimbursement for a procedure is approved by the JMHW, all hospitals, both public and private, are reimbursed for the procedure at the same reimbursement rate. Since the Company's Magnes I, Magnes II and Magnes 2500 WH systems received approval from the JMHW for sales in Japan as clinical devices, Japanese public and private hospitals may purchase the systems for clinical use on patients. Reimbursement is not yet available from the Japanese government or Japanese third-party payors, but private Japanese hospitals are allowed to charge individual patients privately for procedures with the Magnes systems. The Kyushu University Magnes I system and the National Epilepsy Center Magnes II system, in Shizuoka, have been designated as Highly Advanced Medical Technology Sites by the Japanese government. This designation is required for application to the JMHW for reimbursement. In Europe, the current Magnes sites have concentrated primarily on research, and have not in the past pursued governmental or private approval for reimbursement of MSI procedures. However, several European sites are currently investigating mechanisms for obtaining reimbursement of MSI examinations. There is no assurance at this time that these efforts will be successful, nor is an accurate time frame known to the Company. PRODUCT PRICES AND TERMS OF SALE The current prices for the Company's MSI systems range from approximately $1.0-$2.5 million, depending upon system configuration. Standard terms of sale provide for payments of 40% of the purchase price upon placement of the order, 40% upon shipment and the remaining 20% when installation is completed and final acceptance is obtained from the customer. For European customers who receive their funding from governmental agencies, the Company is generally required to provide a bank guarantee for the amount of the deposit that is usually released upon shipment and/or acceptance by the customer. The time between placement of an order and installation typically ranges between six 9 and twelve months. The Company also enters into special collaboration and sale arrangements with certain medical centers to promote clinical applications development. INSTALLATION, SERVICE AND TRAINING In the medical device market, the ability to provide comprehensive and timely service is a key competitive advantage and is important for establishing customer confidence. Installation and service for the Company's products in the United States and Europe is provided from its San Diego, California headquarters and from the Company's branch office in Aachen, Germany, both of which maintain customer service departments capable of performing sophisticated systems installation and equipment maintenance. SMI has its own service capabilities in Japan to service MSI systems sold in their distribution areas. A new distributor relationship in Japan, if arranged, may assume responsibility for providing such service; such distributor arrangements are fairly common in Japan. Installation and a service agreement for the first year are included as part of the standard terms of sale in the United States and Europe. Thereafter, service and maintenance are available on a time and materials basis or pursuant to a yearly service agreement for an annual fee. Initial customer training in the operation of the Company's MSI systems is provided by the Company's personnel at the customer's site and is included in the selling price of the system. Physician training in interpreting the clinical significance of MSI information is currently provided at the Company's cooperating United States clinical sites. COMPETITION The Company operates in an industry characterized by rapid technological change. New products using other technologies or improvements to existing competing products may reduce the size of the potential markets for the Company's products, and may render them obsolete or non-competitive. Competitors may develop new or different products using technology or imaging modalities that may provide or be perceived as providing greater value than the Company's products. Any such development would have a material adverse effect on the Company's financial position and results of operations. Additionally, there continues to be significant price competition from the Company's main competitors for the limited number of whole head systems purchased worldwide. This aggressive competition has and may continue to affect profit margins on sales of the Company's whole head system, the extent of which is not presently determinable. Companies known to BTi to currently manufacture an integrated large-array MSI system are CTF Systems Inc., a Canadian company, Neuromag Oy, a Finnish company, Yokagawa Electric, a Japanese company, Shimadzu, a Japanese company and Daikin, a Japanese company. Neuromag Oy has received Food and Drug Administration ("FDA") clearance for marketing its latest Vectorview system as a clinical device in the United States. It is being marketed by Marconi Medical Systems, Inc. (formerly Picker International) in the United States and Europe, and by Elekta K.K. in Asia. An MSI system produced by CTF Systems, Inc. has been cleared for sale as a clinical device in Japan by the JMHW. Yokagawa Electric has installed one system in the United States and three systems in Japan. Shimadzu has installed one system in Japan and Daikin has installed one system in Japan. The Company's ability to compete successfully, particularly in the Japanese market, may be negatively affected by the emergence of Japanese based competitors providing similar equipment. The Company's ability to compete successfully, particularly against any of its current or potential future competitors, many of which have significantly greater financial, manufacturing, distribution, and technical resources than the Company, will depend upon various factors, including BTi's ability to continue its technological and market development leadership role, and BTi's ability to raise necessary capital for further development and commercialization. 10 BACKLOG As of September 30, 1999, the aggregate amount of revenue backlog from firm orders for Company products and services was approximately $2,788,000, of which the Company expects to fill approximately $2,392,000 before September 30, 2000. The revenue backlog is composed primarily of an order for a Magnes 3600 WH, a Magnes 1300 C cardiac system that has been shipped but not yet accepted by the customer, and deferred service revenues on systems accepted before September 30, 1999. The amount of cash backlog that remains out of the revenue backlog (revenue backlog less cash advances) is approximately $200,000. As sales of the Company's systems typically involve transactions of $1 million or more, backlog is expected to fluctuate significantly from year to year depending upon timing of orders received, installations completed and customer acceptances received during the reporting period. RESEARCH AND DEVELOPMENT The Company has funded its product research and development primarily through public and private sales of stock, and revenues from product sales. The Company substantially completed the design of its Magnes 2500 WH system in fiscal 1996 and decreased expenditures in fiscal 1997 and 1998 as part of the Company's restructuring and focus on developing a clinical market for the Company's Magnes 2500 WH system. In fiscal 1999, research and development expenditures increased due to development efforts for software and hardware enhancements for the Magnes 2500 WH, the construction of product development test equipment, support of the epilepsy clinical testing program at two research clinics in the United States, and ongoing development of the Magnes 3600 WH system. New versions of operating software were released during fiscal 1999. For the Magnes I and Magnes II systems, software version 1.7 was released in August 1999. This update included Y2K compliance updates and Solaris 2 compatibility. It also brought many of the enhancements available in the newer systems to these older models. For the Magnes 2500 WH, software version 1.2.4 was released. This version provided substantial user interface upgrades, Y2K compliance updates and the inclusion of the STA/R analysis software for analysis of clinical data, and other analytical and database enhancements. MANUFACTURING AND MATERIALS The Company engineers and manufactures every major component of its Magnes systems, other than the host computer and its peripherals, the MSR which houses the sensor, and the sensor position indicator hardware used to determine how the sensor is oriented to the body. The Company is also currently purchasing its SQUID production requirements. However, through the Company's joint ownership of Magnesensors, Inc., the Company has the ability to fabricate SQUIDS from materials that become superconductive at liquid helium and liquid nitrogen temperatures should such a need arise. 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 MSRs for Magnes systems sold in the United States and Europe are currently supplied by two European manufacturers, and a third U.S.-based manufacturer has recently delivered its first MSR. The Company believes it has adequate alternate sources of supply for this major system component from these sources. The Company believes its current manufacturing capacity is sufficient to satisfy present demand. In order to achieve its long-term objectives, however, the Company will be required to expand production capabilities, mainly through additional manufacturing personnel and by potentially subcontracting assembly of certain system components. There can be no assurance that the Company will be able to increase its level of output. The Company believes that its control over the development and manufacture of its MSI systems will enable it to modify its devices to address specific needs of anticipated clinical applications without significant dependence upon outside suppliers, manufacturers or providers of technology. 11 GOVERNMENTAL REGULATION; REGULATORY APROVALS The Company is subject to various regulations of the FDA and California Health Services. In particular, the FDA and California Health Services have promulgated regulations to which the Company must adhere, including, but not limited to, minimum manufacturing standards, product operating effectiveness and functional safety of the Company's diagnostic products. The FDA regulates marketing of medical devices, requiring premarket clearance or premarket approval based upon review of information submitted by the Company relating to intended product use, labeling, safety and efficacy. The premarket clearance or approval processes are based upon risk class and degree of equivalence to devices already marketed that are proven to be safe and effective. The Company's continued compliance with applicable governmental regulations is assessed by internal audits and by audits of manufacturing operations and procedures conducted by the FDA and California Health Services. These agencies have the authority, among other rights, to limit or stop product shipments and require product recall should a failure to comply with regulations be observed. The Company has registered with the FDA and California Health Services as a medical device manufacturer. California Health Services has completed an inspection of the Company's facilities and manufacturing processes and has issued the Company a license which permits it to manufacture, sell and ship the Magnes systems as medical devices for diagnostic purposes. The FDA conducted an audit of the Company for compliance with federal current Good Manufacturing Practices ("cGMP") regulation requirements in July 1996. All areas of the Company's internal cGMP program were observed to be in compliance with the regulations. In order to export its products, the Company must comply with United States export control regulations, which restrict the export of devices containing certain of the Company's technology to certain foreign nations. Although the export control regulations have not prohibited the Company from exporting its MSI systems to foreign nations, there can be no assurance that the Company will continue to be able to obtain the necessary export licenses in the future. The Company is currently allowed to export the Magnes systems to many foreign countries, including all Western European countries and Japan, under a general license that requires no additional approval prior to shipment. Medical devices are placed in one of three classes, depending upon their use or the degree to which they provide functions critical to sustaining life. Class I devices are subject to general controls, including Quality System Regulations (QSR, formally known as Good Manufacturing Practice), and examples of such devices are tongue depressors and hot water bottles. Class II devices are subject to general performance standards not yet established by regulation. General controls of Class I devices presently apply to Class II devices, because no performance standards have been developed or promulgated by the FDA for Class II devices. Examples of Class II devices are the ECG and EEG instruments. Class III devices consist of "critical devices," those represented to be life sustaining or life supporting, implanted in the body or presenting potential unreasonable risk of illness or injury. Safety and efficacy must be demonstrated and supported by clinical data submitted to the FDA for "premarket approval". Examples are kidney dialysis systems and cardiac pacemakers. Class I and II devices may be marketed by demonstration of "substantial equivalence" to existing devices via a Section 510(k) premarket notification, and subsequent FDA clearance to market. The Magnes I and Magnes II systems have been determined under the 510(k) process to be substantially equivalent to BTi's prior Model 607 Neuromagnetometer and to EEG. The Magnes 2500 WH system has been found to be substantially equivalent to the Magnes II system. The Company's Magnes MSI systems are classified as Class II devices, and therefore are subject to the general controls of Class I devices and to performance standards that have not yet been defined for Class II devices. While Western Europe and Japan have regulatory agencies that are somewhat similar to the FDA, each country's regulatory requirements for product acceptance are unique and will require the expenditure of substantial time, money and effort to obtain and maintain regulatory acceptance for marketing for clinical use. There can be no assurance that the Company will be able to obtain and maintain such approvals. 12 The Magnes I system, Magnes II system and Magnes 2500 WH systems have all received JMHW approval. The Company has received 510(k) premarket notification clearance from the FDA for its Magnes I, Magnes II and Magnes 2500 WH systems allowing the marketing of the Company's systems in the United States. In addition, the Company has received similar clearance for sale of these systems as a clinical device from the JMHW. In December 1999 BTi received 510(k) premarket notification clearance for its Magnes 3600 WH. The Company has not yet applied to the FDA or similar regulatory agencies to obtain clearance for sale of the Magnes 1300 C. There can be no assurance that such clearance will be obtained, if applied for (see Risk Factors). PATENTS, KNOW-HOW AND PROPRIETARY RIGHTS The Company relies on proprietary technology and seeks to maintain confidentiality of its trade secrets, unpatented proprietary know-how and other proprietary information, and seeks to obtain patent protection when appropriate. As of September 30, 1999, the Company held 43 patents in the United States of which thirteen (13) pertain to the Company's current whole head system. Ten (10) of the forty three (43) patents had counterpart patents issued in certain members of the European Patent Organization, in Canada and in Japan. As of September 30, 1999 the Company had filed one (1) U.S. patent applications that is in the patent prosecution process. The Company has also filed four (4) applications with the European Patent Organization for patent protection in Western Europe, eight (8) applications in Japan and two (2) in Canada. The Company anticipates that patents, if issued, will be issued (i) within two to 20 months with respect to the pending patent applications in the U.S., and (ii) within three years with respect to the pending patent applications in Western Europe. The Company has reserved its priority with respect to receiving patents on its applications in Japan, and may pursue those applications in due course. The Company's patents protect several fundamental aspects of the technology used in its products. Patents have been issued with respect to superconducting devices, ultra-low-noise electronics circuits, biomagnetometer design, biomagnetic signal processing, magnetic shielding techniques, noise suppression methodologies, cryogenic apparatus construction techniques, and system design concepts. Patent applications have been filed with respect to a new process for fabrication of electronic devices using high-temperature superconducting materials, superconducting device designs, magnetic shielding technology, cryogenic refrigeration, ultra-low-noise electronic circuits, patient handling equipment and biomagnetic signal processing and data analysis. The Company currently is considering additional patent applications covering inventions already made in these and related fields of technology. BTi is not aware of any infringement by any of its products on patents issued to others. Rights to certain of the Company's patents associated with the application of so-called high temperature superconductors have been assigned to Magnesensors, Inc., partially owned by BTi, Quantum Magnetics and certain Officers of BTi. Magnes-Registered Trademark- and Biomagnetic Technologies-TM- (with and without the design) and BTi-TM- are registered trademarks of the Company by registration with the State of California and by registration with the U.S. Patent and Trademark Office. BTi has pioneered the development of technologies associated with MSI. Several core technologies that have been developed by and represent proprietary know-how to the Company include superconducting magnetic field detectors, magnetic noise reduction, data analysis and clinically useful temporal and overlay displays. Many of these techniques and technologies are patented. As a result, the Company believes it has established an industry leadership position in MSI. HUMAN RESOURCES As of December 20, 1999, the Company employed a total of 78 permanent full-time and part-time employees, nine of whom hold Ph.D. degrees, at its facilities in San Diego, California and in Aachen, Germany. None of the Company's employees are covered by a collective bargaining agreement and the 13 Company has experienced no work stoppages. The Company believes that its relationships with its employees has been good. FACTORS THAT MAY AFFECT FUTURE RESULTS This annual report on Form 10-K may contain forward-looking statements that involve risks and uncertainties. Such statements include, but are not limited to, statements containing the words "believes", "anticipates", "expects", "estimates", and words of similar import. The Company's results could differ materially from any forward-looking statements, which reflect management's opinions only as of the date hereof, as a result of factors, such as those more fully described under "Risks and Uncertainties" as well as described in this Annual Report. The Company undertakes no obligation to revise or publicly release the results of any revisions to these forward-looking statements. Readers should carefully review the risk factors set forth below as well as other factors addressed in this report and in other documents the Company files from time to time with the Securities and Exchange Commission. RISKS AND UNCERTAINTIES To date, we have been engaged principally in research and development activities, and have made only low volume sales to medical research institutions. We are currently dependent on our Magnes 2500 WH system for clinical market sales, for which there are currently limited clinical applications. Additional clinical applications testing needs to be conducted with the MSI system at major clinical research centers before a substantial commercial clinical market emerges. We are finalizing development of our Magnes 3600 WH system, which is targeted primarily for basic research markets, and must continue to depend upon sales to this market to meet our revenue goals for the very near-term. There can be no assurance that a substantial commercial market will develop for diagnostic or monitoring uses of our MSI systems or for the MSI industry to become viable and profitable. A continued lack of clinical applications and commercial market for our MSI systems will have a material adverse impact on our financial position, results of operations and cash flows. WE ARE UNCERTAIN WITH RESPECT TO ADDITIONAL FUNDING AND MAY NOT BE ABLE TO MEET FUTURE CAPITAL NEEDS. AS A RESULT, THERE IS SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO OPERATE AS A GOING CONCERN. If we achieve the projections in our current business plan, we believe that we will be able to meet our business obligations through the second quarter of fiscal 2000. Even if we meet our operating plan projections, we will need to obtain additional financing in fiscal 2000 to fund operations. We may not find such financing on terms acceptable to us, if at all. IF WE CONTINUE TO INCUR OPERATING LOSSES, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS. Our financial position reflects that we have been principally focused on research and development with only low volume sales to medical research institutions. For example, our net losses in the last three years have been as follows: - - $7,464,000 of losses in fiscal 1999, - - $4,968,000 of losses in fiscal 1998, and - - $5,242,000 of losses in fiscal 1997. 14 In the last three years, our negative cash flows from operations have been as follows: - - $8,602,000 in fiscal 1999, - - $5,520,000 in fiscal 1998, and - - $2,032,000 in fiscal 1997. At September 30, 1999, our accumulated deficit was $98,286,000 with working capital of $3,273,000. Our working capital at September 30, 1999 resulted primarily from the sale of 30,000,000 shares of common stock for proceeds of $15,000,000 during August 1998. We believe that cash projected to be generated from operations alone will not be sufficient to meet our capital and working capital requirements in fiscal 2000. IF WE ARE UNABLE TO SATISFY CUSTOMER PERFORMANCE AND SERVICE REQUIREMENTS, WE MAY BE UNABLE TO COMPETE EFFECTIVELY. Our success may be limited by our ability to satisfy customer performance requirements for our systems; as well as by our ability to complete, in a timely fashion, product developments and enhancements to satisfy customer requirements. In addition, if we or our distributors are not able to respond in a timely manner to service requirements, our competitiveness may be adversely impacted. IF WE ARE UNABLE TO IDENTIFY ADDITIONAL CLINICAL APPLICATIONS FOR OUR MSI SYSTEMS, THERE WILL BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS. Currently, there are only a few established diagnostic uses for MSI systems that the medical industry is aware of. Although we have started our own clinical research and testing to identify new, large application areas, we cannot assure you that a commercial market will develop for multiple uses of our products. IF WE ARE UNABLE TO DEVELOP ADDITIONAL PRODUCTS, OUR ABILITY TO COMMERCIALIZE OUR PRODUCTS WILL BE ADVERSELY IMPACTED. Our success may be limited by our dependence on our one current product, the Magnes 2500 WH system. Before we can more fully penetrate the research and commercial markets, we need to have additional products. In development is our Magnes 3600 WH, which is intended to address more fully the needs of research institutions. Our Magnes 2500 WH system is more appropriate for the commercial market. Our financial results will be materially adversely affected if our Magnes 2500 WH system does not suit the majority of commercial applications that emerge, or we are not able to offer new products in a timely and cost effective manner that meet the emerging needs of the marketplace. IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR MSI PROCEDURES BY THIRD PARTY PAYORS, SALES WILL SUFFER. Our commercial success is also highly dependent on reimbursement for procedures using the MSI system. Currently, Medicare, insurance companies and other healthcare providers approve payment for MSI procedures on a case-by-case basis. As of September 30, 1999, these third party payors have only approved limited reimbursements in the United States. Although third party payors have increasingly approved reimbursements, we cannot assure you that third party reimbursements will become widely available. The United States government does not currently reimburse for MSI procedures. If reimbursement does not become more widely available, our financial position and results of operations will be materially adversely affected. Further, if the Federal government or any state legislature enacts legislation relating to our business or the health care industry, including legislation relating to third party reimbursement, our financial position and results of operations could be negatively affected. In addition, there is currently no reimbursement for MSI procedures outside of the United States. IF OUR PRODUCTS PRODUCE UNRELIABLE DIAGNOSTIC INFORMATION, IT MAY RESULT IN A LIABILITY, WHICH WOULD ADVERSELY IMPACT OUR FINANCIAL CONDITION. Although our products are noninvasive and diagnostic in nature, treatment courses based on the information generated by our instruments may be unreliable or result in adverse effects. This possibility 15 exposes us to the risk of product liability claims. While we carry product liability insurance, there is no assurance that such insurance will be adequate, will be available in the future at a level and cost that is appropriate, or available at all, or that a product liability claim would not adversely affect our business, prospects, financial condition or results of operation. IF DISCOVERIES OR DEVELOPMENTS OF NEW TECHNOLOGIES OCCUR, OUR PRODUCTS AND TECHNOLOGY MAY BECOME OBSOLETE. Our industry is characterized by rapid technological change, which may also impact our commercial success. Competitors may develop products using other technologies or may improve existing products. This competition may reduce the size of the potential market for our products or make them obsolete or non-competitive. Competitors may also develop new or different products using technology or imaging modalities that provide, or are perceived as providing, greater value than the Company's products. Our financial position and results of operations will be materially adversely affected if such competitive developments occur. IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUES AND OPERATING RESULTS WILL BE ADVERSELY AFFECTED. Our industry is also characterized by ongoing significant price competition. Our competitors compete with us aggressively for the currently limited number of whole head systems being purchased worldwide. The future profitability of our systems may be negatively impacted by this aggressive competition. IF NEW GOVERNMENT LEGISLATION IS ENACTED OR UNFAVORABLE MEDICAL INDUSTRY TRENDS ARISE, WE MAY BE UNABLE TO SELL OUR PRODUCTS AND OUR REVENUES WILL SUFFER. We cannot predict what adverse effect, if any, future legislation or FDA regulations may have on the MSI market and our financial results. Medical industry cost containment trends may impose restrictions on sizeable third-party reimbursements for diagnostic procedures, limiting the market opportunity. Further, if Federal government agencies or any state legislature enacts legislation or guidelines relating to our business or the health care industry that create additional business hurdles, including legislation relating to third party reimbursement, our financial position and results of operations could be negatively affected. IF FOREIGN CURRENCY EXCHANGE RATES FLUCTUATE, OUR RETURN ON SALES IN U.S. DOLLARS MAY SUFFER. A significant portion of our sales to date have been in foreign markets. Revenues from export sales represented 73% of our revenues of MSI systems for the year ended September 30, 1999 compared to 71% of similar revenues for the prior year. We expect that revenues from international sales will continue to represent a significant portion of our annual revenues. Because we sell in foreign markets, we are exposed to potential risks of increases and decreases in foreign currency exchange rates. Although at September 30, 1999 and 1998 we did not have any open forward exchange contracts, on occasion, we enter into forward exchange contracts to partially hedge ( or protect) against such foreign currency exchange risks. Nonetheless, these fluctuations may reduce the return in U.S. dollars that we actually receive on our sales. These risks may become material as our sales increase or dramatic currency fluctuations occur from outside events. THE COMPANY'S SUCCESS IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN QUALIFIED SCIENTIFIC AND MANAGEMENT PERSONNEL. The loss of services of any one of our executive management or key scientific personnel would delay our ability to execute our business plans and reduce our ability to successfully develop and commercialize products, maintain good customer relationships and compete in the marketplace. We also face increasing difficulties in recruiting qualified personnel in the software and hardware design areas because of intense competition for such personnel in today's job market. There can be no assurance that the Company will be able to hire, train or retain such qualified personnel. 16 In addition, the loss of the services of the Chief Executive Officer, D. Scott Buchanan, would have a materially adverse effect on our prospects. Currently none of the executive officers of the Company have an employment agreement or contract with the Company; all are "at-will" and under no specified term arrangements. OUR STOCK PRICE IS HIGHLY VOLATILE AND SUBJECT TO SWINGS BASED ON SALES AND OTHER MARKET CONDITIONS. The market prices for securities of companies with newly emerging markets have historically been highly volatile, and their stock price from time to time has experienced significant price and volume fluctuations that are unrelated to the operating performance of such companies. Moreover, BTi's relatively low trading volume increases the likelihood and severity of volume fluctuations which likely will result in a corresponding increase in the volatility of BTi's Common Stock price. Factors such as announcements of complex technological innovations or new sales, governmental regulations, developments in patent or other proprietary rights, developments in the Company's relationships with collaborative partners, general market conditions and the timing of decisions by existing BTi stockholders to sell large positions of our Common Stock may have a significant effect on the market price of the Company's Common Stock. Fluctuations in financial performance from period to period also may have a significant impact on the market price of the Common Stock. (See "Item 5. Market for Registrant's Common Stock and Related Shareholder Matters".) IF WE EXPERIENCE ANY PROBLEMS WITH YEAR 2000 COMPLIANCE, OUR OPERATIONS AND SALES OF OUR PRODUCTS MAY BE INTERRUPTED. If our systems are not made compliant by year-end it could significantly and adversely affect our sales. Year 2000 issues could cause potential customers to reevaluate their current needs and consider deferring purchase of our Magnes systems or decide to purchase from a competitor. Additionally, we could have potential warranty or other claims with existing Magnes systems placed with customers if such systems are not made Year 2000 compliant. Any of the foregoing could result in a material adverse effect on our business, financial position and results of operations. For additional information regarding the status of our Year 2000 issues, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000 Assessment". ITEM 2. PROPERTIES. The Company's executive offices and manufacturing facilities are located in a 55,000 square foot facility at 9727 Pacific Heights Boulevard, San Diego, California. All domestic operations of the Company are conducted from this facility, which was first occupied in December 1989. The Company leases this facility pursuant to a five-year lease agreement which expires in February 2003. Average monthly lease payments over the term of the lease approximate $62,000. The Company's branch office in Germany leases approximately 3,000 square feet at Gruener Weg 82, D-5100 Aachen, Germany pursuant to a year-to-year lease agreement expiring in December 1999. The Company is in the process of renewing this lease. Monthly lease payments are approximately $2,000. Sales and service for the Company's European operations are conducted from the German facility. ITEM 3. LEGAL PROCEEDINGS. Neither the Company nor its German subsidiary are involved in any litigation which is expected to have a material adverse effect on the Company's business, consolidated financial position and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock, formerly traded on the Nasdaq National Market under the symbol "BTIX", was delisted as of March 10, 1997 for lack of then compliance with the net tangible assets requirement of $4 million dollars. The Company stock is currently trading on the Nasdaq Over the Counter Bulletin Board under the symbol "BMTI". The following table sets forth the range of high and low closing sales prices by quarter for the Company's Common Stock as reported by Nasdaq. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
FISCAL YEAR 1999 HIGH LOW ---------------- ---- --- 1st Quarter $0.33 $0.15 2nd Quarter $0.30 $0.13 3rd Quarter $0.17 $0.25 4th Quarter $0.15 $0.24
FISCAL YEAR 1998 HIGH LOW ---------------- ---- --- 1st Quarter $1.50 $0.37 2nd Quarter $0.68 $0.38 3rd Quarter $0.42 $0.28 4th Quarter $0.64 $0.26
As of December 20, 1999, there were approximately 269 holders of record of the Company's Common Stock. The last reported closing price for the Company's Common Stock on the Nasdaq Over the Counter Bulletin Board on December 20, 1999 was $0.1875 per share. The Company has never declared or paid dividends on its Common Stock. The Company does not anticipate declaring any dividends on its Common Stock in the foreseeable future and intends to retain earnings, if any, for the development of its business. There are no contractual obligations, preferences or restrictions related to the declaration or distribution of dividends. 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, 1999 and with respect to the consolidated balance sheets at September 30, 1999 and 1998, 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, 1996 and 1995 and the balance sheet data at September 30, 1997, 1996 and 1995 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: 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Total revenues $ 3,254 $ 2,839 $ 10,592 $ 733 $ 8,981 Operating loss (7,532) (4,898) (3,318) (15,467) (5,720) Net loss (7,464) (4,968) (5,242) (15,566) (6,673) Basic and diluted net loss per share $ (.09) $ (.09) $ (.11) $ (.39) $ (.27) 18 YEARS ENDED SEPTEMBER 30, -------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Shares used in computing basic and diluted net loss per share 83,367 56,430 45,790 39,950 24,783
SEPTEMBER 30, ----------------------------------------------------------------------- BALANCE SHEET DATA: 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Working capital (deficiency) $ 3,273 $ 11,139 $ (2,284) $ (785) $ 10,274 Total assets 8,870 17,343 6,002 16,250 20,124 Long term obligations 359 216 219 48 493 Shareholders' equity (deficit) $ 4,106 $ 11,569 $ (1,286) $ 854 $ 13,368
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the consolidated financial statements and notes contained elsewhere in this report. 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 functioning of the brain, heart and other organs. The Company is focusing on the use of its technology for potential commercial market applications such as the diagnosis and planning for surgical treatment of epilepsy, and the functional mapping of areas of the brain at risk during surgery for tumors and other lesions. The Company is continuing to investigate the potential applications of its technology for problems of the heart, spine, and gastrointestinal system, as well as for disorders of the brain such as closed-head trauma, schizophrenia and other neuro-psychiatric disorders. As of December 1999, twenty-four (24) Magnes systems are installed in medical and research institutions worldwide, and 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 200 scientific and medical papers. Since the first reimbursement for MSI procedures was received in September 1993, more than 200 insurance companies have approved reimbursement on a case-by-case basis 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. The Magnes 2500 WH allows for examination of the entire brain at once and is designed for evaluating ambulatory or critically ill patients in seated or fully reclined positions. As of September 30, 1999, the Company had shipped eleven Magnes 2500 WH systems and received eleven final acceptances from customers. In fiscal 1997 BTi commenced the development of the Magnes 3600 WH, initially for a Japanese customer. Final development is expected to be complete in fiscal 2000. The current price of BTi's MSI systems ranges from approximately $1.0 to $2.5 million, depending upon system configuration. A major portion of the Company's sales have been in foreign markets. The Company has previously priced certain of its European sales in the currency of the country in which the product was sold and the prices of such products in dollars varied as the value of the dollar fluctuated against the quoted foreign currency price. There can be no assurance that currency fluctuations will not reduce the dollar return to the Company on such sales, if made in the future. Although at September 30, 1999 and 1998, the Company did not have any open forward exchange contracts the Company may in the 19 future enter into forward exchange contracts to partially hedge such foreign currency exposure, if appropriate. Since concentrating in 1984 on the development of its MSI systems, the Company's corporate strategy and commitment of resources have focused on long-term product applications and continued product development rather than near-term operating performance. The Company substantially completed the development of its Magnes 2500 WH system in fiscal 1996 and decreased expenditures in fiscal 1997 and 1998 as part of the Company's restructuring and focus on developing a market for sale of the Company's Magnes 2500 WH system. In fiscal 1999, research and development expenditures increased due to development efforts for software and hardware enhancements to the Magnes 2500 WH, the construction of product engineering testing equipment, support of the epilepsy clinical testing program at two research clinics in the United States, and ongoing development of the Magnes 3600 WH system. The Company believes that the relatively small number of proven medical applications for the Magnes systems, the lack of routine reimbursement for MSI procedures, and the uncertainty of product acceptance in the U.S. market have limited system sales through fiscal 1999. Additionally, it is not possible to reliably predict the timing and extent of future product sales due to the uncertainties of the acceptance of medical applications, reimbursement and product acceptance. The Company does not anticipate multiple sales to the same end-user at current sales volumes, and the sale of one Magnes system may have a significant impact on the Company's financial position and results of operations during any reporting period. As a result, quarterly and annual operating performance will continue to fluctuate significantly. RESULTS OF OPERATIONS The consolidated financial statements and notes thereto which appear in Part II, Item 8 should be read in conjunction with the following review: FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998 Results of operations in fiscal 1999 declined as compared to fiscal 1998 primarily due to an increase of operating costs associated with research and development efforts and increased marketing expenditures. Product revenues for fiscal 1999 totaled $2,677,000 as compared to $2,103,000 in fiscal 1998. Increased product revenues were the result of recognizing three final customer acceptances of systems in fiscal 1999 as compared to two final customer acceptances of systems in fiscal 1998. Product costs totaled $2,440,000 in fiscal 1999 as compared to $1,935,000 in fiscal 1998. Product costs increased due to the sale of three systems in fiscal 1999 as compared to two systems in fiscal year 1998. Product costs as a percentage of product revenues amounted to 91% in fiscal 1999 as compared to 92% in fiscal 1998. Service revenues for fiscal 1999 totaled $532,000 as compared to $498,000 in fiscal 1998. The increase of 7% is attributable to the sale of additional service contacts to our customers. Service costs for fiscal 1999 totaled $743,000 as compared to $810,000 in fiscal 1998. This decrease of 8% reflects lower warranty obligations. Research and development expenses totaled $3,729,000 in fiscal 1999 compared to $1,756,000 in fiscal 1998, an increase of 112%. The increase in research and development costs were primarily due to the development efforts for software and hardware enhancements to the Magnes 2500 WH, the construction of product development testing equipment, support of the epilepsy clinical testing program at three research clinics in the United States, and ongoing development of the Magnes 3600 WH system. 20 Marketing and sales expenses amounted to $1,770,000 in fiscal 1999 as compared to $1,281,000 in fiscal 1998, an increase of 38%. This increase is primarily attributed to the increased marketing communication expenses, the addition of sales, marketing and customer service personnel and related sales activities. General and administrative expenses totaled $2,063,000 in fiscal 1999, an increase of 20% from $1,721,000 in fiscal 1998. This increase was primarily due to costs incurred for a third party market research study and outside services including legal costs. Interest income totaled $330,000 for fiscal 1999 as compared to $100,000 in fiscal 1998. This increase is the result of investing excess cash generated from the August 1998 financing, described below in "Liquidity and Capital Resources". Loss on equity investment was $137,000 in fiscal 1999 as compared to $160,000 in fiscal 1998. The loss in fiscal 1999 represented BTi's proportionate share of Magnesensors' losses as compared to fiscal 1998 which included BTi's proportionate share of Magnesensors' losses totaling approximately $78,000 and a write-down of BTi's original investment in Magnesensors of approximately $82,000. FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997 Results of operations in fiscal 1998 declined as compared to fiscal 1997 primarily due to having only two final customer acceptances consisting of a Magnes 2500 WH system and a Magnes II system in fiscal 1998, as compared to seven final customer acceptances of Magnes 2500 WH systems in fiscal 1997. However, as a result of the restructuring of the Company which commenced in December 1996, additional cost savings were realized in general and administrative, marketing and sales, and research and development expenses. Product revenues for fiscal 1998 totaled $2,103,000 as compared to $10,131,000 in fiscal 1997. Decreased product revenues is the result of only two final customer acceptances of systems in fiscal 1998 as compared to seven final customer acceptances of systems in fiscal 1997. Product costs totaled $1,935,000 in fiscal 1998 as compared to $6,333,000 in fiscal 1997. Product costs decreased due to the sale of two systems in fiscal 1998 as compared to seven systems in fiscal year 1997. Product costs as a percentage of product revenues amounted to 92% in fiscal 1998 as compared to 63% in fiscal 1997. The decreased margin is primarily the result of fixed production expenses being absorbed over fewer units in fiscal 1998 as compared to fiscal 1997. Service revenues for fiscal 1998 totaled $498,000 as compared to $395,000 in fiscal 1997. The increase of 26% is attributable to customer acceptances of seven systems in fiscal 1997, resulting in service revenues in fiscal 1998 inherent in the first year service contracts. Research and development expenses totaled $1,756,000 in fiscal 1998 compared to $2,953,000 in fiscal 1997. The decrease of 41% is the result of reduced payroll and related research and development costs which commenced with the Company's restructuring in December 1996. The Company also reduced research and development expenditures in fiscal 1998 to preserve cash flows for other uses including market development for the Company's systems. Marketing and sales expenses amounted to $1,281,000 in fiscal 1998 as compared to $1,902,000 in fiscal 1997, a decrease of 33%. This decrease is attributed to the general reduction of marketing and sales expenses due to the restructuring of operations which commenced in December 1996. 21 General and administrative expenses totaled $1,721,000 in fiscal 1998, a reduction of 21% from $2,190,000 in fiscal 1997. This reduction was primarily due to the restructuring of the Company's operations, including reductions in administrative personnel. Interest expense totaled $72,000 for fiscal 1998 as compared to $2,339,000 in fiscal 1997. Interest expense of $2,339,000 in fiscal 1997 consisted primarily of a non-cash charge of $2,250,000 pertaining to the conversion feature of a note payable to shareholder. Loss on equity investment in fiscal 1998 represents the Company's portion of net losses incurred by Magnesensors, Inc. of approximately $78,000 and a write down of the Company's equity investment of approximately $82,000. Magnesensors, Inc. is 38% owned by the Company. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had working capital of $3,273,000. At September 30, 1998, the Company had working capital of $11,139,000. Cash, cash equivalents and short-term investments decreased $9,230,000 to $3,135,000 as compared to $12,365,000 at September 30, 1998. The decline in cash and investments primarily reflects the use of working capital to fund operations and to purchase and construct capital equipment for use in the epilepsy clinical expansion program and research and development. Capital equipment expenditures totaled $838,000 in fiscal 1999, $95,000 in fiscal 1998 and $145,000 in fiscal 1997. The increase was due primarily to the construction of a 2500 WH system for use in the epilepsy clinical testing program and the purchase of computer and other equipment to replace existing outdated equipment. Capital equipment expenditures may increase in the next fiscal year due to potential placements of Magnes systems at sites that agree to share revenue on a fee for use basis. The Company may enter into capital equipment lease arrangements, if available, and under acceptable terms. The Company anticipates that in fiscal 2000 operating and working capital requirements will substantially exceed cash projected to be generated by operations. Historically, the Company has raised capital resources from private placements of its common stock and debt offerings. In August 1998 the Company received $15,000,000 in proceeds from the sale of 30,000,000 shares of unregistered common stock at $.50 per share to offshore investors pursuant to Regulation S. Dassesta International S.A. ("Dassesta"), a major shareholder of the Company since March 1995, purchased 10,000,000 shares, "La Caixa", Caja de Ahorras y Pensiones de Barcelona, one of the leading financial institution of the Kingdom of Spain, purchased 10,000,000 shares. A total of 2,000,000 shares were sold to Swisspartners Investment Network LTD, and the remaining 8,000,000 shares were purchased by two European banks under the same terms and conditions. From January to July 1998 the Company had borrowed a total of $2,000,000 from Dassesta for working capital requirements. In August 1998, out of the proceeds received from the above offering, the Company paid off the Dassesta principal, plus $36,000 of accrued interest. In December 1997, the Company sold 4,000,000 unregistered shares of common stock to Dassesta and an additional 1,500,000 unregistered shares of common stock to Bank Leu under Regulation S at $.50 per share. Consideration received by the Company for the sale consisted of cash totaling $793,000 and cancellation of its then outstanding loan principal of $1,700,000, related accrued interest of $38,000 and accounts payable of $219,000, all owed to Dassesta. Based on its current operating plans, revenue expectations, capital expenditures, expected working capital requirements and existing capital resources, the Company anticipates that it will be able to fund operations through the second quarter of fiscal 2000. The realization of the Company's operating plans is dependent upon its ability to successfully close a number of Magnes system sales in the current highly competitive market for the limited number of systems being purchased worldwide. Even if the Company meets its 22 operating plan, the Company must continue to fund its operating needs, and is currently considering a number of financing alternatives, such as corporate partnerships and the sale of equity or debt securities. There can be no assurance that such financing will be available on terms acceptable to the Company, if at all. On December 22, 1999, Biomagnetic Technologies, Inc. acquired all of the issued and outstanding capital stock ("Shares") of Neuromag Oy pursuant to the terms of a Share Purchase Agreement by and between Marconi Medical Systems, Inc. ("Marconi") and BTi (the "Share Purchase Agreement"). Under the terms of the Share Purchase Agreement, BTi paid a total of $10 million in cash to Marconi for the purchase of the Shares and agreed to pay between a minimum of $2.5 million and a maximum of $5 million in royalties to Marconi under a royalty agreement over the next eight years, and additional consideration of up to approximately $1.8 million dependent upon the occurence of certain future events. The Company has obtained a loan from AIG Private Bank Ltd. totaling $11 million that is secured by Shares of Neuromag Oy and is guaranteed by an entity unaffiliated with the Company. The loan matures June 22, 2000. Martin Egli, a Board member of BTi, also serves on the Board of Directors of AIG Private Bank Ltd. As a part of its ongoing financing strategies, the Company intends to raise additional capital for the purposes of repaying the loan and to continue to fund operations. There can be no assurance that the Company will be able to raise such capital on terms acceptable to the Company, if at all. Similar to BTi, Neuromag Oy is engaged in the research, development and manufacturing of MSI systems. Neuromag Oy is located in Helsinki, Finland. BTi intends to continue the operations of Neuromag Oy as a subsidiary of BTi. YEAR 2000 ASSESSMENT Many currently installed computer systems and software products are coded to accept only 2 digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept 4 digit entries to distinguish 21st century dates from the 20th century dates. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. As a result, computer systems and/or software used by many companies may need to be upgraded to comply with Year 2000 requirements. The Company is using both internal and external resources as applicable, to identify, correct or reprogram, and test its internal systems for Year 2000 compliance. The total cost of compliance and its effect on the Company's future results of operations was determined as part of the detailed conversion process. The Company determined that it was necessary to acquire new Year 2000 compliant hardware and software systems for its accounting, purchasing, production control and inventory management systems. Also, our security system and portions of our telephone system have been upgraded. The Company is currently seeking to ensure that the software and operating systems included in its Magnes systems are Year 2000 compliant. BTi's current testing has indicated that earlier models of our products (Magnes I and Magnes II systems) purchased from the Company uses older computer hardware and software that requires modification or replacement. The Company has developed a new version 1.7 of its software that, when combined with a new computer and operating system, should be Year 2000 compliant; BTi has made this solution available to its affected customers. The Company's current Magnes 2500 WH product has been tested and customer systems in the field should not require modification. The Company has also requested and received information and assurances from its major vendors, service providers and customers about their state of Year 2000 compliance and readiness. In the event that significant Year 2000 issues are identified with such parties, the Company will identify contingency plans such as the use of alternate vendors or manual systems. As of September 30, 1999, the Company has spent approximately $350,000 in addressing Year 2000 compliance issues, including internal and external hardware, software and labor costs for systems implementation and testing. Installation, replacement, updating and testing of these systems both internally and for customers is currently in process. It is estimated that installation, replacement, updating and testing will be ongoing and completed by December 1999. If the Company's systems are not made compliant by year-end it could significantly and adversely affect future sales. Year 2000 issues could cause potential customers to reevaluate their current needs and consider deferring purchase of our Magnes systems or decide to purchase from a competitor. BTi could also have potential warranty or other claims with existing Magnes systems placed with customers if such systems are not made Year 2000 compliant. Any of the foregoing could result in a material adverse effect on the Company's business, prospects, financial position and results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements as of September 30, 1999 and 1998, and for each of the three years in the period ended September 30, 1999 and the report of independent public accountants are included in this report as listed in the index on page 25 of this report (Item 14 (a)). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required for this item with respect to directors and executive officers is set forth in the sections entitled "Election of Directors", "Security Ownership of Management-Business Experience of Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement and Notice of Annual Meeting of Shareholders the "Proxy Statement" to be filed with the Commission within 120 days of the Company's fiscal year end and delivered to shareholders in connection with the 2000 Annual Meeting of Shareholders, which sections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required for this item is set forth in the section entitled "Executive Compensation and Other Information" in the Proxy Statement, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required for this item is set forth in the section entitled "Security Ownership of Management" and "Principal Shareholders" in the Proxy Statement, which sections are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required for this item is set forth in the sections entitled "Executive Compensation and Other Information" and "Certain Relationships and Related Transactions" in the Proxy Statement, which sections are incorporated herein by reference. 24 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 Public Accountants......................30 Consolidated Balance Sheets at September 30, 1999 and 1998....31 Consolidated Statements of Operations for the three years ended September 30, 1999......................................32 Consolidated Statement of Shareholders' Equity (Deficit) for the three years ended September 30, 1999..........................33 Consolidated Statements of Cash Flows for the three years ended September 30, 1999......................................34 Notes to Consolidated Financial Statements....................35 (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: 25 Exhibit No. Description of Document 3.1 (1) Articles of Incorporation of the Company, as amended. 3.2 (1) Bylaws of the Company, as amended. 3.3 (10) Certificate of Amendment of Fourth Restated Articles of Incorporation (numbered originally as 10.73) +10.6 (4) The Company's 1987 Stock Option Plan, as amended. +10.7 (4) Form of Incentive Stock Option and related exercise documents. +10.8 (1) The Company's 1985 Incentive Stock Option Plan, as amended. +10.9 (1) Form of Incentive Stock Option and related exercise documents. +10.10 (1) The Company's 1985 Non-Qualified Stock Option Plan, as amended. +10.11 (1) Form of Non-Qualified Stock Option and related exercise documents. +10.12 (1) The Company's 1984 Incentive Stock Option Plan, as amended. +10.13 (1) Form of Incentive Stock Option and related exercise documents. 10.17 (1) Option Agreement dated July 16, 1986 between the Company and Quantum Design, Inc. +10.36 (1) Form of Indemnification Agreements for directors and officers. 10.41 (2) License and R & D Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. 10.43 (2) Registration Rights Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. 10.45 (3) Memorandum of Understanding dated January 18, 1991, as amended, between the Company and Sumitomo Metal Industries, Ltd. (with certain confidential portions omitted). 10.46 (3) New R & D Program for Small MSR (Supplementary Agreement to License and R & D Agreement) dated February 28, 1991 between the Company and Sumitomo Metal Industries, Ltd., and Memorandum (not dated) modifying the agreement. 10.48 (3) Exclusive Patent and Technology License Agreement dated July 15, 1991 between the Company and Stanford University (with certain confidential portions omitted). +10.49 (7) Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan. Exhibit +10.55 (6) Employment Agreement, dated July 12, 1993, between the Company and James V. Schumacher. 26 Exhibit No. Description of Document +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). 10.75 (11) Purchase and Distributorship Agreement dated January 23, 1997 between the Company and Sumitomo Metal Industries, Ltd. (with certain confidential portions omitted). 10.76 (12) Form of Offshore Stock Subscription Agreements For August 1998 Sale of Company Common Stock. 10.77 (12) Joint Venture Agreement with Magnesensors. 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule (1) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-29095, filed June 7, 1989, as amended by Amendment No. 1, filed June 13, 1989, Amendment No. 2, filed July 21, 1989 and Amendment No. 3, filed July 28, 1989. (2) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Fiscal 1990 Form 10-K. (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. 27 (5) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Fiscal 1994 Form 10-K. (6) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-46758, filed March 26, 1992, as amended by Amendment No. 1, filed May 8, 1992. (7) These exhibits were previously filed as part of, and are hereby incorporated by reference to the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-8, Registration Statement No. 33-68136 filed August 27, 1993. (8) These exhibits were previously filed as part of, and are hereby incorporated by reference to the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-81294, filed July 8, 1994. (9) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in Fiscal 1995 Form 10-K (10) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in form 8-K, filed April 14, 1995. (11) These exhibits were previously filed as part of, and are hereby incorporated by reference, to the same numbered exhibits (except as otherwise indicated) in Fiscal 1997 Form 10-K (12) 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 1998 Form 10-K + Management contract or compensatory plan or arrangement. SUPPLEMENTAL INFORMATION Proxy materials have not been sent to shareholders as of the date of this report. The Proxy materials will be furnished to the Company's shareholders subsequent to the filing of this report and the Company will furnish such material to the Securities and Exchange Commission at that time. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMAGNETIC TECHNOLOGIES, INC. By /s/ D. Scott Buchanan December 22, 1999 -------------------------------------- ----------------- D. Scott Buchanan Date President, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/D. Scott Buchanan December 22, 1999 ----------------------------------------------- ----------------- D. Scott Buchanan Date President, Chief Executive Officer, Director By /s/Aron P. Stern December 22, 1999 ----------------------------------------------- ----------------- Aron P. Stern Date Vice President of Finance, Chief Financial Officer, Principal Accounting Officer, Corporate Secretary By /s/Enrique Maso December 22, 1999 ----------------------------------------------- ----------------- Enrique Maso, Chairman of the Board Date By /s/Martin P. Egli December 22, 1999 ----------------------------------------------- ----------------- Martin P. Egli, Director Date By /s/Galleon Graetz December 22, 1999 ----------------------------------------------- ----------------- Galleon Graetz, Director Date 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Biomagnetic Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Biomagnetic Technologies, Inc. (a California Corporation) and subsidiary as of September 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biomagnetic Technologies, Inc. and subsidiary as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has historically reported net losses and negative cash flows from operations and has short-term liquidity concerns 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 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II-Valuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ARTHUR ANDERSEN LLP San Diego, California November 24, 1999 (except with respect to the matter discussed in Note 13, as to which the date is December 22, 1999) 30 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS
September 30, 1999 1998 -------------------------------------------- ASSETS Cash and cash equivalents $ 440,702 $ 2,282,002 Short-term investments 2,694,776 10,082,500 Restricted cash 54,496 137,747 Accounts receivable, less allowance for doubtful accounts of $410,420 in 1999 and $10,420 in 1998 365,164 932,161 Inventories 3,982,768 2,990,759 Prepaid expenses and other current assets 140,807 271,095 ------------------- ------------------ Total current assets 7,678,713 16,696,264 ------------------- ------------------ Net property and equipment 870,036 303,874 Restricted cash 165,655 186,601 Other assets 155,797 155,839 ------------------- ------------------ TOTAL ASSETS $ 8,870,201 $ 17,342,578 ------------------- ------------------ ------------------- ------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 1,313,827 $ 782,664 Accrued liabilities 470,249 747,978 Accrued salaries and employee benefits 429,492 460,482 Customer deposits 1,714,100 2,909,100 Deferred revenues 317,570 656,800 Current portion of capital lease obligations 23,256 - Investment in Magnesensors 137,257 - ------------------ ------------------ Total current liabilities 4,405,751 5,557,024 ------------------ ------------------ Deferred revenues 308,140 216,183 Capital lease obligations, net of current portion 50,545 - ------------------ ------------------ Total liabilities 4,764,436 5,773,207 ------------------- ------------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock -- no par value; 200,000,000 shares authorized; 83,367,112 shares issued and outstanding in 1999 and 1998 99,391,882 99,391,882 Additional paid-in capital 3,000,000 3,000,000 Accumulated deficit (98,286,117) (90,822,511) ------------------- ------------------- Total shareholders' equity 4,105,765 11,569,371 ------------------- ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,870,201 $ 17,342,578 ------------------- ------------------ ------------------- ------------------
See Notes to Consolidated Financial Statements 31 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 1999 1998 1997 ----------------------------------------------------------- REVENUES Products $ 2,676,786 $ 2,102,967 $ 10,130,727 Product services 532,144 497,988 395,327 Contract research 44,684 238,053 65,838 ------------------ ------------------ ------------------ 3,253,614 2,839,008 10,591,892 ------------------ ------------------ ------------------ COST OF REVENUES Products 2,439,938 1,935,049 6,333,270 Product services 742,609 809,599 466,763 Contract research 41,221 233,860 64,771 ------------------ ------------------ ------------------ 3,223,768 2,978,508 6,864,804 ------------------ ------------------ ------------------ GROSS MARGIN 29,846 (139,500) 3,727,088 ------------------ ------------------- ------------------ OPERATING EXPENSES Research and development 3,728,609 1,755,756 2,953,009 Marketing and sales 1,769,997 1,281,428 1,902,157 General and administrative 2,063,119 1,721,032 2,189,878 ------------------ ------------------ ------------------ 7,561,725 4,758,216 7,045,044 ------------------ ------------------ ------------------ OPERATING LOSS (7,531,879) (4,897,716) (3,317,956) Interest expense (10,579) (72,129) (2,339,439) Interest income 330,340 99,894 223,565 Other income (expense), net (113,431) 63,115 193,064 Loss on equity investment (137,257) (160,000) - ------------------- ------------------- ------------------ LOSS BEFORE PROVISION FOR INCOME TAXES (7,462,806) (4,966,836) (5,240,766) Provision for income taxes 800 800 800 ------------------ ------------------ ------------------ NET LOSS $ (7,463,606) $ (4,967,636) $ (5,241,566) ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ BASIC AND DILUTED NET LOSS PER SHARE $ (.09) $ (.09) $ (.11) ------------------ ------------------ ------------------ ------------------ ------------------ ------------------ Weighted average number of common shares outstanding 83,367,112 56,429,913 45,789,916 ------------------ ------------------ ------------------ ------------------ ------------------ ------------------
See Notes to Consolidated Financial Statements 32 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Additional Common Stock Paid-In Capital Accumulated Shares Amount Deficit Total ------------------ ----------------- ---------------- ----------------- ---------------- BALANCE, SEPTEMBER 30, 1996 39,974,222 $ 78,467,197 $ 3,000,000 $ (80,613,309) $ 853,888 Exercise of stock options 29,063 14,532 - - 14,532 Conversion of note payable to shareholder and related accrued interest to common stock 7,717,602 3,087,040 - - 3,087,040 Net loss - - - (5,241,566) (5,241,566) --------------- ------------- ------------- ---------------- ----------- BALANCE, SEPTEMBER 30, 1997 47,720,887 81,568,769 3,000,000 (85,854,875) (1,286,106) Exercise of stock options 146,225 73,113 - - 73,113 Conversion of note payable to shareholder, related accrued interest and accounts payable to common stock 3,914,000 1,957,000 - - 1,957,000 Sale of common stock 31,586,000 15,793,000 - - 15,793,000 Net loss - - - (4,967,636) (4,967,636) --------------- ------------- ------------- ---------------- ----------- BALANCE, SEPTEMBER 30, 1998 83,367,112 99,391,882 3,000,000 (90,822,511) 11,569,371 Net loss - - - (7,463,606) (7,463,606) --------------- ------------- ------------- ---------------- --------------- BALANCE, SEPTEMBER 30, 1999 83,367,112 $ 99,391,882 $ 3,000,000 $ (98,286,117) $ 4,105,765 --------------- ------------- ------------- ---------------- --------------- --------------- ------------- ------------- ---------------- ---------------
See Notes to Consolidated Financial Statements 33 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1999 1998 1997 ------------------------------------------------------------ OPERATING ACTIVITIES Net loss $ (7,463,606) $ (4,967,636) $ (5,241,566) Adjustments to reconcile net loss to net cash used in operating activities: Interest cost for conversion feature of note payable to shareholder - - 2,250,000 Loss on disposition of assets - 10,752 9,401 Depreciation and amortization 271,640 307,163 437,552 Provision for doubtful accounts 400,000 - - Changes in operating assets and liabilities: Restricted cash 104,197 367,853 5,892,354 Accounts receivable 166,997 (533,707) (381,723) Inventories (992,009) (602,784) 3,239,540 Prepaid expenses and other current assets 130,288 (1,638) 68,335 Other assets 42 183,224 (60,249) Accounts payable 531,163 (339,328) (1,291,925) Accrued liabilities (277,729) (148,034) (875,193) Accrued salaries and employee benefits (30,990) (51,361) (348,312) Customer deposits (1,195,000) 736,940 (7,036,166) Deferred revenue (247,273) (471,955) 1,344,938 Other liabilities - (9,489) (38,581) --------------- ---------------- ------------------ Net cash used in operating activities (8,602,280) (5,520,000) (2,031,595) ---------------- ----------------- ------------------ INVESTING ACTIVITIES Loss on (Purchase of) investment in Magnesensors 137,257 160,000 (80,000) Change in short-term investments, net 7,387,724 (10,082,500) 744,138 Payments on capital leases (20,352) - - Payments for property and equipment (743,649) (95,345) (145,433) ---------------- ----------------- ------------------ Net cash provided by (used in) investing activities 6,760,980 (10,017,845) 518,705 --------------- ----------------- ----------------- FINANCING ACTIVITIES Proceeds from issuance of common stock - 15,866,113 14,532 Payment of notes payable to shareholder - (2,000,000) - Proceeds from notes payable to shareholder - 2,725,000 975,000 --------------- ---------------- ----------------- Net cash provided by financing activities - 16,591,113 989,532 --------------- ---------------- ----------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,841,300) 1,053,268 (523,358) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,282,002 1,228,734 1,752,092 CASH AND CASH EQUIVALENTS AT END OF YEAR $ 440,702 $ 2,282,002 $ 1,228,734 --------------- ---------------- ----------------- --------------- ---------------- -----------------
See Notes to Consolidated Financial Statements 34 BIOMAGNETIC TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 AND 1998 NOTE 1. BUSINESS, RISKS AND UNCERTAINTIES Biomagnetic Technologies, Inc. (the "Company"), founded in 1970 as a California corporation, is engaged primarily in the business of developing, manufacturing and selling innovative medical imaging systems to medical institutions located in the United States, Europe and Japan. The magnetic source imaging ("MSI") systems developed by the Company measure magnetic fields created by the human body for the noninvasive diagnosis of a broad range of medical disorders. To date, the Company has been engaged principally in research and development activities, and has made only low volume sales to clinical research institutions. The Company is dependent on its current Magnes 2500 WH system as its principal product for which there are currently limited clinical applications. Additional clinical applications development needs to be conducted with the MSI system at major medical centers before the Company can begin to penetrate the commercial clinical market. There can be no assurance that a commercial market will develop for diagnostic or monitoring uses of the MSI system. A continued lack of clinical applications and commercial market for the Company's Magnes 2500 WH system would have a material adverse impact on the Company's financial position, results of operations and cash flows. The Company's commercial success is also highly dependent on the availability of reimbursement for procedures using the MSI system. To date, reimbursements from third party payors are on a case-by-case basis. As of September 30, 1999, there have been limited reimbursements from third party payors in the U.S. Although the number of third party payors making reimbursements has increased, there is no assurance that third party reimbursements will become widely available. Reimbursements are not currently provided for MSI procedures by the United States government, nor is there any assurance that the U.S. government will authorize or budget for such procedures in the future. If widespread availability of reimbursements from government and private insurers is not achieved, the Company's financial position, results of operations and cash flows would be materially adversely affected. The Company also cannot predict what legislation relating to its business or the health care industry may be enacted in the future, including legislation relating to third party reimbursements, or what effect such legislation may have on its financial position, results of operations and cash flows. The industry in which the Company operates is characterized by rapid technological change. New products using other technologies or improvements to existing products may reduce the size of the potential markets for the Company's products, and may render them obsolete or non-competitive. Competitors may develop new or different products using technology or imaging modalities that may provide or be perceived as providing greater value than the Company's products. Any such development could have a material adverse effect on the Company's financial position, results of operations and cash flows. 35 Additionally, there has been recently, and continues to be, ongoing significant price competition from the Company's competitors for the currently limited number of whole head systems being purchased worldwide. This aggressive competition is likely to affect potential future profitability of the Company's Magnes 2500 WH system, the extent of which is not presently determinable. The Company incurred net losses of $7,464,000, $4,968,000, and $5,242,000 in fiscal 1999, 1998 and 1997, respectively. The Company had negative cash flows from operations of $8,602,000, $5,520,000, and $2,032,000 in fiscal 1999, 1998 and 1997, respectively. At September 30, 1999, the Company has an accumulated deficit of $98,286,000, net capital of $4,106,000 and working capital of $3,273,000. Management anticipates that capital and working capital requirements in fiscal 2000 will substantially exceed cash projected to be generated by operations. Historically, the Company has used proceeds from private placements of stock and debt offerings to fund its operating and capital requirements (see Notes 8, 10 and 13.) Based on its current operating plans, revenue expectations, expected capital expenditures, expected working capital requirements and existing capital resources, the Company anticipates that it will be able to fund operations through the second quarter of fiscal 2000. The realization of the Company's operating plans is dependent upon its ability to successfully close a number of Magnes 2500 WH system sales in the current highly competitive market for the limited number of systems being purchased worldwide. There can be no assurance that sufficient sales of the Company's Magnes systems will be achieved in order to realize the current operating plans. Even if the Company meets its operating plan, the Company must continue to fund its operating needs, and is currently considering a number of financing alternatives, such as corporate partnerships and the sale of equity or debt securities. There can be no assurance that such financing will be available on terms acceptable to the Company, if at all (see Note 13.) The Company's current financial condition, the uncertainty regarding its ability to raise additional capital and the uncertainty and risks associated with future operations raise substantial doubt about the Company's ability to operate as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties and asset and liability carrying amounts do not purport to represent realizable settlement values. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and Biomagnetic Technologies GmbH, a wholly owned foreign subsidiary located in Germany. All material intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term highly liquid investments purchased with original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. 36 SHORT-TERM INVESTMENTS Management determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation as of each balance sheet date. The Company has classified its short-term investments as "available-for-sale". At September 30 1999, short-term investments are stated at cost which approximates market, and consist of commercial paper, maturing in October 1999. The Company had no realized gains or losses on short-term investments in fiscal 1999, 1998 and 1997. RESTRICTED CASH Restricted cash consists of cash balances required to be held under contractual obligation to provide future services pertaining to sales of MSI systems and amounts held in trust for executive termination costs. FAIR VALUE OF FINANCIAL INSTRUMENTS It is management's belief that the carrying amounts shown for the Company's financial instruments are reasonable estimates of their related fair values. INVENTORIES Inventories are carried at the lower of cost or market. Cost is determined on the first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is generally computed using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized over the lesser of their estimated useful life or the related lease term. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of related assets are capitalized. LONG-LIVED ASSETS The Company assesses potential impairments to its long-lived assets on an exception basis when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. INCOME TAXES Deferred income tax assets or liabilities are recognized based on the temporary differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the 37 years in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. REVENUE RECOGNITION Standard terms of product sales provide for payment of 40% of the purchase price upon placement of the order, 40% upon shipment and the remaining 20% upon final customer acceptance. Revenue from product sales is recognized at the time of customer acceptance. Standard terms of sale also include a one year service period following the sale. The Company defers and recognizes service revenues over the related service period. Product service and contract research revenues are recognized as services are performed. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. SOFTWARE DEVELOPMENT COSTS Costs relating to the development of software after technological feasibility is established are required to be capitalized. The Company has expensed all software development costs as incurred as technological feasibility is not reached until product testing is complete, which generally coincides with product release. STOCK-BASED COMPENSATION ACCOUNTING The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based Compensation." The Company has elected to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and has provided pro forma disclosures as if the fair value based method prescribed by SFAS No. 123 had been utilized. NET LOSS PER SHARE Basic and diluted net loss per share is computed in accordance with SFAS No. 128 "Earnings Per Share," based upon the weighted average number of common shares outstanding. Common stock equivalents are anti-dilutive and are excluded from the computation of basic and diluted net loss per share. FOREIGN CURRENCY REMEASUREMENT The functional currency of the Company's foreign subsidiary is the U.S. dollar. The monetary assets and liabilities of the foreign subsidiary are translated into U.S. dollars at the exchange rate in effect at the 38 balance sheet date while nonmonetary items are translated at historical rates. Revenues and expenses are translated at average exchange rates for the period, except cost of sales and depreciation, which are translated at historical rates. Remeasurement gains or losses of the foreign subsidiary are recognized currently in consolidated operations. For the years ended September 30, 1999, 1998 and 1997, such gains (losses) totaled approximately $ 69,000, $79,000 and $(17,000), respectively. RECENT AUTHORITATIVE PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires reporting certain information about operating segments in condensed financial statements of interim periods issued to shareholders. SFAS No. 131 was adopted during fiscal 1999. The adoption of this standard did not have a material effect on the Company's financial position or results of operations as it pertains to disclosure only. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics to be used in determining when computer software is for internal use. The adoption of SOP 98-1 did not have a material impact on the Company's financial position or results of operations. In April 1998, the AcSEC issued AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement provides guidance on the financial reporting of start-up costs and organization costs and requires that such costs of start-up activities be expensed as incurred. The adoption of SOP 98-5 did not have a material impact on the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" and in June 1999 issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." These statements establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal quarters beginning after June 15, 2000. As of September 30, 1999 and 1998, the Company had not entered into any derivative instrument arrangements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 39 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the current year presentation. NOTE 3. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one industry segment which includes developing, manufacturing and selling magnetic source imaging products. The overall market for the Company's operations can be further divided into three overlapping segments: the basic research market, the clinical applications development market, and the commercial clinical market. Substantially all of the Company' revenues have been derived from, and substantially all of the Company's assets have been devoted to, the basic research market. The following represents information about operations in different geographic areas pertaining to the basic research market:
Years Ended September 30, ----------------------------------------------------- 1999 1998 1997 ---- ---- ---- Revenues United States $ 866,954 $ 814,052 $ 2,401,984 Germany 387,826 542,956 6,995,299 France 41,152 1,482,000 - Japan 1,957,682 - 1,194,609 -------------- ------------- --------------- $ 3,253,614 $ 2,839,008 $ 10,591,892 -------------- ------------- --------------- -------------- ------------- --------------- Net (Loss) Income United States $ (6,893,271) $ (4,311,817) $ (5,588,919) Germany (570,335) (655,819) 347,353 -------------- ------------- --------------- $ (7,463,606) $ (4,967,636) $ (5,241,566) -------------- ------------- --------------- -------------- ------------- --------------- Identifiable Assets United States $ 8,390,076 $ 16,154,310 $ 3,162,666 Germany 480,125 1,188,268 2,839,662 -------------- ------------- --------------- $ 8,870,201 $ 17,342,578 $ 6,002,328 -------------- ------------- --------------- -------------- ------------- ---------------
NOTE 4. CUSTOMER CONCENTRATIONS On average, the Company's MSI systems sell for approximately $1.0 - $2.5 million, resulting in significant concentrations of revenues and accounts receivable. As of September 30, 1999, the Company has foreign currency denominated accounts receivable of approximately 2,500,000 French Francs, equal to $407,500. 40 For the year ended September 30, 1999, three customers represented 52%, 26% and 22% of product revenues, respectively. For the year ended September 30, 1998, two customers represented 76% and 19% of product revenues, respectively. For the year ended September 30, 1997, 5 customers represented 19%, 18%, 13%, 12%, and 11% of product revenues, respectively. NOTE 5. FINANCIAL STATEMENT INFORMATION Inventories consist of the following:
1999 1998 ---- ---- Finished goods $ 169,538 $ 500,030 Work-in-process 3,562,364 2,328,003 Raw materials 250,866 162,726 ------------- ------------- $ 3,982,768 $ 2,990,759 ------------- ------------- ------------- -------------
Net property and equipment consists of the following:
1999 1998 ----- ---- Machinery and equipment $ 7,907,701 $ 7,279,453 Office furniture and equipment 324,817 253,513 Leasehold improvements 371,156 359,731 ------------- ------------- $ 8,603,674 $ 7,892,697 Less Accumulated Depreciation (7,733,638) (7,588,823) ------------- ------------- $ 870,036 $ 303,874 ------------- ------------- ------------- -------------
Accrued liabilities consist of the following:
1999 1998 ---- ---- Warranty allowance $ 225,000 $ 350,000 Customer obligations - 300,000 Forward loss on product delivery 125,000 - Other 120,249 97,978 ------------- ------------- $ 470,249 $ 747,978 ------------- ------------- ------------- -------------
Supplemental Disclosure of Cash Flow Information: In December 1997, the Company exchanged common stock with a value of $1,957,000 for cancellation of a note payable to shareholder of $1,700,000, related accrued interest of $38,000 and accounts payable of $219,000, all owed to Dassesta. In June 1997, the Company contributed fixed assets with a net book value of $80,000 as part of its investment in Magnesensors. 41 On December 31, 1996, the Company converted principal outstanding under a note payable to shareholder of $3,000,000 and related accrued interest of $87,040 into 7,717,602 shares of common stock. During the year ended September 30, 1999, the Company purchased $94,153 of property and equipment under capital leases. During the years ended September 30, 1999, 1998 and 1997, the Company paid approximately the following for:
1999 1998 1997 ---- ---- ---- Interest $ 11,000 $ 72,000 $ 89,000 Income Taxes $ 800 $ 800 $ 800
NOTE 6. INVESTMENT IN MAGNESENSORS In June 1997, BTi entered into a collaboration with Quantum Magnetics, Inc. to form a new company called Magnesensors, Inc. Of the outstanding share capital of Magnesensors, BTi owns 38%, Quantum Magnetics owns 10%, certain officers of BTi own 28% and management of Magnesensors owns 24%. BTi licensed certain technology, assigned certain patents and contributed cash and certain fixed assets in connection with the formation of Magnesensors. Magnesensors will continue the development of applications and products using high temperature superconductors. BTi will receive royalty-free licenses to any technology developed by Magnesensors. BTi accounts for its investment in Magnesensors under the equity method. During fiscal 1998 and 1997, BTi paid Magnesensors $160,000 and $36,000, respectively, for certain services rendered. As of September 30, 1999, the Company's equity investment in Magnesensors has been reduced to a net liability of $137,257 (as a result of its debt guarantee referred to below), by recording the Company's portion of Magnesensors' losses through September 30, 1999 of $215,257 and writing off $82,000 of BTi's initial contributions to Magnesensors based upon current estimates of future cash flows and profitability of Magnesensors. BTi guarantees up to $200,000 of a working capital line of credit held by Magnesensors which expires in June 2000. 42 NOTE 7. INCOME TAXES The Company's provision for income taxes in fiscal 1999, 1998 and 1997 consists of minimum state taxes. The components of deferred tax assets at September 30, 1999 and 1998 are as follows:
1999 1998 ---- ---- Net operating loss carryforwards $ 9,222,000 $ 7,090,000 Tax credits 853,000 830,000 Capitalized research and development costs 297,000 941,000 Allowances 1,136,000 1,310,000 Other 436,000 339,000 --------------- ---------------- 11,944,000 10,510,000 Valuation allowance (11,944,000) (10,510,000) --------------- ---------------- 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 $25,600,000 and $8,875,000 of Federal and State net operating loss carryforwards which will expire at various dates through 2014. As a result of ownership changes (as defined by Section 382 of the Internal Revenue Code of 1986, as amended) which occurred in fiscal 1995 and fiscal 1997, the Company's tax loss carryforwards generated prior to fiscal 1999 have been limited to a total of approximately $18,650,000 of which approximately $930,000 can be utilized per year as of September 30, 1999. The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows:
1999 1998 1997 ---- ---- ---- Computed expected federal tax benefit $ (2,537,354) $ (1,688,996) $ (1,834,268) State taxes, net of federal benefit (223,884) (287,558) (319,687) Change in valuation reserve 1,434,000 1,169,000 (3,730,000) Limitation of net operating loss carryforwards and tax benefits 630,000 830,000 4,719,000 Interest cost for conversion feature of note payable to shareholder - - 924,750 Other 698,038 ( 21,646) 241,005 ------------- -------------- ------------- Provision for income taxes $ 800 $ 800 $ 800 ------------- -------------- ------------- ------------- -------------- -------------
NOTE 8. DEBT During fiscal 1998, the Company borrowed a total of $2,725,000 from Dassesta International, S.A. at an interest rate of 8%. In December 1997 the Company issued common stock for cancellation of loan 43 principal due Dassesta of $1,700,000 and repaid additional loan principal during 1998 totaling $2,000,000. Interest expense in 1998 related to Dassesta was approximately $72,000. In February 1998, the Company discounted two customer notes for a net amount of $355,000 received from Dassesta International, S.A., a principal shareholder. The face amount of these notes was 2,200,000 French Francs, equal to approximately $366,000 at the then current exchange rate. In May 1997, the Company entered into a loan facility with Dassesta International, S.A. ("Dassesta"), the Company's then controlling shareholder. The loan facility provided for maximum borrowings of $1,700,000 expiring on December 31, 1998. Interest accrued on outstanding principal at 10%. The loan was collateralized by certain of the Company's accounts receivable and required principal repayment upon collection of such receivables. Interest expense in 1997 related to loans from Dassesta was approximately $2,339,000. In August 1996, the Company entered into a loan agreement with Dassesta for $3,000,000 bearing interest at 9% per annum, maturing in February 1997. Under the terms of the agreement, the note plus accrued interest was convertible at the option of the company into common shares upon execution of the agreement at $.40 per share or by Dassesta upon the earlier of maturity, default, or significant change in ownership of BTi at $.40 per share. The Company converted the $3,000,000 loan principal and related accrued interest of $87,040 into 7,717,602 shares of the Company's common stock on December 31, 1996. Upon execution of the convertible note in August 1996, the closing quoted market price of the Company's common stock was $.94 per share, and the conversion price to common stock under the note payable was $.40, a $.54 discount from market. As a result, under the provisions of Topic D-60, the intrinsic value of the conversion feature was equal to the face value of the note and was required to be originally recorded as debt discount and additional paid-in capital, and amortized to interest expense from the date of the note to the earliest conversion date by Dassesta. This resulted in non-cash interest expense of $2,250,000 being charged to operations in 1997. NOTE 9. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company purchased certain equipment under capital leases which expire through April 2004. Cost of equipment under capital leases included in property and equipment in the accompanying consolidated balance sheets totaled $94,153 with related accumulated depreciation of $5,048 as of September 30, 1998. The Company leases its office and production facilities and certain equipment under noncanceable operating leases expiring at various dates through February 2003. The Company's main facility lease agreement expires in February 2003. 44 Approximate minimum future lease payments as of September 30, 1999 are as follows:
YEAR ENDING SEPTEMBER 30, CAPITAL LEASES OPERATING LEASES ------------------------- -------------- ---------------- 2000 $ 34,348 $ 774,000 2001 15,688 766,000 2002 15,641 759,000 2003 15,688 314,000 2004 7,893 - ------------- ------------- $ 89,258 $ 2,613,000 ------------- ------------- Less: amount representing interest (15,457) Present value of obligations under ------------- capital leases 73,801 Current portion (23,256) ------------- $ 50,545 -------------
Total rent expense under noncancelable operating leases was approximately $743,000, $604,000 and $580,000 for the years ended September 30, 1999, 1998 and 1997, respectively. CLINICAL COLLABORATIONS The Company has entered into three clinical collaboration agreements with certain medical institutions utilizing the Company's MSI systems for research. Under terms of the agreements, the Company provides certain services, product and technical support and under one agreement is entitled to revenue sharing from medical reimbursements received above a threshold amount for procedures performed. During fiscal 1999, the Company incurred $221,000 of expenses related to those agreements and at September 30, 1999 is committed to expend an additional $288,000. During fiscal 1999, no revenue sharing was earned. These agreements expire at various dates through January 2001. NOTE 10. SHAREHOLDERS' EQUITY COMMON STOCK On August 5, 1998, the Company received $15,000,000 from the sale of 30,000,000 shares of common stock at $.50 per share to offshore investors pursuant to Regulation S. Of the total 30,000,000 shares, 10,000,000 shares were sold to "La Caixa", Caja de Ahorros y Pensiones de Barcelona, one of the leading financial institutions of the Kingdom of Spain, 10,000,000 shares were sold to Dassesta International S.A., a major shareholder of BTi, 2,000,000 shares were sold to Swisspartners Investment Network Ltd., and 8,000,000 shares to other European banks. In December 1997, the Company sold 4,000,000 unregistered shares of common stock to Dassesta and an additional 1,500,000 unregistered shares of common stock to Bank Leu under Regulation S at $.50 per share. 45 Consideration received by the Company in relation to the common stock sales consisted of cash totaling $793,000 and cancellation of its then outstanding loan principal of $1,700,000, related accrued interest of $38,000 and accounts payable of $219,000, all owed to Dassesta. During August 1996, the Company completed negotiations with its then controlling shareholder, Dassesta for an unsecured working capital loan of $3,000,000 which was to mature on February 14, 1997, bearing interest at 9% per annum. The principal amount of the loan and any accrued interest was convertible at the option of the Company upon execution of the agreement at $.40 per share or at the option of Dassesta upon the earlier of maturity, default, or significant change in ownership of BTi at $.40 per share. The Company elected to convert the $3,000,000 loan and related accrued interest of $87,040 into 7,717,602 shares of common stock on December 31, 1996. STOCK OPTION PLANS The Company has various incentive and non-qualified stock option plans which provide that options to purchase shares of common stock may be granted to key employees and others at an option price of at least fair market value at the date of grant and vest over a maximum period of four years from date of grant. The exercise period for each option is not to exceed 10 years from the date of grant. On December 31, 1996, the Company's 1987 Incentive Stock Option Plan which provided options to purchase up to 5,000,000 shares of common stock expired. At January 1, 1997, the 1997 Incentive Stock Option Plan was approved by the Board of Directors, authorizing options to purchase 3,000,000 shares of common stock. In May 1999, the Company amended the 1997 Incentive Stock Option Plan by increasing the number of shares authorized for issuance of 6,000,000 shares of common stock. At September 30, 1999, options to purchase 3,351,305 shares of the Company's common stock are exercisable and 859,600 shares are available for future grants under the plans. Options outstanding at September 30, 1999 have exercise prices between $6.00 and $.16 per share. On December 18, 1996, the Board of Directors authorized the revaluation of all then outstanding options under its stock option plans to an exercise price of $.50 per share, the closing market value of the Company's stock on that day. 46 The following table summarizes common stock option plan activity:
Weighted Average Options Exercise Price ------- -------------- Outstanding at September 30, 1996 4,255,467 $ 1.46 Granted 1,510,400 .50 Canceled (1,409,327) 1.25 Exercised (29,063) 1.00 ------------ ------------ Outstanding at September 30, 1997 4,327,477 1.18 Granted 2,510,000 .45 Canceled (1,946,422) 1.55 Exercised (146,225) .50 ------------ ------------ Outstanding at September 30, 1998 4,744,830 .66 Granted 2,566,000 .22 Canceled (70,900) .52 Exercised - ------------ ------------ Outstanding at September 30, 1999 7,239,930 $ .51 ------------ ------------ ------------ ------------
If the Company had elected to recognize stock based employee compensation costs (including the Company's Employee Stock Purchase Plan) based on the fair value on the date of grant consistent with the provisions of SFAS No. 123, net loss and basic and diluted net loss per share would have been increased to the following amounts:
1999 1998 1997 ---- ---- ---- Pro forma net loss $ (8,786,440) $ (6,093,477) $ (6,138,480) Pro forma basic and diluted net loss per share $ (.11) $ (.11) $ (.13)
The pro forma effect on net loss for fiscal years 1999, 1998 and 1997 may not be representative of the pro forma effect on net loss of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to December 15, 1995. The weighted-average fair values at date of grant for options granted during fiscal 1999 and 1998 were between $.21 and $.58 and were estimated using the Black-Scholes option pricing model. The following assumptions were applied in fiscal 1999: (i) expected dividend yield of 0%, (ii) expected volatility rate of 2.22, (iii) expected life of 8 years, and (iv) risk-free interest rates ranging from 4.47% to 6.88%. 47 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models also require the input of highly subjective assumptions such as expected option life and expected stock price volatility. Because the Company's employee stock-based compensation plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from those plans. EMPLOYEE STOCK PURCHASE PLAN The Company has established an Employee Stock Purchase Plan in which eligible employees may use funds from accumulated payroll deductions to purchase shares of common stock at the end of designated purchase periods. Employees may contribute up to 15% of their base salary toward such purchases, not to exceed $25,000 per calendar year. The purchase price is the lesser of 85% of the fair market value of common stock determined at the beginning or end of the purchase period. For the purchase period ended March 31, 1998, no shares were issued. A total of 635,949 shares of common stock have been authorized for future purchases under the Employee Stock Purchase Plan as of September 30, 1999. DEFINED CONTRIBUTION PLAN The company maintains a defined contribution 401(k) plan (the "Plan") for substantially all of its employees. Those employees who participate in the Plan are entitled to make contributions of up to 15 percent of their compensation, limited by IRS statutory contribution limits. Company contributions to the Plan are discretionary as determined by the Board of Directors and the Company did not contribute any funds to the Plan in fiscal 1999, 1998, and 1997, respectively. NOTE 11. EMPLOYMENT AGREEMENT In June 1993, the Company and its former Chief Executive Officer entered into an employment agreement that provided for the continuation of base salary payments upon termination for two years under certain circumstances. Pursuant to terms of the employment agreement, the Company secured potential future payments in a trust fund established on behalf of the Chief Executive Officer. At September 30, 1999, the Company is contingently liable for approximately $54,000 of continuation salary which is reflected as part of restricted cash in the accompanying balance sheets at September 30, 1999. 48 NOTE 12. SELECTED QUARTERLY DATA (UNAUDITED) Unaudited quarterly data for fiscal 1999, 1998 and 1997 is presented below:
(In thousands, except per share) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1999 ---- Net revenues $ 119 $ 2,648 $ 233 $ 254 Gross margin (204) 1,404 (285) (885) Net loss (1,750) (875) (2,278) (2,561) Basic and diluted net loss per share $ (.02) $ (.01) $ (.03) $ (.03) 1998 ---- Net revenues $ 324 $ 1,736 $ 616 $ 163 Gross margin 58 488 203 (889) Net loss (1,285) (597) (1,026) (2,060) Basic and diluted net loss per share $ (.03) $ (.01) $ (.02) $ (.03) 1997 ---- Net revenues $ 168 $ 1,555 $ 5,289 $ 3,580 Gross margin 68 499 2,385 775 Net income (loss) (4,615) (1,178) 766 (215) Basic and diluted net loss per share $ (.12) $ (.03) $ .02 $ .00
NOTE 13. ACQUISITION OF NEUROMAG OY On December 22, 1999, Biomagnetic Technologies, Inc. acquired all of the issued and outstanding capital stock ("Shares") of Neuromag Oy pursuant to the terms of a Share Purchase Agreement by and between Marconi Medical Systems, Inc. ("Marconi") and BTi (the "Share Purchase Agreement"). Under the terms of the Share Purchase Agreement, BTi paid a total of $10 million in cash to Marconi for the purchase of the Shares and agreed to pay between a minimum of $2.5 million and a maximum of $5 million in royalties to Marconi under a royalty agreement over the next eight years, and additional consideration of up to approximately $1.8 million dependent upon the occurence of certain future events. The Company has obtained a loan from AIG Private Bank Ltd. totaling $11 million that is secured by Shares of Neuromag Oy and is guaranteed by an entity unaffiliated with the Company. The loan matures June 22, 2000. Martin Egli, a Board member of BTi, also serves on the Board of Directors of AIG Private Bank Ltd. As a part of its ongoing financing strategies, the Company intends to raise additional capital for the purposes of repaying the loan and to continue to fund operations. There can be no assurance that the Company will be able to raise such capital on terms acceptable to the Company, if at all. Similar to BTi, Neuromag Oy is engaged in the research, development and manufacturing of MSI systems. Neuromag Oy is located in Helsinki, Finland. BTi intends to continue the operations of Neuromag Oy as a subsidiary of BTi. 49 BIOMAGNETIC TECHNOLOGIES, INC. SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period - ----------- --------- -------- ---------- ------ Allowance for doubtful accounts Fiscal Year 1999 $10,420 $400,000 $410,420 Fiscal Year 1998 $10,420 ---- ---- $10,420 Fiscal Year 1997 $10,420 ---- ---- $10,420 (A) Uncollectible accounts charged against allowance - --------------- Allowance for obsolete and slow moving inventory: Fiscal 1999 $2,300,594 $60,000 $18,724(B) $2,341,870 Fiscal Year 1998 $1,710,659 $840,191 $250,256(B) $2,300,594 Fiscal Year 1997 $1,650,659 $60,000 ---- $1,710,659
(B) Sale or disposal of items under allowance 50
EX-21 2 EXHIBIT 21 EXHIBIT 21 BIOMAGNETIC TECHNOLOGIES, INC. LIST OF SUBSIDIARIES SEPTEMBER 30, 1999
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. Substantially all assets and liabilities of the subsidiary were transferred to Biomagnetic Technologies, Niedelassung, a branch of Biomagnetic Technologies, Inc. on October 1, 1997.
EX-23.1 3 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into Biomagnetic Technologies, Inc.'s previously filed Form S-8 No. 33-60743, No. 33-61057, No. 33-32260, No. 33-33179 and No. 33-68136. /s/ARTHUR ANDERSEN LLP San Diego, California December 20, 1999 EX-27 4 EXHIBIT 27
5 THE BALANCE SHEET AND STATEMENT OF OPERATIONS 1,000 YEAR SEP-30-1999 OCT-01-1998 SEP-30-1999 441 2749 775 (410) 3983 7679 8604 (7734) 8870 4406 0 0 0 99392 3000 8870 2677 3254 2440 3224 7562 0 11 (7463) 1 (7464) 0 0 0 (7464) (.09) (.09)
-----END PRIVACY-ENHANCED MESSAGE-----