-----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, VbvDR+wF+BqgDunI5RTBXFrxmE4XHikwG5wpRCMLzoZ/EH4hW9AIUtgQZyYCY1Cy pbZEJH5Tt1Ww8EMgOoALsw== 0001047469-98-045111.txt : 19981228 0001047469-98-045111.hdr.sgml : 19981228 ACCESSION NUMBER: 0001047469-98-045111 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981224 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: 98775811 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 September 30, 1998 For the fiscal year ended__________________________________________________ [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from______________________________to__________________________________ 1-10285 Commission File Number_____________________________________________________________________ BIOMAGNETIC TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) California 95-2647755 _______________________________________________________________________________ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 9727 Pacific Heights Boulevard, San Diego, California 92121-3719 _______________________________________________________________________________ (Address of principal executive offices) (zip code) (619) 453-6300 Registrant's telephone number, including area code_____________________________ Securities registered pursuant to Section 12(b) of the Act: None ______ Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value Per Share ____________________ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock (which consists solely of shares of Common Stock) held by non-affiliates of the registrant as of December 17, 1998 was $ 5,337,000, based on the closing price on that date on the Nasdaq Over the Counter Bulletin Board. Shares of Common Stock held by each officer, director, and holder of 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the registrant's Common Stock, no par value, as of December 17, 1998 was 83,367,112 shares. DOCUMENTS INCORPORATED BY REFERENCE 1. Certain portions of Registrant's Proxy Statement and Notice of Annual Meeting, to be filed not later than 120 days after September 30, 1998 pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, in connection with the 1999 Annual Meeting of shareholders to be held are incorporated by reference into Part III of this report where indicated. 2. Certain Exhibits filed with the Registrant's prior registration statements and reports are incorporated herein by reference into Part IV of this report. BIOMAGNETIC TECHNOLOGIES, INC. FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 INDEX Page PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 18 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 19 Item 7A. Quantitative and Qualitative Disclosure About Market Risk. . . . . 24 Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . 24 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 24 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 24 Item 12. Security Ownership of Certain Beneficial Owners and Management . . 24 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 25 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 26 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 PART I ITEM 1. BUSINESS. Except for the historical information contained herein, the following discussion may contain forward-looking statements that involve substantial risks and uncertainties. The Company's future results could differ materially from those discussed here. Factors that could cause or contribute to such differences are discussed in greater detail under "Risks and Uncertainties" on pages 15 through 17 and under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company does not undertake to update the results discussed herein as a result of changes in risks or operating results. Company Overview Biomagnetic Technologies, Inc., a California corporation, (the "Company", "BTi", "we" "us" and "our") was established in 1970 to produce specialized instruments for ultra-sensitive magnetic field and low temperature measurements. These products were supplied to physicists for basic research. The Company has been developing its core magnetic sensing technologies since the early 1970s and has incorporated these technologies into its magnetic source imaging ("MSI") systems. Since 1984, the primary business of the Company has been the development of MSI systems to assist in the noninvasive diagnosis of a broad range of medical disorders. The MSI systems developed by the Company use advanced superconducting technology to measure and locate the source of magnetic fields generated by the human body as it functions. These fields are one billion times smaller than the earth's magnetic fields. While traditional medical imaging methods such as X-ray, magnetic resonance imaging ("MRI"), and computed tomography ("CT") provide anatomical detail, the measurement of the body's magnetic fields by MSI provides information about normal and abnormal function of the brain, heart and other organs. The Company is focusing the development of its technology for potential commercial market applications such as mapping of functional cortex at risk during surgery for tumors and other lesions, and the diagnosis and planning for surgical treatment of epilepsy. The Company is continuing to investigate potential applications of its technology for disorders of the heart, spine and gastrointestinal system, as well as disorders of the brain such as closed-head trauma, schizophrenia and other neuro-psychiatric problems. MSI differs significantly from other existing functional and anatomical imaging methods. The Company believes MSI is the only method that can precisely capture and locate rapid changes in organ function without the injection of radioactive isotopes or costly invasive procedures such as surgical placement of electrodes into the brain. Other functional imaging methods such as electroencephalography ("EEG") or positron emission tomography ("PET") or functional MRI ("fMRI") either require invasive procedures to provide the needed accuracy in locating functional areas or respond too slowly to capture transient physiological events such as those that occur with epilepsy. Anatomically oriented diagnostic methods such as CT and MRI produce images showing cross-sectional slices of various parts of the body. The Company's MSI system, when used in conjunction with anatomically oriented diagnostic methods, provides the clinician with an image that links anatomy with function to give a more complete picture of the patient's condition without the use of radioactive isotopes or costly invasive procedures. As part of its development strategy, the Company has targeted pre-surgical function mapping ("PSFM") and the pre-surgical evaluation of epilepsy as the near-term clinical and commercial applications for MSI. In the United States alone there are 119 tertiary care epilepsy centers which the Company has identified and believes could benefit from the use of MSI technology. The Company is currently directing its marketing and sales efforts toward the development of these centers as potential customers for MSI systems in the U.S. In addition to the 119 centers in the U.S., the Company believes that there are likely to be an approximate equal number of epilepsy centers with similar needs throughout the rest 1 of the world. There is no assurance that the Company's MSI systems will be accepted for commercial use in these hospitals and imaging centers. As part of the market development for its technology, the Company has been seeking to obtain reimbursement for MSI technology from insurers and other health care providers. Since the first third party reimbursement was received in September 1993, more than 130 insurance companies and other health care providers have approved reimbursement for certain MSI procedures performed with the Company's Magnes MSI systems. Expanding this reimbursement acceptance will be a priority for the company over the next fiscal year. The Company will work with leading institutions in the treatment of epilepsy to establish the efficacy of MSI in the surgical evaluation of epilepsy patients as well as in PSFM. There can be no guarantee regarding the outcomes of these efforts. Magnes systems were installed in twenty one medical and research institutions worldwide as of September 30, 1998. Ten sites located in the United States, Germany, Japan and France operate the Company's latest 148 channel Magnes 2500 WH system. Ten sites located in the United States, Germany, France, Austria and Japan operate the Company's 37 channel Magnes I and 74 channel Magnes II systems, and one site located in Germany operates a Magnes 1300 C cardiothoracic system. Most of the Company's Magnes I, Magnes II and Magnes 2500 WH MSI systems are currently being used by physicians in clinical applications such as planning the surgical removal of brain tumors and vascular malformations in order to reduce the risk of neurological injury resulting in paralysis and expensive rehabilitation therapy. The Company's MSI systems are also being used to assist physicians specializing in epilepsy to evaluate whether the surgical treatment of drug-resistant epileptic seizures is appropriate by helping to locate brain tissue that triggers such seizures. Other potential neurological applications for the Company's MSI systems include stroke, trauma, neuro-psychiatric disorders, and learning disorders. The Company's MSI systems have also been used to investigate certain cardiac applications. A new model of the Company's systems, the Magnes 1300C, was developed specifically for a research institute in Germany for measurements of heart function. Preliminary studies using the Magnes 1300C indicate that it may also be useful for measurements of gastrointestinal and spinal cord activity. The Company has received 510(k) premarket notification clearance from the Food and Drug Administration, ("FDA") for its Magnes I, Magnes II and Magnes 2500 WH systems allowing the marketing of the Company's systems in the United States. In addition, the Company has received similar clearance for sale of these systems as a clinical device from the Japanese Ministry of Health and Welfare ("JMHW"). The Company has not yet applied to the FDA or similar regulatory agencies to obtain clearance for sale of the Magnes 1300C. There can be no assurance that such clearance will be obtained, if applied for. CURRENT MEDICAL IMAGING TECHNOLOGY Most debilitating or life threatening disorders of the body, such as stroke, seizures, dementia, movement disorders, mental illness, cardiac arrhythmias and gastrointestinal disorders involve a disruption of function. Because electrical activity plays a critical role in many functions of the body, such activity is frequently monitored as a means to diagnose functional disorders. The electrocardiogram ("ECG") and EEG are recordings of electrical activity of the heart and brain used to obtain information about heart and brain functions, respectively. Electrical activity is also recorded to diagnose functional disorders of skeletal muscles, the spine and peripheral nerves. In the diagnosis and treatment of certain disorders, knowledge of the specific location of the malfunctioning tissue is a key factor. Numerous medical imaging technologies have been developed in response to this need. These include imaging technologies oriented toward organ structure and anatomy, such as CT and MRI, and imaging technologies oriented toward function, such as PET, single-photon emission computed tomography ("SPECT") and fMRI. 2 CT and MRI produce anatomical images showing cross-sectional slices of various parts of the body. These anatomical imaging methods help in locating structural malformations and assessing physical organ damage. Their applications are limited, however, in that many functional disorders have no corresponding structural abnormality or multiple structural problems which may make the identification of the problematic location difficult. Other imaging technologies have been developed specifically to show the location of certain functional areas. PET and SPECT produce cross-sectional pictures showing the location where certain radioactively labeled substances have accumulated after having been injected into the body. Two measures of cell function, relative levels of metabolic activity and regional blood flow, are determined by measuring the amount of radiation emitted by different tissues. Functional Magnetic Resonance Imaging is used to create images related to localized changes in blood flow and oxygenation in the brain. While fMRI has an advantage compared with PET and SPECT in that it does not involve injecting radioactive substances into the body, fMRI, PET and SPECT all have a relatively long response time which prevents observation of rapidly changing activities. Much of the valuable diagnostic information observed in electrical activity in the body occurs in intervals much less than one second, typically tens of milliseconds, and is spontaneous in nature. Because the physiological response time of PET, SPECT and fMRI is several seconds at best, critical information about the sequence of activity, which is essential for understanding disorders such as epilepsy, is unavailable from these technologies. Conventional ECG and EEG have a faster response time than fMRI, PET and SPECT, and provide critical information about the sequence of electrical activity but, in many cases, lack the ability to locate the source of such activity with sufficient accuracy to guide therapy. Locational accuracy is lost because the electrical activity is distorted as it passes through body tissues between the electrical source in the brain or heart and the electrodes on the body's surface. For this reason, electrodes are generally inserted into the brain in an attempt to obtain accurate localization of functional abnormalities in the brain prior to surgery or in the heart prior to ablation procedures. These procedures are invasive, very costly and involve risk and discomfort to the patient. MSI TECHNOLOGY MSI is based on a measurement of the magnetic fields produced by intracellular electrical activity which, as discussed above, is associated with many of the body's most critical functions. Unlike electrical activity generated by the body, the corresponding magnetic fields pass through the body without distortion and without obscuring the location of the source. By measuring the magnetic fields and analyzing them to extract information about the location of the source, MSI can noninvasively provide information about the location of the origin of normal and abnormal electrical activity. MSI can do this with a combination of millimeter spatial resolution and millisecond time resolution which has otherwise been available only from highly invasive procedures. The Company believes that MSI has a unique capability to obtain such information without introducing radioactive or other tracer substances into the body or the use of other costly, invasive procedures. THE MAGNES MSI SYSTEMS The Company's current MSI systems, the single sensor Magnes I, the dual sensor Magnes II, the whole-head Magnes 2500, and the cardiothoracic Magnes 1300C, are integrated systems capable of measuring, analyzing and locating magnetic fields associated with the body's electrical activity in millisecond time scales. The Magnes II was announced in fiscal 1994 and is an enhancement of the Company's original Magnes I system. The Magnes II system employs two sensors, each containing an array of 37 magnetic detectors (for a total of 74 detectors, each consisting of a superconducting detection coil and an amplifier called a superconducting quantum interference device ("SQUID")). Magnes I and Magnes II systems 3 have been used in both neurological and cardiac applications and incorporate a number of unique technologies which are discussed later under the caption "Proprietary Core Technologies". The Magnes 2500 WH system employs a total of 148 magnetic detectors incorporated into a sensor with a helmet shaped recess which is placed over the patient's head and is limited to neurological applications. This design allows simultaneous examination of the entire brain and is designed for evaluating both ambulatory and critically ill patients in fully seated or fully reclined positions. The Magnes 1300C system employs 67 magnetic detectors installed in a sensor with a shallow concave lower surface designed to fit the human chest, abdomen or lower back. The Company has received 510(k) premarket notification clearance from the FDA for its Magnes I, Magnes II and Magnes 2500 WH systems for marketing the Company's systems in the United States. In addition, the Magnes I, Magnes II and Magnes 2500 WH systems have received similar approval from the JMHW for sale in Japan as a clinical device. The Company has not yet applied to the FDA or similar regulatory agencies to obtain clearance for the sale of the Magnes 1300C. There can be no assurance that such clearance will be obtained, if applied for. MEDICAL APPLICATIONS The Company believes its Magnes systems have commercial potential in the diagnosis and treatment of neurological and other disorders. However, as a developing medical technology, the Magnes systems face several challenges to commercial success. Medical applications for the Magnes systems must be developed that result in better patient care than existing technologies. The Company has regulatory approval to market its Magnes I, Magnes II and Magnes 2500 WH systems for applications relating to the brain. However, in general, reimbursement for MSI procedures must be obtained from third party payors, and the use of Magnes systems must, therefore, provide a demonstrated economic benefit to the health care provider. Currently, the Company believes there are two medically accepted applications for its Magnes systems, namely, presurgical functional mapping of the brain ("PSFM") and assistance in the diagnosis and surgical treatment planning for epilepsy. To date, reimbursements from more than 130 insurance companies have been obtained for both procedures on a case - by- case basis. However, the expected volume of such procedures at most hospitals under current standard treatment practices may not provide sufficient operating revenue to completely offset the investment and operating cost of a Magnes system. The Company believes the systems are appropriate for presurgical functional mapping and epilepsy surgery; however, significant applications development and clinical testing must be conducted before these systems can be deemed appropriate for the other applications described below. The Company is primarily focused on establishing the clinical and functional efficacy of MSI applications for functional mapping and epilepsy. The Company is pursuing programs to increase awareness of MSI technology to its target market of neurosurgeons, electrophysiologists, neurologists, psychologists, epileptologists, and gastroenterologists. There can be no assurance that the Company's systems will be accepted for commercial use in any of the areas mentioned in the foreseeable future. NEUROLOGICAL APPLICATIONS Research at leading medical centers has demonstrated that the Company's MSI systems can be used by physicians to noninvasively locate specific functional regions of the brain in preparation for surgery. In addition, research has shown that the Company's MSI systems can assist physicians to noninvasively locate brain tissue suspected of triggering epileptic seizures and abnormal neurological activity associated with closed head injury and trauma, ischemic disorders and stroke. 4 PRESURGICAL FUNCTIONAL MAPPING: The Company believes that currently approximately 100,000 brain surgeries are performed annually in the U.S. These procedures include tumor resection, surgical correction of epilepsy and removal of vascular malformations. The precise locations of functional regions vary even among healthy individuals and more widely among patients with large brain lesions, and the locations can not be reliably determined solely from anatomical imaging such as MRI. However, by relating information about the primary sensory function areas provided by the Company's MSI systems to MRI generated anatomical images, a function map of the brain can be obtained and presented on a screen or recorded on film. Thus, images produced with the Company's MSI systems allow the surgeon to reliably estimate the risk of damage to the identified functional areas which might arise from the surgery itself. These images also help the surgeon to select the best surgical approach, such as where to open the head, and from which direction to access the targeted area to minimize the surgical risk. Using the Company's MSI systems, reliable and practical methods of providing a functional map of the brain have been developed and verified. These results have been reported in several medical journals. The Company's MSI systems allow the surgeon, hospital, insurer and patient to more accurately assess the risk of a proposed surgery and the possibility of improving the outcome of the surgery. EPILEPSY SURGERY: There are approximately 1.2 million people in the United States with recurrent epileptic seizures, and approximately 150,000 new cases emerge each year. The seizures for many of these people can be controlled with drugs, but a number require alternative treatments. It is estimated that there are at least 100,000 people in the United States who could benefit from surgical intervention, although, based on the most recent data published in 1993, it is believed that only about 2,500 such procedures are being performed annually. It is the Company's opinion that the small number of surgical procedures for epilepsy being performed annually, is primarily due to limitations of facilities available for such surgeries, and the small number of trained clinicians expert in the area. Over the past decade, a number of research studies have demonstrated that MSI can noninvasively locate brain tissue suspected of triggering epileptic seizures. It is this tissue which is the target of the surgery. In the absence of a noninvasive method, it is often necessary to implant an array of electrodes directly on or into the brain to locate this tissue. The invasive evaluation approach requires lengthy hospitalization in facilities that are equipped for long-term intensive monitoring of patients, 24 hour nursing care and participation of a highly trained team of specialists. To date, the cost and relative scarcity of appropriate facilities for this long-term monitoring procedure severely limit the number of patients who can benefit from a surgical approach to epilepsy treatment. Recent medical literature shows that the information provided by MSI could, in many cases, avoid invasive evaluation procedures. The Company believes the necessary information can be obtained with its MSI systems in a clinically acceptable time frame and at a cost that will allow for routine use in evaluating patients for epilepsy surgery. The results to date suggest that the use of the Company's MSI system would be a cost-effective alternative to currently used invasive evaluation procedures. The company is currently working with three epilepsy centers in the U.S. to look at the effectiveness of MSI in epilepsy in a prospective clinical trial. ISCHEMIC DISORDERS, STROKE AND OTHER BRAIN APPLICATIONS: Ischemia and stroke are common neurological disorders resulting from the disruption of blood supply to the brain. The total direct cost to the U.S. health care system for treatment and rehabilitation of stroke exceeds $30 billion per year, according to the Annals of Internal Medicine published in 1994. MSI may potentially assist physicians treating stroke by identifying damaged brain areas before they are detectable by CT or MRI scans. As an indicator of neurological function, MSI may be useful to monitor rehabilitation and treatment of stroke patients. Studies have also suggested that the Company's MSI systems could be beneficial in the diagnosis of brain disorders such as Alzheimer's disease, dyslexia, autism and schizophrenia. 5 APPLICATIONS IN THE BODY: The Magnes 1300 C system could be beneficial in evaluating various parts of the body, including applications to gastrointestinal ischemia, spinal cord function and fetal heart monitoring. The Company has not applied to the FDA or similar regulatory agencies to obtain clearance for the marketing of the Magnes 1300C. There can be no assurance that such clearance will be obtained, if applied for. CLINICAL COLLABORATIONS The Company's primary near term objective is to accelerate the development, use and commercialization of its MSI systems by cooperating with researchers and physicians at key medical centers. The Company's MSI systems must be established by clinical researchers as an effective tool suitable for mainstream clinical applications in order to establish a commercial market. Accordingly, the early clinical research sales and collaborations with clinical sites are strategically important to the Company's overall market development plan. As of September 30, 1998, the Company's MSI systems are installed for neurological research at twenty (20) sites and non-neurological research at one (1) site worldwide, listed in Table 1. The Company provides technical support to all of these sites. While the sites listed in Table 1 below do not all have formalized clinical applications development agreements with BTi, the Company benefits from the extensive research conducted at these sites through the clinical results disseminated to the medical community and from potential future applications that may be developed. To date, the findings of BTi and its collaborators have been presented in more than 75 published papers.
TABLE 1 SYSTEM INSTALLED NAME OF INSTITUTION LOCATION - ----------------------------------------------------------------------------------- Magnes I University of Colorado United States Magnes II University of California, San Francisco United States Magnes 2500 WH The Scripps Clinic & Research Foundation (1) United States Magnes 2500 WH New York University Medical Center United States Magnes 2500 WH University of Texas, Houston United States Magnes I Kyushu University Hospital Japan Magnes II National Institute for Physiological Sciences Japan Magnes II National Epilepsy Center Japan Magnes II National Chubu Hospital Japan Magnes 2500 WH Tokyo Medical and Dental University Japan Magnes 2500 WH Communications Research Laboratory Japan Magnes I University of Munster Germany Magnes I University of Rennes France Magnes II University of Erlangen Germany Magnes II University of Vienna General Hospital Austria Magnes 2500 WH Institute of Medicine-KFA Julich Germany Magnes 2500 WH University of Magdeburg Germany Magnes 2500 WH Max Planck Institute, Leipzig Germany Magnes 2500 WH University of Konstantz Germany Magnes 2500 WH FORENAP Institute for Research in France Neuroscience and Psychiatry Magnes 1300 C University of Bochum (2) Germany (1) Company equipment used as beta site. (2) Represents non-neurological site.
6 MARKETING, SALES AND DISTRIBUTION MARKET DESCRIPTION The overall market for the Company's Magnes systems can be divided into three overlapping segments: the basic research market, the clinical research market and the commercial clinical market. Customers in each market segment are identified by the focus of their work, the source of purchase funds, and other characteristics, as described below. The basic research market consists of scientists working in university and government laboratories to discover new information about organ function and to make fundamental advances in their scientific fields. Patient treatment is not their principal concern. Equipment used by these scientists is generally purchased with funds provided by government and private research grants. The basic research market has been to date, and continues to represent the majority of the Company's sales. The clinical research market consists primarily of teaching medical centers where the majority of clinical applications development work for new medical technologies and procedures is conducted. Because of their size, buying power, prestige, and early involvement in assessing and using new medical technologies, teaching medical centers continue to be the primary focus of the Company's near-term marketing plans. The Company has identified more than 150 key members of this group in the U.S., Europe and Asia which are centers of excellence in (i) neurosurgery, neurology and neurophysiology, (ii) neuroradiology and radiology and (iii) cardiology. The potential commercial clinical market for MSI systems if applications for various neurological diseases in addition to epilepsy could be developed, includes hospitals and clinics that could use the MSI systems in routine diagnosis and therapeutic monitoring of patients. The primary commercial clinical market in the United States consists of approximately 450 major medical centers each with 500 or more beds and approximately 780 hospitals each with between 300 and 500 beds. In addition, independent imaging centers in major metropolitan areas have often been among the first buyers of new imaging technologies, and the Company believes this pattern may be applicable for its MSI systems. Of the top 25 neurology centers in the United States, 24 have significant and growing epilepsy centers. There are approximately 200 epilepsy surgery centers in the United States, Western Europe and Asia which could be candidates for the Company's MSI systems. Multiple sales at the same site are not likely in the near term. Sales to the commercial clinical market are expected to develop when further regulatory approvals are obtained, adequate third-party reimbursement for MSI tests becomes routine, MSI procedure costs decline, and physician and decision makers in medical institutions conclude that MSI procedures are more beneficial and economical than existing diagnosis and treatment methods . If the Company is unable to gain general market acceptance of its MSI systems, the Company's business, financial position and results of operations will be materially adversely affected. The National Institute of Health (NIH) has estimated that there are approximately 90 million cases annually of neurological and mental illness disorders in the U.S. Each case represents a separate incident of such disorders and not separate patients. In most cases, diagnostic methods for these disorders remain inadequate. According to NIH estimates, the annual cost associated with these neurological and mental illness disorders in the U.S. is more than $285 billion. This amount includes the direct cost of health care and, in the case of neurological disorders, the indirect cost of income lost due to illness. The majority of these disorders are functional in nature and are a major cause of disability and death. In most cases, no noninvasive test exists to help physicians diagnose or effectively monitor the functional activity associated with these neurological and mental illness disorders. The Magnes systems are designed to address this need. There is substantial medical evidence supporting the view that a significant percentage of mental illness disorders have a physiological origin which may be treated by pharmaceuticals. In most cases, 7 however, it has not been possible to detect physiological dysfunctions clearly associated with the symptoms of mental illness. There has been no objective measure to use for the diagnosis of mental illness, for the prescription of therapy, or for measuring the effectiveness of the therapy on the patient. MSI has demonstrated the ability to provide accurate spatio-temporal maps of neurophysiological function which may serve as an objective measure and, the Company believes, the Magnes systems could fulfill a major need of physicians dealing with mental disorders. Researchers are in the early stages of investigating MSI applications for mental illness and therefore no reliable estimates can be made of the number of patients who might be aided by data provided by the Magnes system. MARKETING STRATEGIES In order to promote sales in both the clinical applications development and commercial clinical markets, the Company's fundamental marketing strategy is to accelerate clinical applications development for the Magnes systems by collaborating with and promoting the work of a core group of influential medical centers engaged in applications development. The Company plans to continue implementation of this strategy by (i) encouraging physicians developing applications for the Company's Magnes systems to publish their results in professional journals, (ii) participating in key medical meetings to generate interest among targeted medical specialists, (iii) direct mailings to encourage communication between research groups working with the Magnes systems, (iv) site visits by key customers, (v) public relations activities, and (vi) continuing its patient referral program. DISTRIBUTION The Company has a small direct sales organization with the specialized skills needed to sell the Company's MSI systems in the United States. The European and Asian markets are served, respectively, by the Company's branch office in Aachen, Germany and by the biomedical division of Sumitomo Metal Industries, LTD. ("SMI") in Japan. In March 1990, the Company entered into a distribution agreement granting SMI the exclusive rights to market, sell, distribute and service the Company's MSI products in certain regions of Asia and in Australia and New Zealand for an initial period of seven years. The agreement established a minimum number of units to be purchased by SMI during the period and granted to SMI a right of first refusal to negotiate a license to manufacture and sell the Company's MSI products in certain regions of Asia, Australia and New Zealand. This distribution agreement with SMI was extended for an additional five (5) years on January 23, 1997 with the modification that SMI's distribution rights outside of Japan would be non-exclusive. BTi is currently seeking additional representation in other areas of Asia, such as Korea and Taiwan. REIMBURSEMENT The Company's long-term commercial success in the United States is dependent upon obtaining approval of routine payment for clinical MSI procedures by Medicare and other third-party payors. The Health Care Financing Administration, which is responsible for the administration of Medicare, and most third-party payors follow similar guidelines for determining whether a specific procedure or health care technology is "reasonable" and "necessary" and, therefore, reimbursable under Medicare or private insurance coverage. These guidelines generally include consideration of whether (i) the procedure or technology is more or less costly than an alternative already covered by insurance, (ii) the added benefit of the procedure or technology is significant enough to justify the expense, and (iii) the procedure or technology provides significant medical benefits not otherwise available from other procedures or technologies. Substantial data is already available to support the use of MSI, and the Company's Magnes systems, for presurgical functional mapping and epileptic foci localization. This includes a number of publications in NEUROSURGERY, AMERICAN JOURNAL OF NEURORADIOLOGY, EPILEPSIA, ANNALS OF NEUROLOGY and THE JOURNAL OF EPILEPSY AND BRAIN, among others. The data have been successfully used by a number of medical centers to receive third-party reimbursement on a case-by-case basis. Since the first reimbursement was 8 received in September 1993, more than 130 insurance companies and other healthcare providers have now approved reimbursement for certain MSI procedures. Although initial results are encouraging and a number of third-party payors have approved reimbursement, there is no assurance that third-party reimbursement will become widely accepted. In Japan, a large number of hospitals are government funded and operated. These hospitals are paid by the JMHW only for procedures that have been approved by a reimbursement board of the JMHW. The JMHW follows guidelines similar to those followed by third-party payors in the U.S. in determining whether the Japanese government will reimburse a new medical procedure. Once reimbursement for a procedure is approved by the JMHW, all hospitals, both public and private, are reimbursed for the procedure at the same reimbursement rate. Since the Company's Magnes I, Magnes II and Magnes 2500 WH systems received approval from the JMHW for sales in Japan as clinical devices, Japanese public and private hospitals may purchase the systems for clinical use on patients. Reimbursement is not yet available from the Japanese government or Japanese third-party payors, but private Japanese hospitals are allowed to charge individual patients privately for procedures with the Magnes systems. The Kyushu University Magnes I system and the National Epilepsy Center Magnes II system, in Shizuoka, have been designated as Highly Advanced Medical Technology Sites by the Japanese government. This designation is required for application to the JMHW for reimbursement. SMI, with assistance from the Company, continues to work with medical centers in Japan in an effort to have the JMHW establish a reimbursement level for Magnes system procedures which will help support future purchases of the Magnes system in Japan. In Europe, the current Magnes sites have concentrated primarily on research, and have not pursued governmental or private approval for reimbursement of MSI procedures. PRODUCT PRICES AND TERMS OF SALE The current prices for the Company's MSI systems range from approximately $1.0-$2.5 million, depending upon system configuration. Standard terms of sale provide for payments of 40% of the purchase price upon placement of the order, 40% upon shipment and the remaining 20% when installation is completed and final acceptance is obtained from the customer. For European customers who receive their funding from governmental agencies, the Company is generally required to provide a bank guarantee for the amount of the deposit which is usually released upon shipment and/or acceptance by the customer. The time between placement of an order and installation typically ranges between six and twelve months. The Company also enters into special collaboration and sale arrangements with certain medical centers to promote clinical applications development. INSTALLATION, SERVICE AND TRAINING In the medical device market, the ability to provide comprehensive and timely service is a key competitive advantage and is important for establishing customer confidence. Installation and service for the Company's products in the United States and Europe is provided from its San Diego, California headquarters and from the Company's branch office in Aachen, Germany, both of which maintain customer service departments capable of performing sophisticated systems installation and equipment maintenance. SMI has its own service capabilities in Japan to service MSI systems sold in their distribution areas. Installation and a service agreement for the first year is included as part of the standard terms of sale in the United States and Europe. Thereafter, service and maintenance are available on a time and materials basis or pursuant to a yearly service agreement for an annual fee. Initial customer training in the operation of the Company's MSI systems is provided by the Company's personnel at the customer's site and is included in the selling price of the system. Physician training in 9 interpreting the clinical significance of MSI information is currently provided at the Company's cooperating United States clinical sites. COMPETITION The Company operates in an industry characterized by rapid technological change. New products using other technologies or improvements to existing competing products may reduce the size of the potential markets for the Company's products, and may render them obsolete or non-competitive. Competitors may develop new or different products using technology or imaging modalities that may provide or be perceived as providing greater value than the Company's products. Any such development would have a material adverse effect on the Company's financial position and results of operations. Additionally, there continues to be significant price competition from the Company's main competitors for the limited number of whole head systems purchased worldwide. This aggressive competition has and will affect profit margins on sales of the Company's whole head system, the extent of which is not presently determinable. Companies known to BTi that have manufactured an integrated large-array MSI system are CTF Systems Inc., a Canadian company, Neuromag Ltd., a Finnish company, Siemens AG, a German company, Phillips N.V., a Netherlands company, and Yokagawa, Shimadzu and Daikin, all three Japanese companies. Neuromag Ltd. has received FDA clearance for marketing one of its systems as a clinical device in the United States. It is being marketed by Picker, Inc. in the United States and Europe, and by Elekta in Asia. An MSI system produced by CTF Systems, Inc. has been cleared for sale as a clinical device in Japan by the JMHW. Yokagawa has installed one system in the United States and three additional systems in Japan. Siemens AG and Phillips N.V. do not currently manufacture or market integrated large-array MSI systems. The Company believes that Magnes systems compete favorably with other MSI systems on the basis of performance for detecting magnetic fields. The Company's ability to compete successfully, particularly in the Japanese market, may be negatively affected by the emergence of Japanese based competitors providing similar equipment. Other large multinational corporations, including GE Corporation, a United States company, have initiated product investigation programs in magnetic source imaging. The Company's ability to compete successfully, particularly against any of its current or potential future competitors, many of which have significantly greater financial, manufacturing, distribution, and technical resources than the Company, will depend upon various factors, including BTi's ability to continue its technological and market development leadership role and BTi's ability to raise necessary capital for further development and commercialization. BACKLOG As of September 30, 1998, the aggregate amount of firm backlog orders for Company products and services was approximately $5,312,000, of which the Company expects to fill approximately $4,581,000 before September 30, 1999. The backlog is composed primarily of an order for a Magnes 2500 WH which was shipped, but not yet accepted by the customer prior to September 30, 1998, an order for an expanded 248-channel sensor, orders for a 2500 WH system and a 1300C cardiac system, and deferred service revenues on systems accepted before September 30, 1998. Future cash proceeds to the Company pertaining to backlog as of September 30, 1998 total approximately $1,559,000. As sales of the Company's systems typically involve transactions of $1 million or more, backlog is expected to fluctuate significantly from year to year depending upon timing of orders received, installations completed and customer acceptances received during the reporting period. 10 PROPRIETARY CORE TECHNOLOGIES BTi has pioneered the development of technologies associated with MSI. Several core technologies that have been developed by and are proprietary to the Company, include superconducting magnetic field detectors, magnetic noise reduction, data analysis and clinically useful displays. The Company believes it has established an industry leadership position in MSI. SUPERCONDUCTING MAGNETIC FIELD DETECTORS The Company's magnetic field detectors consist of a superconducting detection coil and an extraordinarily sensitive amplifier called a SQUID. Superconductivity describes the ability of certain materials, when refrigerated to near absolute zero (-460EF or -273EC), to carry electricity without electrical resistance. This property enables the detection coil to act as a noise-free antenna to pick up magnetic fields and transfer them to the SQUID. The SQUID utilizes other unique electrical properties of superconductors to generate readily measured voltage changes in response to very small magnetic field changes. Together, the superconducting detection coil and SQUID amplifier are able to detect magnetic fields that are at least 1,000 times smaller than is possible with other magnetic field detectors. BTi has developed proprietary processes for fabricating highly reliable superconducting magnetic field detectors and integrating a large number of such detectors into complex sensors which measure magnetic fields generated by electrical activity in the body. Sensors are comprised of the magnetic field detectors and the components required to refrigerate them to their operating temperature. The magnetic field detectors are refrigerated to a near absolute zero temperature with liquid helium. Novel methods have been developed by the Company to accomplish the necessary refrigeration without the requirement of immersing the magnetic field detectors directly in liquid helium. Because of this innovation, the magnetic field detectors can be used in any orientation with respect to the body, thereby overcoming limitations of previous designs that have prevented simultaneous measurements on the entire brain of a patient lying in a horizontal position. BTi believes this unique ability may provide a competitive advantage for the Company's future MSI systems. This construction technique and the subsequent system design have received U.S. patent numbers 4,827,217; 5,494,101; 5,494,033; 5,497,828; 5,441,107; 5,471,985 and Canadian patent number 2,155,076. The Company has also applied for additional patents covering innovative work. The Company has also developed proprietary processes for fabricating detection coils and SQUIDs from materials that become superconducting at the temperature of liquid nitrogen, which is significantly higher than the temperature of liquid helium. The availability of superconducting detection coils and SQUIDs refrigerated with liquid nitrogen would greatly simplify the design and reduce the costs to build and operate an MSI system. The Company has built and tested experimental magnetic detectors fabricated from superconductors operating at liquid nitrogen temperature. While their noise properties are currently less favorable than those obtained by using liquid helium superconductors, further improvements may make them suitable for certain MSI applications. The Company believes its novel high-temperature SQUID fabrication process is the only process having the reliability and reproducibility required of a commercial manufacturing process. The use of those processes has been licensed to Magnesensors, a related party, for applications other than in medical equipment. MAGNETIC NOISE REDUCTION The ability to detect weak magnetic fields created by the body depends upon the elimination or reduction of magnetic noise generally present in the environment. The magnetic fields generated by the electrical activity of the body can easily be overwhelmed by the stronger magnetic fields generated by automobile traffic, elevators, electrical machinery or even an ordinary wrist watch worn by a patient. The Company has developed techniques to reduce interference from magnetic noise. The Company houses its MSI systems in a shielded room constructed according to the Company's specifications from 11 special alloys that reduce magnetic noise. All equipment used in the shielded room is selected or fabricated to avoid contaminating this low-noise environment. In addition, the configuration of the detection coils, reference coils, and supporting software processing algorithms in the Company's Magnes systems sharply reduces their sensitivity to magnetic fields from sources located more than about 10 inches from the sensor, which allows the Company to focus the sensors on the specific portion of the body being measured. The Company is investigating whether its noise reducing algorithms could allow a reduction in magnetic shielding requirements, which could substantially lower the cost of future MSI systems. DATA ANALYSIS The Company has developed techniques to automate the collecting and processing of reliable clinical data according to standardized protocols. The use of standardized protocols enables the Company's MSI system to be operated by a trained technician and helps to ensure the reliability of the results. BTi's proprietary software has dramatically reduced the time to compute specific sources of electrical activity. These developments have been critical factors in the Company's efforts at making its MSI system suitable for routine clinical use. In analyzing a patient's magnetic field data, it is usually assumed that a very small region of electrically active tissue generates the magnetic field at any instant of time. There are situations of potential clinical interest in which the assumption of this single focal source of electrical activity cannot be used, and new analysis techniques are needed. The Company has developed, and is working with other third parties to develop techniques to extend the analysis to multi-focal and spatially extended sources of electrical activity to address this need. CLINICALLY USEFUL DISPLAYS Effective display of the results of an MSI examination is required to allow the technician operator to assess the data quality and to allow the physician to interpret the significance of the MSI results relative to the patient's condition. The Company provides a number of displays ranging from temporal displays, which allow the physician to determine the time sequence of events, to overlay displays, which estimate the location of the analyzed functions relative to the patient's anatomical images provided by MRI or CT. The Company has developed or has access to data interfaces compatible with a wide variety of MRI and CT scanners. RESEARCH AND DEVELOPMENT The Company has funded its product research and development primarily through public and private sales of stock, and revenues from product sales and product-related services. During fiscal 1998, 1997 and 1996, the Company's research and development expenses totaled $1,756,000, $2,953,000 and $7,767,000, respectively. The Company substantially completed the design of its Magnes 2500 WH system in fiscal 1996 and decreased expenditures in 1997 and 1998 as part of the Company's restructuring and focus on developing a market for sale of the Company's Magnes 2500 WH system. MANUFACTURING AND MATERIALS The Company engineers and manufactures every major component of its Magnes systems, other than the host computer and its peripherals, the magnetically shielded room which houses the sensor, and the sensor position indicator hardware used to determine how the sensor is oriented to the body. The Company is also currently purchasing its SQUID production requirements. However, through the Company's joint ownership of Magnesensors, Inc., the Company has the ability to fabricate SQUIDS from materials that become superconductive at liquid helium and liquid nitrogen temperatures should such a need arise. 12 Of the major components of the Magnes system not manufactured by the Company, the host computer and peripherals are widely available standard items. The other major purchased components are constructed in accordance with Company specifications that ensure compatibility with its MSI system. The magnetically shielded rooms for Magnes systems sold in the United States and Europe are currently supplied by two European manufacturers and a third U.S. based manufacturer has recently delivered its first room. In 1991, the Company completed development of a magnetically shielded room of its own design in cooperation with SMI and retains an option to manufacture the room or purchase it from SMI for sales outside the SMI distribution area. The Company believes it has adequate alternate sources of supply for this major system component from these sources. The Company believes its current manufacturing capacity is sufficient to satisfy present demand. In order to achieve its long-term objectives, however, the Company will be required to expand production capabilities, mainly through additional manufacturing personnel and by potential subcontracting assembly of certain system components. There can be no assurance that the Company will be able to increase its level of output. The Company believes that its control over the development and manufacture of its MSI systems will enable it to modify its devices to address specific needs of anticipated clinical applications without significant dependence upon outside suppliers, manufacturers or providers of technology. GOVERNMENTAL REGULATION The Company is subject to various regulations of the FDA and California Health Services. In particular, the FDA and California Health Services have promulgated regulations to which the Company must adhere including, but not limited to, minimum manufacturing standards, product operating effectiveness and functional safety of the Company's diagnostic products. The FDA regulates marketing of medical devices, requiring premarket clearance or premarket approval based upon review of information submitted by the Company relating to intended product use, labeling, safety and efficacy. The premarket clearance or approval processes are based upon risk class and degree of equivalence to devices already marketed that are proven to be safe and effective. Medical devices are placed in one of three classes, depending upon their use or the degree to which they provide functions critical to sustaining life. Class I devices are subject to general controls, including Quality System Regulations (QSR, formally known as Good Manufacturing Practice), and examples of such devices are tongue depressors and hot water bottles. Class II devices are subject to general performance standards not yet established by regulation. General controls of Class I devices presently apply to Class II devices, because no performance standards have been developed or promulgated by the FDA for Class II devices. Examples of Class II devices are ECG and EEG. Class III devices consist of "critical devices," those represented to be life sustaining or life supporting, implanted in the body or presenting potential unreasonable risk of illness or injury. Safety and efficacy must be demonstrated and supported by clinical data submitted to the FDA for "premarket approval." Examples are kidney dialysis systems and cardiac pacemakers. Class I and II devices may be marketed by demonstration of "substantial equivalence" to existing devices via a Section 510(k) premarket notification, and subsequent FDA clearance to market. The Magnes I and Magnes II systems have been determined under the 510(k) process to be substantially equivalent to BTi's prior Model 607 Neuromagnetometer and to EEG. The Magnes 2500 WH system has been found to be substantially equivalent to the Magnes II system. The Company's Magnes MSI systems are classified as Class II devices, and therefore are subject to the general controls of Class I devices and to performance standards that have not yet been defined for Class II devices. The Company believes that its Magnes 1300C system will be found substantially equivalent to previous Magnes devices. However, the FDA has made no such determination, nor is the Company pursuing such clearance at this time. The Company has filed, and subsequently received clearance, for Section 510(k) premarket notifications with the FDA for applications of the Magnes I, Magnes II and Magnes 2500 WH systems relating to the brain. This clearance enables the Company to market the Magnes I, Magnes II and Magnes 2500 WH 13 systems as diagnostic devices for clinical use relating to applications of the brain rather than research equipment. The Company has not yet applied to the FDA or similar regulatory agencies to obtain clearance for sale of the Magnes 1300C. The Company's continued compliance with applicable governmental regulations is assessed by internal audits and by audits of manufacturing operations and procedures conducted by the FDA and California Health Services. These agencies have the authority, among other rights, to limit or stop product shipments and require product recall should a failure to comply with regulations be observed. The Company has registered with the FDA and California Health Services as a medical device manufacturer. California Health Services has completed an inspection of the Company's facilities and manufacturing processes and has issued the Company a license which permits it to manufacture, sell and ship the Magnes systems as medical devices for diagnostic purposes. The FDA conducted an audit of the Company for compliance with federal current Good Manufacturing Practices ("cGMP") regulation requirements in July 1996. All areas of the Company's internal cGMP program were observed to be in compliance with the regulations. In order to export its products, the Company must comply with United States export control regulations, which restrict the export of devices containing certain of the Company's technology to certain foreign nations. Although the export control regulations have not prohibited the Company from exporting its MSI systems to foreign nations, there can be no assurance that the Company will continue to be able to obtain the necessary export licenses in the future. The Company is currently allowed to export the Magnes systems to many foreign countries, including all Western European countries and Japan, under a general license that requires no additional approval prior to shipment. While Western Europe and Japan have regulatory agencies that are somewhat similar to the FDA, each country's regulatory requirements for product acceptance are unique and will require the expenditure of substantial time, money and effort to obtain and maintain regulatory acceptance for marketing for clinical use. There can be no assurance that the Company will be able to obtain and maintain such approvals. The Magnes I system, Magnes II system and Magnes 2500 WH systems have all received JMHW approval. PATENTS AND PROPRIETARY INFORMATION The Company relies on proprietary technology and seeks to maintain confidentiality of its trade secrets, unpatented proprietary know-how and other proprietary information and to obtain patent protection when appropriate. As of September 30, 1998, the Company held forty two (42) patents in the United States of which four (4) pertain to the Company's current whole head system Eight (8) of the forty two (42) patents had counterpart patents issued in certain members of the European Patent Organization, in Canada and in Japan. As of September 30, 1998 the Company had filed three (3) U.S. patent applications that are in various stages of the patent prosecution process. The Company has also filed five (5) applications with the European Patent Organization for patent protection in Western Europe, ten (10) applications in Japan and two (2) in Canada. The Company anticipates that patents, if issued, will be issued (i) within two to 20 months with respect to the pending patent applications in the U.S., and (ii) within three years with respect to the pending patent applications in Western Europe. The Company has reserved its priority with respect to receiving patents on its applications in Japan, and may pursue those applications in due course. The Company's patents protect several fundamental aspects of the technology used in its products. Patents have been issued with respect to superconducting devices, ultra-low-noise electronics circuits, biomagnetometer design, biomagnetic signal processing, magnetic shielding techniques, noise suppression methodologies, cryogenic apparatus construction techniques, and system design concepts. Patent applications have been filed with respect to a new process for fabrication of electronic devices using high-temperature superconducting materials, superconducting device designs, magnetic shielding technology, cryogenic refrigeration, ultra-low-noise electronic circuits, patient handling equipment and 14 biomagnetic signal processing and data analysis. The Company currently is considering additional patent applications covering inventions already made in these and related fields of technology. BTi is not aware of any infringement by any of its products on patents issued to others. Rights to certain of the Company's patents associated with the application of so-called high temperature superconductors have been assigned to Magnesensors, Inc., partially owned by BTi and Quantum Magnetics. Magnes-Registered Trademark- and Biomagnetic Technologies-TM- (with and without the design) and BTi-TM- are registered trademarks of the Company by registration with the State of California and by registration with the U.S. Patent and Trademark Office. HUMAN RESOURCES As of September 30, 1998, the Company employed 59 full-time employees at its facilities in San Diego, California and Aachen, Germany combined. None of the Company's employees are covered by a collective bargaining agreement and the Company has experienced no work stoppages. The Company believes that it maintains good relationships with its employees. RISKS AND UNCERTAINTIES HISTORICAL OPERATING LOSSES AND ACCUMULATED DEFICIT Our financial position reflects that we have been principally focused on research and development with only low volume sales to medical research institutions. For example, our net losses in the last three years have been as follows: * $4,968,000 of losses in fiscal 1998, * $5,242,000 of losses in fiscal 1997, and * $15,566,000 of losses in fiscal 1996. In the last three years, our negative cash flows from operations have been as follows: * $5,360,000 in fiscal 1998, * $2,032,000 in fiscal 1997, and * $12,808,000 in fiscal 1996. At September 30, 1998, our accumulated deficit was $90,823,000 with working capital of $11,139,000. Our working capital at September 30, 1998 resulted primarily from the sale of 30,000,000 shares of common stock for proceeds of $15,000,000 during August 1998. We believe that cash projected to be generated from operations alone will not be sufficient to meet our capital and working capital requirements in fiscal 1999. DEPENDENCE ON MEETING CUSTOMER REQUIREMENTS Our success may be limited by our ability to satisfy customer performance requirements for our systems; as well as our ability to complete, in a timely fashion, product developments and enhancements to satisfy customer requirements. FUTURE CAPITAL NEEDS AND UNCERTAINTIES OF ADDITIONAL FUNDING If we achieve the projections in our current business plan, we believe that we will be able to meet our business obligations through June 2000. However, we may not meet our sales projections due to the current limited and competitive market for MSI systems. If we do not meet our sales projections, we may not have sufficient available funds and cash flows from operations to meet our business obligations through June 2000. Even if we meet our business plan projections, we will likely seek additional financing in fiscal 2000 to fund operations. We may not find such financing on terms acceptable to us, if at all. For more information, you should also read the "Liquidity and Capital Resources" section starting on page 22. 15 DEPENDENCE UPON A SINGLE PRODUCT AND UNCERTAINTY WITH RESPECT TO THE DEVELOPMENT OF ADDITIONAL PRODUCTS OR APPLICATIONS Our future success may be limited by our dependence on one product, our Magnes 2500 WH system, which currently has limited clinical applications. Before we can penetrate the commercial clinical market, we need to develop additional clinical applications for our MSI system by experimenting with its diagnostic and monitoring uses at major medical centers. We cannot assure you that a commercial market will develop for these uses of our MSI system. Our financial position will be materially adversely affected if we do not develop additional clinical applications or if we are not able to develop a commercial market for our Magnes 2500 WH system. DEPENDENCE ON AND UNCERTAINTY WITH RESPECT TO THIRD PARTY REIMBURSEMENT AND HEALTHCARE REFORM Our commercial success is also highly dependent on reimbursement for procedures using the MSI system. Currently, Medicare, insurance companies and other healthcare providers approve payment for MSI procedures on a case-by-case basis. As of September 30, 1998, these third party payors have only approved limited reimbursements in the United States. Although third party payors have increasingly approved reimbursements, we cannot assure you that third party reimbursements will become widely available. The United States government does not currently reimburse for MSI procedures. If reimbursement does not become more widely available, our financial position will be materially adversely affected. Further, if the Federal government or any state legislature enacts legislation relating to our business or the health care industry, including legislation relating to third party reimbursement, our financial position could be negatively affected. In addition, there is currently no reimbursement for MSI procedures outside of the United States. RISK OF TECHNOLOGICAL OBSOLESCENCE Our industry is characterized by rapid technological change, which may also impact our commercial success. Competitors may develop products using other technologies or may improve existing products. This competition may reduce the size of the potential market for our products or make them obsolete or non-competitive. Competitors may also develop new or different products using technology or imaging modalities that provide, or are perceived as providing, greater value than the Company's products. Our financial position will be materially adversely affected if such competitive developments occur. COMPETITION Our industry is also characterized by ongoing significant price competition. Our competitors compete with us aggressively for the currently limited number of whole head systems being purchased worldwide. The future profitability of our Magnes 2500 WH system may be affected by this aggressive competition, but we cannot presently determine the extent. FOREIGN EXCHANGE AND RELATED RISK A significant portion of our sales to date have been in foreign markets. Revenues from export sales represented 71% of our revenues of MSI systems for the year ended September 30, 1998 compared to 77% of similar revenues for the prior year. We expect that revenues from international sales will continue to represent a significant portion of our annual revenues. Because we sell in foreign markets, we are exposed to potential risks of increases and decreases in foreign currency exchange rates. Although at September 30, 1998 and 1997 we did not have any open forward exchange contracts, on occasion, we enter into forward exchange contracts to partially hedge ( or protect) against such foreign currency exchange risks. Nonetheless, these fluctuations may reduce the return in U.S. dollars that we actually receive on our sales. We price our Japanese sales in U.S. dollars. We generally price our European sales in the currency of the country in which our MSI systems are sold. The prices of our products in U.S. dollars will vary as the value of the U.S. dollar fluctuates against the quoted foreign 16 currency price. YEAR 2000 ASSESSMENT Many currently installed computer systems and software products are coded to accept only 2 digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept 4 digit entries to distinguish 21st century dates from the 20th century dates. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with Year 2000 requirements. The Company is utilizing both internal and external resources as applicable, to identify, correct or reprogram, and test its internal systems for Year 2000 compliance. The total cost of compliance and its effect on the Company's future results of operations is being determined as part of the detailed conversion process. The Company has preliminarily determined that it may be necessary to acquire new Year 2000 compliant hardware and software systems for its accounting, purchasing , production control and inventory management systems. Current estimates indicate potential costs may amount to approximately $250,000 for expenditures, including hardware, software and systems conversions, plus additional, yet to be quantified internal and external labor costs for systems conversions and implementation. The Company is currently seeking to ensure that the software and operating systems included in its Magnes 2500WH are Year 2000 compliant. Failure or perceived failure of such product to be Year 2000 compliant could significantly adversely affect sales of the Company. Year 2000 issues could cause potential customers to reevaluate their current system needs and as a result consider deferring purchase of the Company's Magnes systems. Additionally, the Company could have potential warranty or other claims with existing Magnes systems placed with customers if such systems are not year 2000 compliant. Any of the foregoing could result in a material adverse effect on the Company's business, operating results, and financial condition. The Company is also in the process of requesting information and assurances from its major vendors, service providers and customers about their state of Year 2000 compliance and readiness. In the event that significant Year 2000 issues are identified with such parties, the Company will identify contingency plans such as the use of alternate vendors or manual systems. As of September 30, 1998, the Company has spent approximately $40,000 in addressing Year 2000 issues including consultant and in-house labor costs. ITEM 2. PROPERTIES. The Company's executive offices and manufacturing facilities are located in a 55,000 square foot facility at 9727 Pacific Heights Boulevard, San Diego, California. All domestic operations of the Company are conducted from this facility, which was first occupied in December 1989. The Company leases this facility pursuant to a five year lease agreement which expires in February 2003. Average monthly lease payments over the term of the lease approximate $50,700. The Company's branch office in Germany leases approximately 3,000 square feet at Gruener Weg 82, D-5100 Aachen, Germany pursuant to a year-to-year lease agreement expiring in December 1998, which the Company is in the process of renewing. Monthly lease payments are approximately $2,000. Sales and service for the Company's European operations are conducted from the German facility. 17 ITEM 3. LEGAL PROCEEDINGS. Neither the Company nor its German subsidiary are involved in any litigation which is expected to have a material adverse effect on the Company's business, consolidated financial position, or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. The Company's Common Stock, formerly traded on the Nasdaq National Market under the symbol "BTIX", was delisted as of March 10, 1997 for lack of then compliance with the net tangible assets requirement of $4 million dollars. The Company's stock is currently trading on the Nasdaq Over the Counter Bulletin Board. The following table sets forth the range of high and low closing sales prices by quarter for the Company's Common Stock as reported by Nasdaq. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
Fiscal Year 1998 High Low ---------------- ----- ----- 1st Quarter $1.50 $0.37 2nd Quarter $0.68 $0.38 3rd Quarter $0.42 $0.28 4th Quarter $0.64 $0.26 Fiscal Year 1997 High Low ---------------- ----- ----- 1st Quarter $1.00 $0.47 2nd Quarter $0.44 $0.16 3rd Quarter $0.73 $0.20 4th Quarter $0.74 $0.36
As of December 17, 1998, there were approximately 269 holders of record of the Company's Common Stock. The last reported closing price for the Company's Common Stock on the Nasdaq Over the Counter Bulletin Board on December 17, 1998 was $.18 per share. The Company has never declared or paid dividends on its Common Stock. The Company does not anticipate declaring any dividends on its Common Stock in the foreseeable future and intends to retain earnings, if any, for the development of its business. ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth below with respect to BTi's consolidated statements of operations for each of the three years in the period ended September 30, 1998 and with respect to the consolidated balance sheets at September 30, 1998 and 1997, are derived from the audited consolidated financial statements which are included elsewhere in this document. The statement of operations data for the years ended September 30, 1995 and 1994 and the balance sheet data at September 30, 1996, 1995 and 1994 are derived from audited consolidated financial statements not included in this document. The data set forth below should be read in conjunction with the consolidated financial statements and 18 related notes included elsewhere in this document. Dollars are stated in thousands, except per-share amounts.
Years Ended September 30, -------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994 -------- -------- --------- -------- --------- Total revenues $ 2,839 $10,592 $ 733 $ 8,981 $ 3,119 Operating loss (4,898) (3,318) (15,467) (5,720) (10,147) Net loss (4,968) (5,242) (15,566) (6,673) (10,313) Basic and diluted net loss per share (.09) (.11) (.39) (.27) (1.03) Shares used in computing basic and diluted net loss 56,430 45,790 39,950 24,783 9,977 per share
September 30, -------------------------------------------------------------------- BALANCE SHEET DATA: 1998 1997 1996 1995 1994 ------- -------- -------- ------- -------- Working capital (deficiency) $11,139 $(2,284) $ (785) $10,274 $(2,114) Total assets 17,343 6,002 16,250 20,124 9,419 Long term obligations 216 219 48 493 459 Shareholders' equity (deficit) 11,569 (1,286) 854 13,368 2,283
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Except for the historical information contained herein, the following discussion may contain forward-looking statements that involve risks and uncertainties. The Company's future results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not specifically limited to, failure to satisfy performance obligations, timely product development, changes in economic conditions in various markets the Company serves, uncertainty regarding the Company's patents and propriety rights, as well as the other risks detailed in this section. The Company does not undertake to update the results discussed herein as a result of changes in risks or operating results. OVERVIEW Since 1984, the primary business of the Company has been the development of MSI systems that measure magnetic fields generated by the human body and assist in the noninvasive diagnosis of a broad range of medical disorders. The measurement of the body's magnetic fields by MSI provides information about the normal and abnormal functions of the brain, heart and other organs. The Company is focusing on the development of its technology for potential commercial market applications such as mapping of functional cortex at risk during surgery for tumors and other lesions, and the diagnosis and planning for surgical treatment of epilepsy. The Company is continuing to investigate the potential applications of its technology for problems of the heart, spine, and gastrointestinal system, as well as for disorders of the brain such as closed-head trauma, schizophrenia and other neuro-psychiatric disorders. Twenty one (21) Magnes systems were installed in medical and research institutions worldwide at the end of fiscal 1998. To date, more than 5,000 MSI examinations have been performed on patients and control subjects at the Company's application development sites. Related findings by BTi and its collaborators have been published in more than 75 scientific and medical papers. Since the first reimbursement for MSI procedures was received in September 1993, more than 130 insurance companies have approved reimbursement on a case-by-case basis for certain MSI procedures performed with the Company's Magnes MSI systems. 19 In fiscal 1995, BTi announced development of the Magnes 2500 WH, an expansion of the existing Magnes I and Magnes II systems product line. Development of the Magnes 2500 WH hardware was substantially completed in fiscal year 1996. The Magnes 2500 WH allows simultaneous examination of the entire brain and is designed for evaluating ambulatory or critically ill patients in seated or fully reclined positions. As of September 30, 1998, the Company had shipped ten Magnes 2500 WH systems and received nine final acceptances from customers. The current price of BTi's MSI systems ranges from approximately $1.0 to $2.5 million, depending upon system configuration. A portion of the Company's sales have been in foreign markets. The Company has previously priced certain of its European sales in the currency of the country in which the product was sold and the prices of such products in dollars varied as the value of the dollar fluctuated against the quoted foreign currency price. There can be no assurance that currency fluctuations will not reduce the dollar return to the Company on such sales, if made in the future. Although at September 30, 1998 and 1997, the Company did not have any open forward exchange contracts. The Company may in the future enter into forward exchange contracts to partially hedge such foreign currency exposure, if appropriate. Since concentrating on the development of its MSI systems in 1984, the Company's corporate strategy and commitment of resources have focused on long-term product applications and continued product development rather than near-term operating performance. Since the development of the Magnes 2500 WH system was substantially completed in fiscal year 1996, the Company has significantly reduced product and applications development expenses and expects that such expenditures may continue at comparatively reduced levels in 1999. In December 1996, the Company reported a restructuring of its operations due to lower short-term market projections for its MSI systems. The restructuring resulted in a reduction of 44 employees. The Company believes that the relatively small number of proven medical applications for the Magnes systems, the lack of routine reimbursement for MSI procedures, and the uncertainty of product acceptance in the U.S. market have limited system sales through fiscal 1998. Additionally, it is not possible to reliably predict the timing and extent of future product sales due to the uncertainties of medical applications, reimbursement and product acceptance. The Company does not anticipate multiple sales to the same end-user at current sales volumes, and the sale of one Magnes system may have a significant impact on the Company's financial position and results of operations during any reporting period. As a result, quarterly and annual operating performance will continue to fluctuate. RESULTS OF OPERATIONS The consolidated financial statements and notes thereto which appear in Part II, Item 8 should be read in conjunction with the following review: FISCAL YEARS ENDED SEPTEMBER 30, 1998 AND 1997 Results of operations in fiscal 1998 declined as compared to fiscal 1997 primarily due to having only two final customer acceptances consisting of a Magnes 2500 WH system and a Magnes II system in fiscal 1998, as compared to seven final customer acceptances of Magnes 2500 WH systems in fiscal 1997. However, as a result of the restructuring of the Company which commenced in December 1996, additional cost savings were realized in general and administrative, marketing and sales, and research and development expenses. Product revenues for fiscal 1998 totaled $2,103,000 as compared to $10,131,000 in fiscal 1997. Decreased product revenues is the result of only two final customer acceptances of systems in fiscal 1998 as compared to seven final customer acceptances of systems in fiscal 1997. 20 Product costs totaled $1,935,000 in fiscal 1998 as compared to $6,333,000 in fiscal 1997. Product costs decreased due to the sale of two systems in fiscal 1998 as compared to seven systems in fiscal year 1997. Product costs as a percentage of product revenues amounted to 92% in fiscal 1998 as compared to 63% in fiscal 1997. The decreased margin is primarily the result of fixed production expenses being absorbed over fewer units in fiscal 1998 as compared to fiscal 1997. Service revenues for fiscal 1998 totaled $498,000 as compared to $395,000 in fiscal 1997. The increase of 26% is attributable to customer acceptances of seven systems in fiscal 1997, resulting in service revenues in fiscal 1998 inherent in the first year service contracts. Research and development expenses totaled $1,756,000 in fiscal 1998 compared to $2,953,000 in fiscal 1997. The decrease of 41% is the result of reduced payroll and related research and development costs which commenced with the Company's restructuring in December 1996. The Company also reduced research and development expenditures in fiscal 1998 to preserve cash flows for other uses including market development for the Company's systems. Marketing and sales expenses amounted to $1,281,000 in fiscal 1998 as compared to $1,902,000 in fiscal 1997, a decrease of 33%. This decrease is attributed to the general reduction of marketing and sales expenses due to the restructuring of operations which commenced in December 1996. General and administrative expenses totaled $1,721,000 in fiscal 1998, a reduction of 21% from $2,190,000 in fiscal 1997. This reduction was primarily due to the restructuring of the Company's operations, including reductions in administrative personnel. Interest expense totaled $72,000 for fiscal 1998 as compared to $2,339,000 in fiscal 1997. Interest expense of $2,339,000 in fiscal 1997 consisted primarily of a non-cash charge of $2,250,000 pertaining to the conversion feature of a note payable to shareholder. Loss on equity investment in fiscal 1998 represents the Company's portion of net losses incurred by Magnesensors, Inc. of approximately $78,000 and a write down of the Company's remaining equity investment of approximately $82,000. Magnesensors, Inc. is 38% owned by the Company. FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996 Results of operations improved in fiscal 1997 compared to fiscal 1996 primarily due to the receipt of seven final customer acceptances of Magnes 2500 WH systems and the Company's restructuring which began in December 1996. The restructuring reduced headcount by 44 employees, resulting in scaling back and cost savings in general and administrative, marketing and sales, and research and development expenses. Product revenues for fiscal 1997 totaled $10,131,000 as compared to $168,000 in fiscal 1996. Increased product revenues in fiscal 1997 resulted primarily from customer acceptances of seven Magnes 2500 WH systems. The Company's product revenues in fiscal 1996 consisted solely of Magnes components as no Magnes systems were accepted by customers. Service revenues for fiscal 1997 totaled $395,000 as compared to $565,000 in fiscal 1996, a decrease of 30%. The reduction in service revenues is the result of first year service contracts on Magnes I and Magnes II systems having been substantially completed in 1996 for units shipped in 1995. Service contracts pertaining to the Magnes 2500 WH systems did not commence until final customer acceptances were received in the second quarter of fiscal 1997. Product costs totaled $6,333,000 in fiscal 1997 as compared to $2,565,000 in fiscal 1996. Product costs increased due to sales of seven Magnes systems in fiscal 1997 as compared to no system sales in fiscal 1996. 21 Research and development expenses totaled $2,953,000 as compared to $7,767,000 in fiscal 1996. The decrease of 62% is related to substantial completion of the development of the Magnes 2500 WH system in fiscal 1996 and the Company's restructuring in fiscal 1997 which resulted in reduced payroll and related research and development costs. Marketing and sales expenses totaled $1,902,000 in fiscal 1997 as compared to $2,798,000 in fiscal 1996, a decrease of 32%. The decrease was primarily due to the restructuring of operations, including a reduction in marketing and sales personnel, which commenced in December 1996. General and administrative expenses totaled $2,190,000 for fiscal 1997 as compared to $2,958,000 for fiscal 1996, a decrease of 26% attributed to the restructuring of the Company's operations and reduction of administrative personnel. Interest expense totaled $2,339,000 for fiscal 1997 as compared to $788,000 for fiscal 1996. Interest expense consisted primarily of a non-cash charge of $2,250,000 and $750,000 in fiscal 1997 and 1996 respectively, pertaining to the conversion feature of a note payable to shareholder. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998 the Company had working capital of $11,139,000. At September 30, 1997, the Company's current liabilities exceeded current assets, resulting in a working capital deficiency of $2,284,000. The net increase in working capital is primarily due to the sale of 30,000,000 shares of common stock to offshore investors at $.50 per share for a total of $15,000,000 during August 1998. Accordingly, cash and cash equivalents and short-term investments, exclusive of any restricted cash, increased $11,136,000 from September 30, 1997 to $12,365,000 at September 30, 1998. Capital equipment expenditures totaled $95,000 in fiscal 1998, $145,000 in fiscal 1997 and $577,000 in fiscal 1996. The Company anticipates that capital equipment expenditures will amount to less than $100,000 in fiscal 1999. BTi has financed its operations largely through private and public sales of equity and debt securities. In August 1996, the Company entered into a loan agreement with Dassesta International S.A. ("Dassesta") for $3,000,000 bearing interest at 9% per annum, maturing in February 1997. Under the terms of the agreement, the note plus accrued interest was convertible at the option of the company into common shares upon execution of the agreement at $.40 per share or by Dassesta upon the earlier of maturity, default, or significant change in ownership of BTi at $.40 per share. The Company converted the $3,000,000 loan principal and related accrued interest of $87,040 into 7,717,602 shares of the Company's common stock on December 31, 1996. In May 1997, the Company entered into a loan facility with Dassesta International, S.A. ("Dassesta"), the Company's then controlling shareholder. The loan facility provided for maximum borrowings of $1,700,000 and expired on December 31, 1998. Interest accrued on outstanding principal at 10% and was payable on December 31, 1997 and 1998. The loan was collateralized by certain of the Company's accounts receivable and required principal repayment upon collection of such receivables. As of September 30, 1997, the Company had $975,000 outstanding under the loan which was repaid in 1998. In December 1997, the Company sold 4,000,000 unregistered shares of common stock to Dassesta and 1,500,000 additional unregistered shares of common stock to Bank Leu under Regulation S at $.50 per share. Consideration received by the Company in relation to the common stock sales consisted of cash totaling $793,000 and cancellation of its then outstanding loan principal of $1,700,000, related accrued interest of $38,000 and accounts payable of $219,000, all owed to Dassesta. 22 In the period January 1998 through July 1998 the Company borrowed a total of $2,000,000 from Dassesta International S.A., a major shareholder of the Company to meet working capital needs. In August 1998 the Company concluded the sale of 30,000,000 shares of unregistered common stock to overseas investors pursuant to Regulation S. Dassesta, which first became an investor in the Company in March 1995, purchased 10,000,000 shares, "La Caixa", Caja de Ahorras y Pensiones de Barcelona, a leading Spanish financial institution, purchased 10,000,000 shares, and the balance of the additional 10,000,000 shares were purchased by Experta Bil, Bank Leu and LGT Bank Luxembourg. The sale of the entire 30,000,000 shares was consummated at $.50 per share, yielding $15,000,000. The Company immediately repaid Dassesta the $2,000,000 of working capital loans plus $35,824 of accrued interest, and retained proceeds of $12,964,176, of which $10,100,000 was invested in short term U.S. Treasury Notes as of September 30, 1998. Based on the Company's current operating plans, capital and working capital expenditures necessary to support the on-going development and commercialization of the Company's products through September 30, 1999 are expected to substantially exceed cash projected to be generated from operations. However, the Company believes that its current cash and short-term investments exclusive of restricted cash are sufficient to support its operating needs through June 2000 based upon the Company's current business plan. The realization of this business plan is dependent upon the Company' ability to successfully capture a number of Magnes 2500 WH system sales in the current highly competitive market for the limited number of systems being purchased worldwide. There can be no assurance that sufficient numbers of Magnes 2500WH systems sales will be made by the Company in order to realize the current business plan. If these sales are not achieved as planned, the Company's available funds and projected cash flows from operations may not be sufficient to meet operating needs through June 2000. In either case, the Company will likely seek additional financing in fiscal 2000, or prior thereto, to continue to fund operating needs. There can be no assurance that such financing will be available on terms acceptable to the Company, if at all. See "Risks and Uncertainties". YEAR 2000 ASSESSMENT Many currently installed computer systems and software products are coded to accept only 2 digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept 4 digit entries to distinguish 21st century dates from the 20th century dates. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. As a result, in less than two years, computer systems and/or software used by many companies may need to be upgraded to comply with Year 2000 requirements. The Company is utilizing both internal and external resources as applicable, to identify, correct or reprogram, and test its internal systems for Year 2000 compliance. The total cost of compliance and its effect on the Company's future results of operations is being determined as part of the detailed conversion process. The Company has preliminarily determined that it may be necessary to acquire new Year 2000 compliant hardware and software systems for its accounting, purchasing , production control and inventory management systems. Current estimates indicate potential costs may amount to approximately $250,000 for expenditures, including hardware, software and systems conversions, plus additional, yet to be quantified internal and external labor costs for systems conversions and implementation. The Company is currently seeking to ensure that the software and operating systems included in its Magnes 2500WH are Year 2000 compliant. Failure or perceived failure of such product to be Year 2000 compliant could significantly adversely affect sales of the Company. Year 2000 issues could cause potential customers to reevaluate their current system needs and as a result consider deferring purchase of the Company's Magnes systems. Additionally, the Company could have potential warranty or other claims with existing Magnes systems placed with customers if such systems are not year 2000 compliant. Any of the foregoing could result in a material adverse effect on the Company's business, operating results, and financial condition. 23 The Company is also in the process of requesting information and assurances from its major vendors, service providers and customers about their state of Year 2000 compliance and readiness. In the event that significant Year 2000 issues are identified with such parties, the Company will identify contingency plans such as the use of alternate vendors or manual systems. As of September 30, 1998, the Company has spent approximately $40,000 in addressing Year 2000 issues including consultant and in-house labor costs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements as of September 30, 1998 and 1997, and for each of the three years in the period ended September 30, 1998 and the reports of independent accountants are included in this report as listed in the index on page 26 of this report ( Item 14 (a)). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Information required for this item is set forth in Form 8-K dated September 26, 1997 and filed with the Securities and Exchange Commission on October 2, 1997 and is incorporated by reference as part of this report. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required for this item with respect to directors and executive officers is set forth in the sections entitled "Election of Directors", "Security Ownership of Management-Business Experience of Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement and Notice of Annual Meeting of Shareholders the "Proxy Statement" to be filed with the Commission within 120 days of the Company's fiscal year end and delivered to shareholders in connection with the 1999 Annual Meeting of Shareholders, which sections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required for this item is set forth in the section entitled "Executive Compensation and Other Information" in the Proxy Statement, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required for this item is set forth in the section entitled "Security Ownership of Management" and "Principal Shareholders" in the Proxy Statement, which sections are incorporated herein by reference. 24 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required for this item is set forth in the sections entitled "Executive Compensation and Other Information" and "Certain Relationships and Related Transactions" in the Proxy Statement, which sections are incorporated herein by reference. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements Reports of Independent Accountants . . . . . . . . . . . . . . . 32 Consolidated Balance Sheets at September 30, 1998 and 1997 . . . 35 Consolidated Statements of Operations for the three years ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . 36 Consolidated Statement of Shareholders' Equity (Deficit) for the three years ended September 30, 1998 . . . . . . . . . . . . 37 Consolidated Statements of Cash Flows for the three years ended September 30, 1998 . . . . . . . . . . . . . . . . . . . . 38 Notes to Consolidated Financial Statements . . . . . . . . . . . 39 (2) Financial Statement Schedule Schedule II - Consolidated Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report. (b) Reports on Form 8-K during the fourth quarter: None (c) Exhibits The following documents are exhibits to this Form 10-K: 26 Exhibit No. Description of Document 3.1 (1) Articles of Incorporation of the Company, as amended. 3.2 (1) Bylaws of the Company, as amended. 3.3 (10) Certificate of Amendment of Fourth Restated Articles of Incorporation (numbered originally as 10.73) +10.6 (4) The Company's 1987 Stock Option Plan, as amended. +10.7 (4) Form of Incentive Stock Option and related exercise documents. +10.8 (1) The Company's 1985 Incentive Stock Option Plan, as amended. +10.9 (1) Form of Incentive Stock Option and related exercise documents. +10.10 (1) The Company's 1985 Non-Qualified Stock Option Plan, as amended. +10.11 (1) Form of Non-Qualified Stock Option and related exercise documents. +10.12 (1) The Company's 1984 Incentive Stock Option Plan, as amended. +10.13 (1) Form of Incentive Stock Option and related exercise documents. 10.17 (1) Option Agreement dated July 16, 1986 between the Company and Quantum Design, Inc. +10.36 (1) Form of Indemnification Agreements for directors and officers. 10.41 (2) License and R & D Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. 10.43 (2) Registration Rights Agreement dated January 22, 1990 between the Company and Sumitomo Metal Industries, Ltd. 10.45 (3) Memorandum of Understanding dated January 18, 1991, as amended, between the Company and Sumitomo Metal Industries, Ltd. (with certain confidential portions omitted). 10.46 (3) New R & D Program for Small MSR (Supplementary Agreement to License and R & D Agreement) dated February 28, 1991 between the Company and Sumitomo Metal Industries, Ltd., and Memorandum (not dated) modifying the agreement. 10.48 (3) Exclusive Patent and Technology License Agreement dated July 15, 1991 between the Company and Stanford University (with certain confidential portions omitted). +10.49 (7) Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan. Exhibit +10.55 (6) Employment Agreement, dated July 12, 1993, between the Company and James V. Schumacher. +10.56 (6) Form of Trust Agreement between the Company and James V. Schumacher. 27 Exhibit No. Description of Document +10.57 (8) Amendment to Option Agreements between the Company and Stephen O. James (numbered originally as Exhibit 10.3). 10.58 (6) Real Estate Lease, dated April 3, 1989, between the Company and Cornerstone Income Properties, plus First and Second Amendments to the Real Estate Lease. 10.64 (9) Form of Purchase Option Agreement, as amended. 10.67 (9) Magnetically Shielded Room (MSR) Development and Production Program Agreement, dated June 6, 1994 (with certain confidential portions omitted). 10.68 (6) Letter Agreement between the Company and Dassesta International S.A. regarding the purchase of 25,000,000 Shares of Common Stock of the Company. 10.69 (6) Loan and Security Agreement with a bank dated December 13, 1994. 10.70 (6) Schedule to Loan and Security Agreement dated December 13, 1994. 10.71 (11) Offshore Subscription Agreement between the Company and Dassesta International S.A. (Numbered originally as Exhibit 2.1). 10.72 (11) Form of Offer Letter to Holders of 10% Secured Promissory Notes (Numbered originally as Exhibit 2.2). 10.75 (11) Purchase and Distributorship Agreement dated January 23, 1997 between the Company and Sumitomo Metal Industries, Ltd. (with certain confidential portions omitted). 10.76 Form of Offshore Stock Subscription Agreements for August 1998 Sale of Company Common Stock 10.77 Joint Venture Agreement with Magnesensors 23.1 Consent of Arthur Andersen LLP 23.2 Consent of PricewaterhouseCoopers LLP 24 Power of Attorney 27 Financial Data Schedule (1) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-29095, filed June 7, 1989, as amended by Amendment No. 1, filed June 13, 1989, Amendment No. 2, filed July 21, 1989 and Amendment No. 3, filed July 28, 1989. (2) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Fiscal 1990 Form 10-K. 28 (3) These exhibits were previously filed as a part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Fiscal 1991 Form 10-K. (4) These exhibits were previously filed as part of, and are hereby incorporated by, reference to the same numbered exhibits (except as otherwise indicated) in the Fiscal 1992 Form 10-K. (5) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Fiscal 1994 Form 10-K. (6) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-46758, filed March 26, 1992, as amended by Amendment No. 1, filed May 8, 1992. (7) These exhibits were previously filed as part of, and are hereby incorporated by reference to the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-8, Registration Statement No. 33-68136 filed August 27, 1993. (8) These exhibits were previously filed as part of, and are hereby incorporated by reference to the same numbered exhibits (except as otherwise indicated) in the Registration Statement filed pursuant to the Securities Act of 1933 on Form S-1, Registration Statement No. 33-81294, filed July 8, 1994. (9) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in Fiscal 1995 Form 10-K (10) These exhibits were previously filed as part of, and are hereby incorporated by reference to, the same numbered exhibits (except as otherwise indicated) in form 8-K, filed April 14, 1995. (11) These exhibits were previously filed as part of, and are hereby incorporated by reference , to the same numbered exhibits (except as otherwise indicated) in Fiscal 1997 Form 10-K + Management contract or compensatory plan or arrangement. SUPPLEMENTAL INFORMATION Proxy materials have not been sent to shareholders as of the date of this report. The Proxy materials will be furnished to the Company's shareholders subsequent to the filing of this report and the Company will furnish such material to the Securities and Exchange Commission at that time. 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOMAGNETIC TECHNOLOGIES, INC. By /s/D. Scott Buchanan December 24, 1998 ------------------------- -------------------- D. Scott Buchanan Date President, Chief Executive Officer 30 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/D. Scott Buchanan December 24 , 1998 ----------------------------------- ------------------- D. Scott Buchanan Date President, Chief Executive Officer Director By /s/ Herman Bergman December 24 , 1998 ----------------------------------- ------------------- Herman Bergman Date Vice President Finance, Chief Financial Officer, Chief Accounting Officer, Corporate Secretary Director By * December 24, 1998 ----------------------------------- ------------------- Rodolfo Llinas, Director Date By * December 24, 1998 ----------------------------------- ------------------- Martin P. Egli, Director Date By * December 24, 1998 ----------------------------------- ------------------- Enrique Maso, Chairman of the Board Date By * December 24, 1998 ----------------------------------- ------------------- Galleon Graetz, Director Date *By /s/ D. Scott Buchanan ----------------------------------- D. Scott Buchanan (Attorney-in-Fact) 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Biomagnetic Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Biomagnetic Technologies, Inc. (a California Corporation) and subsidiary as of September 30, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the financial statements, the Company has historically reported net losses and negative cash flows from operations. Currently, the Company anticipates that it will seek additional financing to allow it to execute its business plan through the year 2000. For a discussion of management's plans in this regard, see Note 1. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Biomagnetic Technologies, Inc. and subsidiary as of September 30, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II-Valuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects, as of and for the years ended September 30, 1998 and 1997 the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ARTHUR ANDERSEN LLP San Diego, California November 13, 1998 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Biomagnetic Technologies, Inc.: In our opinion, the consolidated statements of operations, of changes in shareholders' equity (deficit) and of cash flows for the year ended September 30, 1996 (appearing on pages 36 through 38 of the Biomagnetic Technologies, Inc. Form 10-K) present fairly, in all material respects, the results of operations and cash flows of Biomagnetic Technologies, Inc. and its subsidiary for the year ended September 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Biomagnetic Technologies, Inc. for any period subsequent to September 30, 1996. The accompanying consolidated financial statements referred to above have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 1. The consolidated financial statements referred to above do not include any adjustments that might result from the outcome of this uncertainty. /s/ PRICEWATERHOUSECOOPERS LLP San Diego, California January 10, 1997, except as to the last paragraph of Note 8, which is as of December 19, 1997 33 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Biomagnetic Technologies, Inc.: Our audit of the consolidated financial statements of Biomagnetic Technologies, Inc. and its subsidiary referred to in our report dated January 10, 1997, except as to the last paragraph of Note 8, which is as of December 19, 1997 appearing on page 33 of this Form 10-K also included an audit of the Financial Statement Schedule II of Biomagnetic Technologies, Inc. and its subsidiary for the year ended September 30, 1996 appearing on page 53. In our opinion, this Financial Statement Schedule of Biomagnetic Technologies, Inc. and its subsidiary presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/PRICEWATERHOUSECOOPERS LLP San Diego, California January 10, 1997, except as to the last paragraph of Note 8, which is as of December 19, 1997 34 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS
September 30, 1998 1997 ---------- ---------- ASSETS Cash and cash equivalents $2,282,002 $1,228,734 Short-term investments 10,082,500 - Restricted cash 137,747 500,181 Accounts receivable, less allowance for doubtful accounts of $10,420 in 1998 and 1997 932,161 398,454 Inventories 2,990,759 2,387,975 Prepaid expenses and other current assets 271,095 269,457 ----------- ---------- Total current assets 16,696,264 4,784,801 ----------- ---------- Net property and equipment 303,874 526,444 Investment in Magnesensors - 160,000 Restricted cash 186,601 192,020 Other assets 155,839 339,063 ----------- ---------- TOTAL ASSETS $17,342,578 $6,002,328 ----------- ---------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Accounts payable $782,664 $1,340,992 Accrued liabilities 747,978 934,012 Accrued salaries and employee benefits 460,482 511,843 Customer deposits 2,909,100 2,172,160 Deferred revenue 656,800 1,134,938 Note payable to shareholder - 975,000 ----------- ---------- Total current liabilities 5,557,024 7,068,945 Other long-term liabilities 216,183 219,489 ----------- ---------- Total liabilities 5,773,207 7,288,434 ----------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT) Common stock -- no par value, 100,000,000 shares authorized; Shares issued and outstanding 83,367,112 in 1998 and 47,720,887 in 1997 99,391,882 81,568,769 Additional paid-in capital 3,000,000 3,000,000 Accumulated deficit (90,822,511) (85,854,875) ----------- ---------- Total shareholders' equity (deficit) 11,569,371 (1,286,106) ----------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $17,342,578 $6,002,328 ----------- ---------- ----------- ----------
See Notes to Consolidated Financial Statements. 35 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 1998 1997 1996 ----------- ----------- ------------ REVENUES Products $2,102,967 $10,130,727 $167,684 Product services 497,988 395,327 564,921 Contract research 238,053 65,838 - ----------- ----------- ------------ 2,839,008 10,591,892 732,605 COST OF REVENUES Products 1,935,049 6,333,270 2,565,454 Product services 809,599 466,763 111,173 Contract research 233,860 64,771 - ----------- ----------- ------------ 2,978,508 6,864,804 2,676,627 ----------- ----------- ------------ GROSS MARGIN (139,500) 3,727,088 (1,944,022) OPERATING EXPENSES Research and development 1,755,756 2,953,009 7,767,199 Marketing and sales 1,281,428 1,902,157 2,798,248 General and administrative 1,721,032 2,189,878 2,957,571 ----------- ----------- ------------ 4,758,216 7,045,044 13,523,018 ----------- ----------- ------------ OPERATING LOSS (4,897,716) (3,317,956) (15,467,040) Interest expense (72,129) (2,339,439) (788,291) Interest income 99,894 223,565 524,895 Other income, net 63,115 193,064 164,623 Loss on equity investment (160,000) - - ----------- ----------- ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (4,966,836) (5,240,766) (15,565,813) Provision for Income Taxes 800 800 - ----------- ----------- ------------ NET LOSS $(4,967,636) $(5,241,566) $(15,565,813) ----------- ----------- ------------ ----------- ----------- ------------ BASIC AND DILUTED NET LOSS PER SHARE $(.09) $(.11) $(.39) ----------- ----------- ------------ ----------- ----------- ------------ Weighted Average Number of Common Shares Outstanding 56,429,913 45,789,916 39,950,047 ----------- ----------- ------------ ----------- ----------- ------------
See Notes to Consolidated Financial Statements. 36
BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) Common Stock Additional Accumulated Shares Amount Paid-In Capital Deficit Total ---------- ----------- --------------- ------------- ----------- BALANCE, SEPTEMBER 30, 1995 39,921,174 $78,415,590 $ - $(65,047,496) $13,368,094 Exercise of stock options 26,765 17,965 - - 17,965 Stock issued to Employee Stock Purchase Plan participants 26,283 33,642 - - 33,642 Interest cost for conversion feature of note payable to shareholder - - 3,000,000 - 3,000,000 Net loss - - - (15,565,813) (15,565,813) ---------- ----------- --------------- ------------- ----------- BALANCE, SEPTEMBER 30, 1996 39,974,222 78,467,197 3,000,000 (80,613,309) 853,888 Exercise of stock options 29,063 14,532 - - 14,532 Conversion of note payable to shareholder and related accrued interest to common stock 7,717,602 3,087,040 - - 3,087,040 Net loss - - - (5,241,566) (5,241,566) ---------- ----------- --------------- ------------- ----------- BALANCE, SEPTEMBER 30, 1997 47,720,887 81,568,769 3,000,000 (85,854,875) (1,286,106) Exercise of stock options 146,225 73,113 - - 73,113 Conversion of note payable to shareholder, related accrued interest and accounts payable to common stock 3,914,000 1,957,000 - - 1,957,000 Sale of common stock 31,586,000 15,793,000 - - 15,793,000 Net loss - - - (4,967,636) (4,967,636) ---------- ----------- --------------- ------------- ----------- BALANCE, SEPTEMBER 30, 1998 83,367,112 $99,391,882 $3,000,000 $(90,822,511) $11,569,371 ---------- ----------- --------------- ------------- ----------- ---------- ----------- --------------- ------------- -----------
See Notes to Consolidated Financial Statements 37 BIOMAGNETIC TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1998 1997 1996 ------------ ------------ ------------- OPERATING ACTIVITIES Net loss $(4,967,636) $(5,241,566) $(15,565,813) Adjustments to reconcile net loss to net cash used in operating activities: Interest cost for conversion feature of note payable to shareholder - 2,250,000 750,000 Loss on disposition of assets 10,752 9,401 345,677 Loss on equity investment 160,000 - - Depreciation and amortization 307,163 437,552 1,248,141 Changes in operating assets and liabilities: Restricted cash 367,853 5,892,354 (5,484,555) Accounts receivable (533,707) (381,723) 757,888 Inventories (602,784) 3,239,540 (3,150,721) Prepaid expenses and other current assets (1,638) 68,335 118,314 Other assets 183,224 (60,249) 283,742 Accounts payable (339,328) (1,291,925) 2,435,363 Accrued liabilities (148,034) (875,193) (311,674) Accrued salaries and employee benefits (51,361) (348,312) 249,582 Customer deposits 736,940 (7,036,166) 5,352,139 Deferred revenue (471,955) 1,344,938 - Other liabilities (9,489) (38,581) 164,147 ------------ ------------ ------------- Net cash used in operating activities (5,360,000) (2,031,595) (12,807,770) ------------ ------------ ------------- INVESTING ACTIVITIES Investment in Magnesensors - (80,000) - Change in short-term investments, net (10,082,500) 744,138 9,771,564 Payments for property and equipment (95,345) (145,433) (577,237) ------------ ------------ ------------- Net cash (used in) provided by investing activities (10,177,845) 518,705 9,194,327 ------------ ------------ ------------- FINANCING ACTIVITIES Proceeds from issuance of common stock 15,866,113 14,532 51,607 Payment of notes payable to shareholder (2,000,000) - - Proceeds from notes payable to shareholder 2,725,000 975,000 3,000,000 ------------ ------------ ------------- Net cash provided by financing activities 16,591,113 989,532 3,051,607 ------------ ------------ ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,053,268 (523,358) (561,836) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,228,734 1,752,092 2,313,928 ------------ ------------ ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $2,282,002 $1,228,734 $1,752,092 ------------ ------------ ------------- ------------ ------------ -------------
See Notes to Consolidated Financial Statements. 38 NOTE 1. BUSINESS, RISKS AND UNCERTAINTIES Biomagnetic Technologies, Inc. (the "Company"), founded in 1970 as a California corporation, is engaged primarily in the business of developing, manufacturing and selling innovative medical imaging systems to medical institutions located in the United States, Europe and Japan. The magnetic source imaging ("MSI") systems developed by the Company measure magnetic fields created by the human body for the noninvasive diagnosis of a broad range of disorders. To date, the Company has been engaged principally in research and development activities, and has made only low volume sales to medical research institutions. The Company is dependent on its current Magnes 2500WH system as its principal product for which there are currently limited clinical applications. Additional clinical applications development needs to be conducted with the MSI system at major medical centers before the Company can begin to penetrate the commercial clinical market. There can be no assurance that a commercial market will develop for diagnostic or monitoring uses of the MSI system. A continued lack of clinical applications and commercial market for the Company's Magnes 2500WH system would have a material adverse impact on the Company's financial position, results of operations and cash flows. The Company's commercial success is also highly dependent on the availability of reimbursement for procedures using the MSI system. To date, reimbursements from third party payors are on a case-by-case basis. As of September 30, 1998, there have been limited reimbursement from third party payors in the US. Although the number of third party payors making reimbursements has increased, there is no assurance that third party reimbursements will become widely available. Reimbursements are not currently provided for MSI procedures by the United States government, nor is there any assurance that the US government will authorize or budget for such procedures in the future. If widespread availability of reimbursement from the government and private insurers is not achieved, the Company's financial position, results of operations and cash flows would be materially adversely affected. The Company also cannot predict what legislation relating to its business or the health care industry may be enacted in the future, including legislation relating to third party reimbursement, or what effect such legislation may have on its financial position, results of operations and cash flows. The industry in which the Company operates is characterized by rapid technological change. New products using other technologies or improvements to existing products may reduce the size of the potential markets for the Company's products, and may render them obsolete or non-competitive. Competitors may develop new or different products using technology or imaging modalities that may provide or be perceived as providing greater value than the Company's products. Any such development could have a material adverse effect on the Company's financial condition, results of operations and cash flows. Additionally, there has been recently, and continues to be, ongoing significant price competition from the Company's competitors for the currently limited number of whole head systems being purchased worldwide. This aggressive competition is likely to affect potential future profitability of the Company's Magnes 2500WH system, the extent of which is not presently determinable. 39 The Company incurred net losses of $4,968,000, $5,242,000, and $15,566,000 in fiscal 1998, 1997 and 1996, respectively. The Company had negative cash flow from operations of $5,360,000, $2,032,000, and $12,808,000 in fiscal 1998, 1997 and 1996, respectively. At September 30, 1998, the Company has an accumulated deficit of $90,823,000, net capital of $11,569,000 and working capital of $11,139,000. Management anticipates that capital and working capital requirements in fiscal 1999 will substantially exceed cash projected to be generated by operations. In August 1998, the Company received total proceeds of $15,000,000 from the sale of 30,000,000 unregistered shares of common stock at $.50 per share to offshore investors pursuant to Regulation S. Dassesta International S.A., a major shareholder of BTi since March 1995 purchased 10,000,000 shares. "La Caixa", Caja de Ahorros y Pensiones de Barcelona, one of the leading financial institutions of the Kingdom of Spain purchased 10,000,000 shares. A total of 2,000,000 shares were sold to Swisspartners Investment Network Ltd, and the remaining 8,000,000 shares were purchased by two European banks under the same terms and conditions. As of July 1998, the Company had borrowed $2,000,000 from Dassesta International, S.A. The loan was a 180 day unsecured loan bearing interest at 8%. In August 1998, the Company paid off the total principal of $2,000,000 owed to Dassesta plus $36,000 of related accrued interest using proceeds from the August 1998 financing of $15,000,000. In February 1998, the Company discounted two customer notes for a net amount of $355,000 received from Dassesta International S.A. The face amount of these notes was 2,200,000 French Francs, equal to approximately $366,000 at the then current exchange rate. In December 1997, the Company sold 4,000,000 unregistered shares of common stock to Dassesta and an additional 1,500,000 unregistered shares of common stock to Bank Leu under Regulation S at $.50 per share. Consideration received by the Company in relation to the common stock sales consisted of cash totaling $793,000 and cancellation of its then outstanding loan principal of $1,700,000, related accrued interest of $38,000 and accounts payable of $219,000, all owed to Dassesta. The Company currently anticipates that its existing capital resources, including the net proceeds from the August 1998 sales of 30,000,000 shares of common stock to offshore investors will be sufficient to provide operating capital required to meet its obligations in the normal course of business through June 2000, based upon the Company's current business plan. There can be no assurance, however, that sales of the Company's systems projected in the current business plan will be achieved in the current limited and competitive market for its systems. If these sales are not achieved as planned, the Company's available funds may not be sufficient to meet operating capital needs through June 2000. Additionally, the Company will likely seek additional financing in fiscal 2000 or prior thereto, to continue to fund operating capital requirements at that time. There can be no assurance that such financing will be available on terms acceptable to the company, if at all. 40 NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and Biomagnetic Technologies GmbH, a wholly owned foreign subsidiary located in Germany. All material intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term highly liquid investments purchased with original maturities of three months or less. Cash equivalents are stated at cost, which approximates market value. SHORT-TERM INVESTMENTS Management determines the appropriate classification of its short-term investments at the time of purchase and reevaluates such designation as of each balance sheet date. The Company has classified its short-term investments as "available-for-sale". At September 30 1998, short-term investments are stated at cost which approximates market, and consist of U.S. Treasury Notes, maturing in December 1998 and March 1999. The Company had no realized gains or losses on short-term investments in fiscal 1998, 1997 and 1996. RESTRICTED CASH Restricted cash consists of cash balances required to be held under contractual obligation to provide future services pertaining to sales of MSI systems and amounts held in trust for executive termination costs. FAIR VALUE OF FINANCIAL INSTRUMENTS It is management's belief that the carrying amounts shown for the Company's financial instruments are reasonable estimates of their related fair values. INVENTORIES Inventories are carried at the lower of cost or market. Cost is determined on the first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation. Depreciation is generally computed using the straight-line method over estimated useful lives of three to ten years. Leasehold 41 improvements are amortized over the lesser of their estimated useful life or the related lease term. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of related assets are capitalized. LONG-LIVED ASSETS The Company assesses potential impairments to its long-lived assets on an exception basis when there is evidence that events or changes in circumstances have made recovery of the asset's carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting For Income Taxes." Deferred income tax assets or liabilities are recognized based on the temporary differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. REVENUE RECOGNITION Standard terms of product sales provide for payment of 40% of the purchase price upon placement of the order, 40% upon shipment and the remaining 20% upon final customer acceptance. Revenue from product sales is recognized at the time of customer acceptance. Standard terms of sale also include a one year service period following the sale. The Company defers and recognizes service revenues over the related service period. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. STOCK-BASED COMPENSATION ACCOUNTING The Company accounts for stock-based compensation in accordance with SFAS No. 123 "Accounting for Stock-Based Compensation." The Company has elected to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" and has provided pro forma disclosures as if the fair value based method prescribed by SFAS No. 123 had been utilized. 42 NET LOSS PER SHARE Basic and diluted net loss per share is computed in accordance with SFAS No. 128 "Earnings Per Share," based upon the weighted average number of common shares outstanding. Common stock equivalents are anti-dilutive and are excluded from the computation of basic and diluted net loss per share. FOREIGN CURRENCY REMEASUREMENT The functional currency of the Company's foreign subsidiary is the U.S. dollar. The monetary assets and liabilities of the foreign subsidiary are translated into U.S. dollars at the exchange rate in effect at the balance sheet date while nonmonetary items are translated at historical rates. Revenue and expenses are translated at average exchange rates for the period, except cost of sales and depreciation, which are translated at historical rates. Remeasurement gains or losses of the foreign subsidiary are recognized currently in consolidated operations. For the years ended September 30, 1998, 1997 and 1996 such gains (losses) totaled approximately $79,000, $(17,000) and $136,000, respectively. OFF-BALANCE SHEET RISK The Company has periodically entered into forward exchange contracts to hedge foreign currency exposure associated with certain identifiable foreign currency commitments entered into in the ordinary course of business. Gains and losses incurred on forward contracts associated with sales orders are deferred and included in the basis of the underlying sales transaction. Gains and losses are recognized when the offsetting gains and losses are recognized in the related hedged items. At September 30, 1998 and 1997, the Company did not have any open forward exchange contracts. RECENT AUTHORITATIVE PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 131 requires reporting certain information about operating segments in condensed financial statements of interim periods issued to shareholders. The Company adopted SFAS No. 130 in fiscal 1998 which had no impact on the Company's financial position or results of operations as presented as the Company has no components of comprehensive income. SFAS No. 131 is required to be adopted during fiscal 1999. The adoption of this standard will not have a material effect on the Company's financial position or results of operations as it pertains to disclosure only. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies characteristics to be used in determining when computer software is for internal use. SOP 98-1 is effective for fiscal years beginning after December 15, 43 1998, with earlier application permitted. The Company anticipates that SOP 98-1 will not have a material impact on the Company's financial position or results of operations. In April 1998, the AcSEC issued AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities." This statement provides guidance on the financial reporting of start-up costs and organization costs and requires that such costs of start-up activities be expensed as incurred. SOP 98-5 is effective for fiscal years beginning after December 15, 1998, with earlier application permitted. The Company anticipates that the adoption of SOP 98-5 will not have a material impact on the Company's financial position or results of operations. In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. SFAS No. 133 is effective for fiscal quarters beginning after June 15, 1999. As of September 30, 1998 and 1997, the Company had not entered into any derivative instrument arrangements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform to the current year presentation. NOTE 3. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one industry segment which includes developing, manufacturing and selling magnetic source imaging products. The overall market for the Company's operations can be further divided into three overlapping segments: the basic research market, the clinical applications development market, and the commercial clinical market. Substantially all of the Company' revenues have been derived from, and substantially all of the Company's assets have been devoted to, the basic research market. The following represents information about operations in different geographic areas pertaining to the basic research market: 44
Years Ended September 30, 1998 1997 1996 ---- ---- ---- Revenues United States $814,052 $2,401,984 $198,351 Germany 542,956 6,995,299 449,895 France 1,482,000 - - Japan - 1,194,609 84,359 ----------- ----------- ------------ $2,839,008 $10,591,892 $732 ,605 ----------- ----------- ------------ ----------- ----------- ------------ Net loss United States $(4,311,817) $(5,588,919) $(13,893,993) Germany (655,819) 347,353 (1,671,820) ----------- ----------- ------------ $(4,967,636) $(5,241,566) $(15,565,813) ----------- ----------- ------------ ----------- ----------- ------------ Identifiable assets United States $16,154,310 $3,162,666 $11,628,478 Germany 1,188,268 2,839,662 4,621,123 ----------- ----------- ------------ $17,342,578 $6,002,328 $16,249,601 ----------- ----------- ------------ ----------- ----------- ------------
NOTE 4. CUSTOMER CONCENTRATIONS On average, the Company's MSI systems sell for approximately $1.0 - $2.5 million, resulting in significant concentrations of revenues and accounts receivable. As of September 30, 1998 and 1997, 77% and 84%, respectively, of accounts receivable pertained to 2 customers. As of September 30, 1998, the Company has foreign currency denominated accounts receivable of 2,500,000 French Francs, equal to $446,000 at September 30, 1998. For the years ended September 30, 1998, 1997 and 1996 total product revenues were derived from 2, 9 and 4 customers, respectively. NOTE 5. FINANCIAL STATEMENT INFORMATION Inventories consist of the following:
1998 1997 ---- ---- Finished goods $ 500,030 $578,702 Work-in-process 2,328,003 1,527,828 Raw materials 162,726 281,445 ---------- ---------- $2,990,759 $2,387,975 ---------- ---------- ---------- ----------
Net property and equipment consists of the following:
1998 1997 ---- ---- Machinery and equipment $7,279,453 $7,192,248 Office furniture and equipment 253,513 258,376 Leasehold improvements 359,731 357,480 ---------- ---------- 7,892,697 7,808,104 Less Accumulated Depreciation (7,588,823) (7,281,660) ---------- ---------- $ 303,874 $ 526,444 ---------- ---------- ---------- ----------
45 Accrued liabilities consist of the following:
1998 1997 ---- ---- Warranty allowance $350,000 $ 350,000 Customer obligations 300,000 450,000 Other 97,978 134,012 -------- --------- $747,978 $ 934,012 -------- --------- -------- ---------
Supplemental Disclosure of Cash Flow Information: In December 1997, the Company exchanged common stock with a value of $1,957,000 for cancellation of a note payable to shareholder of $1,700,000, related accrued interest of $38,000 and accounts payable of $219,000, all owed to Dassesta. In June 1997, the Company contributed fixed assets with a net book value of $80,000 as part of its investment in Magnesensors. On December 31, 1996, the Company converted principal outstanding under a note payable to shareholder of $3,000,000 and related accrued interest of $87,040 into 7,717,602 shares of common stock. During the years ended September 30, 1998, 1997 and 1996, the Company paid approximately the following for :
1998 1997 1996 ---- ---- ---- Interest $72,000 $89,000 $ 38,000 Income Taxes $ 800 $ 800 $ 800
NOTE 6. INVESTMENT IN MAGNESENSORS In June 1997, BTi entered into a collaboration with Quantum Magnetics, Inc., a private company, to form a new company called Magnesensors, Inc. BTi and Quantum Magnetics each own 38% of the outstanding stock of the new company and 24% of the outstanding stock is owned by the management of Magnesensors. BTi licensed certain technology, assigned certain patents and contributed cash and certain fixed assets in connection with the formation of Magnesensors. Magnesensors will continue the development of applications and products using high temperature superconductors. BTi will receive royalty-free licenses to any technology developed by Magnesensors. BTi accounts for its investment in Magnesensors under the equity method. During fiscal 1998 and 1997, BTi paid Magnesensors $160,000 and $36,000, respectively, for certain services rendered. As of September 30, 1998, the Company's equity investment in Magnesensors has been reduced to zero by recording the Company's portion of Magnesensors' losses for fiscal 1998 of approximately $78,000 and writing off the remaining balance of approximately $82,000 based upon current estimates of future cash flows and profitability of Magnesensors. 46 BTi and Quantum Magnetics have agreed to guarantee a working capital line of credit up to $200,000 through June 2000 upon the attainment of such line of credit by Magnesensors. NOTE 7. INCOME TAXES The Company's provision for income taxes in fiscal 1998, 1997 and 1996 consists of minimum state taxes. The components of deferred tax assets at September 30, 1998 and 1997 are as follows:
1998 1997 ---- ---- Net operating loss carryforwards $7,090,000 $ 5,330,000 Tax credits 830,000 780,000 Capitalized research and development costs 941,000 1,771,000 Allowances 1,310,000 1,063,000 Other 339,000 397,000 ---------- ------------ 10,510,000 9,341,000 Valuation allowance (10,510,000) (9,341,000) ---------- ------------ Deferred tax assets $ - $ - ---------- ------------ ---------- ------------
A full valuation allowance for deferred tax assets has been provided because realization of such future tax benefits cannot be assured. The Company has approximately $19,200,000 and $6,200,000 of Federal and State net operating loss carryforwards which will expire at various dates through 2013. As a result of ownership changes (as defined by Section 382 of the Internal Revenue Code of 1986, as amended) which occurred in fiscal 1995 and fiscal 1997, the Company's tax loss carryforwards generated prior to fiscal 1998 have been limited to a total of approximately $18,650,000 of which approximately $930,000 can be utilized per year as of September 30, 1998. The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows:
1998 1997 1996 ---- ---- ---- Computed expected federal tax benefit $(1,688,996) $(1,834,268) $(5,448,035) State taxes, net of federal benefit (287,558) (319,687) (1,266,451) Change in valuation reserve 1,169,000 (3,730,000) 6,318,000 Limitation of net operating loss carryforwards and tax benefits 830,000 4,719,000 _ Interest cost for conversion feature of note payable to shareholder - 924,750 332,250 Other (21,646) 241,005 64,236 ----------- ----------- ----------- Provision for income taxes $ 800 $ 800 $ - ----------- ----------- ----------- ----------- ----------- -----------
NOTE 8. DEBT During 1998, the Company borrowed a total of $2,725,000 from Dassesta International, S.A. at an interest rate of 8%. In December 1997 the Company issued common stock for cancellation of loan 47 principal due Dassesta of $1,700,000 and repaid additional loan principal during 1998 totaling $2,000,000. Interest expense in 1998 related to Dassesta was approximately $72,000. In February 1998, the Company discounted two customer notes for a net amount of $355,000 received from Dassesta International, S.A., a principal shareholder. The face amount of these notes was 2,200,000 French Francs, equal to approximately $366,000 at the then current exchange rate. In May 1997, the Company entered into a loan facility with Dassesta International, S.A. ("Dassesta"), the Company's then controlling shareholder. The loan facility provided for maximum borrowings of $1,700,000 expiring on December 31, 1998. Interest accrued on outstanding principal at 10%. The loan was collateralized by certain of the Company's accounts receivable and required principal repayment upon collection of such receivables. Interest expense in 1997 related to loans from Dassesta was approximately $2,339,000. In August 1996, the Company entered into a loan agreement with Dassesta for $3,000,000 bearing interest at 9% per annum, maturing in February 1997. Under the terms of the agreement, the note plus accrued interest was convertible at the option of the company into common shares upon execution of the agreement at $.40 per share or by Dassesta upon the earlier of maturity, default, or significant change in ownership of BTi at $.40 per share. The Company converted the $3,000,000 loan principal and related accrued interest of $87,040 into 7,717,602 shares of the Company's common stock on December 31, 1996. Upon execution of the convertible note in August 1996, the closing quoted market price of the Company's common stock was $.94 per share, and the conversion price to common stock under the note payable was $.40, a $.54 discount from market. As a result, under the provisions of Topic D-60, the intrinsic value of the conversion feature was equal to the face value of the note and was required to be originally recorded as debt discount and additional paid-in capital, and amortized to interest expense from the date of the note to the earliest conversion date by Dassesta. This resulted in non-cash interest expense of $2,250,000 and $750,000 being charged to operations in 1997 and 1996, respectively. NOTE 9. LEASE OBLIGATIONS The Company leases its office and production facilities and certain equipment under noncancelable operating leases expiring at various dates through February 2003. The Company's main facility lease agreement expires in February 2003. Approximate future minimum cash payments under operating leases are as follows:
Year Ending September 30, 1999 $ 637,000 2000 618,000 2001 618,000 2002 613,000 2003 253,000 ---------- $2,739,000 ---------- ----------
48 Total rent expense under noncancelable operating leases was approximately $604,000, $580,000 and $608,000 for the years ended September 30, 1998, 1997 and 1996, respectively. NOTE 10. SHAREHOLDERS' EQUITY COMMON STOCK On August 5, 1998, the Company received $15,000,000 from the sale of 30,000,000 shares of common stock at $.50 per share to offshore investors pursuant to Regulation S. Of the total 30,000,000 shares, 10,000,000 shares were sold to "La Caixa", Caja de Ahorros y Pensiones de Barcelona, one of the leading financial institutions of the Kingdom of Spain, 10,000,000 shares were sold to Dassesta International S.A., a major shareholder of BTi, 2,000,000 shares were sold to Swisspartners Investment Network Ltd., and 8,000,000 shares to other European banks. In December 1997, the Company sold 4,000,000 unregistered shares of common stock to Dassesta and an additional 1,500,000 unregistered shares of common stock to Bank Leu under Regulation S at $.50 per share. Consideration received by the Company in relation to the common stock sales consisted of cash totaling $793,000 and cancellation of its then outstanding loan principal of $1,700,000, related accrued interest of $38,000 and accounts payable of $219,000, all owed to Dassesta. During August 1996, the Company completed negotiations with its then controlling shareholder, Dassesta for an unsecured working capital loan of $3,000,000 which was to mature on February 14, 1997, bearing interest at 9% per annum. The principal amount of the loan and any accrued interest was convertible at the option of the Company upon execution of the agreement at $.40 per share or at the option of Dassesta upon the earlier of maturity, default, or significant change in ownership of BTi at $.40 per share. The Company elected to convert the $3,000,000 loan and related accrued interest of $87,040 into 7,717,602 shares of common stock on December 31, 1996. STOCK OPTION PLANS The Company has various incentive and non-qualified stock option plans which provide that options to purchase shares of common stock may be granted to key employees and others at an option price of at least fair market value at the date of grant and vest over a maximum period of four years from date of grant. The exercise period for each option is not to exceed 10 years from the date of grant. On December 31, 1996, the Company's 1987 Incentive Stock Option Plan which provided options to purchase up to 5,000,000 shares of common stock expired. At January 1, 1997, a new 1997 Incentive Stock Option Plan was approved by the Board of Directors, authorizing options to purchase 3,000,000 shares of common stock. At September 30 1998, options to purchase 2,645,038 shares of the Company's common stock are exercisable and 365,600 shares are available for future grants under the plans. Options outstanding at September 30, 1998 have exercise prices between $6.00 and $.28 per share. 49 On December 18 1996, the Board of Directors authorized the revaluation of all then outstanding options under its stock option plans to an exercise price of $.50 per share, the closing market value of the Company's stock on that day. The following table summarizes common stock option plan activity:
Weighted Average Options Exercise Price ----------- ---------------- Outstanding at September 30, 1995 1,854,966 $ 1.64 Granted 2,480,400 1.33 Canceled (75,134) 1.38 Exercised (4,765) 1.50 --------- -------- Outstanding at September 30, 1996 4,255,467 $ 1.46 Granted 1,510,400 .50 Canceled (1,409,327) 1.25 Exercised (29,063) 1.00 --------- -------- Outstanding at September 30, 1997 4,327,477 $ 1.18 Granted 2,510,000 .45 Canceled (1,946,422) 1.55 Exercised (146,225) .50 --------- -------- Outstanding at September 30, 1998 4,744,830 $ .66 --------- -------- --------- --------
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" under which no compensation cost has been recognized for employee stock options. If the Company had elected to recognize compensation costs based on the fair value on the date of grant for awards in 1998, 1997 and 1996, consistent with the provisions of SFAS No. 123, net loss and net loss per share would have been increased to the following amounts:
1998 1997 1996 ------------ ------------ ------------- Pro forma net loss $(6,093,477) $(6,138,480) $(16,124,427) Pro forma net loss per share $ (.11) $ (.13) $ (.40)
The pro forma effect on net loss for fiscal years 1998, 1997 and 1996 may not be representative of the pro forma effect on net loss of future years because the SFAS No. 123 method of accounting for pro forma compensation expense has not been applied to options granted prior to December 15, 1995. The weighted-average fair values at date of grant for options granted during fiscal 1998 and 1997 were between $.58 and $.28 and were estimated using the Black-Scholes option pricing model. The following 50 assumptions were applied: (i) expected dividend yield of 0%, (ii) expected volatility rate of 2.28, (iii) expected life of 8 years, and (iv) risk-free interest rates ranging from 4.67% to 6.88%. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models also require the input of highly subjective assumptions such as expected option life and expected stock price volatility. Because the Company's employee stock-based compensation plan has characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, the Company believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of awards from those plans. EMPLOYEE STOCK PURCHASE PLAN The Company has established an Employee Stock Purchase Plan in which eligible employees may use funds from accumulated payroll deductions to purchase shares of common stock at the end of designated purchase periods. Employees may contribute up to 15% of their base salary toward such purchases, not to exceed $25,000 per calendar year. The purchase price is the lesser of 85% of the fair market value of common stock determined at the beginning or end of the purchase period. For the purchase period ended March 31, 1996, the Company issued 26,283 shares of common stock to employees at an average price of $1.28 per share. For the purchase period ended March 31, 1998, no shares were issued. A total of 635,949 shares of common stock have been authorized for future purchases under the Employee Stock Purchase Plan as of September 30, 1998. NOTE 11. EMPLOYMENT AGREEMENT In June 1993, the Company and its former Chief Executive Officer entered into an employment agreement that provided for the continuation of base salary payments upon termination for two years under certain circumstances. Pursuant to terms of the employment agreement, the Company secured potential future payments in a trust fund established on behalf of the Chief Executive Officer. At September 30, 1998, the Company is contingently liable for approximately $186,000 of continuation salary which is reflected as part of restricted cash in the accompanying balance sheets at September 30, 1998 and 1997. 51 NOTE 12. SELECTED QUARTERLY DATA (UNAUDITED) Unaudited quarterly data for fiscal 1998 and 1997 is presented below:
(In thousands, except per share) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1998 ---- Net revenues $ 324 $ 1,736 $ 616 $ 163 Gross margin 58 488 203 (889) Net loss (1,285) (597) (1,026) (2,060) Basic and diluted net loss per share (.03) (.01) (.02) (.03) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1997 ---- Net revenues $ 168 $ 1,555 $ 5,289 $ 3,580 Gross margin 68 499 2,385 775 Net income (loss) (4,615) (1,178) 766 (215) Basic and diluted net income (loss) per share (.12) (.03) .02 .00
52 BIOMAGNETIC TECHNOLOGIES, INC. SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning Costs and End of Description of Period Expenses Deductions Period ---------- ---------- ---------- ----------- Allowance for doubtful accounts on accounts receivable: Fiscal Year 1998 $10,420 ---- ---- $10,420 Fiscal Year 1997 $10,420 ---- ---- $10,420 Fiscal Year 1996 $20,115 ---- $ 9,695(A) $10,420
(A) Uncollectible accounts charged against allowance _______________ Allowance for obsolete and slow moving inventory:
Fiscal Year 1998 $1,710,659 $840,191 $250,256(B) $2,300,594 Fiscal Year 1997 $1,650,659 $ 60,000 ---- $1,710,659 Fiscal Year 1996 $1,015,692 $918,522 $283,555(B) $1,650,659
(B) Sale or disposal of items under allowance 53
EX-10.76 2 EXHIBIT 10.76 OFFSHORE STOCK SUBSCRIPTION AGREEMENT This Stock Subscription Agreement (the "AGREEMENT"), dated _________ __, 1998, is entered into by and between Biomagnetic Technologies, Inc., a California corporation (the "COMPANY"), and the undersigned purchaser (the "PURCHASER"). The Company has offered for sale outside the United States (as such sale is defined in Regulation S ("REGULATION S") under the Securities Act of 1933, as amended (the "SECURITIES ACT")) to the Purchaser and others, shares of its common stock, no par value, pursuant to Regulation S. Capitalized terms used herein and not defined herein shall have the meanings given to them in Regulation S. The parties hereto agree as follows: 1. PURCHASE AND SALE OF SHARES. (a) Upon the basis of the representations and warranties, and subject to the terms and conditions, set forth in this Agreement, the Company covenants and agrees to sell to the Purchaser on the Closing Date (as hereinafter defined), the number of shares of its common stock, no par value, set forth on the signature page hereof (the "SHARES"), at a price equal to $0.50 per share (the "PURCHASE PRICE"), and upon the basis of the representations and warranties, and subject to the terms and conditions, set forth in this Agreement, the Purchaser covenants and agrees to purchase from the Company on the Closing Date the Shares at the Purchase Price. (b) The Shares that the Purchaser has agreed to purchase from the Company on the Closing Date at the Purchase Price of $0.50 per share are currently authorized shares of the Company's Common Stock. Subsequent to the Closing Date, the Company may, subject to the approval of its shareholders, effectuate a 1-for-10 reverse stock split or such other adjustment as deemed appropriate by the Company's board of directors and shareholders by amending the Company's articles of incorporation. 2. Closing. The closing of the purchase and sale of the Shares pursuant to Section 1 hereof (the "CLOSING") shall take place on or before _____________, at the offices of the Company, located at 9727 Pacific Heights Boulevard, San Diego, CA 92121 (such time and date for the closing, the "CLOSING DATE"). The certificates representing the Shares to be purchased by the Purchaser shall be delivered by, or on behalf of, the Company at the above-mentioned offices, against payment of the Purchase Price therefor in immediately available funds by, or on behalf of, the Purchaser to the Company's account (No. 422709) at Bank Julius Baer & Co., Ltd., New York Branch, 330 Madison Avenue, New York, NY 10017 or as otherwise instructed by the Company. Delivery of such shares shall be in accordance with the instructions of the Purchaser, and in such names as the Purchaser shall instruct, subject to customary settlement procedures. 3. REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE COMPANY. The Company represents and warrants to, and agrees with, the Purchaser that: (a) ORGANIZATION AND QUALIFICATION. Each of the Company and Biomagnetic Technologies GmbH, a corporation organized under the laws of Germany (the "SUBSIDIARY"), is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties. Each of the Company and its Subsidiary is duly qualified, licensed or admitted to do business and is in good standing in each jurisdiction in which the ownership, use or leasing of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary, except for such failures to be so qualified, licensed or admitted and in good standing which, individually or in the aggregate, (i) are not having and could not be reasonably expected to have a material adverse effect on the Company and its Subsidiary taken as a whole, and (ii) could not be reasonably expected to have a material adverse effect on the validity or enforceability of this Agreement or on the ability of the Company to perform its obligations hereunder. Except for the Subsidiary and Magnesensors Inc., the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. (b) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed herein or in the Company SEC Reports (as defined in Section 3(f)) filed prior to the date of this Agreement and except that in March 1997, the Company's common stock was delisted from the NASDAQ National Market and now is quoted on the National Association of Securities Dealers, Inc.'s OTC Bulletin Board, (a) since December 31, 1997, there has not been any change, event or development having, or that could be reasonably expected to -have, individually or in the aggregate, a material adverse effect on the Company and its Subsidiary taken as a whole and (b) between such date and the date hereof, the Company and its Subsidiary have conducted their respective businesses only in the ordinary course consistent with past practice. (c) VALIDITY OF THE AGREEMENT. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; and the Company has full corporate power and authority necessary to enter into this Agreement and to perform its obligations hereunder. (d) THE SHARES. The Shares have been duly and validly authorized and on the Closing Date will be duly and validly issued, fully paid and nonassessable. (e) REPORTING COMPANY. The Company is a reporting company and has filed all reports required to be filed by Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") during the preceding 12 months and has been subject to such -2- filing requirements for the past 90 days. Its common stock is quoted on the National Association of Securities Dealers, Inc.'s OTC Bulletin Board. (f) SEC REPORTS AND FINANCIAL STATEMENTS. The Company delivered to the Purchaser prior to the execution of this Agreement a true and complete copy of each form, report, schedule, registration statement, definitive proxy statement and other document (together with all amendments thereof and supplements thereto) filed by the Company or its Subsidiary with the Securities and Exchange Commission (the "SEC") since September 30, 1995 (as such documents have since the time of their filing been amended or supplemented, the "COMPANY SEC REPORTS"), which are all the documents (other than preliminary material) that the Company and its Subsidiary were required to file with the SEC since such date. (g) REGULATION S (all capitalized terms not defined herein shall have the meanings given to them in Regulation S). (i) The sale of the Shares pursuant to this Agreement will be made in accordance with the provisions and requirements of Regulation S and any applicable state law. (ii) The Company has not offered the Shares to any Person in the United States or to any identifiable groups of U.S. citizens abroad or to any U.S. Person. (iii) No offer to buy the Shares was made to the Company by any Person in the United States or by any U.S. Person. (iv) None of the Company, its Subsidiary, or any Representative has engaged, or will engage, in any Directed Selling Efforts with respect to the Shares. (v) The transactions contemplated by this Agreement (A) have not been pre-arranged by the Company with a purchaser which is in the United States or is a U.S. Person; and (B) are not part of a plan or scheme of the Company to evade the registration provisions of the Securities Act. (vi) The Company has not issued, and after the Closing Date will not issue, any stop transfer order or other order impeding the sale and delivery of the Shares except for a stop order restricting the sale of the Shares into the United States or to, or for the account or benefit of, U.S. Persons during the Restricted Period (as hereinafter defined); provided, however, that in the event that the SEC promulgates any revision to, or issues any release reinterpreting, Regulation S which affects this Agreement, the Company may issue such stop transfer order as is necessary to comply with such revision or release. (vii) The Company has not offered to sell or sold any warrants exercisable or convertible into its common stock in a transaction involving Regulation S in the past year; and there are no outstanding warrants exercisable or convertible into its common stock which have been sold in a transaction involving Regulation S. -3- 4. REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE PURCHASER. The Purchaser understands, and represents and warrants to, and agrees with, the Company, that: (a) The Purchaser understands that no federal or state agency has passed on or made any recommendation or endorsement of the Shares. (b) The Purchaser acknowledges that, in making the decision to purchase the Shares, it has relied solely upon independent investigations made by it and not upon any representations made by the Company with respect to the Company or the Shares. The Purchaser acknowledges that it is a sophisticated investor and that an investment in the Shares involves a high degree of risk. The Purchaser further acknowledges that the Purchase Price may or may not exceed the latest publicly quoted per share "asked" price of the Company's common stock. (c) The Purchaser acknowledges that the Company is relying upon the truth and accuracy of the representations, warranties and covenants of the Purchaser made herein in selling the Shares hereunder without registration and in reliance upon Regulation S promulgated under the Securities Act. The Purchaser is familiar with Regulation S and has consulted with legal counsel familiar with Regulation S in connection with this transaction. (d) The Purchaser is not a U.S. Person (as defined in Regulation S) or an affiliate of the Company, and is not acquiring the securities for the account or benefit of any U.S. person. (e) No offer of the Shares was made to the Purchaser in the United States. (f) At the time the offer and buy orders for the Shares were originated, including, without limitation, at the time the Purchaser executed and delivered this Agreement and otherwise subscribed for or agreed to purchase the Shares, the Purchaser was located outside the United States. (g) None of the Purchaser, any affiliate of the Purchaser, or any Person acting on behalf of the Purchaser or any such affiliate has engaged, or will engage, in any Directed Selling Efforts with respect to the Shares; and the Purchaser and its affiliates have complied, and will comply, with the Offering Restrictions (as defined in Regulation S), and any other requirements, of Regulation S. (h) The Purchaser is aware that the Shares have not been and will not be registered under the Securities Act and may only be offered or sold pursuant to registration under the Securities Act or an available exemption therefrom. (i) The Purchaser: (A) will not, during the period commencing on the Closing Date and ending one year after the Closing Date (the "Restricted Period"), offer or sell the Shares in the United States, to a U.S. Person or for the account or benefit of a U.S. Person or -4- other than in accordance with the provisions of Regulation S (Section 230.901 through Section 230.905, and Preliminary Notes); (B) will, after the expiration of the Restricted Period, offer, sell, pledge or otherwise transfer the Shares only pursuant to registration under the Securities Act or an available exemption therefrom and, in any case, in accordance with applicable state securities laws; and (C) at all times agrees not to engage in hedging transactions with regard to such securities unless in compliance with the Securities Act. (j) If the Purchaser offers and sells the Shares during the Restricted Period, then it will do so only in accordance with the provisions of Regulation S, pursuant to registration of the Shares under the Securities Act, or pursuant to an available exemption from the registration requirements of the Securities Act. (k) The transactions contemplated by this Agreement: (A) have not been pre-arranged with a purchaser who is located in the United States or is a U.S. Person; and (B) are not part of a plan or scheme to evade the registration provisions of the Securities Act. (l) The Purchaser is purchasing the Shares for its own account for the purpose of investment and not (A) with a view to, or for sale in connection with, any distribution thereof or (B) for the account or on behalf of any U.S. Person. The Purchaser understands, acknowledges and agrees that it must bear the economic risk of its investment in the Shares for an indefinite period of time and that prior to any offer or sale of such securities, the Company may require, as a condition to effecting a transfer of the Shares, an opinion of counsel to Purchaser, acceptable to the Company, as to the registration or exemption therefrom under the Securities Act. (m) The Purchaser was not formed specifically for the purpose of acquiring the Shares purchased pursuant to this Agreement, and if a corporation, all corporate action on its part, necessary for the authorization, execution, delivery and performance of the Purchaser's obligations under this Agreement has been or shall be taken prior to the closing of this transaction, and this Agreement, when executed and delivered, shall constitute a valid and legally binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms. (n) If the Purchaser is a corporation or trust or other entity, the officer or trustee or other person executing this Agreement represents and warrants that he or she is duly authorized to so sign this Agreement and to consummate the transactions contemplated hereby and that the Purchaser is authorized by its governing documents to make this investment. The Purchaser has such knowledge and experience in financial and business matters that it is capable -5- of evaluating the merits and risks of an investment in the Shares, and it is able to bear the economic risk of losing up to the entire amount of its investment therein. (o) Neither the Purchaser nor any of its affiliates directly or indirectly have within the past ninety (90) days nor will such persons for a period of one year from the Closing directly or indirectly enter into any short selling of any equity security of the Company (including, without limitation, the common stock of the Company) or any hedging transaction with respect to any equity security of the Company, including without limitation, puts, calls, or other option transactions, option writing and equity swaps, unless in compliance with the Securities Act. (p) Purchaser understands and agrees that each certificate or other document evidencing any of the Shares shall be endorsed with the legends set forth below, and the Purchaser covenants that the Purchaser shall not transfer the shares represented by any such certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate and understands that the Company shall refuse to register any transfer of Shares not complying with the following legend: (i) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND HAVE BEEN SOLD IN RELIANCE ON THE EXEMPTION FROM REGISTRATION PROVIDED BY REGULATION S UNDER THE SECURITIES ACT ("REGULATION S"). THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATIONS S (Section 230.901 THROUGH Section 230.905, AND PRELIMINARY NOTES), PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER THE SECURITIES ACT OR ANOTHER AVAILABLE EXEMPTION THEREFROM, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. HEDGING TRANSACTIONS INVOLVING THESE SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT." (ii) "THE SHARES REPRESENTED HEREBY ARE -6- SUBJECT TO THE RESTRICTIONS ON TRANSFER CONTAINED IN A CERTAIN OFFSHORE STOCK SUBSCRIPTION AGREEMENT, AS AMENDED FROM TIME TO TIME. THE COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE." (iii) Any other legend required by law. (q) Purchaser represents that, on the basis of any actions and agreements by it, except as expressly agreed to in writing by the Company, there are no brokers or finders entitled to compensation in connection with the sale of the Shares to the Purchasers. (r) Purchaser understands that as a result of the purchase of the Shares hereunder, Purchaser may be subject to certain reporting requirements, including without limitation, the filing of reports pursuant to Rule 13d-1 of the Securities Exchange Act of 1934, immediately following the Closing. Purchaser agrees to comply with and consult with independent counsel regarding any such obligations. Purchaser understands and agrees that pursuant to Regulation S, each distributor selling securities to a distributor, a dealer (as defined in section 2(a)(12) of the Securities Act), or a person receiving a selling concession, fee or other remuneration in respect of the securities sold, prior to the expiration of a one-year distribution compliance period, must send a confirmation or other notice to the purchaser stating that the purchaser is subject to the same restrictions on offers and sales that apply to a distributor. Purchaser has received and reviewed the capitalization and option vesting table attached hereto as Schedule A, updated as of May 15, 1998, and incorporated herein by this reference. 5. ADDITIONAL COVENANTS OF THE COMPANY. The Company covenants and agrees with the Purchaser as follows: (a) REGULATION S. The Company shall: (i) continue to comply with all applicable reporting requirements of the Exchange Act; (ii) refrain from offering to sell or selling any shares of common stock, or warrants or other securities convertible into its common stock, in a transaction involving Regulation S for a period of 180 days following the Closing Date; -7- (iii) ensure that all Offering Restrictions applicable to the sale of Shares pursuant to this Agreement are thoroughly implemented, complied with and satisfied; and (iv) refrain from engaging in any Directed Selling Efforts with respect to the Shares. (b) ORDINARY COURSE. Until the Closing, the Company and its Subsidiary shall conduct their respective businesses only in, and neither the Company nor its Subsidiary shall take any action except in, the ordinary course consistent with past practice. 6. ADDITIONAL COVENANTS OF THE PURCHASER. The Purchaser covenants and agrees that at all times prior to the Closing and thereafter, the Purchaser will hold, and will use its best efforts to cause its Representatives to hold, in strict confidence, unless (i) compelled to disclose by judicial or administrative process or by other requirements of applicable Laws of Governmental or Regulatory Authorities (including, without limitation, in connection with obtaining the necessary approvals of this Agreement or the transactions contemplated hereby of Governmental or Regulatory Authorities), or (ii) disclosed in an action or proceeding brought by a party hereto in pursuit of its rights or in the exercise of its remedies hereunder, all documents and information concerning trade secrets of the Company and its Subsidiary furnished to it by the Company or its Representatives in connection with this Agreement or the transactions contemplated hereby, except to the extent that such documents or information can be shown to have been (A) previously known by the Purchaser or its Representatives, (B) in the public domain (either prior to or after the furnishing of such documents or information hereunder) through no fault of the Purchaser and its Representatives or (C) later acquired by the Purchaser or its Representatives from another source, provided that such source is under no obligation to keep such documents and information confidential. In the event that this Agreement is terminated without the transactions contemplated hereby having been consummated, upon the request of the Company, the Purchaser will, and will cause its Representatives to, promptly (and in no event later than five (5) days after such request) redeliver or cause to be redelivered all copies of such documents and information furnished by the Company or its Representatives to the Purchaser and its Representatives in connection with this Agreement or the transactions contemplated hereby and destroy or cause to be destroyed all notes, memoranda, summaries, analyses, compilations and other writings rlated thereto or based thereon prepared by the Purchaser or its Representatives. 7. FEES AND EXPENSES. Except as set forth in Section 12(b), each of the Purchaser and the Company agrees to pay its own expenses incident to the performance of its obligations hereunder, including, but not limited to, the fees, expenses and disbursements of such party's counsel. 8. DEFINITIONS. As used in this Agreement, the following defined terms shall have the meanings indicated below: (a) "GOVERNMENTAL OR REGULATORY AUTHORITY" means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any state, county, city or other political subdivision. -8- (b) "LAW" means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision or of any Governmental or Regulatory Authority. (c) "LIEN" means any lien, claim, mortgage, encumbrance, pledge, security interest, equity or charge of any kind. (d) "PERSON" means any natural person, corporation, general partnership, limited partnership, proprietorship, other business organization, trust, union, association or Governmental or Regulatory Authority. (e) "REPRESENTATIVE" means any officer, director, employee, investment banker, financial advisor, attorney, accountant, agent or other Person retained by or acting for or on behalf of the Company or its Subsidiary or the Purchaser. 9. INDEMNIFICATION. (a) In the event the Purchaser becomes involved in any capacity in any action, proceeding or investigation in connection with any matter referred to or relating to this Agreement (except as expressly provided for in paragraph (c) of this Section 9), the Company will reimburse the Purchaser for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred, and will indemnify and hold the Purchaser harmless from and against any losses, claims, damages or liabilities to which it may become subject in connection with any such action, proceeding, investigation or matter, unless such expenses, loss, claim, damage or liability results primarily from the Purchaser's gross negligence, recklessness or bad faith in connection with the subject of this Agreement. (b) In the event that the Company becomes involved in any capacity in any action, proceeding or investigation in connection with any matter referred to or relating to this Agreement (except as expressly provided for in paragraph (c) of this Section 9), the Purchaser will reimburse the Company for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred, and will indemnify and hold the Company harmless from and against any losses, claims, damages or liabilities to which it may become subject in connection with any such action, proceeding, investigation or matter, to the extent, but only to the extent, that such loss, claim, damage or liability results primarily from the Purchaser's gross negligence, recklessness or bad faith in connection with the subject of this Agreement. (c) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action, such indemnified party shall notify the indemnifying party in writing of the commencement thereof; but the omission to so notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have pursuant to this Section 9 unless, due to the failure to be so notified, the indemnifying party is unable to contest the losses or claims indemnified against, and such omission shall in no event relieve the -9- indemnifying party from any liability which it may have to any indemnified party otherwise than under this Section 9. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may elect by written notice delivered to such indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, which consent shall not be unreasonably withheld, be counsel to the indemnifying party); provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assert such legal defenses and otherwise to participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indenifying party will not be liable to such indemnified party under this Section 9 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in connection with the assertion of legal defenses in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel for each indemnified party), (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party; provided further, however, that, if clause (i) or (iii) is applicable, such liability shall be only in respect of the counsel referred to in such clauses (i) or (iii). 10. SURVIVAL OF THE REPRESENTATIONS, WARRANTIES, ETC. The respective agreements, representations, warranties, indemnities and other statements made by or on behalf of the Company and the Purchaser, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of the other party to this Agreement or any officer, director or employee of, or Person controlling or under common control with, such party and will survive delivery of and payment for the Shares. 11. NOTICES. All communications hereunder shall be in writing, and, if sent to the Purchaser shall be sufficient in all respects if delivered, sent by registered United States mail, or by telecopy and confirmed to the Purchaser at: The address or telecopier number shown on the counterpart signature page of this Agreement; or, if sent to the Company, shall be delivered, sent by registered United States mail or by telecopy and confirmed to the Company at: -10- Mr. D. Scott Buchanan President and CEO Biomagnetic Technologies, Inc. 9727 Pacific Heights Boulevard San Diego, CA 92121 Telecopy: (619) 458-5698. 12. TERMINATION. (a) This Agreement may be terminated, and the transactions contemplated hereby may be abandoned: (i) at any time before the Closing, by mutual written agreement of Company and the Purchaser; (ii) at any time before the Closing, by the Company or the Purchaser, in the event (A) of a material breach hereof by the non-terminating party if such non-terminating party fails to cure such breach within ten (10) business days following notification thereof by the terminating party or (B) 10 business days after notification of the non-terminating party by the terminating party that the satisfaction of any condition to the terminating party's obligations under this Agreement becomes impossible or impracticable with the use of commercially reasonable efforts if the failure of such condition to be satisfied is not caused by a breach hereof by the terminating party; provided, that the other party may within such ten (10) business days cure by satisfying or demonstrating the satisfiability of such condition; or (iii) at any time after the Closing by the Company. (b) If this Agreement is validly terminated pursuant to Section 12(a), this Agreement will forthwith become null and void, and there will be no liability or obligation on the part of Company or the Purchaser (or any of their respective officers, directors, employees, agents or other representatives or affiliates), except as provided in the next succeeding sentence and except that the provisions with respect to confidentiality in Section 6 and expenses in Section 7 will continue to apply following any such termination. Notwithstanding any other provision in this Agreement to the contrary, upon termination of this Agreement pursuant to Section 12(a), the Company will remain liable to the Purchaser for any breach of this Agreement by the Company existing at the time of such termination, and the Purchaser will remain liable to the Company for any breach of this Agreement by the Purchaser existing at the time of such termination, and the Company or the Purchaser may seek such remedies, including damages and fees of attorneys, against the other with respect to any such breach as are provided in this Agreement or as are otherwise available at Law or in equity. 13. MISCELLANEOUS. (a) This Agreement may be executed in one or more counterparts and it is not necessary that signatures of all parties appear on the same counterpart, but such counterparts together shall constitute but one and the same agreement. -11- (b) This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective successors and, with respect to Section 9 hereof, the officers, directors and controlling Persons thereof and each Person under common control therewith, and no other Person shall have any right or obligation hereunder. (c) This Agreement shall be governed by, and construed in accordance with, the laws of the State of California and the United States, without regard to conflicts of laws principles. (d) The headings of the sections of this document have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. (e) The Company may reject this subscription, or any subscription for any reason or no reason, in its absolute discretion and without incurring any liability to Purchaser. (f) This Agreement states and comprises the entire agreement between the parties and shall supersede and replace any and all prior agreements between the parties and may be amended only by written instrument signed by both parties. (g) If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. (h) Each party to this Agreement shall use its best efforts to cause the Closing to occur and shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as the other party hereto may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. (i) All references to "dollars" or "$" in this Agreement shall be deemed to refer to United States dollars. (j) If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. -12- IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement, all as of the day and year first above written. BIOMAGNETIC TECHNOLOGIES, INC. By: ------------------------------------- D. Scott Buchanan President and CEO PURCHASER: - ------------------------------------------------------------------------------- Print name of Purchaser. If a corporation, the appropriate officer or officers must sign. - ------------------------------------------------------------------------------- Number of Shares (of the Company's common stock, no par value) subscribed for - ------------------------------------------------------------------------------- Address of Purchaser - ------------------------------------------------------------------------------- Address of Purchaser (continued) - ------------------------------------------------------------------------------- Telephone Number of Purchaser - ------------------------------------------------------------------------------- Telecopy Number of Purchaser - ------------------------------------------------------------------------------- Signature(s) - ------------------------------------------------------------------------------- Print name(s) and title(s) [SIGNATURE PAGE FOR OFFSHORE STOCK SUBSCRIPTION AGREEMENT] EX-10.77 3 EXHIBIT 10.77 JOINT VENTURE AGREEMENT THIS JOINT VENTURE AGREEMENT (the "Agreement") is dated as of June 10, 1997 (the "Effective Date") among Quantum Magnetics, Inc., a California corporation ("QM"), Biomagnetic Technologies, Inc., a California corporation ("BTI"), and Mark S. DiIorio, Ph.D. ("DiIorio"). WHEREAS QM and BTI have entered into that certain non-binding letter of intent dated March 27, 1997, a copy of which is attached hereto as Exhibit 1 (the "Letter of Intent"); and WHEREAS the Letter of Intent contemplates the formation of a new corporation, referred to herein as Magnesensors, Inc. ("MSI"), and that DiIorio will serve as President and Chief Executive Officer of MSI pursuant to an employment contract generally outlined in the Letter of Intent; and WHEREAS the Letter of Intent contemplates that its terms will be implemented by various agreements; and WHEREAS this Agreement is intended by QM, BTI, DiIorio and MSI to serve as the coordinating agreement for the implementation of the Letter of Intent, it being understood that after this Agreement is signed, the terms of this Agreement shall supersede the Letter of Intent in each and every particular; NOW THEREFORE the parties signing below agree as follows: 1. ENTIRE AGREEMENT. This Agreement and the Exhibits attached hereto shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior agreements, understandings, offers and negotiations, including the Letter of Intent. 2. FORMATION OF MAGNESENSORS, INC. The Articles of Incorporation, attached hereto as Exhibit 2, were executed by Mark S. DiIorio as the sole incorporator of MSI who caused them to be filed with the California Secretary of State on June 5, 1997. 3. WRITTEN CONSENT ACTION OF SOLE INCORPORATOR. Immediately upon execution of this Agreement, DiIorio shall execute the form of Action by Written Consent of Sole Incorporator attached hereto as Exhibit 3 electing the following persons to the Board of Directors of MSI: D. Scott Buchanan and Herman Bergman (designated by BTI), Dale Sheets and Lowell Burnett (designated by QM), and Mark S. DiIorio. 4. UNANIMOUS WRITTEN CONSENT ACTION OF DIRECTORS. Each of QM, BTI and DiIorio shall use its or his best efforts to cause the five directors of MSI's Board of Directors to execute the form of Written Consent Action of Directors attached hereto as Exhibit 4. 1 5. UNANIMOUS WRITTEN CONSENT ACTION OF SHAREHOLDERS. Each of QM, BTI and DiIorio shall execute the Unanimous Written Consent Action of Shareholders attached hereto as Exhibit 5. 6. AGREEMENT TO ELECT DIRECTORS DESIGNATED BY QM AND BTI. So long as the parties to this Agreement own stock of MSI, they shall each use their respective best efforts to assure the election to the Board of MSI: (a) two individuals designated by BTI, (b) two individuals designated by QM, and, (c) so long as he remains the CEO of MSI, pursuant to the Employment Agreement attached hereto as Exhibit 8, DiIorio. 7. LOAN GUARANTY. Each of QM and BTI hereby agrees to guarantee for three years one-half of a $200,000 working capital line of credit from Silicon Valley Bank, or a comparable financial institution acceptable to the Board of Directors of MSI. The liability of QM and BTI is to be several as to one-half of the aggregate amount of the line of credit, and not joint and several. If MSI has not pursued such line of credit and caused to be presented to each of QM and BTI the requisite documents to guarantee such line of credit by December 31, 1997, then neither of QM nor BTI shall have an obligation to guarantee any such line of credit. Each of QM and BTI hereby agrees to provide such financial statements and other information as is reasonably required by the financial institution to facilitate the issuance of such a line of credit to MSI. 8. BYLAWS OF MSI. The bylaws attached hereto as Exhibit 6 shall be the bylaws of MSI. 9. BUY-SELL AGREEMENT. QM, BTI, DiIorio and MSI shall execute the Buy-Sell Agreement attached hereto as Exhibit 7. In addition to the foregoing, immediately following execution of this Agreement, the parties agree to execute the following documents by personal execution, or by causing the appropriate corporate officers to execute, as appropriate, each of the following documents which contains a signature line for such party to this Agreement: 10. EMPLOYMENT CONTRACT FOR MARK S. DIIORIO. DiIorio and the officers of MSI shall execute the employment agreement for Mark S. DiIorio, attached hereto as Exhibit 8. 11. EMPLOYMENT CONTRACTS FOR OTHER EMPLOYEES. Other employees of MSI may include ***, ***, ***, and ***. QM agrees that if *** is employed by MSI in 1997, QM will pay for reasonable moving costs of relocating *** to San Diego County. 12. 1997 INCENTIVE STOCK OPTION PLAN. The Board of Directors and officers MSI shall adopt and ratify the 1997 Incentive Stock Option Plan in substantially the form attached as Exhibit 9, together with the form of Grant of Incentive Stock Option, form of Grant of Nonstatutory Stock Option, and form of Notice of Exercise attached thereto. 13. STOCK ISSUANCE DOCUMENTATION. Each of QM, BTI, DiIorio and MSI shall execute applicable stock issuance-related documents attached hereto as Exhibit 10, Exhibit 11, 2 Exhibit 12, Exhibit 13 and Exhibit 14 to effect the purchase and sale of shares of common stock of MSI to: QM (40,000 shares), BTI (40,000 shares) and DiIorio (25,000 shares). Each of QM, BTI and DiIorio shall pay to MSI the cash consideration set forth in its or his respective stock subscription agreement on the Effective Date. 14. SALE OF EQUIPMENT BY QM. QM shall execute the Bill of Sale to MSI attached hereto as Exhibit 15 for the equipment QM is selling, delivering and installing to or at MSI. Consideration for such sale shall be the promissory note which, along with the applicable UCC-1, both found at Exhibit 16, shall be executed by MSI. 15. SALE OF EQUIPMENT BY BTI. BTI shall execute the Bill of Sale to MSI attached hereto as Exhibit 17 for the equipment BTI is selling to or at MSI. Consideration for such sale shall be the promissory note which, along with the applicable UCC-1, both found at Exhibit 18, shall be executed by MSI. 16. GRANT OF PATENT ASSIGNMENTS AND LICENSES, AND TRANSFER OF KNOW HOW. Each of QM, BTI and MSI shall execute the respective Patent and Patent Application Assignments, Licenses, Sublicenses, and Know How Transfer Agreements in the forms set forth in Exhibit 19 (relating to BTI agreements) and Exhibit 20 (relating to QM agreement), respectively. 17. LICENSE OF CERTAIN INTELLECTUAL PROPERTY RIGHTS UPON ACQUISITION BY QM. If QM should ever exercise its rights under the Buy Sell Agreement (Exhibit 7), MSI will transfer to BTI non-exclusive licenses allowing BTI to use and exploit some of the intellectual property previously transferred to MSI by BTI. The form of such conditional nonexclusive license to use and exploit such property is set forth in Exhibit 21, and shall be executed immediately after this Agreement is executed, by MSI and BTI. 18. MSI COVENANT NOT TO COMPETE AGAINST QM. MSI shall execute in favor of QM an agreement in the form attached as Exhibit 22 which obligates MSI to refrain from competing in a specified line of business. 19. MSI COVENANT NOT TO COMPETE AGAINST BTI. MSI shall execute in favor of BTI an agreement in the form attached as Exhibit 23 which obligates MSI to refrain from competing in a specified line of business. 20. QM REQUIREMENTS CONTRACT FOR HIGH-T(c) SUPERCONDUCTING RESEARCH AND DEVICES. QM and MSI shall execute a three-year agreement titled "Requirements Contract for High-T(c) Superconducting Research and Devices" in the form set forth as Exhibit 24. 21. BTI REQUIREMENTS CONTRACT FOR HIGH-T(c) SUPERCONDUCTING DEVICES DESIGN, FABRICATION AND TESTING. BTI and MSI shall execute an 18-month agreement titled "Requirements Contract for High-T(c) Superconducting Devices Design, Fabrication and Testing" in the form set forth as Exhibit 25. 3 22. REPRESENTATIONS AND WARRANTIES OF THE PARTIES. Each party represents and warrants to the other parties with respect to itself as follows: a. AUTHORIZATION. The execution, delivery and performance of this Agreement and all of the other documents contemplated by this Agreement, referenced herein or to be executed in connection herewith (the "Related Agreements") to which such party is a party, by such party, and the consummation by it of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action of such party, and this Agreement when executed and delivered, shall constitute the legal, valid and binding obligations of such party, enforceable against such party in accordance with its terms, and each of the Related Agreements to which such party is a party, and upon execution and delivery by such party, will be legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms. b. NO CONFLICT WITH OTHER INSTRUMENTS OR AGREEMENTS. Neither the execution, delivery and performance of this Agreement, the Related Agreements to which such party is a party, nor the consummation of the transactions contemplated hereby or thereby, will result in a breach or violation of, or constitute a default under, such party's charter documents or any material agreement to which such party is a party, or by which it is bound or to which any of its property is subject. 23. SEVERABILITY. The provisions of this Agreement are severable and in the event that any of the provisions of this Agreement are determined to be invalid or unenforceable under any controlling body of law, such invalidity or unenforceability shall not in any way affect the validity or enforceability of the remaining provisions hereof. 24. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to its choice of law provisions, and any applicable laws of the United States. As respects the interpretation of this Agreement and each of the implementing agreements referenced in this document, this Agreement shall be interpreted in strict accordance with its terms. Each party hereto was either represented by an attorney or voluntarily waived his, her or its right to be so represented. No inference or rule of construction shall be applied to the interpretation of this Agreement relating to the party which prepared the draft Agreement, nor to the degree of any party's participation in the negotiation hereof. 25. WAIVER. The waiver by any party hereto of any right hereunder, or of a breach by any other party hereto, shall not be deemed a waiver of any other right hereunder or of any breach or failure by said or any other party, whether of a similar nature or otherwise. 26. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together constitute one and the same instrument. 4 27. DISPUTE RESOLUTION. In the event of any dispute regarding this Agreement or any implementing agreement, the parties agree to resolve the dispute pursuant to the rules of the American Arbitration Association in San Diego County pursuant to California law. Quantum Magnetics, Inc. By /s/ Dale Sheets Dated June 10, 1997 ---------------------------------------- Biomagnetic Technologies, Inc. By /s/ D. Scott Buchanan Dated June 10, 1997 --------------------------------------- /s/ Mark S. DiIorio Dated June 10, 1997 --------------------------------------- Mark DiIorio Agreed and Accepted: Magnesensors, Inc. By /s/ Mark S. DiIorio Dated June 10, 1997 ----------------------------------- 5 EX-21 4 EXHIBIT 21 EXHIBIT 21 SUBSIDIARY OF THE COMPANY BIOMAGNETIC TECHNOLOGIES, INC. LIST OF SUBSIDIARIES SEPTEMBER 30, 1998
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 5 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 21, 1998 EX-23.2 6 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-60743, No. 33-61057, No. 33-32260, No. 33-33179 and No. 33-68136) of Biomagnetic Technologies, Inc. of our report dated January 10, 1997, except as to the last paragraph of Note 8, which is as of December 19, 1997, appearing on page 33 of this Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule appearing on page 34 of this Form 10-K. /s/PRICEWATERHOUSECOOPERS LLP San Diego, California December 21, 1998 EX-24 7 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, BIOMAGNETIC TECHNOLOGIES, INC. (the "Corporation") intends to file an Annual Report on Form 10-K with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended. WHEREAS, the undersigned are directors of the Corporation. NOW, THEREFORE, the undersigned hereby constitute and appoint Dr. Scott Buchanan and Herman Bergman, or either of them, as their attorneys-in-fact to act in their place and stead and to execute and to file such Annual Report and any amendments or supplements thereto, giving and granting to said attorneys full power and authority to do and perform each and every act whatsoever requisite and necessary to be done in and about the premises, with full power of substitution, as fully to all intents and purposes as the undersigned might or could do if personally present at the doing thereof, and cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney this 21st day of November, 1998. /s/ Rodolfo Llinas /s/ Martin P. Egli - ---------------------------- ---------------------------- Rodolfo Llinas Martin P. Egli /s/ Galleon Graetz /s/ Enrique Maso - ---------------------------- ---------------------------- Galleon Graetz Enrique Maso EX-27 8 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 2,282 10,220 943 (10) 2,991 16,696 7,893 7,589 17,343 5,557 0 0 0 99,392 3,000 17,343 2,103 2,839 1,935 2,979 4,758 0 (72) (4,967) 1 (4,968) 0 0 0 (4,968) (.09) (.09)
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