U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1997.
Commission file number 0-10783
BSD MEDICAL CORPORATION
DELAWARE 75-1590407
(State of Incorporation) (IRS Employer Identification Number)
2188 West 2200 South
Salt Lake City, Utah 84119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 972-5555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 Par Value Over-the-Counter
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B 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-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year:
$1,319,698
The approximate aggregate market value of Common Stock held by
non-affiliates, computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such
stock, as of November 3, 1997, was $4,937,177.
As of November 3, 1997, there were 16,176,980 shares of Common
Stock with $0.01 par value outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes[ ] No[X]
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
BSD Medical Corporation (the "Company") is engaged in the
design, development, production, marketing, and servicing of
heat therapy (hyperthermia/thermotherapy) equipment for both
cancerous and benign diseases. Hyperthermia is used in the
application, monitoring and control of electromagnetic
(microwave or radiofrequency) or ultrasound generated heat for
the treatment of malignant and benign diseases. BSD pioneered
the commercial application of this technology in the radiation,
oncology, and urology fields and has 18 current U.S. patents
(which cover all of its current applications and products as
well as additional applications and devices).
The Company was founded in 1978 by John E. Langdon as a result
of research which demonstrated that high heat could destroy
cancer cells. BSD continued this research and was successful in
pioneering, developing, and commercializing this break-through
cancer treatment. BSD pioneered the commercial field of heat
therapy for the treatment of disease in 1978 and the non-
surgical treatment of benign diseases of the prostate using
microwave energy in 1986. BSD was the first Company to obtain
full PreMarket approvals (PMA) from the Food and Drug
Administration (FDA) for hyperthermia cancer therapy systems (in
1983) and the first Company to obtain Investigational Device
Exemption (IDE) approval from the FDA for
hyperthermia/thermotherapy systems for the treatment of Benign
Prostatic Hyperplasia (BPH). BSD has developed second and third
generation equipment, and the Company's systems, depending upon
configuration and options, have list prices ranging from
approximately $53,500 to $850,000.
The Company was incorporated under the laws of the State of
Utah on March 17, 1978. On July 31, 1986, pursuant to a Plan
and Agreement of Merger dated July 11, 1986, the Company was
merged into a Delaware corporation, changing the Company's state
of incorporation from Utah to Delaware. The Delaware
corporation was the surviving company. At the time of the 1986
merger, the total number of shares of all classes of stock which
the Company shall have the authority to issue was increased to
30,000,000, of which 10,000,000 shares are of $1.00 par value
per share and are of a class designated Preferred Stock and of
which 20,000,000 shares are of $.01 par value per share and are
of a class designated Common Stock. There are currently no
preferred shares outstanding.
BSD PRODUCTS/THERAPIES
HYPERTHERMIA AS A CANCER TREATMENT. There are more than eight
million Americans alive today who have a history of cancer and
over 83 million, approximately four in ten Americans, will
eventually develop cancer, and the incidence of cancer is
expected to continue to grow. Over 520,000 people will die of
cancer this year. The Company's hyperthermia equipment is used
both in an effort to cure cancer by destroying and eliminating
cancer cells and, where curing the cancer is not possible, as
palliative treatment (the shrinking of tumors in order to reduce
the pain and other side effects of cancer). The combination of
differential heat sensitivity between cancerous and normal cells
and the inability of the cores of solid tumors to dissipate heat
as effectively as surrounding normal cells makes it possible, by
utilizing the controlled application of high heat, to destroy
cancerous tissues and cells without causing serious damage to
normal tissues and cells. Prospectively randomized clinical
studies using BSD's equipment have shown that the addition of
hyperthermia to other cancer therapies results in: increased
tumor response; lower relapse rate; increased disease-free
survival time; and improved quality of life for the patient -
with minimal increase in side effects. The Company's equipment
is most effective in the treatment of solid localized tumors and
increases long term control of these tumors. Inability to
control local tumors remains a significant obstacle to a cure
for cancer, causes over one-third of all cancer deaths, results
in severe symptoms which reduce quality of life, increase cost
of care, and increases the risk of metastatic disease.
The Company's hyperthermia equipment can be used alone but is
typically used in conjunction with other therapies and has been
shown to potentiate other cancer therapies, including radiation
therapy, chemotherapy and surgery. Published, clinical studies
using the Company's systems have shown that hyperthermia
increases the efficacy of radiation and chemotherapy to a
significant degree without an increase in toxicity.
Hyperthermia delivery using the Company's equipment has been
shown to provide supra-additive interactions with many
chemotherapeutic drugs; to cause localized toxicity of heated
tumor areas, while maintaining low levels of toxicity to non-
heated normal tissues; and to cause some chemotherapeutic agents
that are not effective at normal temperatures to become
effective at elevated temperatures. The use of pre-surgical
hyperthermia delivered using BSD's equipment has been shown to
obviate the need for amputation of normal tissues in sarcoma
patients. BSD's systems have also been used pre-surgically to
reduce the size of the tumor prior to surgery and thus make the
tumor more easily resectable (surgical removal) and increase the
chances of obtaining clear surgical tumor margins, one of the
most significant prognostic factors in recurrence.
In the past, hyperthermia has been typically used almost
exclusively as a therapy for patients who have failed all other
available methods of treatment, and even these heavily
pretreated patients have responded well to hyperthermia. Some
patients are now being treated earlier with BSD's equipment
using combination therapy which includes hyperthermia.
HYPERTHERMIA/THERMOTHERAPY AS A TREATMENT FOR PROSTATIC
CARCINOMA AND BENIGN PROSTATIC HYPERPLASIA (BPH).
Intracavitary heat treatment of the prostate has been
established as an important adjuvant treatment for many
patients with prostate carcinoma and is becoming an important
nonsurgical treatment for patients with benign prostatic
hyperplasia (BPH).
BSD Medical has various PMA approved control systems,
applicators, catheters, and accessories which can be used for
the treatment of prostatic carcinoma. The use of transurethral
microwave heating for treatment of prostatic carcinoma has most
often utilized concomitant radiation therapy; however, published
studies have reported efficacy using heat alone delivered by
using simultaneous transurethral and transrectal heating or by
using ablative temperatures.
In 1986, BSD developed and patented technology for the
treatment of BPH. On November 14, 1997, BSD signed an
agreement with Oracle Strategic Partners (OSP) to form
TherMatrx, Inc., a jointly-owned company which will initially
focus on minimally invasive treatments of urological diseases,
specifically BPH. The BPH market is currently estimated to be
over $3 billion annually in the U.S. alone. Oracle Strategic
Partners is a private investment firm specializing in public
securities investing and merchant banking in the health care,
bioscience and related industries.
CANCER HYPERTHERMIA PRODUCTS. The Company's cancer
hyperthermia products are designed to apply electromagnetic
(i.e., microwave or radiofrequency) or ultrasonic energy to the
human body in order to generate temperatures of 40 C to 60 C at
the site of the tumor. Thermometry systems are used to measure
tumor and normal tissue temperatures during treatment in order
to assist in achieving and maintaining safe and optimal
treatment temperatures. The Company's hyperthermia systems are
designed to permit the treatment of various tumor sizes, various
tumor depths and various anatomical sites. A physician wishing
to have full hyperthermia treatment capability must have a wide
variety of hyperthermia techniques and devices available.
Cancer Hyperthermia Systems. A hyperthermia system typically
consists of an integrated computer control unit, a fixed or
variable frequency generator, applicators, and thermometry. The
Company's computer software is designed to maximize the safety
and effectiveness of the treatment. The Company's computer
software provides accurate monitoring of temperature and other
treatment parameters, and also pre-treatment planning, display,
storage, and recall of patient treatment data. The pre-
treatment planning capability utilizes the Company's proprietary
algorithms and software to allow the physician to customize
hyperthermia treatments for specific tumors. The Company's
cancer hyperthermia system product line includes many system
designations, depending upon the configuration and options.
Cancer Hyperthermia Applicators. Hyperthermia applicators
emit radiofrequency, microwave or ultrasonic energy directly
into the patient to provide tumor heating. The Company has
developed and patented a number of specially designed
applicators for treating a particular tumor in a particular
location. The Company's applicators are designed to facilitate
safety, effectiveness and comfort of treatment.
Applicators generally fall into two categories: external
surface applicators (superficial and deep) and interstitial
(i.e., invasive) applicators. Microwave, superficial, external
applicators deliver externally generated heat to specific sites
on or slightly below the surface of the skin. Deep phased array
radiofrequency applicators provide externally generated heat to
deep seated tumors by combining phase aligned beams from
multiple applicators positioned around the body. Ultrasound
external applicators generally provide deeper and more focused
heating than microwave external applicators. Interstitial
microwave applicators are antennae which are implanted directly
into the body for heating from within the tumor itself.
Thermometry. In order to monitor and control the heating of
tumors, thermometry systems that are accurate, reliable and
suitable for use in clinical hyperthermia must be included in
hyperthermia systems. The Company manufactures the BSD
Thermistor Probe, as well as other thermistor based thermometry
probes. The Company has an exclusive license for the
manufacture and distribution of the BSD Thermistor Probe. The
Company also manufactures and sells specially developed
thermistor probes for ultrasound treatments.
MARKETING AND SALES
In the U.S., the Company sells its cancer hyperthermia
products primarily to radiation oncology departments and,
outside the U.S., to radiation oncology and chemotherapy
oncology departments. The Company currently markets its
products in the United States directly through its own sales
and marketing staff. International sales are generally
accomplished through distributing companies located in various
foreign countries. The Company's marketing efforts include
participation at trade shows and symposia and development of
product brochures, newsletters, and other promotional
materials. The Company also co-sponsors an annual
international BSD Users' Conference.
Current marketing efforts include education, training, and
dissemination of information on the effectiveness and benefits
of BSD's equipment and therapy. BSD also plans to do
advertising in appropriate trade publications and in mass media
publications to increase patient education and demand.
Future marketing for current cancer products will be expanded
into two previously unexplored markets: surgical and
chemotherapeutic oncology. These two disciplines control most
cancer patients and treatment funds, and clinical evidence of
the safety and efficacy of hyperthermia in conjunction with
chemotherapy and surgery has been published. The Company
believes that the domestic market will begin to slowly expand
in the future because of the recent publication of randomized
studies showing the effectiveness of hyperthermia and a renewed
interest in hyperthermia in the U.S.; however, there can be no
assurance that an increase in the U.S. market will occur.
For the year ended August 31, 1997, two customers accounted
for approximately 52% and 8%, respectively, of net sales of the
Company. The loss of a significant customer could have a
material detrimental impact on the Company's operations.
THIRD-PARTY REIMBURSEMENT/MEDICAL COST CONTAINMENT. In the
United States, the Company's products are purchased primarily by
medical institutions (which then bill various third-party
payers, such as Medicare, Medicaid, other government programs,
and private insurance plans, for the health care services
provided to their patients), or by managed care organizations
which directly pay for services provided to their patients. In
December 1984, the Health Care Financing Administration ("HCFA"
- --- the agency responsible for administering the Medicare and
Medicaid systems) and most of the private medical insurance
carriers in the U.S. approved reimbursement for hyperthermia in
conjunction with radiation therapy for the treatment of surface
and subsurface tumors. Reimbursement for services rendered to
Medicaid beneficiaries is determined pursuant to each state's
Medicaid plan which is established by state law and regulations,
subject to requirements of Federal law and regulations.
In November 1995, the Health Care Financing Administration
authorized Medicare reimbursement for all investigational
therapies and devices for which underlying questions of safety
and effectiveness of that device type have been resolved based
on categorization by FDA into one of two categories - A or B.
Category A includes devices for which questions of safety and
effectiveness have not been resolved. Category B includes
investigational devices for which underlying questions of safety
and effectiveness of that device type have been resolved. As of
November 1, 1995, HCFA stated that all devices and procedures
which fall under Category B will be reimbursed for Medicare
patients. All of BSD's investigational equipment and protocols
have been categorized by the FDA into Category B and thus may be
reimbursed by Medicare. This new procedure will have no effect
on BSD's PMA approved equipment and therapy which received
approval for reimbursement from HCFA in 1984. However,
investigational treatments using BSD's PMA approved equipment
may also be reimbursed under this new policy. BSD anticipates
that these changes in reimbursement policy could have a positive
effect on U.S. sales; however, these new policies have not been
actively implemented by HCFA at this time.
Cost-containment policies are impacting the major cancer
markets such as the U.S., Western Europe, and Japan, and these
changes have negatively impacted the industry. The Company is
unable to predict the extent to which its business may be
affected by future legislative and regulatory developments.
There can be no assurance that future health care reform
legislation or regulation will not have a material adverse
effect on the Company's business, financial condition and
results of operations. There can be no assurance that
procedures using the Company's products will, in the future, be
considered cost-effective by third-party payers, that
reimbursement will be available or, if available, that payers'
reimbursement levels will not adversely affect the Company's
ability to sell its products.
COMPETITION
Competition in the medical products industry is intense, both
in the United States and internationally. Some of the Company's
competitors have significantly greater financial, technical,
research and development, engineering, manufacturing,
distribution, and sales and marketing resources than the
Company. Several companies have received IDEs in the United
States for certain experimental hyperthermia systems designed to
treat both malignant and benign diseases. In addition to BSD,
four other companies (Clinitherm - no longer in business,
Labthermics, Cheung Labs, and Cook Medical) have received FDA
Pre-Market Approval for the commercial sale of certain
hyperthermia equipment for the treatment of cancer in the U.S.
BSD participates in the BPH market as an investor in TherMatrx,
Inc. (see "Hyperthermia/ Thermotherapy as a Treatment for
Prostatic Carcinoma and Benign Prostatic Hyperplasia (BPH)",
page 3). In the BPH market, competitive companies offering
products similar to BSD's BSD-50 include EDAP TMS and Urologix
(which have PMA approval from the FDA), VidaMed (which has
510(k) marketing clearance from the FDA), Dornier, Thermal
Therapeutics, and other foreign manufacturers. In addition to
hyperthermia/thermotherapy equipment made by competitors, there
are many other competitive treatments for benign prostatic
hyperplasia (including various drug treatments, surgical lasers,
ultrasound ablation, electro-cautery surgery, stents,
transurethral incision of the prostate (T.U.I.P.), and balloon
dilation) which are currently being developed, clinically
investigated and/or actively marketed.
The Company believes that other companies are considering or
will consider marketing hyperthermia/thermotherapy equipment and
anticipates increased competition both in the United States and
internationally. There can be no assurance that others,
including those with greater resources and more extensive
business experience than the Company, will not develop products
that would materially adversely affect the ability of the
Company to compete effectively. Further, the treatment of
disease with hyperthermia equipment, and with other methods, is
subject to rapid technological change. There can be no
assurance that other forms of treatment will not be developed
which could render the Company's hyperthermia systems obsolete.
The Company expects to rely upon trade secrets, unpatented
proprietary know-how and continuing technological innovation, as
well as current patents and new patent applications, in order to
maintain and improve its competitive position.
PRODUCT SERVICE
The Company provides a 12-month warranty following
installation on all cancer treatment systems and a 90-day
limited warranty on individual components. BSD's employees
install and service the hyperthermia systems it sells to
domestic customers. In addition, technical and clinical
training is performed by Company personnel or consultants.
Subsequent to the applicable warranty period, the Company offers
full or limited service contracts to its domestic customers.
Generally, the Company's distributors install and service
systems sold to foreign customers and are responsible for
managing their own warranty programs for their customers,
including labor and travel expenses. The Company provides parts
repair/replacement warranties for 12 months for systems and for
90 days for individual components. Spare parts are generally
purchased by the distributors and stored at the distributors'
maintenance facilities to allow prompt repair. Distributor
service personnel are usually trained at customer sites and at
the Company's facilities in Salt Lake City.
PRODUCTION
The Company produces and tests its products at its facilities
in Salt Lake City, Utah. The Company's manufacturing operations
consist primarily of component assembly and testing. Most of
the principal components of the Company's systems are purchased
from independent suppliers and are modified, as required, by the
Company at its facilities. Some purchased components are
modified by the supplier or are customized to the Company's
specifications. Key factors in the manufacturing process are
assembly and testing. Raw/pre-fabricated materials, components,
and sub-assemblies required for production are tested at every
stage of manufacture and again prior to final shipment. Certain
components and processes used in the manufacturing of the
Company's products are currently provided or performed by single-
source vendors. Any supply interruption or yield problems from
these vendors would have a material adverse effect on the
Company's ability to manufacture its products until a new source
of supply were qualified and, as a result, could have a material
adverse effect on the Company's business, financial condition
and results of operations.
In order to provide outside financial support for
manufacturing operations and diversify the Company's services,
the Company is providing manufacturing and testing services
under contract to local companies.
RESEARCH AND DEVELOPMENT
Technological changes in the treatment of disease in general,
and in the hyperthermia field in particular, are frequent.
Thus, the Company intends to continue to devote substantial sums
to research and development in order to improve existing
products and develop new products. During the fiscal years ended
August 31, 1995, August 31, 1996, and August 31, 1997, the
Company expended $219,871, $565,158, and $432,394 respectively,
for research and development, representing 19.14%, 22.28%, and
32.76% of total revenues. The Company intends to pursue new
markets and applications for the Company's products.
BSD has developed the BSD-2000/3D - a new generation of deep
regional hyperthermia equipment funded in part by Phase I and II
grants received from the National Cancer Institute (Grant No.
CA61515). The BSD-2000/3D can be modified for integration with
a magnetic resonance imaging system, and becomes the BSD-
2000/3D/MR system. BSD is completing development of the MR
portion of this system with corporate funding. The BSD-2000/3D
System integrates three-dimensional (3D) focused deep regional
hyperthermia with 3D patient specific treatment planning in
order to provide 3D heating pattern steered focusing. This
system is targeted for the treatment of large and deep tumors;
i.e., recurrent breast, sarcoma, lung, colorectal, liver,
cervical, bladder, stomach, and prostate. The first BSD-2000/3D
system has been installed at a leading German oncological
research institution - the Clinic of Medical Oncology of the
Klinikum Grosshadern Medical School of Ludwigs-Maximilians-
Universitaet Muenchen, Munich, Germany. Delivery of the
Magnetic Resonance (MR) Imaging portion of this system is
anticipated for January 1998. The Medical School received
funding from the Stiftung Deutsche Krebshilfe e.V. (German
Cancer Aid Foundation) for the system order. Over the past few
years, the Foundation has contributed more than DM 11 million
($7.5 million U.S.) to this Institution to develop the clinical
application of regional deep hyperthermia combined with
chemotherapy for the treatment of cancer patients. The Company
has received orders totaling $1,631,978 for purchases of this
new product, and, as of November 1997, has a back-log of
$996,837 in sales for the new product line, which will be
delivered in fiscal 1998. BSD plans to submit to the FDA for a
modified IDE for this equipment.
The BSD-2000/3D/MR System was designed to provide simultaneous
heating and non-invasive measurement of treatment parameters;
such as tumor temperature, tumor response, tissue heat damage,
tissue blood-flow, tissue pathology, and other chemical and
biological changes in the tissue, which has the potential to
optimize tumor heating and thus tumor destruction. Currently
available hyperthermia equipment requires the use of invasive
temperature monitoring to control heating delivery and to
determine treatment effectiveness, which limits the commercial
and clinical applications. The development of reliable non-
invasive thermometry is the next required step in the field of
hyperthermia and has the potential to significantly increase the
clinical applications and commercial potential of hyperthermia;
however, there can be no assurance that this system will provide
reliable non-invasive thermometry.
The Company is also currently collaborating with a number of
research institutions to develop advanced heat treatment
products and treatments to increase the clinical applications
for BSD's products, with a focus on deep regional hyperthermia
and the treatment of prostatic carcinoma and breast cancer.
PATENTS, INTELLECTUAL PROPERTY, LICENSING, AND ROYALTY
AGREEMENTS
Because of the substantial length of time and expense
associated with bringing new products through development and
regulatory approval to the marketplace, the medical device
industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and
processes. The Company's policy is to file patent applications
to protect significant technology, inventions and product
improvements. The Company has been issued 18 patents in the
United States and additional patents outside the United States.
Other hyperthermia related patents are pending in the United
States, Japan and Europe. There can be no assurance that the
patents presently issued or those applied for (if granted), will
be of significant value to the Company or will be held valid
upon judicial review. Successful litigation against these
patents by a competitor could have a material adverse effect
upon the Company's business, financial condition and results of
operations.
The Company believes that it possesses significant proprietary
know-how in its hardware and software capabilities. There can
be no assurance that others will not develop, acquire or patent
technologies similar or superior to those of the Company or that
secrecy will not be breached. In July 1979, the Company entered
into an exclusive worldwide license for a unique temperature
probe (Bowman Probe). The license will remain in effect as long
as the technology does not become publicly known as a result of
actions taken by the licenser. The Company pays royalties based
upon its sales of the Bowman Probe. The license agreement was
amended and renewed in 1987 and is currently in effect.
There has been substantial litigation regarding patent and
other intellectual property rights in the medical device
industry. In the past, the Company has filed lawsuits for
patent infringement against three of its competitors and
subsequently settled those lawsuits.
From time to time, the Company has had and may continue to
have discussions with other companies, universities and private
individuals concerning the possible granting of licenses
covering technology and/or patents. There can be no assurance
that such discussions will result in any agreements. In the
past, BSD has granted non-exclusive practice licenses for a few
selected patents to three companies. One of these companies is
no longer in business. In 1994, BSD issued a non-exclusive
license to Urologix to practice some of its patented technology
for cash payments and royalties on future sales; in 1996, the
Company terminated this license (see Part I, Item 3, Urologix,
Inc. vs. BSD Medical Corporation).
In July 1996, BSD entered into a license agreement and granted
EDAP Technomed, Inc., now EDAP TMS S.A., a non-exclusive, non-
transferable license of certain rights to one of BSD's patents.
As a result of this transaction, BSD received a non-refundable
license fee in the amount of $1,500,000 ($1,000,000 in July 1996
and $500,000 in September 1996), as well as the right to receive
royalties of 2.5%, up to a maximum of $3,500,000, on the sale of
certain products.
GOVERNMENT REGULATION
The medical devices that have been and are being developed by
the Company are subject to extensive and rigorous regulation by
numerous governmental authorities, principally by the United
States Food and Drug Administration (FDA). Pursuant to the
Federal Food, Drug and Cosmetic Act (the FD&C Act), as amended,
the FDA regulates and must approve the clinical testing,
manufacture, labeling, distribution, and promotion of medical
devices in the United States. This regulation has become
stringent and the approval process expensive and time consuming.
In addition, various foreign countries in which the Company's
products are or may be sold, have regulatory requirements.
The majority of the Company's past and present hyperthermia
systems have required, (and future systems, if any, would likely
continue to require) Pre-Market Approval from the FDA instead of
the simpler 510(k) marketing approval. Pre-Market Approval
requires clinical testing to assure safety and effectiveness
prior to marketing and distribution of medical devices. The
Company intends to continue to make improvements in and to its
existing products. Product improvements must be submitted to
the FDA under IDEs, 510(k) PreMarket notifications or PMA
supplements.
International sales of unapproved medical devices are subject
to FDA export requirements, unless these products have been
previously approved by one of 8 countries specified by the FDA.
In addition, international sales are subject to the regulatory
safety agency requirements of each country. The regulatory
review process varies from country to country. The Company has
obtained regulatory approval, import approval and export
approval for various of its products from certain countries and
has applied for additional approvals and will continue to apply
for others. There can be no assurance that all of the necessary
approvals will be granted on a timely basis or at all. Delays
in receipt of or failure to receive such approvals could have a
material adverse effect on the Company's financial condition and
results of operations. Sales into the European Union (EU) are
now governed by the need to obtain ISO certification and a CE
Mark and to comply with all applicable directives. BSD has
started the process of obtaining testing and certifications
needed for compliance which will allow BSD to affix the CE Mark.
There can be no assurance that BSD can obtain the CE Mark, and,
if BSD is unable to obtain these approvals, it could have a
significant material effect on the Company's financial
condition.
FDA regulations pertain not only to human health care products
and medical devices, but also to the processes and facilities
used to manufacture such products. The Company is required to
register with the FDA as a device manufacturer. As such, the
Company is inspected from time to time by the FDA to determine
whether the Company is in compliance with various regulations
relating to medical device manufacturers. All devices must be
manufactured in accordance with regulations specified in the FDA
Quality System Regulation (QSR) dated October 1996. In
complying with FDA's QSR, manufacturers must continue to expend
time, money and effort in the areas of production and quality
control to ensure full compliance. Significant changes to the
manufacturing process require notification to the FDA, and all
changes require documentation. The Medical Device Reporting
regulation requires that the Company provide information to the
FDA on death or serious injuries alleged to have been associated
with the use of its products, as well as product malfunctions
that would likely cause or contribute to death or serious injury
if the malfunctions were to recur. Failure to comply with
regulatory requirements could have a material adverse effect on
the Company's business, financial condition and results of
operations. Although the Company believes that it is in
material compliance with all applicable manufacturing and
marketing regulations of the FDA and other regulatory bodies
with respect to its existing products, a determination that the
Company is in material violation of such regulations could lead
to the imposition of penalties, including fines, recall orders,
product seizures, and criminal sanctions. In addition, current
regulations depend heavily on administrative interpretation, and
there can be no assurance that future interpretations made by
the FDA or other regulatory bodies, with possible retroactive
effect, will not adversely affect the Company. Although the
Company cannot predict what impact, if any, such changes might
have on its business, such changes could materially adversely
affect the Company's business.
The Federal Communications Commission (FCC) regulates the
frequencies of microwave and radiofrequency emissions from
medical and other types of equipment to prevent interference
with commercial and governmental communications networks. The
BSD-50, BSD-400, and the BSD-500 hyperthermia system applicators
emit a fixed frequency of 915 MHz, which is approved by the FCC
for medical applications. Some European countries allow the use
of 433.92 MHz rather than 915 MHz, thus the BSD-50, BSD-400, and
BSD-500 can be operated at 433.92 MHz. Accordingly, these
systems do not require shielding to prevent interference with
communications. The BSD-1000, BSD-1500 and BSD-2000 systems
utilize variable-frequency generators and applicators to achieve
therapeutic temperatures. Accordingly, these systems require
electromagnetic shielding. Ultrasound hyperthermia systems can
be operated without shielding because the applicators emit
acoustic rather than electromagnetic energy.
PRODUCT LIABILITY EXPOSURE
The manufacture and marketing of medical devices involve an
inherent risk of product liability. Because the Company's
products are intended to be used in hospitals on patients who
may be physiologically unstable and severely ill, the Company is
exposed to potential product liability claims. The Company
presently carries product liability insurance. However, there
can be no assurance that the product liability insurance will
provide adequate coverage against potential claims which might
be made against the Company. No product liability claims are
presently pending against the Company; however, there can be no
assurance that product liability claims will not be filed in the
future.
EMPLOYEES
On August 31, 1997, the Company had 18 employees, 16 of them
full time employees. None of the Company's employees is covered
by a collective bargaining agreement. The Company considers its
relations with its employees to be satisfactory. The Company is
dependent upon a limited number of key management,
manufacturing, and technical personnel. The Company's future
success will depend in part upon its ability to retain these
highly qualified employees.
ITEM 2. PROPERTIES
The office, production and research facilities of the Company
are located in Salt Lake City, Utah. The complete headquarters
and production facility occupies approximately 20,000 square
feet and is rented on a lease with an option to purchase. The
current annual rental expense is $62,400 (see Note 7 to
Financial Statements). The building lease is accounted for as a
capitalized lease for financial statement purposes. The
building is currently in good condition; is adequate for the
Company's needs; is suitable for all Company functions; and
provides room for future expansion. The Company believes that
it carries adequate insurance on the property.
ITEM 3. LEGAL PROCEEDINGS
UROLOGIX, INC. VS. BSD MEDICAL CORPORATION, United States
District Court for the District of Minnesota, Civil Action No. 4-
96-647.
In June of 1996, the Company advised Urologix, Inc., with
whom it had previously been involved in litigation involving
the alleged infringement of a BSD patent, of information which
the Company believed indicated a breach of Urologix's
confidentiality obligations under the Settlement Agreement that
had resolved the earlier suit. Dissatisfied with Urologix's
response to this notice, the Company advised Urologix that it
was terminating the Settlement Agreement and the patent license
granted to Urologix thereunder.
On July 30, 1996, Urologix filed a lawsuit against the
Company under seal in the United States District Court for the
District of Minnesota (Urologix, Inc. v. BSD Medical Corp.,
Civil Action No. 4-96-647) seeking a declaratory judgment that
Urologix had not breached the Settlement Agreement. The
Company answered the Complaint and filed a counterclaim on
August 20, 1996, seeking a declaratory judgment that the
Settlement Agreement and license provided thereunder were
properly terminated by the Company based on Urologix's breaches
of the confidentiality provision and seeking damages caused by
such breaches. Urologix has replied to the counterclaim and
discovery is nearly complete. The case is currently set for
trial no later than April 1998.
The Company believes that its claims against Urologix are
well-founded and intends to pursue the matter through trial if
necessary. There can be no assurance that the Court will
resolve the lawsuit in the Company's favor. Though Urologix's
Complaint against the Company requests unspecified "damages,"
it is apparent that the principal thrust of the relief sought
by Urologix is declaratory and injunctive, and no damages have
been quantified. Moreover, since the Company has taken no
action to preclude Urologix from continuing to offer products
under the now-terminated license or to otherwise interrupt
Urologix's on-going business, it seems unlikely that Urologix
will be able to substantiate significant monetary damages.
NELSON BUNKER HUNT LIQUIDATING TRUST (NBHLT) VS. ALAN L. HIMBER
On October 5, 1994, Alan L. Himber, a former principal and
officer of the Company, filed a voluntary petition for
bankruptcy relief under Chapter 11 in the Northern District of
Texas. On March 1, 1995, the case was converted to Chapter 7.
Mr. Himber made claims against the Company for wages and
equitable ownership interests through various entities in which
he had an interest; these claims became property of the Chapter
7 estate. Through an Asset Purchase and Release of Claims, the
Chapter 7 Trustee of Himber's estate "sold, transferred, and
conveyed" to the NBHLT all of the Himber estate's claims against
BSD, as well as its entire interest in and right to any shares
of stock of BSD, and all rights of the Himber estate to acquire
additional shares of BSD. On May 19, 1997, BSD purchased from
the NBHLT all such rights previously owned by the Himber estate.
As a result of this purchase, the Company believes that it no
longer has any obligations regarding Mr. Himber or claims he may
have against the Company or his former partnerships.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock began publicly trading on December
9, 1980, and was traded in the over-the-counter market under the
NASDAQ symbol "BSDM" until it was delisted from NASDAQ on
January 3, 1991. After that time, it continued to trade (very
sporadically) in the over-the-counter market and consistently
reliable stock quotations were not readily available because
there had been no established market for the Company's stock.
In May 1997, the symbol "BSDM" was listed on the OTC Bulletin
Board.
The following table sets forth the high and low bid
transactions, as provided by the OTC Bulletin Board, for the
quarters in fiscal year 1997 after the Company's stock symbol
was listed. The amounts reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent
actual transactions.
Bid
Quarter Ended: High Low
---------------------------------
May 31, 1997 $0.5625 $0.50
August 31, 1997 $0.6250 $0.25
As of August 31, 1997, there were approximately 627 holders of
record of the Common Stock. The Company has not paid any cash
dividends on its Common Stock since its inception and has no
intention of declaring any Common Stock dividends in the
foreseeable future.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The balance sheet as of August 31, 1997, and the statements of
operations, statements of cash flow and statements of
stockholders' equity for the years ending August 31, 1996, and
1997, and the independent auditors report thereon are included
elsewhere in this report. The following selected financial
information should be read in conjunction with the financial
statements and notes thereto included elsewhere in this report.
FISCAL YEAR ENDED AUGUST 31, 1997. Revenues for the year
ended August 31, 1997, totaled $1,319,698, compared to
$2,536,525 for the year ended August 31, 1996, a decrease of
$1,216,827, or 47.97%, primarily because the Company received
$1,501,376 in fiscal 1996 from the grant of a patent license, as
opposed to $232,163 in license fees in 1997. Product sales
increased from $711,459 in 1996 to $949,369 in 1997, an increase
of $237,910, or 33.43%. During fiscal 1996, the Company devoted
time and resources to completion of a new product line - the BSD-
2000/3D/MR - and to establishing the manufacturing capabilities
and support functions needed for this new product line. The
first BSD-2000/3D was installed in August 1997, and BSD is
completing the modifications required for the installation of
the MR portion of this system, which is projected for
installation in January 1998. BSD has received orders totaling
$1,631,978 for purchases of this new product, and, as of
November 1997, has a back-log of $996,837 in sales for the new
product line, which will be delivered in fiscal 1998.
The Company's revenues from products and services in the
United States decreased from $266,147 in fiscal 1996 to $122,413
in fiscal 1997. The Company is currently evaluating methods to
increase U.S. sales, which includes pursuing increases in
reimbursement for some treatments and a strategic partnership to
pursue studies regarding treatment of prostatic carcinoma. BSD
also intends to install a BSD-2000/3D System at Duke University
Medical Center, projected for installation in December 1997, as
part of the NCI grant (Grant No. CA61515) BSD received to
develop and clinically evaluate this system. Some of these
actions may eventually improve the U.S. market, however, this
market continues to be sluggish.
Gross profit on product sales for 1997 was $560,924, an
increase of 256.95%, as compared to $218,298 for fiscal 1996, a
result of an increase in sales and lower product costs in 1997,
as compared to 1996. Gross profit margin as a percentage of
sales increased from 30.68% in fiscal 1996 to 59.08% in fiscal
1997 because of the aforementioned increase in sales and lower
product costs.
Selling, General and Administrative Expenses for 1997 totaled
$1,359,082, an increase of $662,082, or 94.99%, as compared to
$697,000 for fiscal 1996, primarily because of the following
expenditures. The Selling, General and Administrative Expenses
for 1997 included $372,000 in deferred compensation from
amortization of options and warrants issued to purchase shares
of the Company's common stock (see Note 6 to Financial
Statements); increases in compensation; $311,000 in legal costs
due to litigation with Urologix (see Part I, Item 3, Legal
Proceedings, Urologix, Inc. vs. BSD Medical Corporation);
$47,858 due to write-off of amortization costs of abandoned
patents; and increased costs for trade shows and marketing
expense. Selling, General and Administrative Expenses may
increase in the future as the Company intends to expand its
marketing and sales efforts.
Research and Development Expenses for 1997 totaled $432,394, a
decrease of $132,764 or 23.49%, as compared to $565,158 for
fiscal 1996, due to completion of the design of the BSD-2000/3D
product line. The Company may increase research and development
in the future in order to improve existing products and develop
new products, including prostatic carcinoma treatment products.
The Company also intends to pursue new markets and applications
for the Company's products.
Total Costs and Expenses for 1997 were $2,179,921, an increase
of 20.03%, as compared to $1,755,319 for fiscal 1996, due to the
aforementioned increases in Selling, General and Administrative
Expenses for 1997.
Interest Expense in 1997 decreased to $22,936, as compared to
$46,461 in 1996. The decrease was caused primarily by lower
interest costs associated with notes payable as they reach
maturity and typical periodic business fluctuations.
During fiscal 1997, the Company experienced a net loss of
$872,525. During fiscal 1996, the Company experienced a net
profit of $870,993 before taxes and $800,993 after taxes. The
difference from 1996 to 1997 was due to the receipt in fiscal
1996 of $1,501,376 from the grant of a patent license (as
opposed to $232,163 in license fees in 1997), combined with the
aforementioned increases in Selling, General, and Administrative
costs during 1997. As of November 1997, BSD had received orders
totaling $1,631,978 for purchases of BSD-2000/3D/MR product line
and has a back-log of $996,837 in sales for the new product
line, which will be delivered in fiscal 1998.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. International
sales accounted for 62.59% and 72.94% of the Company's total
product sales during the fiscal years ended August 31, 1997, and
August 31, 1996, respectively. The Company expects that
international sales will continue to represent a significant
portion of its total sales. The Company is subject to risks
generally associated with international operations, including
the establishment by foreign regulatory agencies of product
standards different from, and in some cases more stringent than,
those in the United States. Although the Company's sales are
denominated in U.S. dollars, its international business may be
affected by changes in demand resulting from fluctuations in
currency exchange rates. The Company's international sales may
also be adversely affected by tariff regulations and export
license requirements. Possible governmental, legislative and
political actions that may be taken by the United States in
order to reduce the balance of payments deficit may result in
retaliatory actions by foreign governments. Such actions could
have adverse effects upon sales of the Company's products in
certain foreign markets. In addition, the laws of certain
foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United
States.
FLUCTUATIONS IN OPERATING RESULTS. The Company's sales and
operating results historically have varied (and will likely
continue to vary) greatly on a quarter-to-quarter and year-to-
year basis due to risks associated with international
operations; budgeting considerations of the Company's customers;
the nature of the medical capital equipment market; the
inability of the Company to predict the timing of various
approvals required from the Food and Drug Administration and
other governmental agencies; the relatively large per unit sales
prices of the Company's products; the typical fluctuations in
the mix of orders for different systems and system
configurations; the limited unit sales volumes; the Company's
limited cash resources; changes in Medicare and other third-
party reimbursement policies; competition; and other factors.
For these and other reasons, the results of operations for a
particular fiscal period may not be indicative of results for
any other period.
LIQUIDITY AND CAPITAL RESOURCES. Total assets decreased by
$658,974, a decrease of 32.49% from August 31, 1996, to August
31, 1997. The decrease was primarily due to decreases in cash
and other receivables. Cash decreased to $43,681, a decrease of
$338,065 or 88.55%, as compared to 1996, primarily as a result
of payment of accrued debts and increased operating expenses
required to build and support new product lines. Trade accounts
receivable increased by $272,390, an increase of 209.94%,
primarily as a result of a receivable for the MR portion of a
BSD-2000/3D/MR system, which is projected to ship in January
1998. Inventories increased by $11,160, an increase of 2.1%,
primarily as a result of normal periodic fluctuations. Current
liabilities increased by $257,608, an increase of 42.31%,
primarily as a result of increases in notes payable, accounts
payable, and deferred revenue, as well as other normal periodic
fluctuations.
MANAGEMENT DISCUSSION AND CURRENT STATUS OF FINANCIAL CONDITION.
Management believes that the current projected sales will be
sufficient to meet the Company's operating cash requirements
into 1998. However, if sales are not sufficient to meet
operating needs, management intends to use its current cash
position, (supplemented and aided by anticipated cash flow from
sales, budget controls, fiscal conservatism, the possibility of
loans, and if necessary, private placements of its equity
securities) to meet operating requirements planned for 1998.
The Company's backlog of unfilled customer orders was $408,355,
as of August 31, 1997; the Company's backlog was $409,141, as of
August 31, 1996, (for which a $335,000 deposit had already been
collected by the Company). The Company also had long term
receivables due for field service contracts of $105,820, as of
August 31, 1996, and $68,480, as of August 31, 1997. As of
November 1997, BSD had received orders totaling $1,634,978 for
purchases of the BSD-2000/3D/MR product line and had a back-log
of $1,046,978 in sales for this product, which will be delivered
in fiscal 1998.
On November 14, 1997, BSD signed an agreement with Oracle
Strategic Partners (OSP) to form TherMatrx, Inc., a jointly-
owned company which will initially focus on minimally invasive
treatments of urological diseases, specifically Benign
Prostatic Hyperplasia (BPH). The BPH market is currently
estimated to be over $3 billion annually in the U.S. alone.
Oracle Strategic Partners is a private investment firm
specializing in public securities investing and merchant
banking in the health care, bioscience and related industries.
TherMatrx will be capitalized by the contribution of certain
assets of BSD which have applicability in the urology market and
a $6 million investment by OSP. OSP's investment is milestone-
based with an initial $3 million investment on closing and $3
million contingent on the achievement of certain milestone
parameters. Assuming completion of the milestone funding, BSD
will retain a 30% interest on a fully diluted basis. As part of
the agreement, BSD plans to provide certain manufacturing and
consulting services, for which TherMatrx will compensate the
Company. TherMatrx' corporate offices will be located in
Chicago, Illinois. The President and CEO will be Charles
Manker. Dr. Gerhard Sennewald has been appointed by BSD's Board
to serve as BSD's representative on the Board of Directors of
TherMatrx. This transaction is consistent with the strategy of
the BSD Board of Directors to enhance shareholder value. BSD
will continue to focus its resources on the cancer treatment
market, including a concentration on the areas of deep regional
hyperthermia and the treatment of prostatic carcinoma.
In 1996, BSD received the first purchase order for its new,
deep regional hyperthermia system - the BSD-2000/3D/MR System.
The purchase order was received from Dr. Sennewald/Medizin-
Technik GmbH, Munich, Germany, BSD's primary European
distributor, and included an option for a second system order.
The Company anticipates that the BSD-2000/3D System will
increase the commercial market in hyperthermia throughout the
world. BSD has started collaborative developments for clinical
application of this technology, and some of these developments
will be conducted under grants from the Stiftung Deutsche
Krebshilfe e.V. (German Cancer Aid Foundation). The Company is
seeking other strategic partnerships for marketing, sales and
distribution of the Company's current products; collaborative
arrangements for the development of new product lines; as well
as alliances for product development and manufacturing of the
companies' product. BSD is in negotiations for some of these
partnerships.
Management is expanding world wide marketing for current
cancer products into two previously unexplored markets: surgical
and chemotherapeutic oncology. These two disciplines control
most cancer patients and treatment funds, and clinical evidence
of the safety and efficacy of hyperthermia in conjunction with
chemotherapy and surgery has been published.
The Company is primarily focused on the development and
commercialization of minimally invasive, low toxicity, effective
treatments of disease using controlled heating. BSD plans to
support further R & D for current products to improve function
and reduce cost. Funding of R & D will primarily come from
government, strategic partnerships, and foundation sources;
product improvements on existing product lines will be supported
by current product sales. The Company also intends to pursue
new markets and applications for the Company's product.
The Company has expanded its business to include contract
manufacturing in order to more effectively utilize BSD's
manufacturing expertise.
Management has implemented programs to increase profitability
and expand BSD's business; however, there can be no assurance
that management will be successful in achieving improved
operating results and there are certain risk factors which may
impact the Company's ability to fund its cash needs. Such risk
factors include uncertainties as to the Company's ability to
achieve adequate sales, general economic conditions, possible
unforeseen and/or non recurring expenses, and the availability
of outside financing. The Company's backlog as of any
particular date may not be indicative of the Company's actual
sales for any fiscal period. In addition, the Company's
ability to produce and ship its products depends upon its
production capacity, manufacturing yields and component
availability, among other factors. The domestic United States
market for cancer hyperthermia equipment has been severely
adversely impacted as a result of Medicare and other third-party
reimbursement policies and procedures. The positive clinical
results from European studies and recent changes in Medicare
reimbursement policy may eventually stimulate the U.S. market;
however, BSD projects that the U.S. market will continue to grow
at a slower rate than the international market.
Domestic United States orders have traditionally generated a
substantial cash down payment with each order. These down
payments have helped to stabilize cash fluctuations over the
course of each year and have helped to finance the acquisition
of the specific components needed to produce the systems for
which these down payments have been received. For the previous
few years, foreign sales have provided the majority of sales
revenues, and the Company anticipates that the majority of its
sales for at least the next one to two years will be to foreign
customers. The dramatic shift from predominantly domestic
United States sales to predominantly foreign sales could have a
negative impact on the Company's ability to fund its future
purchases of raw materials because payments to the Company for
foreign sales have typically been by means of letters of credit
whereby 100% of the purchase price for each system is paid to
the Company after the system has been produced and shipped. In
order to remedy this situation, the Company is attempting to
encourage substantial down payments with system orders and is
seeking to establish a line of credit; however, there can be no
assurance the Company will be successful in obtaining either.
ITEM 7. FINANCIAL STATEMENTS
Pursuant to Rule 12b-23, the financial statements set forth on
pages 1 through 19 attached hereto are incorporated by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
As reported in Form 8-K/A filed September 2, 1997 and Form 8-
K/A filed September 23, 1997, the Company dismissed its former
auditors, KPMG Peat Marwick, LLP, on August 14, 1997. Pursuant
to action approved by the Company's Board of Directors, the
Company retained Tanner + Co. as its auditors as of August 14,
1997.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The current directorship positions resulted from vacancies and
were filled by a majority of the directors then in office, and
the directors so chosen hold office until their successors have
been duly elected and qualified. The Company does not presently
have a nominating committee. Executive officers of the Company
are appointed by the Board of Directors and serve at the
discretion of the Board. There are no family relationships
between any of the directors or executive officers of the
Company and none of these individuals have been involved in any
reportable legal proceedings.
The following table sets forth certain information concerning
the directors, executive officers, and other significant
employee(s) of the Company.
Name Age Position
Paul F. Turner, 50 Chairman of the Board, Acting
M.S.E.E. President, and Senior Vice
President of Research
Dixie Toolson Sells 47 Vice President of Regulatory
Affairs and Corporate Secretary
Ray Lauritzen 47 Vice President of Field Service
Gerhard W. Sennewald, 61 Member of the Board of Directors
Ph.D.
S. Lewis Meyer, Ph.D. 53 Member of the Board of Directors
J. Gordon Short, M.D. 66 Member of the Board of Directors
Theron Schaefermeyer 46 Director of International Sales
and Marketing
Mr. Turner has been with BSD for 19 years. He served as Staff
and Senior Scientist from 1979 to September 1986; as Vice
President of Research from September 1986, to January 1989; and
as Senior Vice President of Research from January 1989, to
October 1993. In October 1993, Mr. Turner resigned as Vice
President of Research, and he served as Senior Scientist from
October 1993 to December 1994. In December 1994, Mr. Turner was
re-appointed as Senior Vice President of Research and was
elected to the Board of Directors. On October 3, 1995, the
Board of Directors appointed Mr. Turner as Acting President.
Ms. Sells has been with BSD for 19 years. She served as
Administrative Director from 1978 to 1984; as Director of
Regulatory Affairs from 1984 to September 1987; and as Vice
President of Regulatory Affairs from September 1987, to October
1993. In October 1993, Ms. Sells resigned as Vice President of
Regulatory Affairs, and she served as Director of Regulatory
Affairs from October 1993 to December 1994. In December 1994,
Ms. Sells was re-appointed as Vice President of Regulatory
Affairs and was appointed as Corporate Secretary by the Board of
Directors. Ms. Sells also serves on the Board of Directors of
the Utah Intermountain Biomedical Association.
Mr. Lauritzen has been with BSD for 15 years. He served as
Field Service Manager from 1982 to January 1988 and as Vice
President of Field Service Operations since January 1988.
Dr. Gerhard Sennewald was appointed to BSD's Board of
Directors in December 1994. He has been the key BSD European
representative and distributor for 13 years and has been
instrumental in obtaining the majority of BSD's foreign sales.
Dr. Sennewald is the President and Chief Executive Officer of
Medizin-Technik GmbH of Munich, Germany.
Dr. S. Lewis Meyer returned to BSD's Board of Directors in
December 1994, after previously serving as a Director in the mid-
1980's. Dr. Meyer is President and Chief Executive Officer of
Imatron, Inc., a publicly traded manufacturer of Ultrafast CT (TM)
Scanner. Dr. Meyer is also Chief Executive Officer of Heartscan
Imaging, Inc., a subsidiary of Imatron, Inc., which is engaged
in the development of a nationwide network of coronary artery
disease risk assessment centers.
Dr. J. Gordon Short was appointed to BSD's Board of Directors
in December 1994, after extensive participation in the initial
development and market establishment of the Company's products
as Medical Director for BSD, as well as previous service on the
Company's Medical Advisory Board. Dr. Short is President and
Chief Executive Officer of Brevis Corporation, a medical
products company which specializes in consumable specialty
supplies.
Mr. Schaefermeyer has been with BSD for 16 years. He has been
a Research Assistant since 1985 and assisted with International
Marketing from 1991 to 1995. He has served as Director of
International Sales and Marketing since July 1995.
Pursuant to Section 16(a) of the Securities Act of 1934, the
Company's directors, executive officers, and any persons holding
more than 10 percent of the Company's stock, are required to
report their ownership and any changes in beneficial ownership
of the Company's stock to the Securities and Exchange
Commission. To the Company's knowledge, based solely on review
of the copies of such reports furnished to the Company, all of
such persons subject to these reporting requirements filed the
required reports with respect to the Company's most recent
fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain information regarding
all compensation earned during the last three fiscal years and
fiscal year-end stock option values for the person acting in a
similar capacity to chief executive officer of the Company in
the fiscal year ended August 31, 1997. No stock options were
granted to or exercised by the Acting President during fiscal
year 1997. No other executive officers of the Company received
compensation exceeding $100,000.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
Awards
- -------------------------------------------- ---------------- ----
Other Restric- All
Annual ted Other
Compen- Stock Compen-
Name and Fiscal Salary Bonus sation Awards Options sation
Position Year ($) ($) ($) ($) (#) ($)
- -----------------------------------------------------------------------
Paul F. 1997 $115,000 -0- -0- -0- -0- -0-
Turner,
Acting 1996 $115,000 -0- -0- $2,110(1) 14,953 -0-
President;
Sr. VP, 1995 $115,000 -0- -0- $1,240(2) 166,000 -0-
Research
(1) During fiscal 1996, the Company awarded Mr. Turner 1,000
shares of restricted common stock. Consistently reliable
stock quotations had not been readily available because there
had been no established market for the Company's stock (see
Part II, Item 5). However, the Company received a valuation
of $2.11 per share on a minority interest basis as of
December 31, 1996. The Company believes these numbers may
not be a reliable indicator of actual realizable value of
these shares. However, this value has been reflected for the
shares listed in this table.
(2) During fiscal 1995, the Company awarded both Mr. Turner
1,000 shares of restricted common stock. Consistently
reliable stock quotations had not been readily available
because there had been no established market for the
Company's stock (see Part II, Item 5). However, the Company
received a valuation of $1.24 per share on a controlling
interest basis as of December 4, 1994. The Company believes
these numbers may not be a reliable indicator of actual
realizable value of these shares. However, this value has
been reflected for the shares listed in this table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Shares
Acquired Number of Value of
on Value Securities Unexercised
Exer- Reali- Underlying In-the-Money
cise zed Unexercised Options at FY-end
Options at FY-end ($)
(#)
Name and ------------------- -----------------
Position (#) ($) Exerci- Unexerci- Exerci- Unexerci-
sable sable sable sable
- -----------------------------------------------------------------
Paul F. -0- -0- 172,655 8,298 $58,271 $2,801
Turner,
Acting
President;
Sr. VP,
Research
COMPENSATION OF DIRECTORS
During the fiscal year ended August 31, 1997, the Company's
directors received no compensation of any kind for their service
to the Company as directors.
EMPLOYMENT CONTRACTS
The Company has an employment contract with Mr. Paul F. Turner
which was signed November 2, 1988. This agreement provided
specified salary increases through 1992; the agreement provided
that, after October 1, 1993, Paul Turner's salary shall be based
upon reasonable mutual agreements. The agreement also provided
that, in the case of non-voluntary termination, Mr. Turner shall
receive severance pay for a one year period, which includes an
extension of all employee rights, privileges, and benefits,
including medical insurance. The one year severance pay shall
be an average of Mr. Turner's salary for the immediate twelve
month period prior to termination. The agreement also requires
the Company to pay Mr. Turner any accrued unused vacation at the
time of termination. BSD is also obligated to pay Mr. Turner
$1,000 (or the equivalent value in stock options) for newly
issued patents (this compensation is halved if multiple
inventors are involved).
Mr. Turner's agreement includes a period of non-competition
for one year following termination of employment. This non-
competition agreement may be extended by BSD for up to an
additional four years by written notification and continuing
severance payments for the additional years of extension (as
defined for the first year) if the non-competition obligation is
extended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of
August 31, 1997, with respect to the beneficial ownership of the
outstanding Common Stock by (i) each person known to management
of the Company to own beneficially more than 5% of the
outstanding Common Stock, (ii) all directors and named executive
officers of the Company, and (iii) all officers and directors as
a group:
Name and Address of Shares of Common Percentage of
Beneficial Owner Stock Beneficially Common Stock
Owned (1) Ownership (2)
- -------------------------------------------------------------------
Dr. Gerhard W. 6,669,946(3) 41.04%
Sennewald
c/o Medizin-Technik GmbH
Augustenstrasse 27
D-80333 Munich, Germany
Paul F. Turner 1,987,573(4) 12.16%
762 Lacey Way
North Salt Lake, UT 84054
John E. Langdon 1,434,010(5) 8.86%
2501 Parkview Drive,
Suite 500
Fort Worth, TX 76102
Inchon Partners, L.P.(6) 912,500 5.64%
c/o BSD Medical Corporation
2188 West 2200 South
Salt Lake City, UT 84119
S. Lewis Meyer, Ph.D. 19,000(7) *
c/o Imatron
389 Oyster Point Boulevard
South San Francisco, CA 94080
J. Gordon Short, M.D., FCAP 16,000(8) *
c/o Brevis Corporation
3310 South 2700 East
Salt Lake City, UT 84109
All officers and 9,268,928(9) 55.95%
directors as
a group (6 persons)
- -----------------------------
* Less than 1.0%.
(1) Unless otherwise noted and subject to community property
laws, where applicable, the persons named in the table above
possess sole voting and investment power with respect to all
shares shown to be beneficially owned by them.
(2) Shares not outstanding but deemed beneficially owned by
virtue of the right of a person or member of a group to
acquire them within 60 days are treated as outstanding only
when determining the amount and percent owned by such person
or group.
(3) Includes 76,065 shares subject to options.
(4) Includes 172,655 shares subject to options.
(5) Includes 537,525 shares owned directly by Mr. Langdon. The
remaining shares are held in trusts for which Mr. Langdon is
Trustee.
(6) Alan L. Himber, as the General Partner of Inchon Partners,
L.P., exercised the voting rights to the stock owned by the
partnership. Mr. Himber subsequently declared Chapter 7
bankruptcy. Pursuant to an agreement between Thomas Powers,
Himber's Chapter 7 Trustee, and Carter Pate, the Nelson
Bunker Hunt Liquidating Trust (NBHLT) Trustee, dated January
12, 1996, Powers "sold, transferred, and conveyed" to the
NBHLT all of the Himber estate's interest in and right to any
shares of stock of BSD, and all rights of the Himber estate
to acquire additional shares of BSD, including all options,
warrants, and convertible instruments. On May 19, 1997, BSD
purchased from the NBH Liquidating Trust its rights to shares
of stock of BSD and other equity or debt interest or rights
in BSD owned by the Himber estate, including all of the
Himber estate's interest in and control of Cognoscenti
Partners, Inchon Partners, and San Jacinto Partners. BSD is
currently attempting to ascertain the ownership positions of
the limited partners in this partnership.
(7) Includes 14,000 shares subject to options.
(8) Includes 14,000 shares subject to options.
(9) Includes 388,637 shares subject to options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report or are
hereby incorporated by reference as indicated:
Exhibit Description
Number
- ----------------------------------------------------------------
3.1 Certificate of Incorporation. Incorporated by reference
to Exhibit 3.1 of the BSD Medical Corporation
Registration Statement on Form S-1, filed October 16,
1986.
3.2 By-Laws. Incorporated by reference to Exhibit 3.2 of
the BSD Medical Corporation Registration Statement on
Form S-1, filed October 16, 1986.
4.1 Specimen Common Stock Certificate. Incorporated by
reference to Exhibit 4 of the BSD Medical Corporation
Registration Statement on Form S-1, filed October 16,
1986.
10.1 Transfer of Trade Secrets Agreement dated December 7,
1979, among BSD Medical Corporation, Vitek, Incorporated
and Ronald R. Bowman. Incorporated by reference to
Exhibit 10.6 of the BSD Medical Corporation Registration
Statement on Form S-1, filed October 16, 1986.
10.2 Volume Purchase Agreement dated June 6, 1986, between
BSD Medical Corporation and Luxtron Corporation.
Incorporated by reference to Exhibit 10.9 of the BSD
Medical Corporation Registration Statement on Form S-1,
filed October 16, 1986.
10.3 BSD Medical Corporation 1987 Stock Option Plan.
Incorporated by reference to Exhibit 10 of the BSD
Medical Corporation Form 10-K, filed April 8, 1988.
10.4 Second Addendum to Exclusive Transfer of Trade Secrets
Agreement dated April 2, 1987. Incorporated by
reference to Exhibit 10 of the BSD Medical Corporation
Form 10-K, filed April 8, 1988.
10.5 License Agreement between BSD Medical Corporation and
EDAP Technomed, Inc., dated July 3, 1996. Incorporated
by reference to Exhibit 10 of Form 8-K, filed August 7,
1996.
10.6 Terms of Engagement between BSD Medical Corporation and
Ambient Capital dated November 26, 1996. Incorporated
by reference to Exhibit 10 of Form 10-QSB filed February
27, 1997.
16 Letter on changes in certifying accountant.
Incorporated by reference to Exhibit 16 of the BSD
Medical Corporation Form 8-K/A, filed September 23,
1997.
27 Financial Data Schedule.
(b)Reports on Form 8-K
The Company filed a report on Form 8-K/A on September 2,
1997, which reported a change in the Company's certifying
accountants. The letter of agreement from the Company's
former certifying accountant was filed as Exhibit 16 to Form
8-K/A on September 23, 1997.
The Company filed a report on Form 8-K on November 18, 1997,
which reported the formation of TherMatrx, Inc., by BSD
Medical Corporation and Oracle Strategic Partners.
<PAGE>
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.
BSD MEDICAL CORPORATION
Date: November 26, 1997 By: /s/ Paul F. Turner
Paul F. Turner
Chairman of the Board, Acting
President, and Senior Vice
President of Research
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.
Date: November 26, 1997 By: /s/ Paul F. Turner
Paul F. Turner
Chairman of the Board, Acting
President, and Senior Vice
President of Research
Date: November 26, 1997 By: /s/ S. Lewis Meyer
Dr. S. Lewis Meyer
Member of the Board of Directors
Date: November 26, 1997 By: /s/ Gerhard W. Sennewald
Dr. Gerhard W. Sennewald
Member of the Board of Directors
Date: November 26, 1997 By: /s/ J. Gordon Short
Dr. J. Gordon Short
Member of the Board of Directors
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of BSD Medical Corporation
We have audited the balance sheet of BSD Medical Corporation
(the Company) as of August 31, 1997, and the related
statements of operations, stockholders' equity, and cash
flows for the year 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 audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards 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. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to
above present fairly, in all material respects, the financial
position of BSD Medical Corporation as of August 31, 1997,
and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared
assuming that the company will continue as a going concern.
As discussed in Note 2 to the financial statements, the
Company has an accumulated deficit and incurred an operating
loss. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 2. The
financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
TANNER + CO.
Salt Lake City, Utah
September 30, 1997 except for note 16,
which is dated November 18, 1997
<PAGE>
Independent Auditors' Report
The Board of Directors
BSD Medical Corporation:
We have audited the accompanying statements of operations,
stockholder's equity and cash flows of BSD Medical
Corporation (the Company) for the year ended August 31, 1996.
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 in accordance with generally accepted
auditing standards. Those standards 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. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of
operations and cash flows of BSD Medical Corporation for the
year ended August 31, 1996, in conformity with generally
accepted accounting principles.
The accompanying 1996 financial statements have been prepared
assuming that BSD Medical Corporation will continue as a
going concern. As discussed in note 2 to the financial
statements, the Company has historically experienced losses
from operations and has limited capital resources both of
which raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to
these matters are also described in note 2. The financial
statements do not include any adjustments that might result
from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Salt Lake City, Utah
November 25, 1996
<PAGE>
BSD MEDICAL CORPORATION
Balance Sheet
August 31, 1997
Assets
Current assets:
Cash and cash equivalents $ 43,681
Receivables 406,874
Inventories 542,226
Prepaid expenses 20,500
Deposits 6,850
-------------
Total current assets 1,020,131
Property and equipment, net 280,396
Long-term trade receivables 68,480
-------------
1,369,007
=============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt 251,723
Current portion of deferred revenue 82,850
Accounts payable 323,918
Accrued expenses 207,913
-------------
Total current liabilities 866,404
-------------
Long-term debt 89,697
Deferred revenue 104,733
-------------
194,430
Total liabilities 1,060,834
-------------
Commitments and contingency -
Stockholders' equity:
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
16,176,980 shares 161,770
Additional paid-in capital 20,413,575
Accumulated deficit (19,874,689)
Deferred compensation (463,246)
Less 234,928 shares of treasury stock, at cost (19,237)
-------------
Total stockholders' equity 308,173
-------------
$ 1,369,007
=============
See accompanying notes to financial statements 1
<PAGE>
BSD MEDICAL CORPORATION
Statement of Operations
Years Ended August 31,
1997 1996
-----------------------
Product sales $ 949,369 $ 711,459
Grant and license revenue 370,329 1,825,066
-----------------------
Total revenues 1,319,698 2,536,525
-----------------------
Costs and expenses:
Cost of product sales 388,445 493,161
Research and development 432,394 565,158
Selling, general, and administrative 1,359,082 697,000
-----------------------
Total costs and expenses 2,179,921 1,755,319
-----------------------
Operating (loss) income (860,223) 781,206
Other income (expense):
Interest income 10,634 2,243
Interest expense (22,936) (46,461)
Other, net - 134,005
-----------------------
Net income (loss) before income taxes (872,525) 870,993
Provision for income taxes - current - (70,000)
-----------------------
Net (loss) income $ (872,525)$ 800,993
=======================
Net (loss) income per common and common
equivalent share $ (.05)$ .05
=======================
Weighted average number of shares outstanding 16,176,980 17,164,967
=======================
See accompanying notes to financial statements 2
<PAGE>
BSD MEDICAL CORPORATION
Statement of Stockholders' Equity
Years Ended August 31, 1997 and 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Additional Deferred
Common Stock Paid-In Compen- Accumulated Treasury Stock
Shares Amount Capital sation Deficit Shares Amount
------------------------------------------------------------------------------------
Balances,
September 1, 1996 16,176,980 $ 161,770 $ 20,055,347 $ (1,055,070)$(19,713,157) 67,428 $ (19,911)
Treasury stock issued
for exercised stock
options - - (442) - - - 844
Treasury stock issued
for employee bonuses - - 35,200 - - - 4,200
Deferred compensation
related to grant of stock
options - - 251,313 (251,313) - - -
Amortization of deferred
compensation - - - 456,967 - - -
Net income - - - - 800,993 - -
------------------------------------------------------------------------------------
Balance,
August 31, 1996 16,176,980 161,770 20,341,418 (849,416) (18,912,164) 67,428 (14,867)
Amortization of deferred
compensation - - - 405,170 - - -
Cancellation of stock
options - - (19,843) - - - -
Deferred compensation
related to grant of stock
options - - 19,000 (19,000) - - -
Treasury stock issued
for employee bonuses - - - - - (3,000) 630
Purchase of treasury
stock for cash - - - - - 170,500 (5,000)
Net loss - - - - (872,525) - -
------------------------------------------------------------------------------------
Balances,
August 31, 1997 16,176,980 161,770 20,340,575 $(463,246)$(19,784,689) 234,928 $ (19,237)
====================================================================================
</TABLE>
See accompanying notes to financial statements. 3
<PAGE>
BSD MEDICAL CORPORATION
Statements of Cash Flows
Years Ended August 31,
1997 1996
-----------------------
Cash flows from operations activities:
Net (loss) income $ (872,525) $ 800,993
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 24,481 39,705
Write-off of patents 67,742 -
Provision for losses on receivables (46,694) 46,694
Provision for warranties (12,377) 32,172
Gain on settlement of payables - (95,765)
Stock issued for employee bonuses - 39,400
Deferred compensation 386,170 456,967
Stock compensation expense 73,000 -
(Increase) decrease in:
Receivables 324,539 (582,887)
Inventories (11,160) 915
Prepaid expense and other assets 14,475 (5,084)
Increase (decrease) in:
Accounts payable 190,926 (107,483)
Accrued expenses (165,892) 22,121
Deferred revenue (252,291) 9,172
-----------------------
Net cash (used in) provided by
operations activities (279,606) 656,920
-----------------------
Cash flows from investing activities - purchase
of property and equipment (52,474) (6,866)
-----------------------
Cash flows from financing activities:
Net proceeds from (payments on) short-term notes
payable 155,672 (246,230)
Payments on capital lease obligation (46,554) (48,403)
Payments on long-term debt obligation (109,890) (20,202)
Proceeds from exercise of stock options - 402
Payment for treasury stock (5,213) -
-----------------------
Net cash used in
financing activities (5,985) (314,433)
-----------------------
(Decrease) increase in cash and cash equivalents (338,065) 335,621
Cash and cash equivalents, beginning of year 381,746 46,125
-----------------------
Cash and cash equivalents, end of year $ 43,681 $ 381,746
=======================
See accompanying notes to financial statements. 4
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
August 31, 1997 and 1996
1. Summary of Business and Significant Accounting Policies Business
BSD Medical Corporation, the Company, develops, produces, markets, and
services systems used for the treatment of cancer and other diseases. Such
systems are sold worldwide.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and investments with original
maturities to the Company of three months or less.
Inventories
Raw material inventories are stated at the lower of cost or market. Cost is
determined using the average cost method. Work-in-process and finished goods
are stated at the lower of the accumulated manufacturing costs or market.
Property and Equipment
Property and equipment are stated at cost. The building under capital lease
is stated at the present value of the minimum lease payments, plus costs
incurred to obtain the option to purchase the building, less the reserve for
potential impairment. Depreciation is provided using the straight-line method
over the estimated useful lives of 40 years for the building and leasehold
improvements and 5 to 12 years for furniture, fixtures, and equipment.
Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Income (Loss) Per Common and Common Equivalent Share
Net loss per share is based on net loss and the weighted average number of
common shares outstanding, during each period after giving effect to stock
options considered to be dilutive stock equivalents, determined using the
treasury stock method. Fully diluted net loss per share is antidilutive or
not materially different from primary net loss per share.
5
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
1. Summary of Business and Significant Accounting Policies -
Continued
Revenue Recognition
Sales revenues for products are recorded when products are shipped. Revenue
from long-term service contracts is recognized on a straight-line basis over
the term of the contract, which approximates recognizing it as it is earned.
Deferred revenue includes amounts from service contracts as well as revenue
from sales of products which have not been shipped.
Research and Development Costs
Research and development costs are expensed as incurred.
Other Income
Included in other income in 1996 are gains from settling payables for less
than their recorded balances. These gains totaled approximately $96,000 in
fiscal 1996, which increased earnings per share by $.01 in 1996.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consists primarily of trade receivables. In the normal course
of business, the Company provides credit terms to its customers. Accordingly,
the Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the
range of management's expectations.
The Company has cash in bank and short-term investments which, at times, may
exceed federally insured limits. The Company has not experienced any losses
in such accounts. The Company believes it is not exposed to any significant
credit risk on cash and short-term investments.
6
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect 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 accounts in the 1996 financial statements have been reclassified to
conform with the current year.
2. Going Concern
The Company has historically encountered difficulties in meeting its
obligations as they come due, has experienced a substantial operating loss,
and has had to rely primarily upon cash provided by financing activities and
fees received from its patent license agreement to meet cash requirements.
Furthermore, the Company has limited capital resources. These conditions
raise substantial doubt concerning the continuation of the Company as a going
concern. Management intends to use its current cash position supplemented and
aided by anticipated cash inflows from sales, budget cutting, fiscal
conservatism, the possibility of loans, and, if necessary, private placements
of its equity securities to meet operating requirements for future years.
However, there are certain risk factors which may impact the Company's ability
to fund its cash needs. Such risk factors include uncertainties as to the
Company's ability to achieve adequate sales, general economic conditions,
possible unforseen and/or nonrecurring expenses, and the availability of
outside financing. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
7
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
3. Detail of Certain Balance Sheet Accounts
Details of certain balance sheet accounts at August 31, 1997 are as follows:
Receivables:
Trade receivables $ 412,565
Other 4,309
Less allowance for doubtful accounts (10,000)
----------
Net receivables $ 406,874
==========
Inventories:
Parts and supplies $ 255,718
Work-in-process 29,802
Finished goods 276,706
Inventory reserve (20,000)
----------
Total inventory $ 542,226
==========
Accrued expenses:
Accrued expenses $ 137,913
Income taxes payable 70,000
----------
Total accrued expenses $ 207,913
==========
8
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
4. Property and Equipment
Property and equipment at August 31, 1997 consists of the following:
Buildings, net of reserve for impairment
of $181,534 $ 233,766
Equipment 525,573
Furniture and fixtures 297,743
----------
1,057,082
Less accumulated depreciation and
amortization (776,686)
----------
Net property and equipment $ 280,396
==========
5. Income Taxes
The Income tax benefit (provision) differs from the amount computed at federal
statutory rates as follows:
Years Ended
August 31,
1997 1996
---------------------
Income tax benefit (provision) at
statutory rate 282,000 (296,138)
State taxes 44,000 (26,400)
Change in valuation allowance (326,000) 305,897
Other - (53,359)
---------------------
Total income tax benefit
(provision $ - $ (70,000)
=====================
9
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
5. Income Taxes - Continued
Deferred tax assets (liabilities) at August 31, 1997 are comprised of the
following:
Net operating loss carryforward $ 3,904,000
Deferred compensation expense 157,000
Depreciation 5,000
Allowance for bad debt and reserves 10,000
General business credit carryforward 128,000
-----------
4,204,000
Valuation allowance (4,204,000)
-----------
Total deferred income taxes $ -
===========
Expiration Date NOL RETC ITC
1998 $ 1,192,000 $ 16,000 $ 2,100
1999 1,238,000 - 3,300
2000 1,115,000 - -
2001 235,000 - 1,000
2002 2,827,000 8,000 -
2003 2,122,000 41,000 -
2004 - 57,000 -
2005 1,000,000 - -
2007 197,000 - -
2009 200,000 - -
2010 174,000 - -
2012 873,000 - -
--------- ------------ ------------
$ 11,173,000 $ 122,000 $ 6,400
============= ============ ============
10
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
5. Income Taxes - Continued
The Company has experienced a greater than 50 percent change of ownership.
Consequently, use of the Company's carryovers against future taxable income in
any one year may be limited and these carryovers may expire unutilized due to
the limitation imposed by the change of ownership rules.
Net operating losses expiring in the years 2005 through 2012 have been
estimated due to no tax returns having been filed by the Company for the
years in which these losses originated.
6. Stock Option and Award Plans
Stock Options
The Company's 1987 Employee Stock Option Plan authorizes the granting of
incentive options to certain key employees of the Company and nonqualified
stock options to certain key employees, nonemployee directors, or individuals
who provide services to the Company. The Plan, as amended, provides for the
granting of options for an aggregate of 950,000 shares. The options vest
according to a set schedule of over a five-year period and expire upon the
employee's termination or after ten years from the date of grant.
In addition, the Board of Directors authorized the cancellation of all
outstanding options and resistance of options with an exercise price of $.10
per share which will vest over a one to five year period. Each employee was
granted options to purchase 3,000 shares per year of service performed at the
Company, and the officers and directors were each granted options to purchase
35,000 shares. In addition, the Company granted 242,655 warrants to another
entity at an exercise price of $.20 per share.
11
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
6. Stock Option and Award Plans - Continued
A schedule of the options and warrants of at August 31, 1997 is as follows:
Number of Price Per
Options Warrants Share
Outstanding at
August 31, 1997 1,090,246 - $ .10
Granted 47,500 242,655 .10 to .20
Exercised - - -
Expired (30,000) - .10
------------------------------------
Outstanding at
August 31, 1997 1,107,746 242,655 $ .10 to .20
====================================
Options exercisable at August 31, 1997 and 1996 were 908,714 and 377,992,
respectively.
Stock options shown above include 162,065 options which were authorized by the
Company's Board of Directors and not issued under the employee stock option
plan discussed above. Of these 162,065 options 100,000 were issued to
nonemployees.
The Company has issued options to purchase shares of common stock to employees
and nonemployees, at an exercise price of $.10 per share. For options granted
to employees, the Company has recorded as deferred compensation the excess of
the deemed value of common stock at the date of grant over the exercise price.
For options granted to nonemployees, the Company's financial statements include
$0 and $155,273 as deferred compensation as of August 31, 1997 and 1996,
respectively, which is the estimated fair value of those options at the date of
12
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
7. Capital Lease Obligation
The Company building is leased under a noncancellable lease. According to the
terms of the lease, the Company has the option to purchase the building at any
time during the lease term at a purchase price of approximately $330,000. If
the Company elects to exercise the purchase option, $2,000 of each monthly
lease payment made will be applied against the purchase price.
The asset under capital lease includes the capitalization of the costs
incurred to obtain and retain the option to purchase the asset, as well as
management's best estimate of a reserve for impairment.
Future minimum lease payments at August 31, 1997 are as follows:
Year Ending August 31:
1998 $ 62,400
1999 57,200
---------
Total minimum lease payments 119,600
Less amount representing interest (13,230)
Present value of net minimum ---------
lease payments 106,370
Less current portion of capital
leases (52,459)
---------
$ 53,911
========= 13
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
8. Long-term Debt
Long-term debt at August 31, 1997 consists of the following:
Note payable to a vendor, due in monthly
installments of $2,742, including
interest at 9%, maturing October 1, 1999 $64,549
Note payable to an insurance company,
due in monthly installments of $2,125,
including interest at 9.6%, maturing
June 1998 20,500
Related party note payable (Note 4) 150,000
Capital lease obligation (Note 7) 106,370
--------
341,420
Less current portion (257,723)
--------
$89,697
========
Future maturities of long-term debt are as follows:
Year Ending August 31:
1998 $251,723
1999 84,275
2000 5,422
--------
$341,240
========
9. Grant and License Revenue
On July 3, 1996, the Company issued a license agreement for the use of a
patent owned by the Company. As consideration for the agreement the Company
received a nonrefundable license fee of $1,500,000, which was recognized as
revenue during the year ended August 31, 1996. In addition, the Company will
also receive a royalty of 2.5 percent, up to a maximum of $3,500,000, of the
net selling price received on products covered by the Company's patent.
14
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
9. Grant and License Revenue - Continued
The Company was awarded a federal grant from the National Cancer Institute for
research and development. During fiscal 1997 and 1996, $138,499 and $325,066
of revenues and expenses were recognized under this grant. These grants were
issued for the production and testing of system upgrades. A representative of
the awarding agency is currently reviewing the allowableness of grant
expenditures. This agency is currently reviewing the allowableness of grant
expenditures. This agency may disallow certain expenditures based on its
judgements about information available to it during its examination. However,
while the outcome of the examination is currently not determinable, it is
management's opinion that this examination will not have a material adverse
effect on the Company's financial condition, results of operations, or
liquidity.
10. Sales to Foreign Customers and Major Customers
A summary of sales to foreign customers are as follows:
Years Ended
August 31,
1997 1996
Europe $ 795,420 $ 320,826
Far East - 102,917
Other 35,000 21,569
--------- ---------
$ 830,420 $ 445,312
========= =========
Sales to major customers, which exceeded ten percent of total sales, are as
follows:
Years Ended
August 31,
1997 1996
--------------------
Company A $ 692,542 $ 277,509
Company B $ - $ 100,000
15
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
11. Related Party Transactions
During fiscal 1997 and 1996, the Company had sales to a stockholder totaling
$692,542 and $277,509, respectively. Furthermore, included in finished goods
inventories at August 31, 1997, is $35,702 of inventory on consignment to this
stockholder.
The Company has a noninterest bearing, unsecured note payable to a shareholder
of the corporation in the amount of $150,000. The Company expects to repay
this loan in December 1997.
12. Supplemental Cash Flow Information
During the year ended August 31, 1996, the Company converted accounts payable
and accrued expenses to notes payable and long-term debt
Actual amounts paid for interest and income taxes are as follows:
Years Ended
August 31,
1997 1996
Interest expense $ 22,936 $ 46,461
========= =========
Income taxes $ - $ -
========= =========
13. Commitments and Contingencies
The Company is involved in various claims and other legal actions that have
arisen in the ordinary course of business. Furthermore, the last tax returns
filed by the Company were for 1993. While the outcome of such matters is
currently not determinable, it is management's opinion that these matters will
not have a material adverse effect on the Company's financial condition,
results of operations, or liquidity.
16
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
The Company has an employment agreement with the acting president of the
Company. The agreement provides that the president's salary will be based
upon reasonable mutual agreement. At August 31, 1997, the agreement provided
for a salary to the acting president of $115,000 per year. Additionally, in
the case of nonvoluntary termination, the acting president will receive
severance pay for a one year period, which includes an extension of all
employee rights, privileges, and benefits, including medical insurance. The
one year severance pay would be an average of the acting president's salary
for the immediate twelve month period prior to termination. The agreement
also requires the Company to pay the acting president for any accrued unused
vacation and $1,000 for any newly issued patents.
In addition, in July of 1979, the Company entered into an exclusive worldwide
license for a unique temperature probe. The license will remain in effect as
long as the technology does not become publicly known as a result of actions
taken by the licenser. The Company pays royalties based upon its sales of
this probe. Royalties accrued as of August 31, 1997, totaled $4,600. Royalty
expense was $8,400 and $9,600 for 1997 and 1996, respectively.
14. Fair Value of Financial Instruments
None of the Company's financial instruments are held for trading purposes.
The Company estimates that the fair value of all financial instruments at
August 31, 1997, does not differ materially from the aggregate carrying values
of its financial instruments recorded in the accompanying balance sheet. The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
Considerable judgement is necessarily required in interpreting market data to
develop the estimates of fair value, and, accordingly, the estimates are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange.
17
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
15. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123) which established financial accounting and reporting
standards for stock-based compensation. The new standard defines a fair value
method of accounting for an employee stock option or similar equity
instrument. This statement gives entities the choice between adopting the
fair value method or continuing to use the intrinsic value method under
Accounting Principles Board (APB) Opinion No. 25 with footnote disclosures of
the pro forma effects if the fair value method had been adopted. The Company
has opted for the latter approach. Accordingly, no compensation expense has
been recognized for the stock option plans. Had compensation expense for the
Company's stock option plan been determined based on the fair value at the
grant date for awards in 1997 and 1996 consistent with the provisions of FAS
No. 123, the Company's results of operations would have been reduced to the
pro forma amounts indicated below:
August 31,
1997 1996
-----------------------
Net (loss) income - as reported $ (872,525) $ 800,993
Net (loss) income - pro forma $ (881,898) $ 791,620
(Loss) earnings per share
as reported $ (.05) .05
(Loss) earnings per share
pro forma $ (.05) .05
-----------------------
The fair value of each option grant is estimated in the date of grant using
the Black-Scholes option pricing model with the following assumptions:
August 31,
1997 1996
-------------------
Expected dividend yield $ - $ -
Expected stock price volatility 229% 229%
Risk-free interest rate 6.3% 5.5%
Expected life of options 5 years 5 years
-------------------
The weighted average fair value of options granted during 1997 and 1996 are
$.10 and $.10, respectively.
18
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
The following table summarizes information about fixed stock options and
warrants outstanding at August 31, 1997:
Options Outstanding Options Exercisable
-----------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercisable at Exercise
Prices 8/31/97 (Years) Price 8/31/97 Price
------------------------------------------------------------------------
$ .10 1,107,746 3.9 .10 666,059 $ .10
.20 242,655 4.0 .20 242,655 $ .20
------------------------------------------------------------------------
$ .10-.20 1,350,401 3.9 .12 908,714 $ .13
========================================================================
16. Subsequent Events
The Company entered into an agreement to form a jointly owned Company which
will initially focus on treatment of urological diseases, specifically BPH.
As part of the agreement, the Company will contribute certain assets and the
other joint venture company will contribute cash.
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 43,681
<SECURITIES> 0
<RECEIVABLES> 416,874
<ALLOWANCES> (10,000)
<INVENTORY> 542,226
<CURRENT-ASSETS> 1,020,131
<PP&E> 1,057,082
<DEPRECIATION> (776,686)
<TOTAL-ASSETS> 1,369,007
<CURRENT-LIABILITIES> 866,404
<BONDS> 194,733
0
0
<COMMON> 161,770
<OTHER-SE> 146,403
<TOTAL-LIABILITY-AND-EQUITY> 1,369,007
<SALES> 949,369
<TOTAL-REVENUES> 1,319,698
<CGS> 388,445
<TOTAL-COSTS> 2,179,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,936
<INCOME-PRETAX> (872,525)
<INCOME-TAX> 0
<INCOME-CONTINUING> (872,525)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (872,525)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
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