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, 1999.
Commission file number 0-10783
BSD MEDICAL CORPORATION
DELAWARE 75-1590407
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(State of Incorporation) (IRS Employer Identification Number)
2188 West 2200 South
Salt Lake City, Utah 84119
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(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
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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]
Issuer's revenues for its most recent fiscal year: $620,221
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 22, 1999, was
$6,512,884.
As of November 22, 1999, there were 16,693,975 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
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BSD Medical Corporation (the "Company") was founded in 1978 to research the
demonstrated ability of elevated heat (hyperthermia) to destroy cancer cells.
BSD was subsequently successful in developing and commercializing hyperthermia
treatment - a break-through treatment for both cancerous and benign diseases.
The Company is currently engaged in the development, production, marketing, and
servicing of heat therapy (hyperthermia/thermotherapy) equipment. Hyperthermia
literally means "elevated temperature", and hyperthermia treatment creates
fever, the body's natural mechanism to fight disease. Hyperthermia equipment is
currently marketed for the application, monitoring and control of
electromagnetic (microwave or radiofrequency) or ultrasound generated heat for
the treatment of malignant and benign diseases. BSD currently has 11 U.S.
patents, 8 foreign patents, and 5 patent licenses (which cover all of its
current applications and products as well as additional applications and
devices).
BSD was the first Company to obtain full PreMarket approvals (PMA) from the
Food and Drug Administration (FDA) for a hyperthermia cancer therapy system and
the first Company to obtain Investigational Device Exemption (IDE) approval from
the FDA for 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 $100,000 to $1,100,000.
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'S PRODUCTS/THERAPIES
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HYPERTHERMIA AS A CANCER TREATMENT. There are more than eight million
Americans alive today who have a history of cancer. Over 83 million, half of
American men and one-third of American women, will eventually develop cancer.
Over 564,800 people are expected to die of cancer this year; and the incidence
of cancer is continuing to grow. Hyperthermia is the process of applying energy
to elevate the temperature of the cancer cells - in order to destroy or damage
the tumor. 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). Hyperthermia can
usually destroy cancerous cells without harming normal cells. There is also some
evidence that hyperthermia increases the patient's immune system, allowing the
patient's own system to fight the cancer as well as the side effects of other
treatments.
The Company's hyperthermia treatment can be used alone, but is typically
used in conjunction with other therapies. The primary advantage of hyperthermia
is that it can increase the effect of other therapies, such as radiation therapy
(radiotherapy) or chemotherapy, while sometimes reducing overall side effects.
Hyperthermia has been shown to double the effectiveness of radiation and provide
supra-additive interactions with many chemotherapeutic drugs. The use of
pre-surgical hyperthermia delivered using BSD's equipment has been shown to
obviate the need for amputation of normal tissues in some 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. Published, randomized
clinical studies using BSD's equipment have shown that the addition of
<PAGE>
hyperthermia to other cancer therapies can result in: increased tumor response;
increased disease-free survival time; and improved quality of life for the
patient.
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(degree)C to 60(degree)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.
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 by providing accurate
treatment planning, monitoring, and recall. The 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 various systems
designed to target specific markets.
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.
Applicators generally fall into two categories: external surface
applicators (superficial and deep) and interstitial (i.e., invasive)
applicators. Superficial and external applicators deliver externally generated
energy to specific sites on or slightly below the surface of the skin. Deep
phased array radiofrequency applicators provide externally generated energy to
deep-seated tumors by combining phase-aligned beams from multiple applicators
positioned around the body. Interstitial microwave applicators are antennae that
are implanted directly into the body for heating from within the tumor itself.
Thermometry. 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.
THERMOTHERAPY AS A BPH TREATMENT. On November 24, 1997, BSD entered into an
agreement with Oracle Strategic Partners to form TherMatrx, Inc., a
jointly-owned company that would initially focus on minimally invasive
treatments of urological diseases, specifically Benign Prostatic Hyperplasia
(BPH), a market that is currently estimated to exceed $3 billion annually in the
United States alone.
The partnership allowed Oracle Strategic Partners to invest an initial $3
million on closing and an additional $3 million upon the achievement of certain
milestone parameters. Charles Manker, President and CEO of TherMatrx, was
allowed to provide an initial investment of $250,000, in addition to Oracle's
investment, and another $250,000 when milestone funding was obtained from
Oracle. BSD contributed certain assets that have applicability in the urology
market, and agreed not to engage in BPH business. As part of the agreement, BSD
is providing certain manufacturing and consulting services, for which TherMatrx
compensates the Company.
In April 1999, TherMatrx Investment Holdings, LLC (assignee of Oracle
Strategic Partners, L.P. and Charles Manker) completed an additional capital
infusion into TherMatrx, Inc. of $3.25 Million, based on TherMatrx's achievement
of key success milestones in the clinical investigation of a new therapy to
treat BPH with microwave energy. This infusion decreased BSD's ownership of
TherMatrx from 54% to 34% (see Note 1 to Financial Statements). After exercise
of all shares allocated for the Management Stock Purchase Plan, the Company will
retain a 30 percent interest on a fully diluted basis.
<PAGE>
TherMatrx's corporate headquarters are in Chicago. Dr. Gerhard Sennewald
serves as BSD's representative on TherMatrx's Board of Directors.
MARKETING AND SALES
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The Company markets its cancer hyperthermia products primarily to radiation
oncology departments in the U.S. and to radiation oncology and chemotherapy
oncology departments outside the U.S. In the U.S., the Company markets its
equipment directly using its own sales and marketing staff. International sales
are generally accomplished through distributing companies located in various
foreign countries. BSD has not carried lease or rental equipment contracts for
customers and therefore has no exposure to lease or rental contract cancellation
as a result of customer action. 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.
Future marketing for current cancer products may be expanded into two
largely untapped 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 expand in the future because of a renewed interest in
hyperthermia in the U.S. and evidence of increased profits from the addition of
hyperthermia; however, there can be no assurance that an increase in the U.S.
market will occur.
For the year ended August 31, 1999, two customers accounted for
approximately 46% and 15%, respectively, of BSD's net sales. The loss of a
significant customer could have a material detrimental impact on the Company's
operations. Because only one hyperthermia machine is generally required at a
treatment facility, BSD does not sell capital equipment to any one customer on
an ongoing basis.
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, HCFA 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. All of BSD's investigational (IDE) equipment and
protocols have been placed in this category by the FDA, and thus may be
reimbursed by Medicare.
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.
<PAGE>
COMPETITION
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The Company believes that its combination of technology, performance,
quality, reliability, price, and breadth of product line and services are
important competitive factors, however, competition in the medical products
industry is intense, both in the United States and internationally. BSD's
therapies are generally considered complementary to rather than competitive with
other cancer therapies, such as radiation and chemotherapy. However, some
companies that could be competitors, in that they are also engaged in cancer
treatment businesses, 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 have received FDA Pre-Market Approval for the commercial sale of
certain hyperthermia equipment for the treatment of cancer in the U.S.:
(Clinitherm - no longer in business); Labthermics; Celsion Corporation (formerly
Cheung Labs); and Cook Medical - no longer in the hyperthermia business.
BSD participates in the BPH market as an investor in TherMatrx, Inc. (see
"Thermotherapy as a BPH Treatment", Page 3). In the BPH market, competitive
companies offering products similar to TherMatrx's products include EDAP TMS,
Urologix, and Dornier (which have PMA approval from the FDA), VidaMed and
ArgoMed, Inc. (which have 510(k) marketing clearance from the FDA), Thermal
Therapeutics, and other foreign manufacturers. In addition to thermotherapy
equipment made by competitors, there are many other competitive treatments for
BPH [including various drug treatments, surgical lasers, ultrasound ablation,
electro-cautery surgery, stents, transurethral incision of the prostate
(T.U.I.P.), and balloon dilation] that are currently being developed, clinically
investigated and/or actively marketed.
The Company believes that other companies may consider marketing
hyperthermia/thermotherapy equipment and anticipates possible increased
competition in the United States and internationally. There can be no assurance
that others 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 technological
change. There can be no assurance that other forms of treatment will not be
developed which could be superior to the Company's hyperthermia systems.
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
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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, Company personnel or consultants perform
technical and clinical training. 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
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The Company produces and tests its products at its facilities in Salt Lake
City, Utah. 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. 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
<PAGE>
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 other companies.
RESEARCH AND DEVELOPMENT
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During the fiscal years ended August 31, 1998, and August 31, 1999, the
Company expended $361,735, and $517,564 respectively, for research and
development, representing 22.72%, and 83.45% of total revenues. Research and
Development expenditures increased in 1999 due to costs associated with the
development of the BSD-2000o3D/MR system and a new BSD-300-4 system, combined
with costs associated with obtaining ISO 9001 and EN 46001 certification and CE
Marking for the BSD-2000o3D.
BSD has developed the BSD-2000o3D - 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-2000o3D can be modified
for integration with a magnetic resonance imaging system, and becomes the
BSD-2000o3D/MR system. The BSD-2000o3D System integrates three-dimensional (3D),
"steerable", focused deep regional hyperthermia with 3D patient specific
treatment planning. 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-2000o3D/MR system has been
installed and tested at a leading German oncological research institution - the
Clinic of Medical Oncology of the Klinikum Gro(beta)hadern Medical School of
Ludwigs-Maximilians-Universitat Munchen, Munich, Germany. The Medical School
received funding from the Stiftung Deutsche Krebshilfe e. V. (German Cancer Aid
Foundation) for the system order. The BSD-2000o3D has been sold and used
successfully for some patient treatments, but there can be no assurance as to
the degree of its commercial success.
The BSD-2000o3D/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. Non-invasive treatment
monitoring 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. Preliminary laboratory testing has demonstrated the ability to
simultaneously heat and image with the MR portion of this system.
Technological changes play an important part in the advancement of the
hyperthermia industry. Thus, the Company intends to continue to devote
substantial sums to research and development in order to improve existing
products and develop new products. The Company is also currently in discussions
with some researchers and institutions regarding heat treatment products and
treatments that might increase the clinical applications for BSD's products,
with a focus on deep regional hyperthermia, which would include ovarian,
colorectal, uterine, cervix, and bladder, and the treatment of prostatic
carcinoma and breast cancer.
PATENTS, INTELLECTUAL PROPERTY, LICENSING, AND ROYALTY AGREEMENTS
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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
<PAGE>
currently has 11 patents in the United States and 8 patents outside the United
States. [Four patents were assigned to TherMatrx, for which the Company
maintained a license, and one patent license was obtained by the Company from
University of California San Francisco (UCSF).] Other hyperthermia related
patents are pending in the United States, Japan and Europe, and a European
patent for the BSD-2000o3D system has been issued. 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. However, 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 licensor. 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.
On September 15, 1996, Medizintechnik (a company owned by Dr. Gerhard
Sennewald, a member of BSD's Board of Directors and a major stockholder of the
Company) obtained a worldwide fully paid software license from
Konrad-Zuse-Zentrum fur Informationstechnik (ZIB) of Berlin for a
three-dimensional (3D) hyperthermia treatment planning software - HYPERPLAN -
developed by ZIB. On January 21, 1998, BSD entered into an agreement with
Medizintechnik wherein Medizintechnik irrevocably assigned the worldwide rights
under the ZIB software license agreement to BSD, with the sole exception of
Europe, where Medizintechnik retained these rights. In consideration for this
assignment of rights, BSD agreed to supply, at no charge, one Sigma-Eye
applicator (not an MR compatible version) to Medizintechnik, which will forward
this applicator to Strahlenklinik and Poliklinik, Virchow-Klinikum of the
Humboldt-Universitat of Berlin. BSD also agreed to inform Medizintechnik on a
regular basis about software sales to final customers and to pay timely to
Medizintechnik the software license fee (8% of the sales price for the HYPERPLAN
software or a minimum of DM 6,000) that, under the terms of the ZIB agreement,
is due to ZIB for each software sale.
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. 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. This license became part of a lawsuit that was settled in May 1998. The
license is now fully paid and irrevocable (see Note 15 to Financial Statements).
BSD has acquired from UCSF the exclusive patent license for small microwave
antennae that can be inserted into cancerous tumors to destroy them from the
inside. The innovative microwave antenna design enables the therapeutic heating
length to be tailored to match the tumor size. Clinical studies have shown a
survival improvement when using this technology in combination with radiation
brachytherapy. This technology has been shown to be effective for many cancerous
tumors, including brain tumors.
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 all three of 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.
GOVERNMENT REGULATION
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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.
<PAGE>
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.
Sales into the European Union (EU) are now governed by the need to obtain
ISO certification and a CE Mark and the requirement to comply with all
applicable directives. In June 1998, the Medical Devices Directives (MDD)
requirements went into effect for the EU. Following June 1998, no medical
products could be marketed in Europe without obtaining a CE Mark and thus
demonstrating compliance to MDD requirements. The Company has obtained ISO
certification of its quality, development, and manufacturing processes and has
successfully completed the CE Mark testing and Annex II audit, which will allow
BSD to affix the CE Mark label on the BSD-2000o3D system and deliver systems to
Europe. However, the Company must maintain compliance with all current and
future directives and requirements in order to maintain ISO certification and to
continue to affix the CE Mark, and there can be no assurance that the Company
will continue to maintain compliance. If BSD is unable to maintain these
approvals, it could have a significant material effect on the Company's future
financial condition.
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. Significant product changes must be submitted to the FDA under IDEs,
510(k) PreMarket notifications or PMA supplements.
All medical devices must be manufactured in accordance with regulations
specified in the FDA Quality System Regulation (QSR) and in the ISO and other
applicable regulations. In complying with these regulations, manufacturers must
continue to expend time, money and effort in the areas of design control,
production, and quality control to ensure full compliance. 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 information on product malfunctions that would likely cause
or contribute to a death or serious injury if the malfunctions were to recur.
The MDD vigilance system regulations require that the Company's European
Representative provide information to the Competent Authority on death or
serious injuries alleged to have been associated with the use of its products,
as well as information on product malfunctions that would likely cause or
contribute to a death or serious injury if the malfunctions were to recur.
International sales of unapproved medical devices are subject to FDA export
requirements, unless these products have been previously approved by one of the
countries specified by the FDA. 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.
International sales are subject to the regulatory and safety requirements
of the country into which the sale occurs. 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.
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. BSD's fixed frequency systems and applicators emit 915 MHz for U.S.
and some European installations and 433.92 MHz for some European installations,
which is approved by the FCC for medical applications. Accordingly, these
systems do not require shielding to prevent interference with communications.
<PAGE>
BSD's variable-frequency generators and applicators require electromagnetic
shielding. Ultrasound hyperthermia systems can be operated without shielding
because the applicators emit acoustic rather than electromagnetic energy.
PRODUCT LIABILITY EXPOSURE
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The manufacturing 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 that 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
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As of August 31, 1999, the Company had 27 employees; 22 of them were 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. The Company leases the building for
an annual rental expense of $78,396 (see Note 5 to Financial Statements). The
Company has an option to purchase the building. The building lease is accounted
for as an operating 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
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades publicly on the OTC Bulletin Board under
the symbol "BSDM". The following table sets forth the high and low bid
transactions, as provided by the OTC Bulletin Board, for the quarters in fiscal
year 1998 and 1999. The amounts reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not represent actual transactions.
Bid
---------------------------
Quarter Ended: High Low
----------------------------------------------------------------
November 30, 1997................. 3/4 1/4
February 28, 1998................. 13/16 3/8
May 31, 1998...................... 7/16 1/4
August 31, 1998................... 7/16 1/4
November 30, 1998................. 3/8 .19
February 28, 1999................. 9/16 3/16
May 31, 1999...................... 1/2 .26
August 31, 1999................... .45 5/16
As of August 31, 1999, there were approximately 640 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, 1999, and the statements of operations,
statements of cash flow and statements of stockholders' equity for the years
ending August 31, 1998, and 1999, 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. At August 31, 1998, BSD had a
fifty-four percent interest in a subsidiary, TherMatrx, thus, the financial
statements for the two companies were consolidated. During the year ended August
31, 1999, the Company's interest in the subsidiary was reduced to 34% and
consolidation was no longer required. Therefore, the financial statements as of
August 31, 1998, and the year ended August 31, 1999, have been restated with the
Company's investment in TherMatrx recorded using the equity method (see Note 1
to Financial Statements).
FISCAL YEAR ENDED AUGUST 31, 1999. Revenues for the year ended August 31,
1999, totaled $620,221, as compared to $1,592,316 for the year ended August 31,
1998, a decrease of $972,095, or 61.05%, primarily due to a delay in receipt and
processing of European orders because the Company did not have CE Marking
approval on the new BSD-2000o3D system, now required for sales to all European
Union (EU) countries. The Company has successfully completed the CE Mark testing
and Annex II audit, which will allow BSD to affix the CE Mark label on the
BSD-2000o3D system and deliver systems to Europe. (The Company plans to start
shipping European systems currently on order in January.)
During fiscal years 1996 through 1999, the Company devoted time and
resources to completion of a new product line - the BSD-2000o3D/MR - and to
establishing the manufacturing capabilities and support functions needed for
<PAGE>
this new product line. The first BSD-2000o3D/MR was installed in August 1997,
and the first MR portion of this system was installed in August 1998. BSD has
received orders totaling $3,240,353 for purchases of this new product, and, as
of October 1999, has a back-log of $1,608,750 in sales for the new product line,
which will be delivered in fiscal 2000.
The Company's revenues from products and services in the U.S. decreased
from $493,857 in fiscal 1998 to $326,171 in fiscal 1999. The market for
hyperthermia equipment in the U.S. continues to be sluggish due to low
reimbursement levels and cost containment efforts. The Company is currently
taking actions to increase U.S. sales, including hiring of a new Director of
Sales, and some of these actions may improve the U.S. market, however, there can
be no assurance that U.S. sales will increase in the future.
Product sales decreased from $1,459,143 in 1998 to $596,441 in 1999, a
decrease of $862,702, or 59.12%, as a result of the above mentioned delay in
receipt and processing of European orders.
Gross loss on product sales was $36,064, as compared to a gross profit of
$751,744 for fiscal 1998, due to above mentioned decrease in sales.
Selling, General and Administrative Expenses for 1999 totaled $944,756, as
compared to $992,972 in 1998, a decrease of $48,216, or 4.86%, primarily because
of a reduction in legal costs due to settlement of the lawsuit with Urologix
(see Note 15 to Financial Statements), partially offset by an increase in
deferred compensation expense for amortization of options and stock awards.
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 1999 totaled $517,564, as compared to
$361,735 in 1998, an increase of $155,829 or 43.08%, due to development costs
associated with the BSD-2000o3D/MR system and with a new BSD-300-4 system,
combined with costs associated with obtaining ISO 9001 and EN 46001
certification and CE Marking for the BSD-2000o3D.
Total Costs and Expenses for 1999 were $2,094,825, an increase of $32,719,
or 1.59%, as compared to $2,062,106 for fiscal 1998 due to the aforementioned
increase in Research and Development Expenses.
Interest Expense in 1999 decreased to $3,630, as compared to $8,373 in
1998. The decrease was caused primarily by lower interest costs associated with
notes payable as they reach maturity and typical periodic business fluctuations.
During fiscal 1999, the Company experienced a Net Loss of $1,928,050, of
which $546,452 was attributable to TherMatrx, compared to a Net Income in fiscal
1998 of $2,890,579 [primarily due to the aforementioned decrease in revenues in
fiscal 1999 and receipt in fiscal 1998 of $2,950,000 from the grant of a patent
license to Urologix pursuant to settlement of a lawsuit (see Note 15 to
Financial Statements)].
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. International sales
accounted for 75.30% and 47.59% of the Company's total product sales during the
fiscal years ended August 31, 1998, and August 31, 1999, respectively. The
Company expects that international sales will continue to represent a
significant portion of its total sales. The Company has successfully completed
the CE Mark testing and Annex II audit, which will allow BSD to affix the CE
Mark label on the BSD-2000o3D system and deliver systems to Europe. However, an
inability to maintain the necessary approvals could have adverse effects on
future sales of products to EC countries (see Government Regulation, page 7).
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
<PAGE>
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, the European Union countries, 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 to $2,797,917 in
1999, a decrease of $1,510,943, as compared to 1998. The decrease was primarily
due to decreases in cash and accounts receivable. Cash decreased to $1,689,029,
as compared to $2,798,032 in 1998, primarily as a result of using cash for
operating expenses. Accounts receivable decreased to $59,266, a decrease of
$270,072, or 82.0%, primarily due to a delay in European orders pending receipt
of the CE Mark. Total inventories increased to $908,241, an increase of
$283,966, or 45.49%, primarily due to anticipation of future orders. Current
liabilities increased to $761,924, an increase of $268,069, or 54.29%, primarily
due to an increase in customer deposits, combined with BSD's portion of the loss
incurred by TherMatrx, decreases in accounts payable, and other normal periodic
fluctuations.
MANAGEMENT DISCUSSION AND CURRENT STATUS OF FINANCIAL CONDITION.
- ----------------------------------------------------------------
BSD management believes that the primary deficit of the Company has been
weakness in sales and marketing skills. The Company therefore hired a new
President experienced in sales and managing turnaround situations (August 1999)
and a new Director of Sales experienced in aggressive sales in medical markets
(November 1999). BSD has subsequently intensified its marketing efforts to
create patient awareness of hyperthermia through the addition of new patient
brochures, the internet and targeted television broadcasting about hyperthermia
and plans aggressive sales and marketing efforts to the medical community in the
coming fiscal year.
Management believes that the current projected sales will be sufficient to
meet the Company's operating cash requirements through fiscal year 2000,
including its aggressive marketing and research and development efforts.
However, if sales are not sufficient to meet operating needs, management intends
to use its current cash position to meet operating requirements. The Company's
backlog of unfilled customer orders was $476,064, as of August 31, 1999, and
$1,608,750 as of November 1999. The Company also had long term receivables due
for field service contracts of $12,740, as of August 31, 1999.
In 1996, BSD received the first purchase order for its new, deep regional
hyperthermia system - the BSD-2000o3D System. The first BSD-2000o3D/MR has been
installed and initial lab testing has been completed. BSD has started
collaborative developments for clinical application of this technology. The
Company anticipates that the BSD-2000o3D System may increase the commercial
market in hyperthermia throughout the world. As of November 1999, BSD had
received cumulative orders totaling $3,240,353 for purchases of the
BSD-2000o3D/MR product line.
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 benign urological diseases,
specifically Benign Prostatic Hyperplasia (BPH). BSD participates in the BPH
market through TherMatrx; the BPH market is currently estimated to be over $3
billion annually in the U.S. alone. The Company continues to provide certain
manufacturing and consulting services, for which TherMatrx compensates the
Company.
<PAGE>
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.
Management is expanding worldwide marketing for current cancer products
into two new 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. However, these efforts will take
time to develop.
The Company's revenues from products and services in the U.S. decreased
from $493,857 in fiscal 1998 to $326,171 in fiscal 1999. The Company is
currently implementing methods to increase U.S. sales, which include development
of a low-cost PC-based device (BSD-300-4) targeted for the U.S. market and
hiring a new Director of Sales who will focus on U.S. sales.
BSD plans further support of R & D for current products to improve function
and reduce cost. Some funding of R & D will 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
expand marketing and product applications into the oncology area. In order to
utilize BSD's manufacturing expertise, the Company has expanded its business to
include contract manufacturing.
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 that 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 U.S. 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, recent changes in Medicare
reimbursement policy, and the Company's new reimbursement program may stimulate
the U.S. market; however, there is no assurance of influence on the U.S. market.
YEAR 2000 COMPLIANCE. All of BSD Medical's systems are fully Year 2000
(Y2K) compliant, with the exception of the BSD-500 and some BSD-2000 systems. To
make these systems Y2K compliant and permit unrestricted use, the Company has
rewritten the software for the BSD-2000 and BSD-500 systems, which is available
for purchase. The cost to BSD Medical to address this issue is not material -
less than $10,000. In the event that a customer elects not to purchase the
updated software, their system can still be operated by making a one time entry
of a year between 1985 and 1999. The system operations and calculations do not
include any date driven functions and therefore the systems will not exhibit any
change in performance due to the arrival of the year 2000; rather the date is
used only as a method to identify the treatment record. Thus, the use of an
invalid date does not create any material risks. These systems are not connected
to any other computer systems, as they are stand-alone systems.
The Company has installed software upgrades for its accounting and
manufacturing systems that are warranted by the vendors to be Y2K compatible.
The Company is currently evaluating its other computerized systems. The
aggregate costs to upgrade systems for Y2K compliance appear to be below
$13,000, and these costs will be amortized over five years. There do not appear
to be any other material internal issues at this time.
The Company has been talking to vendors and customers but has not yet
determined the Y2K readiness of these entities. However, the Company is
monitoring the Y2K progress of its vendors, customers, and payors to determine
the potential impact to the Company.
FORWARD OUTLOOK AND RISKS. From time to time, the Company may publish
forward-looking statements relating to such matters as anticipated financial
<PAGE>
performance, business prospects, technological development, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in any of the Company's forward-looking statements.
This form 10-KSB contains and incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act with respect to results of operations
and businesses of the Company. All statements, other than statements of
historical facts, included in this Form 10-KSB, including those regarding market
trends, the Company's financial position, business strategy, projected costs,
and plans and objectives of management for future operations, are
forward-looking statements. These forward-looking statements are based on the
Company's current expectations. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to be correct.
ITEM 7. FINANCIAL STATEMENTS
Pursuant to Rule 12b-23, the financial statements set forth on pages F-1
through F-18 attached hereto are incorporated by reference.
BSD MEDICAL CORPORATION
Financial Statements
August 31, 1999 and 1998
<PAGE>
BSD MEDICAL CORPORATION
Index to Financial Statements
- --------------------------------------------------------------------------------
Page
----
Report of Tanner + Co. F-1
Balance Sheet F-2
Statement of Operations F-3
Statement of Stockholders' Equity F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6
<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, 1999, and the related statements of operations, stockholders' equity,
and cash flows for the years ended August 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BSD Medical Corporation as of
August 31, 1999, and the results of their operations and cash flows for the
years ended August 31, 1999 and 1998 in conformity with generally accepted
accounting principles.
As discussed in note 1 to the financial statements, the Company no longer
consolidates with a subsidiary.
Salt Lake City, Utah
October 6, 1999
F-1
<PAGE>
BSD MEDICAL CORPORATION
Balance Sheet
August 31, 1999
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,689,029
Receivables 59,266
Inventories 908,241
Prepaid expenses 20,905
Deposits 20,643
------------------
Total current assets 2,698,084
Property and equipment, net 87,093
Long-term trade receivables 12,740
------------------
$ 2,797,917
------------------
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 30,789
Accrued expenses 557,472
Current portion of long-term debt 25,922
Current portion of deferred revenue 86,325
Current portion of deferred gain on sale - leaseback 61,416
------------------
Total current liabilities 761,924
------------------
Deferred revenue 24,717
Deferred gain on sale - leaseback 138,107
------------------
Total liabilities 924,748
------------------
Commitments and contingencies -
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000
shares; issued and outstanding 16,693,975 shares 166,940
Additional paid-in capital 20,688,109
Deferred compensation (159,486)
Accumulated deficit (18,822,160)
Less 13,412 shares of treasury stock, at cost (234)
------------------
Total stockholders' equity 1,873,169
------------------
$ 2,797,917
------------------
- --------------------------------------------------------------------------------
F-2
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BSD MEDICAL CORPORATION
Statement of Operations
Years Ended August 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Revenues:
Sales $ 596,441 $ 1,459,143
Grants and licenses 23,780 133,173
-----------------------------------
620,221 1,592,316
-----------------------------------
Costs and expenses:
Cost of sales 632,505 707,399
Research and development 517,564 361,735
Selling, general, and administrative 944,756 992,972
-----------------------------------
2,094,825 2,062,106
-----------------------------------
Operating loss (1,474,604) (469,790)
Other income (expense):
Interest income 96,636 38,096
Interest expense (3,630) (8,373)
Litigation settlement - 2,970,661
(Loss) income of joint venture (546,452) 409,985
-----------------------------------
Net (loss) income before income taxes (1,928,050) 2,940,579
Provision for income taxes - current - (50,000)
-----------------------------------
Net (loss) income $ (1,928,050) $ 2,890,579
-----------------------------------
(Loss) earnings per common share - basic $ (.12) $ .18
-----------------------------------
(Loss) earnings per common share - diluted $ (.12) $ .17
-----------------------------------
- ----------------------------------------------------------------------------------------------------------
F-3
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BSD MEDICAL CORPORATION
Statement of Stockholders' Equity
Years Ended August 31, 1999 and 1998
- ----------------------------------------------------------------------------------------------------------
Common Stock Additional Deferred Treasury Stock
--------------------- Paid-In Compen- Accumulated ----------------------
Shares Amount Capital sation Deficit Shares Amount
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 1, 1997 16,176,980 $ 161,770 $ 20,413,575 $ (463,246) $ (19,784,689) 234,928 $ (19,237)
Amortization of deferred
compensation - - - 151,880 - - -
Donated shares - - - - - 5,412 -
Treasury stock issued for
services - - 51,913 - - (226,928) 19,003
Common stock issued
for services 193,072 1,931 66,479 - - - -
Net income - - - - 2,890,579 - -
----------------------------------------------------------------------------------
Balance,
August 31, 1998 16,370,052 163,701 20,531,967 (311,366) $ (16,894,110) 13,412 (234)
Amortization of deferred
compensation - - - 151,880 - - -
Common stock issued
for services 323,923 3,239 156,142 - - - -
Net loss - - - - (1,928,050) - -
----------------------------------------------------------------------------------
Balance,
August 31, 1999 16,693,975 $ 166,940 $ 20,688,109 $ (159,486) $ (18,822,160) 13,412 $ (234)
----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
F-4
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
BSD MEDICAL CORPORATION
Statement of Cash Flows
Years Ended August 31,
- ----------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,928,050) $ 2,890,579
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 23,854 19,089
Provision for losses on receivables (30) -
Deferred gain on sale of building (61,416) (46,061)
Loss (gain) on disposal of property and equipment 1,203 (18,154)
Deferred compensation 151,880 151,880
Stock compensation expense 159,381 139,326
(Increase) decrease in:
Receivables 304,848 98,530
Inventories (283,966) (82,049)
Prepaid expenses and other assets (10,580) (3,618)
Increase (decrease) in:
Accounts payable (51,520) (241,610)
Accrued expenses 196,491 16,602
Deferred revenue (83,288) 87,968
Loss (income) from equity investment 546,452 (409,985)
-------------------------------
Net cash (used in) provided by
operating activities (1,034,741) 2,602,497
-------------------------------
Cash flows from investing activities:
Purchase of property and equipment (43,374) (22,601)
Proceeds from sale of building - 446,545
-------------------------------
Net cash (used in) provided by
investing activities (43,374) 423,944
-------------------------------
Cash flows from financing activities-
payments on long-term debt (30,888) (272,090)
-------------------------------
(Decrease) increase in cash and cash equivalents (1,109,003) 2,754,351
Cash and cash equivalents, beginning of year 2,798,032 43,681
-------------------------------
Cash and cash equivalents, end of year $ 1,689,029 $ 2,798,032
-------------------------------
- --------------------------------------------------------------------------------------------------------
F-5
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
August 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Organization
BSD Medical Corporation (the Company) develops, produces, markets, and services
systems used for the treatment of cancer and other diseases. These systems are
sold worldwide. In addition, the Company currently has a thirty-four percent
interest in TherMatrx, Inc. (TherMatrx) a corporate joint venture that is
engaged in the manufacture and sale of medical equipment.
Principles of Presentation
At August 31, 1998, the Company owned a controlling interest in TherMatrx.
Accordingly, the financial statements originally issued for the year ended
August 31, 1998, included consolidated balances. All significant intercompany
balances had been eliminated from the August 31, 1998 financial statements.
During the year ended August 31, 1999, the Company reduced its interest in
TherMatrx below the level of control, and, as a result, consolidation was no
longer required. Accordingly, the financial statements for the year ended August
31, 1999, do not include consolidated balances. Moreover, as a result of this
change in reporting entity, all information related to the year ended August 31,
1998, has been restated to show financial information for the Company with the
investment in TherMatrx recorded on the equity method.
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 less accumulated depreciation.
Depreciation and amortization is determined using the straight-line method over
the estimated useful lives of the assets. Expenditures for maintenance and
repairs are expensed when incurred and betterments are capitalized. Gains and
losses on sale of property and equipment are reflected in operations.
- --------------------------------------------------------------------------------
F-6
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
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.
Earnings (Loss) Per Common Share
The computation of basic earnings (loss) per common share is based on the
weighted average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year, plus the common stock
equivalents that would arise from the exercise of stock options and warrants
outstanding, using the treasury stock method and the average market price per
share during the year. Common stock equivalents are not included in the diluted
earnings (loss) per share calculation when their effect is antidilutive.
Revenue Recognition
Sales 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.
- --------------------------------------------------------------------------------
F-7
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies Continued
Concentration of Credit Risk
Financial instruments that 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 that, 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.
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 1998 financial statements have been reclassified to
conform with the current year presentation.
2. Detail of Certain Balance Sheet Accounts
Details of certain balance sheet accounts are as follows:
Receivables:
Trade receivables $ 52,219
Other receivables 17,017
Less allowance for doubtful
accounts (9,970)
----------------
$ 59,266
----------------
- --------------------------------------------------------------------------------
F-8
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Detail of Certain Balance Sheet Accounts Continued
Inventories:
Parts and supplies $ 433,455
Work-in-process 256,681
Finished goods 218,105
----------------
$ 908,241
----------------
Accrued expenses:
Customer deposits $ 301,653
Accrued expenses 119,352
Investment in subsidiary 136,467
----------------
$ 557,472
----------------
3. Property and Equipment
Property and equipment consists of the following:
Equipment $ 476,142
Furniture and fixtures 297,741
----------------
773,883
Less accumulated depreciation
and amortization (686,790)
----------------
$ 87,093
----------------
- --------------------------------------------------------------------------------
F-9
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
4. Long-term Debt
Long-term debt consists of the following:
Note payable to an insurance company, due in
monthly installments of $2,125, including interest
at 9.4% $ 20,500
Note payable to a vendor, due in monthly
installments of $2,742, including interest at 9% 5,422
----------------
25,922
Less current portion (25,922)
----------------
$ -
----------------
5. Deferred Gain
During the year ended August 31, 1998, the Company entered into a sale-leaseback
on its building. The sale-leaseback resulted in a gain of $325,513, of which
$307,000 was deferred and is being credited to income as rent expense
adjustments over the term of the lease. The lease requires monthly payments of
$6,533 through November 2002.
Future minimum payments at August 31, 1999, are as follows:
Years Ending August 31, Amount
----------------
2000 $ 78,396
2001 78,396
2002 78,396
2003 19,599
----------------
$ 254,787
----------------
Rent expense on this operating lease for the years ended August 31, 1999 and
1998, amounted to approximately $78,000 and $59,000, respectively.
- --------------------------------------------------------------------------------
F-10
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Income Taxes
The Income tax benefit (provision) differs from the amount computed at federal
statutory rates as follows:
Years Ended
August 31,
-------------------------------
1999 1998
-------------------------------
Income tax benefit (provision) at
statutory rate $ 655,000 $ (1,000,000)
Change in valuation allowance (655,000) 950,000
-------------------------------
$ - $ (50,000)
-------------------------------
Deferred tax assets (liabilities) are comprised of the following:
Net operating loss carryforwards $ 2,502,000
General business and AMT credit carryforwards 173,000
Accrued expenses and deposits 138,000
Capital loss carryforwards 86,000
Inventory 7,000
Allowance for bad debts and reserves 3,000
Depreciation (14,000)
Deferred compensation expense (105,000)
----------------
2,790,000
Valuation allowance (2,790,000)
----------------
$ -
----------------
- --------------------------------------------------------------------------------
F-11
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
6. Income Taxes Continued
At August 31, 1999, the Company has net operating losses (NOL), research and
experimentation tax credit (RETC), and investment tax credit (ITC) available to
offset future taxable income and taxes payable as follows:
Expiration
Date NOL RETC ITC
- --------------------------------------------------------------------
2001 $ - $ - $ 2,000
2002 1,999,000 8,000 -
2003 2,122,000 41,000 -
2005 1,270,000 72,000 -
2007 190,000 - -
2008 100,000 - -
2009 671,000 - -
2010 170,000 - -
2012 837,000 - -
------------------------------------------------------
$ 7,358,000 $ 121,000 $ 2,000
------------------------------------------------------
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.
7. Stock Options and Warrants
Stock Options
The Company's 1998 Employee Stock Option Plan authorizes the granting of
incentive stock options to certain key employees and nonemployees who provide
services to the Company. The Plan provides for the granting of options for an
aggregate of 2,000,000 shares. The options vest subject to management's
discretion. Under this plan, 319,000 options were granted, 5,500 options vested,
and 50,000 options were canceled for the year ended August 31, 1999.
- --------------------------------------------------------------------------------
F-12
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock Options and Warrants Continued
Stock Options - Continued
The Company's 1998 Director Stock Plan authorizes granting a total of $12,000 in
cash and options to each nonemployee director. The Plan allows for an aggregate
of 1,000,000 shares to be granted. The options vest according to a set schedule
over a five-year period and expire upon the director's termination, or after ten
years from the date of grant. Under this plan, 100,000 options were granted and
25,000 shares were canceled for the year ended August 31, 1999.
A schedule of the options and warrants are as follows:
Price Per
Options Warrants Share
------------------------------------
Outstanding at September 1,
1997 1,107,746 242,655 $ .10 to .20
Granted 27,500 - .25
------------------------------------
Outstanding at August 31, 1998 1,135,246 242,655 $ .10 to .25
Granted 419,000 - .24 to .45
Canceled (75,000) - .24 to .35
------------------------------------
Outstanding at August 31, 1999 1,479,246 242,655 $ .10 to .45
------------------------------------
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
market value of common stock at the date of grant over the exercise price.
- --------------------------------------------------------------------------------
F-13
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock Options and Warrants Continued
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost has been recognized in the financial
statements for employees, except when the exercise price is below the market
price of the stock on the date of grant. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date for
awards in 1999 and 1998 consistent with the provisions of SFAS No. 123, the
Company's net (loss) earnings and earnings per share would have been the pro
forma amounts indicated below:
Years Ended
August 31,
--------------------------------
1999 1998
--------------------------------
Net (loss) income - as reported $ (1,928,050) $ 2,890,579
Net (loss) income - pro forma $ (1,956,532) $ 2,883,894
Diluted (loss) earnings per share - as
reported $ (.12) $ .17
Diluted (loss) earnings per share -
pro forma $ (.12) .17
--------------------------------
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,
--------------------------------
1999 1998
--------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 124% 139%
Risk-free interest rate 5.6% 5.6%
Expected life of options 5 years 5 years
--------------------------------
The weighted average fair value of options and warrants granted during 1999 and
1998 are $.31 and $.22, respectively.
- --------------------------------------------------------------------------------
F-14
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Stock Options and Warrants Continued
The following table summarizes information about stock options and warrants
outstanding at August 31, 1999:
Options and Warrants
Options and Warrants Outstanding Exercisable
------------------------------------------------------------
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise at Life Exercise at Exercise
Prices 8/31/99 (Years) Price 8/31/99 Price
- ------------------------------------------------------------------------
$ .10 - .24 1,452,901 5.5 $ .12 1,452,901 $ .12
.37 - .45 269,000 9.8 .39 269,000 .39
- ------------------------------------------------------------------------
$ .10 - .45 1,721,901 6.2 $ .17 1,721,901 $ .17
- ------------------------------------------------------------------------
8. Foreign Customer and Major Customer
Sales to foreign customers are as follows:
Years Ended
August 31,
--------------------------------
1999 1998
--------------------------------
Europe $ 290,551 $ 903,849
Far East - 194,824
--------------------------------
$ 290,551 $ 1,098,673
--------------------------------
During the years ended August 31, 1999 and 1998, the Company had sales to a
major customer that amounted to $285,000 and $888,000, respectively.
9. Related Party Transactions
During the years ended August 31, 1999 and 1998, the Company had sales to a
stockholder of approximately $285,000 and $888,000.
During the year ended August 31, 1999 the Company had sales of approximately
$96,000 to an unconsolidated subsidiary.
- --------------------------------------------------------------------------------
F-15
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Supplemental Cash Flow Information
During the year ended August 31, 1998, the Company sold a building with a book
value of $213,259, debt of $93,741, and recognized a deferred gain of $307,000.
Actual amounts paid for interest and income taxes are as follows:
Years Ended
August 31,
--------------------------------
1999 1998
--------------------------------
Interest expense $ 3,631 $ 8,373
--------------------------------
Income taxes $ 32,827 $ -
--------------------------------
11. Significant Unconsolidated Affiliates
Summarized financial information for the significant unconsolidated affiliate of
the Company at September 30, 1999 and 1998 (the affiliates's fiscal year runs
from October 1, through September 30,) are as follows:
September 30,
--------------------------------
1999 1998
--------------------------------
Result for year:
Gross revenues $ - $ -
Gross profit $ - $ -
Net loss $ (1,476,223) $ (2,204,656)
Year-end financial position:
Current assets $ 5,432,408 $ 3,782,614
Non-current assets $ 2,935,308 $ 304,025
Current liabilities $ 72,372 $ 514,335
Non-current liabilities $ - $ 304,568
- --------------------------------------------------------------------------------
F-16
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
12. Commitments and Contingencies
The Company has an employment agreement with the Chairman of the Board of
Directors of the Company. The agreement provides that the Chairman of the Board
of Directors's salary will be based upon a reasonable mutual agreement.
Additionally, in the case of nonvoluntary termination, the acting president will
receive severance pay for a six month period, which includes an extension of all
employee rights, privileges, and benefits, including medical insurance. The six
month severance pay would be the salary at the highest rate paid to the
president prior to such a nonvoluntary termination. The agreement also requires
the Company to pay the acting president for any accrued unused vacation and
bonuses.
The Company has 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 licensor. The Company pays
royalties based upon its sales of this probe. Royalties accrued as of August 31,
1999 and 1998, are approximately $6,000 and $1,000, respectively. Royalty
expense amounted to approximately $5,000 and $9,000 for the years ended August
31, 1999 and 1998, respectively.
13. 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,
1999 and 1998, 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.
- --------------------------------------------------------------------------------
F-17
<PAGE>
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
- --------------------------------------------------------------------------------
14. Earnings Per Share
Financial accounting standards require companies to present basic earnings per
share (EPS) and diluted earnings per share along with additional informational
disclosures. Information related to earnings per share is as follows:
Years Ended December 31,
--------------------------------
1999 1998
--------------------------------
Basic EPS:
Net (loss)income available to
common stockholders $ (1,928,050) $ 2,890,579
--------------------------------
Weighted average common shares $ 16,468,000 $ 16,214,000
--------------------------------
Net (loss) income per share $ (.12) $ .18
--------------------------------
Diluted EPS:
Net income (loss) available to
common stockholders $ (1,928,050) $ 2,890,579
--------------------------------
Weighted average common shares $ 16,468,000 $ 17,174,000
--------------------------------
Net (loss) income per share $ (.12) $ .17
--------------------------------
15. Litigation Settlement
During 1998, the Company settled litigation with Urologix. Pursuant to the
settlement agreement, Urologix paid an aggregate total of $5,000,000 to the
Company and its subsidiary. As part of the settlement, Urologix maintains its
non-exclusive license to certain patents.
- --------------------------------------------------------------------------------
F-18
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Information regarding directors of the Company are contained under Election
of Directors in the registrant's 1998 Proxy Statement, which is incorporated
herein by reference. 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
and executive officers of the Company.
<TABLE>
<CAPTION>
Initial Date as
Name Age Position Officer or Director
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Paul F. Turner 52 Chairman of the Board, Senior Vice President, and 1986
Chief Technology Officer
Hyrum A. Mead 52 President and Member of the Board of Directors 1999
Dixie Toolson Sells 49 Vice President of Regulatory Affairs and Corporate 1987
Secretary
Ray Lauritzen 49 Vice President of Field Service 1988
Gerhard W. Sennewald, Ph.D. 63 Member of the Board of Directors 1994
J. Gordon Short, M.D. 68 Member of the Board of Directors 1994
Michael Nobel, Ph.D. 59 Member of the Board of Directors 1997
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mr. Turner has been with BSD for 21 years. He served as Staff and Senior
Scientist from 1978 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. From October
1995, to August 1999, Mr. Turner served as Acting President. Since August 1999,
Mr. Turner has served as Senior Vice President and Chief Technology Officer.
Mr. Mead was appointed as President and elected to the Board of Directors
in August 1999. He has served as VP of Business Development at ZERO Enclosures,
a leading manufacturer in the telecommunications, computer and aerospace
<PAGE>
industry and as President of Electro Controls, a manufacturer of computer
controlled power systems that have significant technological overlaps with the
BSD systems. Mr. Mead began his career in sales and marketing with IBM.
Ms. Sells has been with BSD for 20 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 16 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 14
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. 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
that specializes in consumable specialty supplies.
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, 1999. No stock
options were granted to or exercised by the Acting President during fiscal year
1998. No other executive officers of the Company received compensation exceeding
$100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation Awards
- ------------------------------------------------------------------------------------------------------------------------
Other
Annual Restricted All Other
Name and Fiscal Salary Bonus Compen- Stock Compen-
Position Year ($) ($) sation ($) Awards ($) Options(#) sation($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hyrum A. Mead, 1999 $5,689 -0- -0- -0- 200,000 -0-
President (1)
- ------------------------------------------------------------------------------------------------------------------------
Paul F. Turner, 1999 $140,000 $100 -0- -0- -0- -0-
Sr. VP and Chief 1998 $128,543 -0- -0- -0- -0- (2) -0-
Technology Officer 1997 $115,000 -0- -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Mead began employment with BSD as of August 10, 1999.
(2) During fiscal 1998, TherMatrx approved the grant of an option to Mr. Turner
to purchase 1% of outstanding shares of common stock in TherMatrx, Inc.
(strike price and total number of outstanding shares to be determined at a
later date by TherMatrx's Board of Directors).
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR - Individual Grants
Percent of Total
Options Granted to Exercise or
Name and Options Employees in Fiscal Base Price
Position (#) 1999 ($/Sh) Expiration Date
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Hyrum A. Mead, 200,000 62.70% $.37 August 10, 2009
President
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired on Value Underlying Unexercised In-the-Money Options
Name and Exercise Realized Options at FY-end (#) at FY-end ($)
Position (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hyrum A. Mead, -0- -0- 0 200,000 0 $92,660
President
- ----------------------------------------------------------------------------------------------------------------------
Paul F. Turner, -0- -0- 178,187 2,766 $82,554 $1,281
Sr. VP and Chief
Technology Officer
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPENSATION OF DIRECTORS
- -------------------------
The 1998 Director Stock Plan provides for annual compensation in the amount
of $12,000 for each non-employee director - $4,000 to be paid in cash and the
balance of the retainer to be paid in the form of restricted shares of BSD
Common Stock. In addition to the annual compensation to directors, each
Non-Employee Director shall receive an annual option to purchase 25,000
<PAGE>
restricted shares of BSD Common Stock at a purchase price of 85% of the Fair
Market Value at the date the Option is granted. The options vest over 5 years
and expire in 10 years. On September 1, 1998, S. Lewis Meyer, Michael Nobel,
Gerhard W. Sennewald, and J. Gordon Short were each awarded 25,000 options to
purchase the Company's restricted common stock at $.24 per share. On March 1,
1999, S. Lewis Meyer, Michael Nobel, Gerhard W. Sennewald, and J. Gordon Short
were each paid $2,000 and awarded 10,240 shares of restricted common stock,
based on service to the Company for the prior six months. On September 1, 1999,
Michael Nobel, Gerhard W. Sennewald, and J. Gordon Short were each awarded
25,000 options to purchase the Company's restricted common stock at $.39 per
share. These directors were also paid $2,000, and awarded 8,633 shares of
restricted common stock based on service to the Company for the prior six
months. On September 1, 1999, S. Lewis Meyer was awarded 2,065 shares of
restricted common stock and paid $478.26 for his service to the Company from
March 1, 1999, through April 13, 1999, when he resigned from his position on the
Board of Directors.
EMPLOYMENT CONTRACTS
- --------------------
The Company has an employment contract with the President, Mr. Mead, that
was signed August 10, 1999. This agreement provides that Mr. Mead shall receive
a base salary of $125,000, which shall be reviewed annually by the Board of
Directors. Additionally, in the case of non-voluntary termination, Mr. Mead
shall receive all compensation for a period of six months, which includes an
extension of all benefits and perquisites. The six month severance shall be
salary at the highest rate paid to Mr. Mead prior to such termination and the
total amount of bonuses paid or payable during the preceding 12 months. The
agreement also requires the Company to vest any options granted to Mr. Mead for
the purchase of the Company's stock with a 90 day period to exercise such
options. Mr. Mead's agreement includes a period of non-competition for one year
following termination of employment.
The Company has an employment contract with the Senior Vice President and
Chief Technology Officer, Mr. Turner that was signed November 2, 1988. This
agreement provides that Mr. Turner's salary will be based upon a reasonable
mutual agreement. Additionally, in the case of non-voluntary termination, Mr.
Turner 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 will 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 November 1, 1999,
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:
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Shares of Common Stock Percentage of Common Stock
Beneficial Owner Beneficially Owned (1) Ownership (2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dr. Gerhard W. Sennewald 6,757,819(3) 40.25%
c/o Medizin-Technik GmbH
Augustenstrasse 27
D-80333 Munich, Germany
Paul F. Turner 1,993,105(4) 11.81%
762 Lacey Way
North Salt Lake, UT 84054
John E. Langdon 1,300,010(5) 7.79%
2501 Parkview Drive, Suite 500
Fort Worth, TX 76102
Hyrum A. Mead 0 *
202 Coventry Lane
North Salt Lake, UT 84054
Michael Nobel 48,873(6) *
P.O. Box 30043
S-10425 Stockholm, Sweden
J. Gordon Short, M.D. 103,873(7) *
c/o Brevis Corporation
3310 South 2700 East
Salt Lake City, UT 84109
All officers and directors as 9,553,836(8) 55.64%
a group (7 persons)
</TABLE>
* 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 95,065 shares subject to options. Does not include 500,000 shares
held by Dr. Sennewald's spouse, for which he disclaims beneficial
ownership.
(4) Includes 178,187 shares subject to options.
(5) Includes 403,525 shares owned directly by Mr. Langdon. The remaining shares
are held in trusts for which Mr. Langdon is Trustee. Does not include
50,000 shares held by Mr. Langdon's spouse, for which he disclaims
beneficial ownership.
(6) Includes 5,000 shares subject to options.
(7) Includes 33,000 shares subject to options.
(8) Includes 476,926 shares subject to options.
<PAGE>
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
Number Description
- ------- -----------
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 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.
10.4 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.
10.5 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.
10.6 Stock Purchase Agreement dated October 31, 1997, by and among
TherMatrx, Inc., BSD Medical Corporation, Oracle Strategic Partners,
L.P., and Charles Manker.
10.7 BSD Medical Corporation 1998 Director Stock Plan. Incorporated by
reference to Exhibit A of the BSD Medical Corporation Schedule 14A,
filed July 27, 1998.
10.8 BSD Medical Corporation 1998 Stock Incentive Plan. Incorporated by
reference to Exhibit B of the BSD Medical Corporation Schedule 14B,
filed July 27, 1998.
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.
<PAGE>
27 Financial Data Schedule.
99 The financial statements for the fiscal year ended September 30,
1999, of TherMatrx, Inc., a significant subsidiary reported on the
equity method, and the report of independent certified public
accountants.
(b) Reports on Form 8-K
During the last quarter of fiscal year 1999, the Company filed no reports
on Form 8-K.
<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 24, 1999 By: /s/ Hyrum A. Mead
------------------------------ --------------------------------
Hyrum A. Mead
President and Member of the
Board of Directors
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 24, 1999 By: /s/ Paul F. Turner
------------------------------ --------------------------------
Paul F. Turner
Chairman of the Board,
Chief Technology Officer,
and Senior Vice President
of Research
Date: November 24, 1999 By: /s/ Hyrum A. Mead
------------------------------ --------------------------------
Hyrum A. Mead
President and Member of the
Board of Directors
Date: November 24, 1999 By: /s/ Gerhard W. Sennewald
------------------------------ --------------------------------
Dr. Gerhard W. Sennewald
Member of the Board of
Directors
Date: November 24, 1999 By: /s/ J. Gordon Short
------------------------------ --------------------------------
Dr. J. Gordon Short
Member of the Board of
Directors
Date: November 24, 1999 By: /s/ Michael Nobel
------------------------------ --------------------------------
Dr. Michael Nobel
Member of the Board of
Directors
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
BSD MEDICAL CORPORATION FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 1,689,029
<SECURITIES> 0
<RECEIVABLES> 59,266
<ALLOWANCES> 0
<INVENTORY> 908,241
<CURRENT-ASSETS> 2,698,084
<PP&E> 773,883
<DEPRECIATION> 686,790
<TOTAL-ASSETS> 2,797,917
<CURRENT-LIABILITIES> 761,924
<BONDS> 0
0
0
<COMMON> 166,940
<OTHER-SE> 1,706,229
<TOTAL-LIABILITY-AND-EQUITY> 2,797,917
<SALES> 596,441
<TOTAL-REVENUES> 620,221
<CGS> 632,505
<TOTAL-COSTS> 2,094,825
<OTHER-EXPENSES> 546,452
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,630
<INCOME-PRETAX> (1,928,050)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,928,050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,928,050)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
TherMatrx, Inc.
(A Development Stage Company)
Financial Statements
September 30, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
TherMatrx, Inc.
Bannockburn, Illinois 60015
We have audited the accompanying balance sheet of TherMatrx, Inc. (A Development
Stage Company) as of September 30, 1999, and the related statements of income
and retained earnings and cash flows for the year ended September 30, 1999, and
the period from November 13, 1997 (Date of Inception) to September 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our 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 financial position of TherMatrx, Inc. (A Development
Stage Company) as of September 30, 1999, and the results of its operations and
its cash flows for the year then ended and the period from November 13, 1997
(date of inception), to September 30, 1999, in conformity with generally
accepted accounting principles.
November 2, 1999
<PAGE>
TherMatrx, Inc.
(A Development Stage Company)
Balance Sheet
September 30, 1999
ASSETS
Current Assets
Cash and Cash Equivalents $ 494,984
Investments 4,875,865
Inventory 21,057
Deposits and Prepaid Expenses 40,502
-------------
Total Current Assets $ 5,432,408
Property and Equipment
Furniture and Fixtures 10,430
Equipment 37,729
-------------
48,159
Less: Accumulated Depreciation (17,351)
-------------
Total Property and Equipment 30,808
Other Assets
Patents 2,904,500
-------------
Total Other Assets 2,904,500
-------------
Total Assets $ 8,367,716
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 31,733
Accrued Expenses 40,639
-------------
Total Current Liabilities $ 72,372
Stockholders' Equity
Common Stock, .001 Par Value
(1,000,000 Shares Authorized; 54,000
Shares issued and Outstanding) 4,000,000
Preferred Stock, .01 Par Value
(1,000,000 Shares Authorized; 103,500
Shares issued and Outstanding) 6,500,000
Retained Earnings
(Deficit Accumulated During the
Development Stage) (2,204,656)
-------------
Total Stockholders' Equity 8,295,344
-------------
Total Liabilities and
Stockholders' Equity $ 8,367,716
=============
The accompanying notes to the financial statements
are an integral part of this statement.
<PAGE>
TherMatrx, Inc.
(A Development Stage Company)
Statements of Income and Retained Earnings
Year Ended September 30, 1999, and the Period from
November 13, 1997 (Date of Inception) to September 30, 1999
<TABLE>
<CAPTION>
November 13, 1997
Year Ended (Inception) to
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Expenses
Sales and Marketing $ 79,943 $ 110,556
Administrative 831,350 1,791,232
Research and Development 756,471 1,477,503
--------------- ---------------
Total Expenses 1,667,764 3,379,291
--------------- ---------------
Other Income (Expense)
Settlement from Lawsuit 1,230,000
Interest Income 191,541 ` 327,258
Organization Costs (382,621)
--------------- ---------------
Total Other Income (Expense) 191,541 1,174,635
--------------- ---------------
Net Loss (1,476,223) (2,204,656)
Retained Earnings, Beginning of Period (728,433) -0-
--------------- ---------------
Retained Earnings, End of Period $ (2,204,656) $ (2,204,656)
=============== ===============
</TABLE>
The accompanying notes to the financial statements
are an integral part of this statement.
<PAGE>
TherMatrx, Inc.
(A Development Stage Company)
Statements of Cash Flows
Year Ended September 30, 1999, and the Period from
November 13, 1997 (Date of Inception) to September 30, 1999
<TABLE>
<CAPTION>
November 13, 1997
Year Ended (Inception) to
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $ (1,476,223) $ (2,204,656)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and Amortization 233,652 442,851
Decrease (increase) in operating assets:
Inventory (5,978) (21,057)
Other (6,373) (40,503)
Increase (decrease) in operating liabilities:
Accounts Payable (33,134) 31,733
Accrued Liabilities (4,319) 40,640
---------------- ----------------
Total Adjustments 183,848 453,664
---------------- ----------------
Net cash used by operating activities (1,292,375) (1,750,992)
---------------- ----------------
Cash Flows From Investing Activities
Investments (4,875,865) (4,875,865)
Purchase of Property and Equipment (15,482) (48,159)
Lawsuit Settlement Allocated to Patents 670,000
---------------- ----------------
Net Cash Used by Investing Activities (4,891,347) (4,254,024)
---------------- ----------------
Cash Flows From Financing Activities
Preferred Stock 3,250,000 6,500,000
---------------- ----------------
Increase (Decrease) in Cash and Cash Equivalents (2,933,722) 494,984
Cash and Cash Equivalents at Beginning of Period 3,428,706 -0-
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 494,984 $ 494,984
================ ================
Noncash Investing and Financing Transactions
Common stock was acquired by the contribution of patents $ 4,000,000
================
</TABLE>
The accompanying notes to the financial statements
are an integral part of this statement.
<PAGE>
TherMatrx, Inc.
(A Development Stage Company)
Notes to Financial Statements
From Inception November 13, 1997 to September 30, 1999
NOTE 1 - ORGANIZATION AND OPERATION
TherMatrx, Inc. (A Development Stage Company) (the Company) was incorporated in
the state of Delaware on November 13, 1997. The Company is conducting clinical
trials for a new medical device to treat Benign Prostatic Hyperplasia (BPH)
which is a non-cancerous enlargement of the prostate gland. The clinical trials
are being performed throughout the United States.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting
- --------------------
The Company prepares its financial statements using the accrual basis of
accounting in accordance with generally accepted accounting principles.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include all monies in banks and highly liquid
investments with maturity dates of less than seventy-six days.
Inventory
- ---------
Inventories are stated at the lower of cost or market. Cost is determined using
the specific identification method.
Property and Equipment
- ----------------------
Property and Equipment are carried at cost. Depreciation is provided using the
straight-line method at rates based on the following useful lives:
Furniture and Fixtures 5 years
Equipment 3 years
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Use of Estimates
- ----------------
The process of preparing financial statements in conformity with generally
accepted accounting principles required 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 reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
<PAGE>
TherMatrx, Inc.
(A Development Stage Company)
Notes to Financial Statements
From Inception November 13, 1997 to September 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
- ------------
Incomes taxes are accounted for in accordance with the provisions of Statement
of Financial Accounting Standards No. 109. The provision for income tax expense
or benefit is based on income or loss reported for financial statement purpose
adjusted for temporary and permanent differences between reported financial and
taxable income or loss.
Patents
- -------
Patents are amortized on the straight-line basis over fifteen years.
Costs $4,000,000
Proceeds from Lawsuit (670,000)
Accumulated Amortization (425,500)
----------
Patents, net $2,904,500
==========
NOTE 3 - COMMITMENTS
The Company has a lease for it's office space which expired on December 31,
1998. The Company has an option to renew the lease for one year. The minimum
monthly rental is $2,041. In December, 1998 the lease was extended until
December 31, 1999. The minimum monthly rental is $2,041. In September, 1999 the
lease was extended until December 31, 2000. The minimum rental is $2,070. The
Company is responsible for it's proportional share of real estate taxes and
operating expenses of the building.
Future minimum rental payments:
Year ending
September 30, Amount
------------ ------
2000 $ 24,758
2001 6,211
--------
$ 30,969
========
Rent expense for the period ended September 30, 1999 and 1998 was $25,107 and
$18,371, respectively.
The Company subleased office space on a month-to-month basis through November,
1998. Rental income for the period ended September 30, 1999 and 1998 was $2,600
and $11,700, respectively.
The Company has a consulting agreement with a doctor that expires in January,
2000. The minimum monthly payment is $4,125.
Future minimum payments:
Year ending
September 30,
------------
2000 $ 16,500
========
<PAGE>
TherMatrx, Inc.
(A Development Stage Company)
Notes to Financial Statements
From Inception November 13, 1997 to September 30, 1999
NOTE 4 - INVESTMENTS
Investments consist of time deposits worth $3,855,969 and a Treasury Note with a
value of $1,019,896. The carrying value of these investments approximate fair
value because of the short term maturities of these financial instruments.
NOTE 5 - CONCENTRATION OF CREDIT RISK
The Company maintains cash accounts in one financial institution. Balances in
these accounts exceed the federally insured limit of $100,000.
NOTE 6 - RELATED PARTY
The Company has entered into a consulting, supply and non-compete, non
disclosure agreement with BSD Medical Corporation (BSD). BSD owns 100% of the
Company's common stock.
Consulting Agreement
- --------------------
The Company will use the expertise, on an "as needed" basis, of employees of BSD
in the development and conducting clinical trials of a new medical device to
treat Benign Prostatic Hyperplasia. At September 30, 1999 and 1998 the Company
has paid approximately $179,000 and $197,000 for these services.
Supply Agreement
- ----------------
The Company has purchased, from BSD, the demo medical devices to be used in the
clinical trials. The Company will also purchase supplies used in the clinical
trials. These supplies consist mainly of applicators and temperature probes. At
September 30, 1999 and 1998 the Company has paid approximately $92,000 and
$175,000 for these supplies.
Non-Compete, Non Disclosure Agreement
- -------------------------------------
BSD has entered into an agreement with the Company not to engage in any business
or provide any services in the treatment of any benign conditions or diseases of
the prostate gland. BSD shall not disclose any "Confidential Information" of the
clinical trials or the medical device used in such treatments.
<PAGE>
TherMatrx, Inc.
(A Development Stage Company)
Notes to Financial Statements
From Inception November 13, 1997 to September 30, 1999
NOTE 7 - CAPITALIZATION AND VALUATION OF INTANGIBLES
Capitalization
- --------------
Date # of Shares Amount
---- ----------- ------
Common Stock 11/13/97 54,000 $4,000,000
Preferred Stock 11/13/97 46,000 $3,250,000
4/20/99 57,500 $3,250,000
The initial capitalization of the Company included the issuance of 54,000 shares
of common stock and 46,000 shares of convertible preferred stock. The agreements
call for the issuance of 57,500 additional shares at a second closing
("Milestone Closing") when certain conditions have been met. On April 20, 1999
the "Milestone Closing" ocurred. The total shares to be issued on a fully
diluted basis is 180,000 after the second closing. This includes 22,500 shares
reserved for issuance under a Management Stock Option Plan.
Valuation of Intangibles
- ------------------------
In order to establish the value of the patents and patent rights contributed the
Company compared the percentage of the shares acquired for cash with the
percentage acquired for the rights to the patents. Based on the expectation that
the "Milestone Closing" would be achieved, it was determined that the intangible
assets contributed were worth $4,000,000 (Note 2). This asset is shown in the
financial statements as Patents and it will be amortized over 15 years in
accordance with generally accepted accounting principles. The patents and patent
rights were contributed to the Company for common stock valued at $4,000,000.
NOTE 8 - DEVELOPMENT STAGE COMPANY
The subject clinical trial will investigate the safety and efficacy of the
TherMatrx TMX2000 and its clinical utility in treating certain aspects of
symptomatic Benign Prostatic Hyperplasia. The proposed investigation will be a
double blinded randomized trial which will include a sham group to study and
placebo effects and a treatment group which will receive Transurethral Microwave
Thermotherapy (Thermotherapy) as a targeted dose range.
<PAGE>
TherMatrx, Inc.
(A Development Stage Company)
Notes to Financial Statements
From Inception November 13, 1997 to September 30, 1999
NOTE 8 - DEVELOPMENT STAGE COMPANY (CONTINUED)
Although the official Phase I/II Protocol has been approved by the U.S. Food and
Drug Administration (FDA), it is possible that modifications will be desirable
once a full-scale patient accrual is under way at all investigational sites.
When all of the modifications have been made and FDA approval has been granted
then the Company can start to sell this procedure to treat Benign Prostatic
Hyperplasia.
