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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1995
---------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________________ to________________
Commission File Number: 1-10285
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BIOMAGNETIC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
California 95-2647755
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9727 Pacific Heights Boulevard, San Diego, California 92121-3719
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (619)453-6300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value Per Share
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x] Yes [ ] No
The aggregate market value of the voting stock (which consists solely of shares
of Common Stock) held by non-affiliates of the registrant as of December 6, 1995
was $13,012,429, based on the closing price on that date on the Nasdaq
National Market.
The number of shares outstanding of the registrant's Common Stock, no par value,
as of December 6, 1995 was 39,932,174 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of Registrant's Annual Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, in connection with the Annual Meeting of Shareholders to be
held March 18, 1995 are incorporated by reference into Part III of this
report.
2. Registrant's Annual Report of its Employee Stock Purchase Plan for the
fiscal year ended September 30, 1995 is included as Exhibit 99.1.
3. Items contained in the above-referenced documents which are not
specifically incorporated by reference are not included in this report.
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BIOMAGNETIC TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
INDEX
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Page
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PART I
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . 17
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters . . . . . . . 18
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . 25
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . 25
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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PART I
ITEM 1. BUSINESS.
Company Overview
Biomagnetic Technologies, Inc. (the "Company" or "BTi") was established in 1970
to produce specialized instruments for ultra- sensitive magnetic field and low
temperature measurements. These products were supplied to physicists for basic
research. The Company has been developing its core magnetic sensing technologies
since the early 1970s and incorporated those technologies into its magnetic
source imaging ("MSI") system, an instrument designed to assist in the
noninvasive diagnosis of a broad range of medical disorders. The MSI system
developed by the Company uses advanced superconducting technology to measure and
locate the source of magnetic fields generated by the human body, which are one
billion times smaller than the earth's magnetic field. While traditional medical
imaging methods provide anatomical detail, the measurement of the body's
magnetic fields by MSI provides information about normal and abnormal function
of the brain, heart and other organs. The Company is focusing the development of
its technology on large potential commercial market applications such as brain
surgery, the diagnosis and surgical planning for treatment of epilepsy and
life-threatening cardiac arrhythmias.
MSI differs significantly from other existing functional and anatomical imaging
methods. The Company believes MSI is the only method that can precisely capture
and locate rapid changes in organ function without the injection of radioactive
isotopes or costly invasive procedures such as surgical placement of electrodes
into the body. Other functional imaging methods such as electroencephalography
("EEG") or positron emission tomography ("PET") either require invasive
procedures to provide the needed accuracy of locating functional areas or
respond too slowly to follow transient physiological events. Anatomy oriented
diagnostic methods such as computed tomography ("CT") and magnetic resonance
imaging ("MRI") produce anatomical images showing cross-sectional slices of
various parts of the body. The Company's MSI system, when used in conjunction
with anatomy oriented diagnostic methods, provides the clinician with an image
that links anatomy with function to give a more complete picture of the
patient's condition without the use of radioactive isotopes or costly invasive
procedures.
The Company's MSI system is currently being used by physicians for planning the
surgical removal of brain tumors and vascular malformations to reduce the risk
of neurological injury resulting in paralysis and expensive rehabilitation
therapy. The Company's MSI system is also being used to assist physicians
specializing in epilepsy to evaluate whether the surgical treatment of drug-
resistant epileptic seizures is appropriate by helping to locate brain tissue
that triggers such seizures. Other potential neurological applications for the
Company's MSI system include certain stroke, trauma and mental disorders. The
Company's MSI system is also being used to investigate certain cardiac
applications including the assessment of risk for lethal arrhythmias and the
location of the tissue responsible for the arrhythmias as a guide for subsequent
therapy. In addition, the Company is focusing its internal research efforts on
developing and expanding its proprietary technology into more cost-effective
products.
Several leading medical centers worldwide have performed more than 4,400
clinical examinations on patients and control subjects with the Company's MSI
system for the purpose of developing the clinical applications, either
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independently or in collaboration with BTi. Since the first third-party
reimbursement was received in September 1993, 49 insurance companies have
approved reimbursement for certain MSI procedures performed with the Company's
Magnes(R) MSI system. Magnes systems are installed in 15 medical and research
institutions worldwide. These sites include the Scripps Research Institute in La
Jolla, California ("Scripps"), New York University Medical Center ("NYU"), the
University of Tokyo ("UT"), the University of California, San Francisco Medical
Center ("UCSF") and the Karolinska Hospital in Sweden. Patients have been
referred to collaborating domestic sites from more than 50 leading medical
institutions throughout the United States.
According to statistics issued by the National Institutes of Health ("NIH"), the
annual cost associated with neurological and mental illness disorders in the
U.S. is more than $285 billion. This amount includes the direct cost of health
care and, in the case of most neurological disorders, the indirect cost of
income lost due to illness. The Company currently is directing its sales efforts
toward the more than 150 medical centers in the U.S., Japan and Europe where
clinical applications for MSI may be developed. The potential commercial
clinical market in the U.S. consists of more than 1,200 large hospitals and
independent imaging centers.
Current Medical Imaging Technology
Most debilitating or life threatening disorders of the body, such as stroke,
seizures, dementia, movement disorders, mental illness, cardiac arrhythmias and
gastrointestinal disorders, involve a disruption of function. Because electrical
activity plays a critical role in many functions of the body, such activity is
frequently monitored as a means to diagnose functional disorders. The
electrocardiogram ("ECG") and EEG are recordings of electrical activity of the
heart and brain used to obtain information about heart and brain function,
respectively. Similarly, electrical activity is often recorded to diagnose
functional disorders of skeletal muscles and peripheral nerves.
In the diagnosis and treatment of certain disorders, knowledge of the specific
location of the malfunctioning tissue is a key factor. Numerous medical imaging
technologies have been developed in response to this need. These technologies
include imaging technologies oriented toward organ structure and anatomy, such
as CT and MRI, and imaging technologies oriented toward function, such as PET,
single-photon emission computed tomography ("SPECT") and functional MRI
("fMRI").
CT and MRI produce anatomical images showing cross-sectional slices of various
parts of the body. These anatomical imaging methods help in locating structural
malformations and assessing physical organ damage. Their applications are
limited, however, in that many functional disorders have no corresponding
structural abnormality.
Other imaging technologies have been developed specifically to show the location
of certain functional areas. PET and SPECT produce cross-sectional pictures
showing the location of certain radioactively labeled substances that have been
injected into the body. Relative levels of metabolic activity and regional blood
flow, two measures of cell function, are determined by measuring the amount of
radiation emitted by different tissues.
An adaptation of conventional MRI known as fMRI is used to create images related
to localized changes in blood flow in the brain. While fMRI has the advantage
compared with PET and SPECT in that it does not involve injecting radioactive
substances into the body, fMRI, PET and SPECT all have a relatively long
response time that prevents observation of rapidly changing activities. Much of
the valuable diagnostic information
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observed in brain and cardiac electrical activity occurs in intervals much less
than one second, typically tens of milliseconds, and is spontaneous in nature.
Because the response time of PET, SPECT and fMRI is several seconds at best,
critical information about the sequence of activity, which is essential for
understanding disorders such as epilepsy and cardiac arrhythmias, is unavailable
from these technologies.
Conventional ECG and EEG have a faster response time than fMRI, PET and SPECT,
and provide critical information about the sequence of electrical activity but,
in many cases, lack the ability to locate the source of such activity with
sufficient accuracy to guide therapy. Locational accuracy is lost because the
electrical activity is distorted as it passes through body tissues between the
electrical source in the brain or heart and the electrodes on the body's
surface. For this reason, electrodes are commonly inserted into the body in an
attempt to obtain accurate localization of functional abnormalities in the brain
or heart prior to ablation procedures. This procedure is invasive, very costly
and involves risk and discomfort.
MSI Technology
MSI is based on a measurement of the magnetic fields produced by intracellular
electrical activity which, as discussed above, is associated with many of the
body's most critical functions. Unlike electrical activity generated by the
body, the corresponding magnetic fields pass through the body without distortion
and without obscuring the location of the source. By measuring the magnetic
fields and analyzing them to extract locational information, MSI can
noninvasively provide information about the location of the origin of normal and
abnormal electrical activity with a combination of millimeter spatial resolution
and millisecond time response that has otherwise been available only from highly
invasive procedures. The Company believes that MSI has a unique capability to
obtain such information without introducing radioactive or other tracer
substances into the body or use of other invasive procedures.
The Magnes MSI System
The Company's current MSI systems, the single sensor Magnes I and the dual
sensor Magnes II, are integrated systems capable of measuring, analyzing and
locating magnetic fields associated with the body's electrical activity in
millisecond time frames. The Magnes II was announced in fiscal 1994 and is an
enhancement of the Company's original Magnes I MSI system. Magnes II employs two
sensors, each containing an array of 37 magnetic detectors (for a total of 74
detectors, each consisting of a superconducting detection coil and an amplifier
called a superconducting quantum interference device ("SQUID")). Magnes I and
Magnes II systems have been used in both neurological and cardiac applications
and incorporate a number of unique technologies which are discussed later under
the caption "Proprietary Core Technologies".
In fiscal 1995, BTi announced the development of the Magnes 2500 WH whole head
MSI system ("Magnes WH"). The Magnes WH employs a total of 148 magnetic
detectors incorporated into a sensor with a helmet shaped recess that is placed
over the patient's head. This design, when completed, will allow simultaneous
examination of the entire brain and is uniquely designed for evaluating both
ambulatory and critically ill patients in a seated or fully reclined position.
Simultaneous examination of limited areas of both brain hemispheres has been
previously accomplished with the Magnes II system and may be useful in measuring
electrical events occurring in several different locations in the brain.
In 1990, the Company received 510(k) clearance from the United States Food and
Drug Administration (the
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"FDA") of the Magnes I system for applications relating to the brain. The
Company is currently seeking FDA clearance of the Magnes I system for
applications relating to the heart and of the Magnes II system for applications
relating to the brain. The Magnes I system received approval from the Japanese
Ministry of Health and Welfare ("JMHW") in 1992 for sale in Japan as a clinical
device and the dual sensor Magnes II system received similar JMHW approval in
1995. The Company intends to file a 510(k) premarket notification for the new
Magnes WH.
Medical Applications
The Company believes its Magnes system has significant commercial potential in
the diagnosis and treatment of neurological disorders. However, as a new medical
technology, the Magnes system faces several challenges to commercial success.
Medical applications for the Magnes system must be developed that result in
better patient care than existing technologies, regulatory clearance must be
obtained to sell the Magnes as a clinical device, reimbursement for MSI
procedures must be obtained from third party payors and the Magnes must provide
an economic benefit to the health care provider.
Currently, the Company believes there are two medically accepted applications
for the Magnes, presurgical functional mapping and assistance in the diagnosis
and treatment planning for epilepsy. Reimbursement from a number of insurance
companies has been obtained for both of these procedures, however the expected
volume of such procedures at a single hospital site does not currently provide
sufficient operating revenue to offset the investment and operating cost of a
Magnes system. The Company is currently focused on the development of MSI
applications for functional mapping, epilepsy and cardiology and is
aggressively pursuing programs to increase awareness of MSI technology to its
target market of neurosurgeons, neurocardiologists, neurologists and
epileptologists.
The Company's Magnes I system has, to date, only been cleared by the FDA for
applications relating to the brain. Further applications development and
clinical testing must be conducted before it can be deemed appropriate for the
potential applications described below. Notwithstanding the size of the
potential markets, there is no assurance the Company's system will be accepted
for use in any of the areas mentioned.
Neurological Applications
Research at leading medical centers has demonstrated that the Company's MSI
system can be used by physicians to noninvasively locate specific functional
regions of the brain in preparation for surgery. In addition, research has shown
that the Company's MSI system can assist physicians to noninvasively locate
brain tissue suspected of triggering epileptic seizures and abnormal
neurological activity associated with closed head injury and trauma, ischemic
disorders and stroke.
Presurgical Functional Mapping: Approximately 100,000 brain surgeries
are performed annually in the U.S. These procedures include tumor
resection, surgical correction of epilepsy and removal of vascular
malformations. The precise locations of functional regions vary even
among healthy individuals and more widely among patients with large
brain lesions, and the locations cannot reliably be determined solely
from anatomical imaging such as MRI. By relating information about the
primary sensory function areas provided by the Company's MSI system to
MRI-generated anatomical images, however, a function map of the brain
can be obtained and presented on a screen or recorded on film. Thus,
images produced with the Company's MSI system allow the surgeon to
reliably estimate the risk
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of damage to the identified function areas arising from the surgery
itself and to select the best surgical approach, such as where to open
the head and from which direction to access the targeted area to
minimize the risk.
Using the Company's MSI system, reliable and practical methods of
providing a functional map have been developed, verified and reported in
several medical journals. The Company's MSI system allows the surgeon,
hospital, insurer and patient to more accurately assess the risk of a
proposed surgery and the possibility of improving the outcome of the
surgery.
Epilepsy Surgery: There are approximately 1.2 million people in the
United States with recurrent epileptic seizures, and approximately
150,000 new cases emerge each year. The seizures for many of these
people can be controlled with drugs, but a number require alternative
treatments. There are at least 100,000 people in the United States alone
that could benefit from surgical intervention, although only about 2,500
such procedures are currently performed each year due to limited
facilities needed to perform the presurgical evaluations.
Over the past decade, a number of research studies have demonstrated
that information produced by MSI can noninvasively locate brain tissue
suspected of triggering epileptic seizures. Locating epileptic tissue is
vital in the evaluation of patients for epilepsy surgery. In the absence
of a noninvasive method, it has often been necessary to implant an array
of electrodes directly on or into the brain to locate this tissue. The
invasive approach requires lengthy hospitalization in facilities that
are equipped for long-term intensive monitoring of patients, 24-hour
nursing care and participation of a highly trained team of specialists.
To date, the cost and relative scarcity of appropriate facilities for
this long-term monitoring procedure severely limit the number of
patients who can benefit from a surgical approach to epilepsy treatment.
Recent medical literature shows MSI provides additional information that
is useful for locating epileptic tissue and could, in many cases, avoid
invasive evaluation procedures. The Company believes the necessary
information can be obtained with its MSI system in a clinically
acceptable time frame and at a cost that will allow for routine use in
evaluating patients for epilepsy surgery. The results to date suggest
that, in a large number of cases, the use of the Company's MSI system
would be a cost-effective alternative to currently used invasive
evaluation procedures.
Closed Head Injury and Trauma: The National Institute of Neurological
Disorders and Stroke and the National Head Injury Foundation estimate
that there are approximately 500,000 incidents of closed head injury
per year, about 10% of which result in lingering brain damage.
Currently, clinicians primarily use MRI or CT scans which provide only
anatomical images to determine the nature and extent of brain damage
following a closed head injury. These anatomical images are often
normal even though the patient shows severe neurological symptoms.
Other currently used tests of neurological function such as EEG are
generally difficult to interpret.
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Research studies conducted at the Company's cooperating clinical sites
show that the Company's MSI system is a sensitive detector for abnormal
brain activity accompanying traumatic injury while also providing a map
of the abnormality as it relates to anatomy. Researchers believe the
information provided by its MSI system could prove uniquely valuable in
enabling the trauma physician to assess the severity and potential
consequences of the physical damage and to help determine the
appropriate course of treatment.
Ischemic Disorders and Stroke: Ischemia and stroke are common
neurological disorders resulting from the disruption of blood supply
to the brain. The total direct cost to the U.S. healthcare system for
treatment and rehabilitation of stroke exceeds $10 billion per year.
MSI may potentially assist physicians treating stroke by identifying
damaged brain areas before they are detectable by CT or MRI scans.
Also, as an indicator of neurological function, MSI may be used to
monitor rehabilitation and treatment of stroke patients.
Cardiac Applications
Each year more than 300,000 Americans die from arrhythmias, or irregular heart
rhythms, that stop the heart from pumping enough blood through the body.
Arrhythmias result from electrical disturbances in damaged heart tissue. Two of
the great challenges facing cardiologists today are identifying people at risk
for arrhythmias and treating those people once they are identified. Early
results of measurements on subjects with a wide range of cardiac disorders
suggest that the Company's MSI system can help address both challenges.
Current techniques for reliably identifying people at risk for lethal
arrhythmias require the cardiologists to insert a catheter into the heart to
perform an electrophysiological test. Patterns of electrical stimuli are then
introduced into the heart in an attempt to artificially induce the arrhythmia.
This test lasts about two hours and requires a specially equipped
catheterization laboratory. In 1993, approximately $615 million was spent in the
United States on 246,000 electrophysiological tests performed for this purpose.
Although the use of the Company's MSI system for magnetic field detection
related to cardiac arrhythmias is in the very early stages, the Company believes
that a noninvasive cardiac arrhythmia risk assessment test could be developed
using its MSI system based on detecting the magnetic fields of the damaged heart
tissues that produce arrhythmias. If successful, such a test would be far less
expensive than the current electrophysiological test because it would not
require a cardiologist to be present and could be completed in about 30 minutes.
The availability of a reliable, inexpensive and noninvasive test would greatly
facilitate the selection of antiarrhythmic drugs and the dosage appropriate to
each patient.
Recently, some arrhythmia patients have been treated by destroying the tissue
responsible for the arrhythmia using a special type of catheter, a treatment
known as catheter ablation therapy. At present, however, the treatment is not
available for many patients because of the need for a map of the electrical
activity of the heart to determine which region of tissue should be destroyed.
The Company believes that its MSI system may be able to produce this map and
enable catheter ablation to be used in a greater number of arrhythmia patients.
The Company is currently seeking FDA clearance to market the Magnes system for
applications relating to the heart.
Clinical Collaborations
The Company's primary near-term objective is to accelerate the use of its MSI
system by cooperating with researchers and physicians at key medical centers
selected by the Company. The Company's MSI system must
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be established by clinical researchers as an effective tool suitable for
mainstream clinical applications in order to establish a large commercial
market. Accordingly, the early clinical research sales and collaborations with
clinical sites are strategically important to the Company's overall market
development plan.
The Company's MSI systems are currently installed for neurological use at 15
sites worldwide listed in Table 1. The Company also has established programs for
the development of cardiac applications and cardiac test protocols at two of
these sites. The Company provides technical support to all of these sites. While
the sites listed in Table 1 below do not all have formalized clinical
applications development agreements with BTi, the Company benefits from the
extensive research conducted at these sites through the clinical results
disseminated to the medical community and from potential future applications
that may be developed. To date, the findings of BTi and its collaborators have
been presented in 68 published papers.
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TABLE 1
NAME OF INSTITUTION LOCATION
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The Scripps Research Institute* United States
U.C. San Francisco Medical Center* United States
New York University Medical Center United States
University of Tokyo Hospital Japan
National Institute for Physiological Sciences Japan
Kyushu University Hospital Japan
National Epilepsy Center Japan
Sumitomo Research Center Japan
National Chubu Hospital Japan
University of Muenster Germany
Institute of Medicine-KFA Juelich Germany
University of Erlangen Germany
University of Vienna General Hospital Austria
University of Rennes France
Karolinska Hospital Sweden
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* Represents equipment on loan under a collaboration agreement
Marketing, Sales and Distribution
Market Description
The overall market for the Magnes system can be divided into three overlapping
segments: the basic research market, the clinical applications development
market and the commercial clinical market. Customers in each market segment are
identified by the focus of their work, the source of purchase funds and other
characteristics, as described below.
The basic research market consists of scientists working in university and
government laboratories to discover
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new information about organ function and to make fundamental advances in their
scientific fields. Patient treatment is not their principal concern. Equipment
used by these scientists generally is purchased with funds provided by
government and private research grants. The basic research market continues to
be the source of the majority of the Company's sales.
The clinical applications development market consists primarily of teaching
medical centers where the majority of clinical applications development work for
new medical technologies and procedures is conducted. Because of their size,
buying power, prestige and early involvement in assessing and using new medical
technologies, teaching medical centers continue to be the primary focus of the
Company's near-term marketing plans. The Company has identified more than 150
key members of this group in the U.S., Europe and Japan, which are centers of
excellence in (i) neurosurgery, neurology and neurophysiology, (ii)
neuroradiology and radiology and (iii) cardiology.
The commercial clinical market for MSI systems includes hospitals and clinics
that would use the MSI system in routine diagnosis and therapeutic monitoring of
patients. The primary commercial clinical market in the United States consists
of approximately 450 major medical centers with 500 or more beds and
approximately 780 hospitals with between 300 and 500 beds. In addition,
independent imaging centers in major metropolitan areas have often been among
the first buyers of new imaging technologies, and the Company believes this
pattern may be repeated for its MSI system. Of the top 25 neurology centers in
the United States, 24 have significant and growing epilepsy centers. There are
approximately 100 epilepsy surgery centers in the United States and Western
Europe that could be candidates for the Company's MSI system. Multiple sales at
the same site are not likely in the near term. Sales to the commercial clinical
market are expected to develop when regulatory approvals are obtained, adequate
third-party reimbursement for MSI tests becomes routine and MSI procedure costs
decline. Therefore, growth in this market depends on the development of
effective, regulatory approved clinical applications that qualify for
third-party reimbursement and are accepted by physicians such as neurosurgeons,
neurologists, cardiologists and radiologists.
The NIH has estimated that there are approximately 90 million cases annually of
neurological and mental illness disorders in the U.S.. Each case represents a
separate incident of such disorders and not separate patients. In most cases,
diagnostic methods for these disorders remain inadequate. According to NIH
estimates, the annual cost associated with these neurological and mental illness
disorders in the U.S. is more than $285 billion. This amount includes the direct
cost of health care and, in the case of neurological disorders, the indirect
cost of income lost due to illness. The majority of these disorders are
functional in nature and are a major cause of disability and death. In most
cases, no noninvasive test exists to help physicians diagnose or effectively
monitor the functional activity associated with these neurological and mental
illness disorders. The Magnes system is designed to address this need.
There is substantial medical evidence supporting the view that a significant
percentage of mental illness disorders have a physiological origin which may be
treated by pharmaceuticals or surgery. In most cases, however, it has not been
possible to detect physiological dysfunctions clearly associated with the
symptoms of mental illness. There has been no objective measure to use for the
diagnosis of mental illness, for the prescription of therapy, and for measuring
the effectiveness of the therapy on the patient. MSI has demonstrated the
ability to provide accurate spatio-temporal maps of neurophysiological function
which may serve as an objective measure and, the Company believes, the Magnes
system could fulfill a major need of physicians dealing with mental disorders.
Researchers are in the early stages of investigating MSI applications for mental
illness and therefore no reliable
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estimates can be made of the number of patients that might be aided by data
provided by the Magnes system.
Marketing Strategies
In order to promote sales in both the clinical applications development and
commercial clinical markets, the Company's fundamental marketing strategy is to
accelerate clinical applications development for the Magnes system by
collaborating with and promoting the work of a core group of influential medical
centers engaged in applications development. The Company plans to continue
implementation of this strategy by (i) encouraging physicians developing
applications for the Magnes to publish their results in professional journals,
(ii) participating in key medical meetings to generate interest among targeted
medical specialists, (iii) direct mailings to encourage communication between
research groups working with the Magnes system, (iv) site visits by key
customers, (iv) public relations activities, and (v) continuing its patient
referral program.
Distribution
The Company has a small direct sales organization with the specialized skills
needed to sell the Company's MSI system in the United States. The European and
Asian markets are served, respectively, by the Company's subsidiary in Germany
and by the biomedical division of SMI in Japan. In March 1990, the Company
entered into a distribution agreement granting SMI the exclusive rights to
market, sell, distribute and service the Company's MSI products in certain
regions of Asia and in Australia and New Zealand for an initial period of seven
years. The agreement establishes a minimum number of units to be purchased by
SMI during the period and grants to SMI a right of first refusal to negotiate a
license to manufacture and sell the Company's MSI products in certain regions of
Asia and in Australia and New Zealand. The distribution rights may be extended
by either party for an additional five years and may be terminated by the
Company or SMI under certain conditions.
Reimbursement
The Company's long-term commercial success in the United States is dependent
upon obtaining approval of routine payment for clinical MSI procedures by
Medicare and third-party payors. The Health Care Financing Administration, which
is responsible for the administration of Medicare, and most third-party payors
follow similar guidelines for determining whether a specific procedure or health
care technology is "reasonable" and "necessary" and, therefore, reimbursable
under Medicare or private insurance coverage. These guidelines generally include
consideration of whether (i) the procedure or technology is more or less costly
than an alternative already covered by insurance, (ii) the added benefit of the
procedure or technology is significant enough to justify the expense, and (iii)
the procedure or technology provides significant medical benefits not otherwise
available from other procedures or technologies.
Substantial data is already available to support the use of MSI and the
Company's Magnes system for presurgical functional mapping and epileptic foci
localization. This includes a number of publications in Neurosurgery and the
American Journal of Neuroradiology. The data has been successfully used by
several medical centers to receive third-party reimbursement on a case-by-case
basis. Since the first reimbursement was received in September 1993, a total of
49 insurance companies and other healthcare providers have now approved
reimbursement for MSI procedures. Although initial results are encouraging and a
number third-party payors have approved reimbursement, there is no assurance
that third-party reimbursement will become widely available.
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<PAGE> 12
In Japan, a large number of hospitals are government funded and operated. These
hospitals are paid by the JMHW only for procedures that have been approved by a
reimbursement board of the JMHW. The JMHW follows guidelines similar to those
followed by third-party payors in the U.S. in determining whether a new medical
procedure will be reimbursed by the Japanese government. Once reimbursement for
a procedure is approved by the JMHW, all hospitals, both public and private, are
reimbursed for the procedure at the same reimbursement rate. Since January 1992,
when the Magnes system received approval from the JMHW for sales in Japan as a
clinical device, Japanese public and private hospitals may purchase the system
for clinical use on patients. Reimbursement is not yet available from the
Japanese government or third-party payors, but private Japanese hospitals are
allowed to charge patients for procedures with the Magnes system. The Kyushu
University Magnes system has been designated as a Highly Advanced Medical
Technology Site by the Japanese government. This designation is required for
application to the JMHW for reimbursement. SMI, with assistance from the
Company, continues to work with medical centers in Japan in an effort to have
the JMHW establish a reimbursement level for Magnes system procedures that will
help support future purchases of the Magnes system.
In Europe, the Magnes sites have concentrated primarily on research and have not
pursued governmental or private approval for reimbursement of MSI procedures.
Product Prices, Terms of Sale and Upgrade Policy
The current prices for the Company's MSI systems range from $1.5-$2.5 million,
depending upon system configuration. Standard terms of sale provide for payment
of 40% of the purchase price upon placement of the order, 40% prior to shipment
and the remaining 20% when installation is completed. The Company may also enter
into special collaboration and sale arrangements with medical centers to promote
clinical applications development. The time between placement of an order and
installation typically ranges between six and 12 months.
Installation, Service and Training
In the medical device market, the ability to provide comprehensive and timely
service is a key competitive advantage and important for establishing customer
confidence. Installation and service for the Company's products in the United
States and Europe is provided from its San Diego headquarters and from the
Company's subsidiary in Germany, both of which maintain customer service
departments capable of performing sophisticated systems installation and
equipment maintenance. SMI has its own service capabilities in Japan to service
MSI systems sold in their distribution area.
Installation and a service agreement for the first year are provided as part of
the standard terms of sale in the United States and Europe. Thereafter, service
and maintenance are available on a time and materials basis or pursuant to a
yearly service agreement for an annual fee.
Initial customer training in the operation of the Company's MSI systems is
provided by the Company's personnel at the customer's site. Physician training
in interpreting the clinical significance of MSI information is currently
provided at the Company's cooperating United States clinical
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<PAGE> 13
sites.
Competition
Companies known to BTi that have manufactured an integrated large-array MSI
system are CTF Systems Inc., a Canadian company, Neuromag Ltd., a Finnish
company, Siemens AG, a German company, Phillips N.V., a Netherlands company and
Shimadzu, a Japanese company. To the best of the Company's knowledge, none of
these competing systems has received FDA clearance for marketing as a clinical
device in the United States. An MSI system produced by CTF Systems, Inc. has
been cleared for sale as a clinical device in Japan by the JMHW and a consortium
of companies led by Osaka Gas Ltd. is currently soliciting orders for the CTF
system. The Company believes that Siemens AG and Phillips N.V. do not currently
manufacture or market integrated large-array MSI systems. The Company believes
that the Magnes systems competes favorably with other MSI systems on the basis
of performance for detecting magnetic fields.
The Japanese government funded an extensive long-term program to develop a MSI
system by a consortium of Japanese companies coordinated by the Japan Ministry
of International Trade and Industry ("MITI"). This program is scheduled to be
terminated in 1996. Other large multinational corporations with substantial
resources available for research and development activities, including GE
Corporation, a United States company, have initiated product investigation
programs in magnetic source imaging. The Company's ability to compete
successfully against any of its current or potential future competitors will
depend upon various factors, including its ability to continue its technological
and market development leadership role and to raise the necessary capital for
further development and commercialization.
Backlog
As of September 30, 1995, the aggregate amount of firm backlog orders for the
Company's products was $9,262,000, of which the Company expects to fill
approximately $8,000,000 before September 30, 1996. The backlog is composed
primarily of orders for the new Magnes WH (See Note 2 of the Notes to the
Financial Statements in Part IV). In comparison, at September 30, 1994 and 1993,
backlog was $6,444,000 and $3,138,000, respectively. As sales of the Company's
systems products typically involve transactions of $1 million or more, the
backlog is expected to fluctuate significantly from year to year depending upon
orders received and installations completed during the reporting period.
Proprietary Core Technologies
BTi has pioneered the development of technologies associated with MSI. Among the
core technologies related to the Company's MSI system that have been developed
by and are proprietary to the Company, several, such as superconducting MSI
detectors, magnetic noise reduction, data analysis and clinically useful
displays, represent areas where the Company believes it has established a
leadership position in MSI.
Superconducting MSI Detectors
The Company's MSI detectors consist of a superconducting detection coil and an
extraordinarily sensitive amplifier called a SQUID. Superconductivity describes
the ability of certain materials, when refrigerated to near absolute zero
(-460 degrees F or -273 degrees C), to carry electricity without electrical
resistance. This property enables the
11
<PAGE> 14
detection coil to act as a noise-free antenna to pick up magnetic fields and
transfer them to the SQUID. The SQUID utilizes other unique electrical
properties of superconductors to generate readily measured voltage changes in
response to very small magnetic field changes. Together, the superconducting
detection coil and SQUID amplifier are able to detect magnetic fields that are
at least 1,000 times smaller than is possible with other magnetic field
detectors.
BTi has developed proprietary processes for fabricating highly reliable
superconducting magnetic field detectors and integrating a large number of such
detectors into complex sensors that measure magnetic fields generated by
electrical activity in the body. Sensors are comprised of the MSI detectors and
the components required to refrigerate them to their operating temperature. The
MSI detectors are refrigerated to a near absolute zero temperature with liquid
helium. Novel methods have been developed by the Company to accomplish the
necessary refrigeration without the requirement of immersing the MSI detectors
directly in liquid helium. Without this requirement, the magnetic field
detectors can be used in any orientation with respect to the body, thereby
overcoming limitations of previous designs that have prevented simultaneous
measurements on a patient lying in a horizontal position. BTi believes this
unique ability will provide a significant competitive advantage for the
Company's future MSI systems.
The Company has also developed proprietary processes for fabricating detection
coils and SQUIDs from materials that become superconducting at the temperature
of liquid nitrogen, which is significantly higher than the temperature of liquid
helium. The availability of superconducting detection coils and SQUIDs
refrigerated with liquid nitrogen would greatly simplify the design and reduce
the costs to build and operate an MSI system. The Company has built and tested
experimental magnetic detectors fabricated from superconductors operating at
liquid nitrogen temperature. While their noise properties are currently less
favorable than those obtained by using liquid helium superconductors, further
improvements may make them suitable for certain MSI applications. The Company
believes its novel high-temperature SQUID fabrication process is the only
process having the reliability and reproducibility required of a commercial
manufacturing process.
Magnetic Noise Reduction
The ability to detect the weak magnetic fields created by the body depends upon
the elimination or reduction of magnetic noise generally present in the
environment. The magnetic fields generated by the electrical activity of the
body can easily be overwhelmed by the stronger magnetic fields generated by
automobile traffic, elevators, electrical machinery or even an ordinary wrist
watch worn by a patient. The Company has developed techniques to reduce
interference from magnetic noise. The Company houses its MSI system in a
shielded room constructed according to the Company's specifications from special
alloys that reduce magnetic noise. All equipment used in the shielded room is
selected or fabricated to avoid contaminating this low-noise environment. In
addition, the configuration of the detection coils in the Company's MSI system
sharply reduces their sensitivity to magnetic fields from sources located more
than about 10 inches from the sensor, which allows the Company to focus the
sensors on the specific portion of the body being measured.
Finally, the Company's MSI sensor contains additional detectors to measure the
magnetic noise in the vicinity of the patient. Signal processing algorithms have
been developed that use this information to remove magnetic interference in the
recorded fields. The Company is investigating whether its noise reducing
algorithms could allow a reduction in magnetic shielding requirements which
could substantially lower the cost of future MSI systems.
12
<PAGE> 15
Data Analysis
The Company has developed techniques to automate the collecting and processing
of reliable clinical data according to standardized protocols. The use of
standardized protocols enables the Company's MSI system to be operated by a
trained technician and helps to ensure the reliability of the results. BTi's
proprietary software has dramatically reduced the time to compute specific
sources of electrical activity. These developments have been critical factors in
the Company's efforts at making its MSI system suitable for routine clinical
use.
In analyzing a patient's magnetic field data, it is usually assumed that the
magnetic field at any instant of time is generated by a very small region of
electrically active tissue. There are situations of potential clinical interest
in which the assumption of a single focal source of electrical activity cannot
be used, and new analysis techniques are needed. The Company has developed and
is testing techniques to extend the analysis to multi-focal and spatially
extended sources of electrical activity to address this need.
Clinically Useful Displays
Effective display of the results of an MSI examination is required to allow the
technician operator to assess the data quality and to allow the physician to
interpret the significance of the MSI results relative to the patient's
condition. The Company provides a number of displays ranging from temporal
displays, which allow the physician to determine the time sequence of events and
to overlay displays which estimate the location of the analyzed functions
relative to the patient's anatomical images provided by MRI or CT. The Company
has developed or has access to data interfaces compatible with a wide variety of
MRI and CT scanners.
Research and Development
The Company has funded its research and development of its technology programs
primarily through revenues from product sales and product-related services,
through capital raised by venture capital financing and from its public and
private sales of stock. The Company has received additional funds for research
and development through NIH grants and contracts with the Department of Defense.
During fiscal 1995, 1994 and 1993, the Company's internally funded research and
development expenses were $5,410,000, $6,725,000 and $8,255,000, respectively.
The Company does not anticipate that there will be any further reduction in the
internally funded research and development expense in fiscal 1996, but rather
that such expenditures will increase slightly to complete the development of the
Magnes WH.
Manufacturing and Materials
The Company engineers and manufactures every major component of the Magnes
system, other than the host computer and its peripherals, the magnetically
shielded room that houses the sensor, and the sensor position indicator
hardware, that determines how the sensor is oriented to the body. The Company
has complete facilities to fabricate SQUIDs from materials that become
superconductive at liquid helium and liquid nitrogen temperatures.
Of the major components of the Magnes system not manufactured by the Company,
the host computer and peripherals are widely available standard items. The other
major purchased components are constructed in accordance with Company
specifications that ensure compatibility with its MSI system. The magnetically
shielded
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<PAGE> 16
room for Magnes systems sold in the United States and Europe is currently
supplied by a subsidiary of Siemens AG. In 1991, the Company completed
development of a magnetically shielded room of its own design in cooperation
with SMI and retains an option to manufacture the room or purchase it from SMI
for sales outside the SMI distribution area. In June 1994, the Company also
entered into an agreement with a United States company to develop and
manufacture a lower cost alternative to existing magnetically shielded rooms.
The Company believes it has adequate alternate sources of supply for this major
system component from these sources and other companies.
The Company believes its current manufacturing capacity is sufficient to satisfy
present demand. In order to achieve its long-term objectives, however, the
Company will be required to expand production capabilities, mainly through
additional personnel. There can be no assurance that the Company will be able to
increase its level of output. The Company believes that its control over the
development and manufacture of its MSI system will enable it to modify its
devices to address specific needs of anticipated clinical applications without
significant dependence upon outside suppliers, manufacturers or providers of
technology.
Governmental Regulation
The Company is subject to various regulations of the FDA and of the California
Health Services. In particular, the FDA and the California Health Services have
promulgated regulations to which the Company must adhere relating to the
manufacturing standards, effectiveness and safety of the Company's diagnostic
products. The FDA regulates marketing of medical devices, requiring premarket
clearance or premarket approval based upon review of information submitted by
the Company relating to intended product use and product labeling, safety and
efficacy. The premarket clearance or approval processes are based upon risk
class and degree of equivalence to devices already marketed that are proven to
be safe and effective.
The Company filed a Section 510(k) premarket notification with the FDA in March
1990 for applications of the Magnes I system relating to the brain. In June
1990, it received clearance from the FDA to market the Magnes I system based
upon that 510(k) premarket notification. That clearance enables the Company to
market the Magnes I MSI system as a diagnostic device rather than as research
equipment. The Company is currently seeking FDA clearance of the Magnes I system
for applications relating to the heart and of the Magnes II system for
applications relating to the brain. The Company intends to file a 510(k)
premarket notification for the new Magnes WH.
Medical devices are placed in one of three classes, depending upon their use or
the degree to which they provide functions critical to sustaining life. Class I
devices are subject to general controls, including Good Manufacturing Practice
regulations, and examples of such devices are tongue depressors and hot water
bottles. Class II devices are subject to general performance standards not yet
established by regulation. General controls of Class I presently apply to Class
II devices, because no performance standards have been developed or promulgated
by the FDA for Class II devices. Examples of Class II devices are ECG and EEG.
Class III devices consist of "critical devices," those represented to be life
sustaining or life supporting, implanted in the body or presenting potential
unreasonable risk of illness or injury. Safety and efficacy must be demonstrated
and supported by clinical data submitted to the FDA for "premarket approval."
Examples are kidney dialysis systems and cardiac pacemakers. Class I and II
devices may be marketed by demonstration of "substantial equivalence" to
existing devices via a Section 510(k) premarket notification, and subsequent FDA
clearance to market. The Magnes I system has been determined under the 510(k)
process to be substantially equivalent to BTi's prior Model 607
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<PAGE> 17
Neuromagnetometer and to EEG. The Company's Magnes MSI systems are classified as
Class II, and therefore are subject to the general controls of Class I and to
performance standards that have not yet been defined for Class II devices.
The Company's continued compliance with applicable governmental regulations is
assessed by internal audits and by audits of manufacturing operations and
procedures conducted by the FDA and California Health Services. These agencies
have the authority, among other things, to limit or stop product shipments and
require product recall should a failure to comply with regulations be observed.
The Company has registered with the FDA and the California Health Services as a
medical device manufacturer. California Health Services has completed an
inspection of the Company's facilities and manufacturing processes and has
issued the Company a license which permits it to manufacture, sell and ship the
Magnes system as a medical device for diagnostic purposes. The FDA conducted an
audit of the Company to federal current Good Manufacturing Practices ("cGMP")
regulation requirements in August and September 1991. Some areas of the
Company's internal cGMP program were observed to be noncompliant with the
regulations at that time. Action to correct the observed deficiencies has been
completed and implemented, and may be verified during future FDA audits.
In addition, in order to export its products, the Company must comply with
United States export control regulations, which restrict the export of devices
containing certain of the Company's technology to certain foreign nations.
Although the export control regulations have not prohibited the Company from
exporting its MSI systems to foreign nations, there can be no assurance that the
Company will continue to be able to obtain the necessary export licenses in the
future. The Company is currently allowed to export the Magnes system to many
foreign countries, including all Western European countries and Japan, under a
general license that requires no additional approval prior to shipment.
While Western Europe and Japan have regulatory agencies that are somewhat
similar to the FDA, each country's regulatory requirements for product
acceptance are unique and will require the expenditure of substantial time,
money and effort to obtain regulatory acceptance for marketing. There can be no
assurance that the Company will be able to obtain such approvals. The Magnes I
system received approval in Japan from the JMHW in 1992 for sale as a clinical
device and Magnes II received similar JMHW approval in 1995.
Patents and Proprietary Information
The Company significantly relies on proprietary technology and seeks to maintain
confidentiality of its trade secrets, unpatented proprietary know-how and other
proprietary information and to obtain patent protection when available. As of
September 30, 1995, the Company held 35 patents in the United States. One of
these had counterpart patents issued in the United Kingdom, France, Germany, the
Netherlands and Canada and two others have counterpart patents granted by the
European Patent Organization. As of September 30, 1995 the Company had filed 9
U.S. patent applications that are in various stages of the patent prosecution
process. The Company has also filed 16 applications with the European Patent
Organization for patent protection in Western Europe, 17 applications in Japan
and three in other countries. The Company anticipates that patents, if issued,
will be issued (i) within two to 20 months with respect to the pending patent
applications in the U.S., and (ii) within three years with respect to the
pending patent applications in Western Europe. The Company, having reserved its
priority with respect to receiving patents on its applications in Japan, is
currently pursuing additional perfection of patent rights with respect to six of
these applications.
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<PAGE> 18
The Company's patents protect several fundamental aspects of the technology used
in its products. Patents have been issued with respect to superconducting
devices, ultra-low-noise electronics circuits, biomagnetometer design,
biomagnetic signal processing, magnetic shielding techniques, noise suppression
methodologies and cryogenic apparatus construction techniques. Patent
applications have been filed with respect to a new process for fabrication of
electronic devices using high-temperature superconducting materials,
superconducting device designs, magnetic shielding technology, cryogenic
refrigeration, ultra-low-noise electronic circuits, patient handling equipment
and biomagnetic signal processing and data analysis. The Company currently is
considering additional patent applications covering inventions already made in
these and related fields of technology. BTi is not aware of any infringement by
any of its products on patents issued to others.
Magnes(R) and Neuromagnetometer(R) are registered trademarks of the Company.
Ferritometer(TM), Biomagnetic Technologies(TM) (with and without the design) and
BTi(TM) are trademarks/service marks of the Company either by registration with
the State of California or by application for registration with the U.S.
Patent and Trademark Office.
Human Resources
As of September 30, 1995, the Company employed 95 full-time employees at its
facilities in San Diego, California and Germany. None of the Company's employees
is covered by a collective bargaining agreement and the Company has experienced
no work stoppages. The Company believes that it maintains good relationships
with its employees.
Financial Information
Additional financial information concerning revenues related to foreign
operations and sales to certain customers is included in Note 3 of the Notes to
Consolidated Financial Statements included in Part II, Item 8 of this report.
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<PAGE> 19
ITEM 2. PROPERTIES.
The Company's executive offices and manufacturing facilities are located in a
55,095 square foot facility at 9727 Pacific Heights Boulevard, San Diego,
California. All domestic operations of the Company are conducted from this
facility, which was first occupied in December 1989. The Company leases this
facility pursuant to an eight-and-one-half-year lease agreement which expires in
February 1998. Average monthly lease payments over the term of the lease are
approximately $39,500. The Company's subsidiary in Germany leases approximately
3,000 square feet at Gruener Weg 82, D-5100 Aachen, Germany pursuant to a
year-to-year lease agreement. Monthly lease payments are approximately $1,700.
Sales and service for the Company's European operations are conducted from the
German facility.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor its subsidiary are involved in any litigation which is
expected to have a material adverse effect on the Company's business,
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "BTIX". The following table sets forth the range of high and low closing
sales prices by quarter for the Company's Common Stock as reported by the Nasdaq
National Market for the last two fiscal years.
<TABLE>
<CAPTION>
Fiscal Year 1995 High Low
- --------------- ---- ---
<S> <C> <C>
1st Quarter $1-5/8 $ 5/8
2nd Quarter $1-3/16 $ 5/8
3rd Quarter $1-1/8 $ 11/16
4th Quarter $2-1/8 $ 13/16
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1994 High Low
- ---------------- ---- ---
<S> <C> <C>
1st Quarter $4-1/4 $2-5/8
2nd Quarter $4-1/8 $2-3/4
3rd Quarter $3-1/4 $1-5/8
4th Quarter $1-3/4 $1-5/8
</TABLE>
As of December 15, 1995, there were approximately 375 holders of record of the
Company's Common Stock.
The Company has never declared or paid dividends on its Common Stock. The
Company does not anticipate declaring any dividends on its Common Stock in the
foreseeable future and intends to retain its earnings, if any, for the
development of its business.
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<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below with respect to BTi's consolidated
statements of operations for each of the three years in the period ended
September 30, 1995 and with respect to the consolidated balance sheets at
September 30, 1995 and 1994, are derived from the audited consolidated financial
statements which are included elsewhere in this document. The statement of
operations data for the years ended September 30, 1992 and 1991 and the balance
sheet data at September 30, 1993, 1992 and 1991 are derived from audited
financial statements not included in this document. The data set forth below
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere in this document. Dollars and shares are
stated in thousands, except per-share amounts.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $ 9,196 $ 3,344 $ 4,327 $ 10,048 $ 10,191
Net loss (6,673) (10,313) (10,989) (8,700) (6,519)
Net loss per share (1) (0.27) (1.03) (1.11) (0.98) (0.92)
Shares used in computing
per share amounts(1) 24,783 9,977 9,912 8,907 7,117
</TABLE>
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------
1995 1994 1993 1992 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $10,274 $(2,114) $ 7,115 $ 17,562 $ 13,656
Total assets 20,124 9,419 14,434 26,429 24,332
Long term obligations 493 459 650 548 995
Shareholders' equity 13,368 2,283 11,970 22,787 17,080
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements describing shares
used in calculating net loss per share.
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<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
Since 1984, the primary business of the Company has been the development of MSI
systems that measure magnetic fields generated by the human body and assist in
the noninvasive diagnosis of a broad range of medical disorders. The measurement
of the body's magnetic fields by MSI provides information about the normal and
abnormal functions of the brain, heart and other organs. BTi is focusing the
development of its MSI system on large potential commercial market applications
such as brain surgery, the diagnosis and surgical planning for treatment of
epilepsy and life-threatening cardiac arrhythmias.
Fifteen Magnes systems were installed in medical and research institutions
worldwide at the end of fiscal 1995. To date, more than 4,400 MSI examinations
had been performed on patients and control subjects at the Company's application
development sites and the findings of BTi and its collaborators had been
published in 68 scientific and medical papers. Since the first reimbursement for
MSI procedures was received in September 1993, 49 insurance companies have
approved reimbursement for certain MSI procedures performed with the Company's
Magnes MSI system.
In fiscal 1995, BTi announced development of the Magnes WH, which is intended
to complement the existing Magnes I and Magnes II systems. The Magnes WH
design, when completed, will allow simultaneous examination of the entire brain
and is uniquely designed for evaluating ambulatory or critically ill patients
in a seated or fully reclined position. Simultaneous examination of portions of
both brain hemispheres has previously been accomplished with the Magnes II
system and may be useful in measuring electrical events occurring in several
different locations in the brain.
The current price of BTi's MSI systems ranges from approximately $1.5-$2.5
million, depending upon system configuration. A significant portion of the
Company's sales have been, and are expected to continue in foreign markets. The
Company generally prices its European sales in the currency of the country in
which the product is sold and the prices of such products in dollars will vary
as the value of the dollar fluctuates against the quoted foreign currency price.
There can be no assurance that currency fluctuations will not reduce the dollar
return to the Company on such sales. The Company enters into forward exchange
contracts to hedge such foreign currency exposure.
Due to substantial research and product development expenses and low unit sales,
the Company has incurred net losses every year since fiscal 1982. Since
concentrating on the development of its MSI systems in 1984, the Company's
corporate strategy and commitment of resources have focused on long-term
product, applications and market development rather than near-term operating
performance. Although considerable progress has been achieved, the Company
expects to continue to incur significant product and applications development
expenses in the foreseeable future and anticipates incurring operating losses at
least through fiscal 1996.
The Company believes the relatively small number of proven medical applications
for the Magnes system, lack of routine reimbursement for MSI procedures and
uncertainty in the U.S. market have limited system sales. Additionally, due to
the relatively recent introduction of MSI products to the market, it is not
possible to reliably
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<PAGE> 23
predict the timing and extent of future product sales. The Company does not
anticipate multiple sales to the same end-user in the near term and at current
sales volumes, the sale of one Magnes system may have a significant impact on
the results of operations of the Company during any reporting period. As a
result, quarterly and annual operating performance will continue to fluctuate.
The consolidated financial statements and notes thereto which appear in Part II,
Item 8 should be read in conjunction with the following review.
Results of Operations
Fiscal Years Ended September 30, 1995 and 1994
Fiscal 1995 results of operations improved from fiscal 1994 levels primarily as
a result of the increased volume of Magnes product sales and reduced research
and development expenses. The improvement in operating results was partially
offset by higher sales and marketing expenses, higher interest expense on
short-term debt and the extraordinary loss resulting from the conversion of
certain short-term debt to equity.
Revenues from product sales increased 172% in fiscal 1995 to $8,578,000 from
$3,158,000 in fiscal 1994 as a result of four Magnes system sales in 1995
compared to a single Magnes system sale in fiscal 1994. Product sales in both
fiscal years were composed of Magnes MSI systems and Magnes components. Sales to
SMI represented approximately 19% and 28% of total sales for fiscal years 1995
and 1994, respectively. In fiscal 1995, sales to three customers represented
32%, 32% and 12% of total sales and in fiscal 1994 sales to one customer
represented 68% of total sales.
The gross profit margin on product sales in fiscal 1995 was 47%, a 28% increase
over fiscal 1994. The improvement in gross margin was primarily the result of
volume related manufacturing efficiencies and reduction in product costs.
Research and development expenses declined 20% in fiscal 1995 to $5,410,000 from
$6,725,000 in fiscal 1994. The decline is primarily the result of lower overhead
costs associated with research and development activities and the transfer of
several people from research and development projects to sales support and
marketing activities. The decline in research and development expenses was
partially offset by an increase in materials spending associated with the Magnes
WH development program. The Company expects research and development expenses to
increase slightly in fiscal 1995 to complete the development of the Magnes WH.
Marketing and sales plus general and administrative expenses in fiscal 1995
totaled $4,670,000 versus $3,959,000 in the prior fiscal year. These expenses
represented 51% and 118% of total revenues in fiscal 1995 and 1994,
respectively. General and administrative expenses totaled $2,300,000 in fiscal
1995, representing a slight decline from fiscal 1994. Fiscal 1994 general and
administrative expenses included nonrecurring expenses of $423,000 related to an
uncompleted public offering of common stock. Considering only recurring
expenses, the increase from fiscal 1994 to 1995 in general and administrative
expenses resulted primarily from higher personnel costs and higher insurance
costs. Total marketing and sales expenses increased $740,000 over the prior
year as a result of higher expenditures for sales support and marketing
activities. This included the addition of a Vice President of Sales and
Marketing, the transfer of personnel noted above and associated program
expenses.
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<PAGE> 24
Interest expense increased to $573,000 in fiscal 1995 from $391,000 in the prior
fiscal year as a result of continued short-term debt financing and an increase
in short-term borrowing.
Fiscal Years Ended September 30, 1994 and 1993
The Company recorded a net loss of $10,313,000 in fiscal 1994 and $10,989,000 in
fiscal 1993. The decreased loss was primarily due to lower research and
development expenses, offset by lower gross margins on sales and interest
expense on short-term debt.
Revenues from product sales declined to $3,158,000 in fiscal 1994 from
$3,819,000 in fiscal 1993, a decrease of 17%. The decrease resulted primarily
from a decline in unit sales of instrumentation products. Sales of
instrumentation products declined to $53,000 in fiscal 1994 from $1,170,000 in
the previous year. The Company distributed certain instrumentation products of
another manufacturer in Europe through fiscal 1993. Future instrumentation
product sales are not expected to be significant. One Magnes system was sold in
both fiscal 1994 and fiscal 1993.
The percentage of total product sales to SMI was 28% and 8%, respectively, for
fiscal years 1994 and 1993. Additionally, sales to one customer in fiscal 1994
represented approximately 68% of total sales and sales to one customer in fiscal
1993 represented approximately 59% of total sales.
The gross profit margin on product sales in fiscal 1994 was 19% compared to 24%
in fiscal 1993. Gross margins in fiscal year 1994 were low primarily as a result
of the modest level of sales and higher manufacturing costs associated with
current year cost of sales.
Research and development expenses decreased to $6,725,000 in fiscal 1994 from
$8,255,000 in fiscal 1993, a decrease of 19%. The decline is primarily the
result of reduced applications development expenses and reduced engineering
staff and related expenses compared to fiscal 1993 levels.
Marketing and sales plus general and administrative expenses in fiscal 1994
totaled $3,959,000 versus $4,012,000 in the prior year. As a percentage of total
revenues, these expenses were 118% and 93% in fiscal 1994 and fiscal 1993,
respectively. General and administrative expenses in fiscal 1994 included
$423,000 in expenses related to a public offering of common stock that was not
completed. Fiscal 1993 general and administrative expenses included nonrecurring
charges totaling approximately $510,000 related to the replacement of the
Company's former President and Chief Executive Officer and recruitment expenses
for his successor. Marketing and sales expenses increased 5% in fiscal 1994 from
the previous year from efforts to increase market awareness for MSI applications
leading to market acceptance and increased sales. Interest expense in fiscal
1994 increased to $391,000 from $60,000 in the prior fiscal year due to
interest, fees and expenses related to the issuance of short-term debt.
Liquidity and Capital Resources
BTi has financed its operations largely through private and public sales of
equity securities. From 1984 through 1989 the Company raised aggregate proceeds
of $15.9 million in private sales of common and preferred stock. The Company
raised net proceeds of $34.1 million through an initial public offering of
common stock in July 1989 and two subsequent public offerings in June 1991 and
1992. In March 1990, the Company executed
22
<PAGE> 25
agreements with SMI resulting in net proceeds of $8.8 million from the sale of
common stock and $1.0 million from a research and development project.
In March 1995, the Company completed the private sale of 25 million shares of
common stock to Dassesta resulting in net proceeds of $14.8 million. Dassesta
had previously provided a short-term loan of $1.5 million which was repaid at
the closing of the transaction. In connection with the Dassesta financing the
Company repaid $500,000 of short-term debt and executed agreements with the
holders of $2.2 million of short-term notes providing for the extinguishment of
the note principal plus accrued interest in exchange for the issuance of 4.9
million shares of common stock plus options to purchase an additional 486,200
shares of common stock.
At September 30, 1995, the Company had working capital of $10,274,000, an
increase of $12,388,000 from the prior year. The increase in working capital is
primarily due to the Dassesta financing and the extinguishment of short-term
debt, offset by operating losses and capital expenditures. In fiscal 1995, the
Company used a credit facility to issue $2.6 million in standby letters of
credit to secure certain customer deposits, thereby eliminating short-term
restricted cash. At September 30, 1995 and 1994, working capital was reduced by
long-term restricted cash of $1.1 million, which relates to the guarantee of
certain potential future payments to the Company's President.
Capital expenditures were $453,000 in fiscal 1995 compared to $942,000 in fiscal
1994. Fiscal 1994 expenditures included the establishment of an applications
program at UCSF. The Company anticipates capital equipment expenditures will
amount to approximately $1,000,000 in fiscal 1996.
Based on the Company's current operating plans, capital and working capital
expenditures necessary to support the further development and commercialization
of the Company's products through September 30, 1996 are expected to
substantially exceed cash generated from operations and will result in a further
decline in the Company's liquidity. The Company's backlog at September 30, 1995
is composed primarily of orders for the new Magnes WH, which is scheduled for
delivery in fiscal 1996. As of September 30, 1995 the development of the Magnes
WH was not complete and shipments anticipated to commence in the first quarter
of fiscal 1996 have been delayed. The delay is the result of additional
engineering effort and time required to complete the development for the
production and shipment of systems.
The Company believes that the Magnes WH will be completed in fiscal 1996.
Although significant effort is being expended to complete the development so
that shipments can commence in fiscal 1996, there can be no assurance that this
will be accomplished. In the event such development is not completed as
anticipated, shipments could be further delayed with possible negative effects
on the cash flow and cash resources of the Company. The Company anticipates
that existing capital resources together with its potential ability to borrow
on a short-term basis will be sufficient to complete development of the Magnes
WH and to provide operating capital required to meet its obligations in the
normal course of business through fiscal year 1996.
The Company's ability to meet its expected cash needs beyond this period will be
dependent on a number of factors, including the market's acceptance and sales of
the Magnes system, which cannot be accurately predicted at this time. The
Company may also attempt to obtain additional sources of funding such as
government grants and strategic alliances with other entities. However, there
can be no assurance that additional funds will be available when needed and on
terms favorable to the Company, that grant applications will be approved or
funded, that applications of the Company's technology will be successfully
developed or that any agreements will be reached related to strategic alliances.
Should additional funding not be available, the Company would be required to
significantly reduce the scope of its operations.
23
<PAGE> 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements as of September 30, 1995 and
1994, and for each of the three years in the period ended September 30, 1995 and
the report of independent accountants are included in this report as listed in
the index on page 26 of this report (Item 14 (a)).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required for this item with respect to directors is set forth in the
sections entitled "Election of Directors" and "Compliance with Section 16(a) of
the Exchange Act" in the Company's Proxy Statement and Notice of Annual Meeting
of Shareholders to be held March 18, 1995 (the "Proxy Statement"), to be filed
with the Commission within 120 days of the Company's fiscal year end, which
sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required for this item is set forth in the section entitled
"Executive Compensation and Other Information" in the Proxy Statement, which
section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required for this item is set forth in the section entitled
"Security Ownership of Management" and "Principal Shareholders" in the Proxy
Statement, which sections are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required for this item is set forth in the sections entitled
"Executive Compensation and Other Information" and "Certain Transactions" in the
Proxy Statement, which sections are incorporated herein by reference.
25
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<S> <C>
(1) Financial Statements
Report of Independent Accountants . . . . . . . . . . . . . . . . . 32
Consolidated Balance Sheets at September 30, 1995 and 1994 . . . . . 33
Consolidated Statements of Operations for the three years
ended September 30, 1995 . . . . . . . . . . . . . . . . . . 34
Consolidated Statement of Shareholders' Equity for the three years
ended September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated Statements of Cash Flows for the three years
ended September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . 36
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 37
(2) Financial Statement Schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto
(3) Exhibits
The Exhibits listed in the accompanying Exhibit Index are filed or incorporated by
reference as part of this report.
(b) Reports on Form 8-K during the fourth quarter:
None
(c) Exhibits
</TABLE>
The following documents are exhibits to this Form 10-K:
26
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit
No. Description of Document
- --------------------------------------------------------------------------------
<S> <C>
3.1 (1) Articles of Incorporation of the Company, as amended.
3.2 (1) Bylaws of the Company, as amended.
+10.6 (4) The Company's 1987 Stock Option Plan, as amended.
+10.7 (4) Form of Incentive Stock Option and related exercise documents.
+10.8 (1) The Company's 1985 Incentive Stock Option Plan, as amended.
+10.9 (1) Form of Incentive Stock Option and related exercise documents.
+10.10 (1) The Company's 1985 Non-Qualified Stock Option Plan, as amended.
+10.11 (1) Form of Non-Qualified Stock Option and related exercise documents.
+10.12 (1) The Company's 1984 Incentive Stock Option Plan, as amended.
+10.13 (1) Form of Incentive Stock Option and related exercise documents.
10.17 (1) Option Agreement dated July 16, 1986 between the Company and Quantum
Design, Inc.
10.22 (1) Agreement to subordinate debt of S.H.E. GmbH.
+10.36 (1) Form of Indemnification Agreements for directors and officers.
10.39 (2) Purchase and Distributorship Agreement dated January 22, 1990
between the Company and Sumitomo Metal Industries, Ltd. (with
certain confidential portions omitted).
10.40 (2) Two Sets Purchase Agreement dated January 22, 1990 between the
Company and Sumitomo Metal Industries, Ltd. (with certain
confidential portions omitted).
10.41 (2) License and R & D Agreement dated January 22, 1990 between the
Company and Sumitomo Metal Industries, Ltd.
10.42 (2) Stock Purchase Agreement dated January 22, 1990 between the Company
and Sumitomo Metal Industries, Ltd.
10.43 (2) Registration Rights Agreement dated January 22, 1990 between the
Company and Sumitomo Metal Industries, Ltd.
10.45 (3) Memorandum of Understanding dated January 18, 1991 between the
Company and Sumitomo Metal Industries, Ltd. (with certain
confidential portions omitted).
10.46 (3) New R & D Program for Small MSR (Supplementary Agreement to
License and R & D Agreement) dated February 28, 1991 between the
Company and Sumitomo Metal Industries, Ltd., and Memorandum (not
dated) modifying the agreement.
10.48 (3) Exclusive Patent and Technology License Agreement dated July 15,
1991 between the Company and Stanford University (with certain
confidential portions omitted).
+10.49 (7) Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan.
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
Exhibit
No. Description of Document
- --------------------------------------------------------------------------------
<S> <C>
+10.55 (6) Employment Agreement, dated July 12, 1993, between the Company and
James V. Schumacher.
+10.56 (6) Form of Trust Agreement between the Company and James V.
Schumacher.
+10.57 (8) Amendment to Option Agreements between the Company and Stephen O.
James (numbered originally as Exhibit 10.3).
10.58 (6) Real Estate Lease, dated April 3, 1989, between the Company and
Cornerstone Income Properties, plus First and Second Amendments to
the Real Estate Lease.
10.64 (9) Form of Purchase Option Agreement, as amended.
10.67 (9) Magnetically Shielded Room (MSR) Development and Production Program
Agreement, dated June 6, 1994 (with certain confidential portions
omitted).
10.68 (6) Letter Agreement between the Company and Dassesta International S.A.
regarding the purchase of 25,000,000 Shares of Common Stock of the
Company.
10.69 (6) Loan and Security Agreement with a bank dated December 13, 1994.
10.70 (6) Schedule to Loan and Security Agreement dated December 13, 1994.
10.71 (10) Offshore Subscription Agreement between the Company and Dassesta
International S.A. (Numbered originally as Exhibit 2.1).
10.72 (10) Form of Offer Letter to Holders of 10% Secured Promissory Notes
(Numbered originally as Exhibit 2.2).
10.73 Amendment to Articles of Incorporation.
21 Subsidiary of the Company (Biomagnetic Technologies GmbH).
23 Consent of Independent Accountants -- Price Waterhouse LLP.
24 Power of Attorney.
99.1 Annual Report of the Biomagnetic Technologies, Inc. 1992 Employee
Stock Purchase Plan.
- ----------------
</TABLE>
28
<PAGE> 31
(1) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-1, Registration Statement No. 33-29095,
filed June 7, 1989, as amended by Amendment No. 1, filed June 13, 1989,
Amendment No. 2, filed July 21, 1989 and Amendment No. 3, filed July 28,
1989.
(2) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1990 Form 10-K.
(3) These exhibits were previously filed as a part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1991 Form 10-K.
(4) These exhibits were previously filed as part of, and are hereby
incorporated by, reference to the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1992 Form 10-K.
(5) These exhibits were previously filed as part of, and are hereby
incorporated by, reference to the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1993 Form 10-K.
(6) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Fiscal 1994 Form 10-K.
(7) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-1, Registration Statement No. 33-46758,
filed March 26, 1992, as amended by Amendment No. 1, filed May 8, 1992.
(8) These exhibits were previously filed as part of, and are hereby
incorporated by reference to the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-8, Registration Statement No. 33-68136
filed August 27, 1993.
(9) These exhibits were previously filed as part of, and are hereby
incorporated by reference to the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-1, Registration Statement No. 33-81294,
filed July 8, 1994.
(10) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in form 8-K, filed April 14, 1995.
+ Management contract or compensatory plan or arrangement.
Supplemental Information
Proxy materials have not been sent to shareholders as of the date of this
report. The Proxy materials will be furnished to the Company's shareholders
subsequent to the filing of this report and the Company will furnish such
material to the Securities and Exchange Commission at that time.
29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIOMAGNETIC TECHNOLOGIES, INC.
By /s/ James V. Schumacher December 21, 1995
------------------------------------------ -----------------
James V. Schumacher Date
President and Chief Executive Officer
30
<PAGE> 33
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By /s/ James V. Schumacher December 21, 1995
--------------------------------------------------- -----------------
James V. Schumacher, President and Chief Date
Executive Officer and Director
(Principal Executive Officer)
By /s/ Herman Bergman December 21, 1995
--------------------------------------------------- -----------------
Herman Bergman, Acting Chief Financial Officer Date
(Principal Financial and Accounting Officer)
By * December 21 ,1995
--------------------------------------------------- -----------------
R. Scott Asen, Director Date
By * December 21, 1995
--------------------------------------------------- -----------------
Jerry C. Benjamin, Director Date
By * December 21, 1995
--------------------------------------------------- -----------------
William C. Black, Jr., Director Date
By * December 21, 1995
--------------------------------------------------- -----------------
Martin P. Egli, Director Date
By December 21, 1995
--------------------------------------------------- -----------------
Gerald D. Knudson, Director Date
By * December 21, 1995
--------------------------------------------------- -----------------
Enrique Maso, Director Date
*By /s/ James V. Schumacher
---------------------------------------------------
James V. Schumacher
(Attorney-in-Fact)
31
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Biomagnetic Technologies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 26 present fairly, in all material
respects, the financial position of Biomagnetic Technologies, Inc. and its
subsidiary at September 30, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
November 27, 1995
32
<PAGE> 35
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,313,928 $ 753,820
Short-term investments 10,515,702
Restricted cash 1,194,539
Accounts receivable (less allowance for doubtful
accounts: 1995, $20,115; 1994, $11,886) 774,619 122,862
Inventories 2,476,794 2,022,678
Prepaid expenses and other current assets 456,106 469,125
------------ ------------
Total current assets 16,537,149 4,563,024
Property and equipment -- at cost 9,818,678 11,238,526
Less accumulated depreciation and amortization (7,894,133) (8,315,823)
------------ ------------
Net property and equipment 1,924,545 2,922,703
Restricted cash 1,100,000 1,422,300
Other assets 562,556 511,341
------------ ------------
TOTAL ASSETS $ 20,124,250 $ 9,419,368
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 786,553 $ 1,090,450
Accrued salaries and employee benefits 610,573 528,311
Accrued liabilities 1,009,430 1,057,057
Customer deposits 3,856,187 1,556,236
Notes payable to related parties 767,000
Short-term debt 1,678,000
------------ ------------
Total current liabilities 6,262,743 6,677,054
Other liabilities 493,413 459,453
------------ ------------
Total liabilities 6,756,156 7,136,507
COMMITMENTS AND CONTINGENCIES (Notes 2, 7 and 9)
SHAREHOLDERS' EQUITY
Common stock -- no par value, 60,000,000 shares authorized;
39,921,174 and 10,027,697 shares issued and outstanding 78,415,590 60,657,544
Accumulated deficit (65,047,496) (58,374,683)
------------ ------------
Total shareholders' equity 13,368,094 2,282,861
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 20,124,250 $ 9,419,368
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE> 36
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Product sales $ 8,577,777 $ 3,157,760 $ 3,818,765
Contract research 89,247 10,630 71,782
Interest income 528,987 175,742 436,224
------------ ------------ ------------
Total revenues 9,196,011 3,344,132 4,326,771
Cost of product sales 4,523,846 2,571,707 2,905,003
Contract research costs 97,376 10,543 84,780
Research and development 5,409,678 6,724,587 8,254,894
Marketing and sales 2,369,974 1,629,823 1,555,476
General and administrative 2,299,974 2,329,124 2,456,181
Interest expense 573,261 391,460 59,734
------------ ------------ ------------
Total expenses 15,274,109 13,657,244 15,316,068
------------ ------------ ------------
Loss before extraordinary loss (6,078,098) (10,313,112) (10,989,297)
Extraordinary loss from extinguishment
of short-term debt (594,715)
------------ ------------ ------------
Net loss $ (6,672,813) $(10,313,112) $(10,989,297)
============ ============ ============
Net Loss Per Share
Loss before extraordinary loss $ (.25) $ (1.03) $ (1.11)
Extraordinary loss (.02)
------------ ------------ ------------
Net loss $ (.27) $ (1.03) $ (1.11)
============ ============ ============
Weighted Average Number of
Common Shares Outstanding 24,782,800 9,977,192 9,911,967
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
34
<PAGE> 37
BIOMAGNETIC TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Accumulated
Shares Amount Deficit Total
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1992 9,883,156 $ 59,859,709 $(37,072,274) $22,787,435
Exercise of stock options 41,541 175,101 175,101
Common stock tendered upon exercise of
stock options (341) (3,111) (3,111)
Net loss (10,989,297) (10,989,297)
----------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1993 9,924,356 60,031,699 (48,061,571) 11,970,128
Exercise of stock options 15,573 20,687 20,687
Stock issued to Employee Stock Purchase
Plan participants 87,768 205,158 205,158
Issuance of options to purchase equity securities 400,000 400,000
Net loss (10,313,112) (10,313,112)
----------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1994 10,027,697 60,657,544 (58,374,683) 2,282,861
Exercise of stock options 33,000 18,480 18,480
Sale of common stock, net of issuance costs 25,000,000 14,790,880 14,790,880
Common stock issued upon debt extinguishment 4,860,477 2,948,686 2,948,686
Net loss (6,672,813) (6,672,813)
----------- ------------ ------------ -----------
BALANCE, SEPTEMBER 30, 1995 39,921,174 $ 78,415,590 $(65,047,496) $13,368,094
=========== ============ ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
35
<PAGE> 38
BIOMAGNETIC TECHNOLOGIES , INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,672,813) $(10,313,112) $(10,989,297)
Adjustments to reconcile net loss to net
cash used by operating activities:
Extraordinary loss 594,715
Depreciation and amortization 1,238,251 1,944,423 1,948,191
Interest expense 265,000 135,000
Changes in operating assets and liabilities:
Restricted cash 1,516,839 (1,516,839)
Accounts receivable (651,757) 362,261 12,687
Inventories (279,117) 1,694,965 187,002
Prepaid expenses and other current assets (36,668) (208,699) 70,170
Accounts payable (303,897) 620,216 (674,529)
Accrued liabilities 146,031 226,771 (198,741)
Customer deposits 2,299,951 1,556,236 (194,673)
Other liabilities 33,960 (190,571) 147,902
Other 68,687 28,889 (170,236)
------------ ------------ ------------
Net cash used for operating activities (1,780,818) (5,660,460) (9,861,524)
INVESTING ACTIVITIES
Change in short-term investments (10,515,702) 3,925,251 10,452,368
Capital expenditures (452,732) (941,691) (489,819)
------------ ------------ ------------
Net cash (used for) provided by investing activities (10,968,434) 2,983,560 9,962,549
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of issuance costs 14,809,360 225,845 171,990
Proceeds from short-term debt 2,318,182 2,710,000
Principal repayments on short-term debt (2,818,182) (45,734) (176,878)
------------ ------------ ------------
Net cash provided by (used for) financing activities 14,309,360 2,890,111 (4,888)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,560,108 213,211 96,137
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 753,820 540,609 444,472
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,313,928 $ 753,820 $ 540,609
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
36
<PAGE> 39
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Biomagnetic Technologies, Inc. (the "Company"), founded in 1970 as a California
corporation, is engaged primarily in the business of developing, manufacturing
and selling innovative medical imaging systems. The magnetic source imaging
("MSI") systems developed by the Company measure magnetic fields created by the
human body for the noninvasive diagnosis of a broad range of disorders.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
Biomagnetic Technologies GmbH, a wholly owned foreign subsidiary located in
Germany. The subsidiary was formed in 1978 primarily to market the Company's
products. All material intercompany balances and transactions have been
eliminated in consolidation.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash equivalents and short-term investments.
The Company invests in high grade short-term debt instruments. No losses have
been incurred related to these investments.
Foreign Currency Remeasurement
The functional currency of the Company's foreign subsidiary is the U.S. dollar.
The monetary assets and liabilities of the foreign subsidiary are translated
into U.S. dollars at the exchange rate in effect at the balance sheet date while
nonmonetary items are translated at historical rates. Revenue and expenses are
translated at the average exchange rate for the period, except cost of sales and
depreciation, which are translated at historical rates. Remeasurement gains or
losses of the foreign subsidiary are recognized currently in consolidated
income. For the years ended September 30, 1995, 1994 and 1993 such (losses)
gains totaled approximately $(96,400), $4,600 and $157,900, respectively.
Off-Balance Sheet Risk
The Company has a one year $5,500,000 letter of credit and foreign exchange
credit facility with a bank which is secured by cash and short-term investments.
The Company utilizes standby letters of credit to secure bank guarantees issued
to customers for advance deposits on sales. At September 30, 1995 the Company
has outstanding letters of credit of approximately $2,621,000.
The Company periodically enters into forward exchange contracts to hedge foreign
currency exposure associated with certain identifiable foreign currency
commitments entered into in the ordinary course of business. Gains and losses
incurred on forward contracts associated with sales orders are deferred and
included in the basis of the underlying sales transaction. At September 30, 1995
and 1994, the Company had forward exchange contracts to purchase approximately
$5,289,000 and $3,185,000 respectively, primarily in Deutsche marks, French
Francs
37
<PAGE> 40
and Austrian Schillings, at varying maturities generally within one year
and had incurred $197,000 in unrealized losses which had been deferred at
September 30, 1995.
Cash and Cash Equivalents
Cash and cash equivalents consist of short-term highly liquid investments
purchased with a maturity of three months or less. Cash equivalents are stated
at cost, which approximates market value. At September 30, 1995 cash equivalents
include a $450,000 certificate of deposit.
Short-term Investments
Short-term investments consist of U.S. Treasury securities. The Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") on a prospective basis
effective October 1, 1994. Under the provisions of SFAS No. 115, short-term
investments have been recorded at amortized cost and classified as "held to
maturity". Adoption of SFAS 115 had no material effect on the Company's
financial position or results of operations in fiscal 1995.
Inventories
Inventories are carried at the lower of cost or market. Cost is determined on
the first-in, first-out basis.
Revenue Recognition
Revenue from product sales is generally recognized at the time of shipment.
Standard terms of sale include a one year service period following the sale. The
Company defers and recognizes service revenues over the related service period.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred income tax asset or liability is established
for the expected future consequences resulting from the differences in the
financial reporting and tax basis of assets and liabilities. Deferred income tax
expense is the change during the year in the deferred income tax asset or
liability (Note 5).
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is generally computed using the straight-line method over estimated
useful lives of three to ten years. Leasehold improvements are amortized over
the related lease term.
Net Loss Per Share
Net loss per share is based on the weighted average number of shares of common
stock outstanding. Common stock equivalents are antidilutive and are excluded
from the computation of net loss per share.
38
<PAGE> 41
NOTE 2. MAGNES WHOLE HEAD SYSTEM PRODUCTION AND DELIVERY RISK
The Company's backlog at September 30, 1995 is composed primarily of orders for
the new Magnes WH, which is scheduled for delivery in fiscal 1996. As of
September 30, 1995, the development of the Magnes WH was not complete and
shipments anticipated to commence in the first quarter of fiscal 1996 have been
delayed. The delay is the result of additional engineering effort and time
required to complete the development for the production and shipment of systems.
Although significant effort is being expended to complete the development so
that shipments can commence in fiscal 1996, there can be no assurance that this
will be accomplished. In the event such development is not completed as
anticipated, shipments could be further delayed with possible negative effects
on the cash flow and cash resources of the Company. The Company incurred a net
loss of $6,672,813 for the year ended September 30, 1995 and has an accumulated
deficit of $65,047,496 as of September 30, 1995, and anticipates that capital
and working capital expenditures in fiscal 1996 will substantially exceed cash
generated from operations. However, the Company anticipates that existing
capital resources together with its potential ability to borrow on a
short-term basis will be sufficient to complete development of the Magnes WH
and to provide operating capital required to meet its obligations in the normal
course of business through fiscal year 1996.
39
<PAGE> 42
NOTE 3. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment which includes developing,
manufacturing and selling magnetic source imaging products. The following
represents information about operations in different geographic areas.
Information under the caption "U.S." represents domestic operations and
information under the caption "Europe" represents the activities of the
Company's foreign subsidiary. Revenues under the captions "Asia" and "Other"
represent export sales from the Company's domestic operations.
Sales to Sumitomo Metal Industries, Ltd., the Company's exclusive distributor
for certain portions of the Asian market, represented approximately 19%, 28% and
8% of total Company sales for fiscal years 1995, 1994 and 1993, respectively. In
fiscal 1995, sales to three customers represented 32%, 32% and 12% of total
sales. Additionally, sales to one customer in fiscal 1994 represented
approximately 68% of total sales and sales to one customer in fiscal 1993
represented approximately 59% of total sales.
<TABLE>
<CAPTION>
Years Ended September 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues
U.S $ 711,953 $ 86,675 $ 427,398
Europe 6,883,913 2,327,354 3,595,012
Asia 1,600,145 928,703 300,236
Other 1,400 4,125
------------ ------------ ------------
$ 9,196,011 $ 3,344,132 $ 4,326,771
============ ============ ============
Net (Loss) Income
U.S $ (6,439,051) $ (9,938,530) $(11,384,207)
Europe (233,762) (374,582) 394,910
------------ ------------ ------------
$ (6,672,813) $(10,313,112) $(10,989,297)
============ ============ ============
Identifiable Assets
U.S $ 17,041,388 $ 6,823,137 $ 11,888,986
Europe 3,082,862 2,596,231 2,545,235
------------ ------------ ------------
$ 20,124,250 $ 9,419,368 $ 14,434,221
============ ============ ============
</TABLE>
40
<PAGE> 43
NOTE 4. FINANCIAL STATEMENT INFORMATION
The composition of certain financial statement captions are summarized below.
<TABLE>
<CAPTION>
Inventories:
1995 1994
---- ----
<S> <C> <C>
Finished goods $ 620,990 $ 267,482
Work-in-process 1,620,147 1,544,298
Raw materials 235,657 210,898
---------- -----------
$2,476,794 $ 2,022,678
========== ===========
Inventories include an allowance for obsolescence of approximately $1,016,000
and $656,000 at September 30, 1995 and 1994, respectively.
<CAPTION>
Property and equipment:
1995 1994
---- ----
<S> <C> <C>
Machinery and equipment $6,578,793 $ 7,898,534
Office furniture and equipment 2,880,774 2,973,918
Leasehold improvements 340,313 347,336
Construction-in-process 18,798 18,738
---------- -----------
$9,818,678 $11,238,526
========== ===========
<CAPTION>
Accrued liabilities:
1995 1994
---- ----
<S> <C> <C>
Deferred revenue $ 401,269 $ 155,475
Customer obligations 319,336 190,961
Contract termination costs, short-term 304,660
Other 288,825 405,961
---------- -----------
$1,009,430 $ 1,057,057
========== ===========
<CAPTION>
Other liabilities:
1995 1994
---- ----
<S> <C> <C>
Contract termination costs, long-term $ 343,750 $ 230,237
Other 149,663 229,216
---------- -----------
$ 493,413 $ 459,453
========== ===========
</TABLE>
Supplemental Disclosure of Cash Flow Information:
In fiscal 1995, the Company issued 4,882,477 shares of common stock and options
to purchase common stock in a non-cash transaction to certain holders of
short-term debt in exchange for extinguishment of the obligations under the debt
instruments (Note 6).
During the years ended September 30, 1995, 1994 and 1993, the Company paid
interest expense of $94,430, $251,270 and $11,394, respectively.
41
<PAGE> 44
NOTE 5. INCOME TAXES
The Company has not recorded provisions for income taxes in fiscal 1995, 1994
and 1993 due to net operating losses for reporting purposes.
The components of deferred tax assets at September 30, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net operating loss carryforwards $4,302,000 $22,278,000
Research and development credits 528,000 1,660,000
Capitalized research and development costs 896,000
Allowances 524,000 467,000
Other 525,000 394,000
---------- -----------
6,775,000 24,799,000
Valuation allowance (6,775,000) (24,799,000)
---------- -----------
Deferred tax assets $ --- $ ---
========== ===========
</TABLE>
A full valuation allowance for deferred tax assets has been provided because
realization of such future tax benefits cannot be assured. The Company has
approximately $11,188,000 and $4,153,000 of Federal and State net operating loss
carryforwards which will begin to expire in 1997 if not utilized. The Company's
ability to utilize its net operating loss carryforwards is limited to
approximately $15,341,000 over the carryforward period due to a change in
ownership for tax purposes in fiscal 1995 and is reflected by a reduction in the
fiscal 1995 net operating loss carryforwards.
NOTE 6. DEBT EXTINGUISHMENT
In March and April 1995, the Company executed agreements with the holders of
$2,210,000 of short-term notes (including $850,000 to related parties) providing
for the extinguishment of the note principal plus accrued interest in exchange
for the issuance of common stock in connection with the completion of the sale
of common stock to Dassesta International S.A. ("Dassesta") (Note 8). The
conversion agreements contained similar terms to non-binding term sheets
previously negotiated with certain noteholders in November 1994. The conversion
agreements provided for i) a 10% increase in the principal balance of the notes
for purposes of conversion to common stock, ii) issuance of common stock at a
price per share utilized in the Dassesta financing less 10% and iii) a 10%
increase in the number of shares of common stock subject to purchase under
previously issued option agreements. In April 1995, the Company issued 4,882,477
shares of common stock in accordance with the conversion agreements. In fiscal
1995, the Company recorded an extraordinary loss of $594,715, representing the
excess of the fair value of common stock and options issued in connection with
the conversion over the net carrying value of the notes at conversion.
In December 1994, the Company entered into a $833,000 line of credit arrangement
with a bank. The line of credit bears interest at prime plus 2%, is secured by
substantially all of the assets of the Company and is available to be guaranteed
to the extent of $750,000 by an agency of the State of California that assists
in financing export sales. The line of credit arrangement contains certain
covenants regarding minimum net
42
<PAGE> 45
tangible assets, restrictions on further borrowing, payment of dividends,
redemption or repurchase of common stock of the Company and other restrictions.
No borrowings were outstanding under the line at September 30, 1995, which
expired in October 1995.
NOTE 7. LEASE OBLIGATIONS
The Company leases its office and production facilities and certain equipment
under noncancelable operating leases. In March 1993, the Company renegotiated
certain portions of the facility lease, extended the term through February 1998
and received an allowance for leasehold improvements. Under the previous
facility lease, the Company recorded a deferred credit to reflect the excess of
rent expense incurred over cash payments due to certain rent free periods. The
amount of the deferred rent credit at March 1993, totaling approximately
$306,000, will be amortized over the remaining lease term as a reduction of
future rent expense. The new facility lease agreement contains two renewal
options of five years each.
Future minimum cash payments under operating leases are as follows:
<TABLE>
<CAPTION>
Years Ending September 30,
<S> <C>
1996 $ 549,341
1997 552,469
1998 228,565
----------
$1,330,375
==========
</TABLE>
Total rent expense under noncancelable operating leases was $579,706, $535,508,
and $552,628, for the years ended September 30, 1995, 1994 and 1993,
respectively.
NOTE 8. SHAREHOLDERS' EQUITY
Common Stock
In March 1995, the Company completed the private sale of 25 million shares of
common stock to Dassesta resulting in net proceeds of $14,790,880 after
deducting $209,120 of issuance costs. Dassesta provided a $1,500,000 short-term
loan prior to the completion of the stock sale, which was repaid at the closing
of the transaction. As a result of the equity investment, Dassesta owns
approximately 63% of the outstanding shares of common stock of the Company at
September 30, 1995.
In April 1995, the Company issued 4,882,477 shares of common stock and certain
options to purchase common stock in connection with the extinguishment of
$2,210,000 of short-term debt (Note 6). The Company issued five-year options to
purchase 486,200 shares of common stock of the Company at $0.60 per share that
replace options previously issued in connection with the issuance of short-term
debt in fiscal 1994. At September 30, 1995, options to purchase 453,200 shares
of common stock remain outstanding and exercisable.
43
<PAGE> 46
Stock Option Plans
The Company has various incentive and non-qualified stock option plans which
provide that options to purchase up to 5,000,000 shares of common stock may be
granted to key employees and others at an option price of at least fair market
value at the date of grant. The exercise period for each option is not to exceed
10 years from the date of grant. At September 30, 1995, options to purchase
404,714 shares of the Company's common stock are exercisable and 2,821,895
shares are available for future grants under the plans. During fiscal 1995,
certain employee stock options were canceled and reissued at the fair market
value at date of grant.
The following table summarizes common stock option activity:
<TABLE>
<CAPTION>
Years Ended September 30,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of period 1,389,097 1,452,763 743,153
Granted 1,606,238 20,500 926,264
Canceled (1,140,369) (68,593) (175,113)
Exercised (15,573) (41,541)
----------- ------------ ------------
Outstanding at end of period 1,854,966 1,389,097 1,452,763
=========== ============ ============
Price range of options exercised -- $ 1.20-$1.50 $ 1.20-$6.75
Price range of outstanding options $1.00-$6.75 $1.20-$11.50 $1.20-$11.50
</TABLE>
Employee Stock Purchase Plan
The Company has established an Employee Stock Purchase Plan in which eligible
employees may use funds from accumulated payroll deductions to purchase shares
of common stock at the end of designated purchase periods. Employees may
contribute up to 15% of their base salary toward such purchases, not to exceed
$25,000 per calendar year. The purchase price is the lesser of 85% of the fair
market value of common stock determined at the beginning or end of the purchase
period. For the purchase period ended March 31, 1994 the Company issued 87,768
shares of common stock to employees at an average price of $2.34 per share. The
next purchase period will end March 31, 1996. A total of 212,232 shares of
common stock have been authorized for future purchases under the Employee Stock
Purchase Plan.
44
<PAGE> 47
NOTE 9. EMPLOYMENT AGREEMENT
In June 1993, the Board of Directors and the President agreed to certain terms
of employment. The agreement includes a potential future payment to the
President of up to $600,000 in June, 1997 based upon the price of the Company's
common stock at that date and the realized and unrealized gains incurred on
stock options granted to him. The Company accrued compensation of approximately
$150,000, $163,000 and $31,000 during fiscal 1995, 1994 and 1993, respectively,
which represents the estimated value of compensation earned based upon the price
of the Company's common stock during the fiscal year. In addition, the
employment agreement provides for the continuation of base salary payments for
two years under certain circumstances. Pursuant to terms of the employment
agreement, the Company secured these potential future payments by placing
$1,100,000 in a trust established on behalf of the President which is reported
as restricted cash in the financial statements.
45
<PAGE> 48
BIOMAGNETIC TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts on accounts
receivable:
Fiscal Year 1995 $ 11,886 $ 9,695 $ 1,466(A) $ 20,115
Fiscal Year 1994 $ 17,216 --- $ 5,330(A) $ 11,886
Fiscal Year 1993 $ 32,292 --- $ 15,076(A) $ 17,216
(A) Uncollectible accounts charged against allowance
- ---------------
Allowance for obsolete
and slow moving
inventory:
Fiscal Year 1995 $656,149 $499,281 $139,738(B) $1,015,692
Fiscal Year 1994 $592,149 $134,882 $ 70,882(B) $ 656,149
Fiscal Year 1993 $424,290 $181,704 $ 13,845(B) $ 592,149
(B) Sale or disposal of items under allowance
</TABLE>
46
<PAGE> 1
EXHIBIT 10.73
AMENDMENT TO ARTICLES OF INCORPORATION
<PAGE> 2
CERTIFICATE OF AMENDMENT
OF
FOURTH RESTATED ARTICLES OF INCORPORATION
James V. Schumacher and Peter L. Millikin certify that:
1. They are the President and Chief Executive Officer and Secretary,
respectively, of Biomagnetic Technologies, Inc., a California corporation.
2. Article IV of the Fourth Restated Articles of Incorporation of this
corporation is amended to read as follows:
"The corporation is authorized to issue one (1) class of stock to be designated
"Common Stock." The total number of shares which the corporation is authorized
to issue is Sixty Million (60,000,000) shares, of which all such shares shall be
Common Stock, without par value."
3. The foregoing amendment of Fourth Restated Articles of Incorporation has been
duly approved by the board of directors.
4. The foregoing amendment of Fourth Restated Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with Sections
902 and 903 of the California Corporations Code. The current number of total
outstanding shares of the corporation is 10,027,697 shares of Common Stock. The
number of shares voting in favor of the amendment equaled or exceeded the vote
required. The percentage vote required was more than 50% of all outstanding
shares of Common Stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of my own knowledge.
DATED: March 24, 1995
/s/ James V. Schumacher
-------------------------------------
President and Chief Executive Officer
/s/ Peter L. Millikin
-------------------------------------
Secretary
<PAGE> 1
EXHIBIT 21
SUBSIDIARY OF THE COMPANY
<PAGE> 2
BIOMAGNETIC TECHNOLOGIES, INC.
LIST OF SUBSIDIARIES
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Jurisdiction Percentage of
in which Voting Securities
Name Incorporated Owned by Parent
- --------------------------------- ------------ -----------------
<S> <C> <C>
Biomagnetic Technologies GmbH (A) Germany 100%
</TABLE>
(A) The subsidiary changed its name in October 1991. It was formerly
known as S.H.E. Kryotechnische Instrumente und Systeme GmbH.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS -- PRICE WATERHOUSE LLP
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-61057, No. 33-32260, No. 33-33179 and No.
33-68136) of our report dated November 27, 1995 appearing on page 32 of this
Form 10-K.
PRICE WATERHOUSE LLP
San Diego, California
December 20, 1995
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, BIOMAGNETIC TECHNOLOGIES, INC. (the "Corporation") intends to file an
Annual Report on Form 10-K with the Securities and Exchange Commission under the
provisions of the Securities Exchange Act of 1934, as amended.
WHEREAS, the undersigned are directors of the Corporation.
NOW, THEREFORE, the undersigned hereby constitute and appoint James V.
Schumacher and Craig S. Andrews, or either of them, as their attorneys-in-fact
to act in their place and stead and to execute and to file such Annual Report
and any amendments or supplements thereto, giving and granting to said attorneys
full power and authority to do and perform each and every act whatsoever
requisite and necessary to be done in and about the premises, with full power of
substitution, as fully to all intents and purposes as the undersigned might or
could do if personally present at the doing thereof, and hereby ratifying and
confirming all that said attorneys may or shall lawfully do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney this
30th day of November, 1995.
/s/ R. Scott Asen /s/ Martin P. Egli
----------------------------- -----------------------------
R. Scott Asen Martin P. Egli
/s/ Jerry C. Benjamin /s/ Enrique Maso
----------------------------- -----------------------------
Jerry C. Benjamin Enrique Maso
/s/ William C. Black, Jr.
----------------------------- -----------------------------
William C. Black, Jr. Gerald D. Knudson
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-1-1994
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 2,314
<SECURITIES> 10,516
<RECEIVABLES> 775
<ALLOWANCES> 20
<INVENTORY> 2,477
<CURRENT-ASSETS> 16,537
<PP&E> 9,819
<DEPRECIATION> 7,894
<TOTAL-ASSETS> 20,124
<CURRENT-LIABILITIES> 6,263
<BONDS> 0
<COMMON> 78,416
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,124
<SALES> 8,578
<TOTAL-REVENUES> 9,196
<CGS> 4,524
<TOTAL-COSTS> 4,621
<OTHER-EXPENSES> 10,080
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 573
<INCOME-PRETAX> (6,078)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,078)
<DISCONTINUED> 0
<EXTRAORDINARY> 595
<CHANGES> 0
<NET-INCOME> (6,673)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
ANNUAL REPORT OF THE BIOMAGNETIC TECHNOLOGIES, INC.
1992 EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 2
ANNUAL REPORT
For the fiscal year ended September 30, 1995
BIOMAGNETIC TECHNOLOGIES, INC.
1992 EMPLOYEE STOCK PURCHASE PLAN
(Full title of the plan)
Biomagnetic Technologies, Inc.
9727 Pacific Heights Blvd., San Diego, California 92121-3719
(Name of issuer of the securities held pursuant to
the plan and the address of its principal executive office)
<PAGE> 3
BIOMAGNETIC TECHNOLOGIES, INC.
1992 EMPLOYEE STOCK PURCHASE PLAN
Index To Financial Statements
Page
----
Report of Independent Accountants F-2
Financial Statements:
Statement of Net Assets Available for Benefits F-3
Statement of Changes in Net Assets Available for Benefits F-4
Notes to Financial Statements F-5
Schedules:
None
All schedules are omitted because they are not applicable or the required
information is shown in the Financial Statements or the notes thereto.
F-1
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Administrative Committee and Participants of the Biomagnetic
Technologies, Inc. 1992 Employee Stock Purchase Plan
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the net assets available for benefits
of the Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan (the
Plan) at September 30, 1995 and 1994 and the changes in net assets available for
benefits for the years then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Plan's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
November 27, 1995
F-2
<PAGE> 5
BIOMAGNETIC TECHNOLOGIES, INC.
1992 EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS
<TABLE>
<CAPTION>
September 30,
1995 1994
--------- ---------
<S> <C> <C>
Cash and cash equivalents $195,649 $82,180
Participant contributions receivable 4,598 5,723
--------- ---------
Net assets available for benefits $200,247 $87,903
======== =======
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE> 6
BIOMAGNETIC TECHNOLOGIES, INC.
1992 EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1994
---------- ----------
<S> <C> <C>
Participant contributions $144,358 $155,015
Interest revenue 7,164 5,772
Benefits paid (39,178) (349,594)
-------- --------
Net increase (decrease) 112,344 (188,807)
Net assets available for benefits:
Beginning of year 87,903 276,710
------ --------
End of year $200,247 $ 87,903
======== ========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE> 7
BIOMAGNETIC TECHNOLOGIES, INC.
1992 EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
Note A. Plan Description
In January 1992, the shareholders approved the establishment of the Biomagnetic
Technologies, Inc. 1992 Employee Stock Purchase Plan (the "Stock Purchase Plan")
under Section 423 of the Internal Revenue Code. The Stock Purchase Plan is
intended to provide eligible employees with the opportunity to acquire an equity
interest in Biomagnetic Technologies, Inc. (the "Company") through the
acquisition of purchase rights, implemented in a series of purchase periods as
determined by the Plan Administrator.
Generally, employees are eligible for participation in the Stock Purchase Plan
in the calendar quarter following their first 90 days of continuous employment
with the Company. After enrollment, payroll deductions are made to acquire
shares under the Stock Purchase Plan up to a maximum of the lesser of 15% of
base salary or $25,000 per calendar year. A participant may purchase a maximum
of 10,000 shares during any one purchase period and may not acquire more than 5%
of the total combined voting power of the Company. In addition, each participant
is limited to purchases of $25,000 worth of the Company's stock when combined
with any other Company stock purchase plan during any calendar year. The
purchase price of the shares is the lesser of 85% of the fair market value of
the shares on the date the purchase right is granted or 85% of the fair market
value of the shares on the date the purchase period ends. The purchase rights
may be terminated by the participant at any time and the balance in the
participant's account, including accrued interest, will be returned to the
participant. In addition, if the participant's employment is terminated, any
outstanding purchase rights are terminated and the balance in the payroll
deduction account will be returned to the participant. If the participant dies
or is permanently disabled, his estate or he shall have the option to receive
the balance in the payroll deduction account or purchase the shares at the end
of the purchase period.
The Stock Purchase Plan provides for the automatic purchase of shares from the
monies deducted from the participant's pay at the end of the purchase period,
subject to a pro-rata allocation if the Stock Purchase Plan is oversubscribed.
The Stock Purchase Plan is scheduled to terminate on December 31, 2001, unless
terminated sooner. The total number of shares authorized for future purchases
under the Stock Purchase Plan is 212,232 at September 30, 1995. The initial
purchase period ended on March 31, 1994, resulting in the issuance of 87,768
shares of common stock of the Company. The next purchase period will end March
31, 1996.
F-5
<PAGE> 8
Note B. Summary of Significant Accounting Policies
Basis of Accounting
The Stock Purchase Plan's financial statements are prepared on the accrual basis
of accounting.
Valuation of Investments
Investments consist of money market funds valued at cost, which approximates
market value. The Stock Purchase Plan's investments are held in a Company
administered bank account.
Administrative Expenses of the Plan
All expenses incurred in the administration of the Stock Purchase Plan,
including Trustee fees, are paid by the Company.
Contributions
Contributions to the Stock Purchase Plan originate from after-tax payroll
deductions of the participants.
Income Taxes
The Stock Purchase Plan was established under and is operated in compliance with
Section 423 of the Internal Revenue Code. Therefore, the Plan Administrator
believes the Stock Purchase Plan and related trust are tax exempt and, thus,
there is no provision for income taxes included in the accompanying financial
statements.
F-6
<PAGE> 9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Administrative Committee of the Biomagnetic Technologies, Inc. 1992 Employee
Stock Purchase Plan has duly caused this annual report to be signed by the
undersigned thereunto duly authorized.
BIOMAGNETIC TECHNOLOGIES, INC.
1992 EMPLOYEE STOCK PURCHASE PLAN
By: /s/ James V. Schumacher Date: December 21, 1995
--------------------------------- -----------------
James V. Schumacher
Biomagnetic Technologies, Inc.
1992 Employee Stock Purchase
Plan Administrative Committee
F-7
