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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
For the fiscal year ended September 30, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-10285
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BIOMAGNETIC TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
California 95-2647755
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
9727 Pacific Heights Boulevard, San Diego, California 92121-3719
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (619) 453-6300
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO
PAR VALUE PER SHARE
Indicate by check mark 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. [ ]
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 31,
1997 was $25,605,179, based on the closing price on that date on the Nasdaq Over
the Counter Bulletin Board.
The number of shares outstanding of the registrant's Common Stock, no par value,
as of December 31, 1997 was 53,344,123 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of Registrant's Proxy Statement and Notice of Annual
Meeting 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 are incorporated by reference into Part III of this
report.
2. Items contained in the above-referenced document which are not specifically
incorporated by reference are not included in this report.
BIOMAGNETIC TECHNOLOGIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
INDEX
PAGE
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . 19
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . 22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk. . . 29
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . 29
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . 29
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 13. Certain Relationships and Related Transactions . . . . . . . . 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
PART I
ITEM 1. BUSINESS.
Except for the historical information contained herein, the following discussion
may contain forward-looking statements that involve substantial risks and
uncertainties. The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences are
discussed in greater detail in "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations" of this report. The Company
does not undertake to update the results discussed herein as a result of changes
in risks or operating results.
COMPANY OVERVIEW
Biomagnetic Technologies, Inc. (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") systems. Since 1984, the primary business of the
Company has been the development of MSI systems to assist in the noninvasive
diagnosis of a broad range of medical disorders.
The MSI systems developed by the Company use advanced superconducting
technology to measure and locate the source of magnetic fields, generated by
the human body, 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 for
potential commercial market applications such as mapping of functional cortex
at risk during surgery for tumors and other lesions, and the diagnosis and
planning for surgical treatment of epilepsy. The Company is continuing to
investigate the potential applications of its technology for problems of the
heart, brain, spine, and gastrointestinal system.
MSI differs significantly from other existing functional and anatomical imaging
methods. The Company believes MSI is the only method that can precisely capture
and locate rapid changes in organ function without the injection of radioactive
isotopes or costly invasive procedures such as surgical placement of electrodes
into the brain. Other functional imaging methods such as electroencephalography
("EEG") or positron emission tomography ("PET") either require invasive
procedures to provide the needed accuracy of locating functional areas or
respond too slowly to capture transient physiological events. Anatomically
oriented diagnostic methods such as computed tomography ("CT") and magnetic
resonance imaging ("MRI") produce images showing cross-sectional slices of
various parts of the body. The Company's MSI system, when used in conjunction
with anatomically oriented diagnostic methods, provides the clinician with an
image that links anatomy with function to give a more complete picture of the
patient's condition without the use of radioactive isotopes or costly invasive
procedures.
According to the latest available 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
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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., Asia and Europe where various clinical applications
for MSI may be developed in addition to the area of epilepsy. The potential
commercial clinical market in the U.S. for epilepsy alone consists of more than
100 large hospitals and independent imaging centers. Notwithstanding the size of
this potential market, there is no assurance that the Company's MSI systems
will be accepted for commercial use in these hospitals and imaging centers.
Several leading medical centers worldwide have performed more than 5,000
clinical examinations on patients and control subjects with the Company's MSI
systems for the purpose of developing clinical applications, either
independently or in collaboration with BTi. Since the first third-party
reimbursement was received in September 1993, more than 100 insurance companies
and other health care providers have approved reimbursement for certain MSI
procedures performed with the Company's Magnes MSI systems. Magnes systems were
installed in 21 medical and research institutions worldwide as of September 30,
1997. Nine of these sites operate the Company's latest 148 channel Magnes 2500
WH systems including the Scripps Clinic & Research Foundation in La Jolla,
California ("Scripps"), New York University Medical Center ("NYU"), the
Institute of Medicine in Julich, Germany, the University of Magdeburg in
Magdeburg, Germany, the Max Planck Institute in Leipzig, Germany, the
University of Konstantz in Konstantz, Germany, the Communications Research
Laboratory in Tokyo, Japan, Herman Hospital at the University of Texas, Houston,
and the Institute for Research in Neurosciences and Psychiatry in Rouffach,
France. Patients have been referred to collaborating domestic sites from more
than 50 leading medical institutions throughout the United States. The other 12
sites located in the United States, Europe and Japan operate the Company's 37
channel Magnes I and the 74 channel Magnes II systems.
The Company's Magnes I, Magnes II, and Magnes 2500 WH MSI systems are 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 systems are
also being used to assist physicians specializing in epilepsy to evaluate
whether the surgical treatment of drug-resistant epileptic seizures is
appropriate by helping to locate brain tissue that triggers such seizures.
Other potential neurological applications for the Company's MSI systems include
stroke, trauma, psychiatric learning disorders and spinal cord evaluation. The
Company's MSI systems have also been 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. A new model of the Company's systems, the Magnes 1300C, was developed
specifically for measurements of heart function. Preliminary studies using the
Magnes 1300C indicate that it may also be useful for measurements of
gastrointestinal and spinal cord activity.
The Company has received 510 (k) premarket notification clearance from the Food
and Drug Administration, ("FDA") for its Magnes I, Magnes II and Magnes 2500 WH
systems allowing their use in the United States for clinical applications
involving the brain. In addition, the Company has received similar clearance for
sale of these systems as a clinical device from the Japanese Ministry of Health
and Welfare. The Company has not yet applied to the FDA or similar regulatory
agencies for clearance on the clinical use of the Magnes 1300C.
2
In December 1996, the Company reported a restructuring of its operations due to
lower short-term market projections for its MSI systems. The restructuring
resulted in a reduction of 44 employees by 1997 after completion of the final
development phases of its Magnes 2500 WH system. As part of the restructuring,
D. Scott Buchanan, Ph.D., assumed the responsibilities of President and CEO.
In June 1997, BTi entered into a collaboration with Quantum Magnetics, Inc., a
privately owned San Diego company specializing in advanced magnetic
instrumentation and systems, to form a new Company called Magnesensors Inc. BTi
and Quantum Magnetics each own 38% of the outstanding stock of the new company
and 24% of the outstanding stock is owned by the management of Magnesensors.
Magnesensors' mission is to continue the development of applications and
products utilizing high temperature superconductors. Magnesensors is privately
owned by U.S. citizens and entities and is thus eligible for a variety of
government research and development contracts and grants to fund operations.
BTi licensed certain technology, assigned certain patents and contributed cash
and certain fixed assets in connection with the formation of Magnesensors. BTi
will receive royalty-free licenses to any technology developed by Magnesensors
for use in its medical equipment.
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, the spine and peripheral nerves.
In the diagnosis and treatment of certain disorders, knowledge of the specific
location of the malfunctioning tissue is a key factor. Numerous medical imaging
technologies have been developed in response to this need. These include
imaging technologies oriented toward organ structure and anatomy, such as CT and
MRI, and imaging technologies oriented toward function, such as PET,
single-photon emission computed tomography ("SPECT") and 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 where certain radioactively labeled substances have
accumulated after having 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.
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Functional Magnetic Resonance Imaging (fMRI) is used to create images related to
localized changes in blood flow and oxygenation in the brain. While fMRI has
an advantage compared with PET and SPECT in that it does not involve injecting
radioactive substances into the body, fMRI, PET and SPECT all have a relatively
long response time that prevents observation of rapidly changing activities.
Much of the valuable diagnostic information 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 physiological
response time of PET, SPECT and fMRI is several seconds at best, critical
information about the sequence of activity, which is essential for understanding
disorders such as epilepsy 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 sometimes inserted into the body in an
attempt to obtain accurate localization of functional abnormalities in the brain
prior to surgery or heart prior to ablation procedures. This procedure is
invasive, very costly and involves risk and discomfort to the patient.
MSI TECHNOLOGY
MSI is based on a measurement of the magnetic fields produced by intracellular
electrical activity which, as discussed above, is associated with many of the
body's most critical functions. Unlike electrical activity generated by the
body, the corresponding magnetic fields pass through the body without distortion
and without obscuring the location of the source. By measuring the magnetic
fields and analyzing them to extract 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 resolution 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 costly invasive procedures.
THE MAGNES MSI SYSTEMS
The Company's current MSI systems, the single sensor Magnes I, the dual sensor
Magnes II, the whole-head Magnes 2500 and the cardiothoracic Magnes 1300C, are
integrated systems capable of measuring, analyzing and locating magnetic fields
associated with the body's electrical activity in millisecond time frames. The
Magnes II was announced in fiscal 1994 and is an enhancement of the Company's
original Magnes I 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".
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The Magnes 2500 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 and is
limited to neurological applications. This design allows simultaneous
examination of the entire brain and is designed for evaluating both ambulatory
and critically ill patients in a seated or fully reclined position.
The Magnes 1300C system employs 67 magnetic detectors installed in a sensor with
a shallow concave lower surface designed to fit the human chest, abdomen or
lower back.
The Company has received 510(k) premarket notification clearance from the United
States Food and Drug Administration (the"FDA") for its Magnes I, Magnes II and
Magnes 2500 WH systems for applications relating to the brain. In addition, the
Magnes I, Magnes II and Magnes 2500 WH systems have received approval from the
Japanese Ministry of Health and Welfare ("JMHW") for sale in Japan as a clinical
device. The Company has not yet applied to the FDA or similar regulatory
agencies for clearance on the clinical use of the Magnes 1300C. There can be no
assurance that such clearance will be obtained, when applied for.
MEDICAL APPLICATIONS
The Company believes its Magnes systems have commercial potential in the
diagnosis and treatment of neurological and other disorders. However, as a
developing medical technology, the Magnes systems face several challenges to
commercial success. Medical applications for the Magnes systems must be
developed that result in better patient care than existing technologies. The
Company has regulatory approval to sell its Magnes I, Magnes II and Magnes 2500
WH systems as clinical devices for applications relating to the brain. However,
in general, reimbursement for MSI procedures must be obtained from third party
payors and the Magnes systems must, therefore, provide a demonstrated economic
benefit to the health care provider.
Currently, the Company believes there are two medically accepted applications
for its Magnes systems, namely, presurgical functional mapping of the brain and
assistance in the diagnosis and surgical treatment planning for epilepsy.
Reimbursement from more than 100 insurance companies has been obtained for both
of these procedures combined on a case - by- case basis. However, the expected
volume of such procedures at most hospitals under current standard treatment
practices may not provide sufficient operating revenue to completely offset the
investment and operating cost of a Magnes system.
The Company believes the systems are appropriate for presurgical functional
mapping and epilepsy surgery; significant applications development and clinical
testing must be conducted before these systems can be deemed appropriate for the
other applications described below. The Company is currently focused primarily
on establishing the clinical and functional efficacy of MSI applications for
functional mapping and for epilepsy. The Company is also pursuing programs to
increase awareness of MSI technology to its target market of neurosurgeons,
neurocardiologists, neurologists, psychologists, epileptologists, and
gastroenterologists. Notwithstanding the size of the potential markets, there is
no assurance the Company's systems will be accepted for commercial use in any of
the areas mentioned.
5
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. However, by
relating information about the primary sensory function areas provided by the
Company's MSI systems to MRI-generated anatomical images, a function map of the
brain can be obtained and presented on a screen or recorded on film. Thus,
images produced with the Company's MSI systems allow the surgeon to reliably
estimate the risk of damage to the identified 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 systems, reliable and practical methods of providing a
functional map have been developed, verified and reported in several medical
journals. The Company's MSI systems allow the surgeon, hospital, insurer and
patient to more accurately assess the risk of a proposed surgery and the
possibility of improving the outcome of the surgery.
EPILEPSY SURGERY: There are approximately 1.2 million people in the United
States with recurrent epileptic seizures, and approximately 150,000 new cases
emerge each year. The seizures for many of these people can be controlled with
drugs, but a number require alternative treatments. It is estimated that there
are at least 100,000 people in the United States alone that could benefit from
surgical intervention, although, based on the most recent data published in 1993
only about 2,500 such procedures were being performed yearly due to the limited
facilities which are available and are 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 that MSI provides additional information which
is useful for locating epileptic tissue and could, in many cases, avoid invasive
evaluation procedures. The Company believes
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the necessary information can be obtained with its MSI systems in a clinically
acceptable time frame and at a cost that will allow for routine use in
evaluating patients for epilepsy surgery. The results to date suggest that the
use of the Company's MSI system would be a cost-effective alternative to
currently used invasive evaluation procedures.
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.
Research studies conducted at the Company's cooperating clinical sites show that
the Company's MSI systems are sensitive detectors 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 the
Company's MSI systems could prove 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, STROKE AND OTHER BRAIN APPLICATIONS: Ischemia and stroke are
common neurological disorders resulting from the disruption of blood supply to
the brain. The total direct cost to the U.S. health care system for treatment
and rehabilitation of stroke exceeds $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. As an indicator of neurological function, MSI
may be useful to monitor rehabilitation and treatment of stroke patients.
Recent research has also suggested that the Company's MSI systems could be
beneficial in the diagnosis of brain disorders such as Alzheimer's disease,
dyslexia, autism and schizophrenia.
CARDIOTHORACIC AND OTHER APPLICATIONS IN THE BODY
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 Magnes 1300C system can help address both challenges.
In addition, the newly developed Magnes 1300 C system might be beneficial in
evaluating other parts of the body, including applications to gastrointestinal
ischemia, spinal cord function and fetal heart monitoring. The Company has not
yet applied for clearance for clinical use of the Magnes 1300C to the FDA or
similar regulatory agencies.
CLINICAL COLLABORATIONS
The Company's primary near term objective is to accelerate the development, use
and commercialization of its MSI systems by cooperating with researchers and
physicians at key medical
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centers. The Company's MSI systems must be established by clinical researchers
as an effective tool suitable for mainstream clinical applications in order to
establish a 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.
As of September 30, 1997, the Company's MSI systems are installed for
neurological use at twenty (20) sites and nonneurological use at one (1) site
worldwide, listed in Table 1. The Company provides technical support to all of
these sites. While the sites listed in Table 1 below do not all have formalized
clinical applications development agreements with BTi, the Company benefits from
the extensive research conducted at these sites through the clinical results
disseminated to the medical community and from potential future applications
that may be developed. To date, the findings of BTi and its collaborators have
been presented in more than 75 published papers.
TABLE 1
NAME OF INSTITUTION LOCATION
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The Scripps Clinic & Research Foundation (1) United States
U.C. San Francisco Medical Center United States
New York University Medical Center United States
University of Texas, Houston United States
University of Tokyo Hospital Japan
National Institute for Physiological Sciences Japan
Kyushu University Hospital Japan
National Epilepsy Center Japan
Communications Research Laboratory Japan
National Chubu Hospital Japan
University of Muenster Germany
University of Bochum (2) Germany
Institute of Medicine-KFA Juelich Germany
University of Erlangen Germany
University of Konstantz Germany
Max Planck Institute, Leipzig Germany
University of Magdeburg Germany
University of Vienna General Hospital Austria
University of Rennes France
FORENAP Institute for Research in Neurosciences
and Psychiatry (Pending final customer acceptance) France
Karolinska Hospital Sweden
(1) Represents equipment on loan under a
collaboration agreement.
(2) Represents nonneurological site for Magnes 1300C
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MARKETING, SALES AND DISTRIBUTION
MARKET DESCRIPTION
The overall market for the Company's Magnes systems can be divided into three
overlapping segments: the basic research market, the clinical 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 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 Asia, 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 systems in routine diagnosis and therapeutic monitoring
of patients. The primary commercial clinical market in the United States
consists of approximately 450 major medical centers each with 500 or more beds
and approximately 780 hospitals each with between 300 and 500 beds. In
addition, independent imaging centers in major metropolitan areas have often
been among the first buyers of new imaging technologies, and the Company
believes this pattern may be repeated for its MSI systems. Of the top 25
neurology centers in the United States, 24 have significant and growing epilepsy
centers. There are approximately 200 epilepsy surgery centers in the United
States, Western Europe, and Asia 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 further
regulatory approvals are obtained, adequate third-party reimbursement for MSI
tests becomes routine, MSI procedure costs decline and physician and decision
makers in medical institutions conclude that MSI procedures are more beneficial
and economical than existing diagnosis and treatment methods. If the company is
unable to gain general market acceptance of its MSI systems, the Company's
business, financial condition and results of operations will be materially
adversely affected.
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
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U.S. is more than $285 billion. This amount includes the direct cost of health
care and, in the case of neurological disorders, the indirect cost of income
lost due to illness. The majority of these disorders are functional in nature
and are a major cause of disability and death. In most cases, no noninvasive
test exists to help physicians diagnose or effectively monitor the functional
activity associated with these neurological and mental illness disorders. The
Magnes systems are designed to address this need.
There is substantial medical evidence supporting the view that a significant
percentage of mental illness disorders have a physiological origin which may be
treated by pharmaceuticals. In most cases, however, it has not been possible to
detect physiological dysfunctions clearly associated with the symptoms of mental
illness. There has been no objective measure to use for the diagnosis of mental
illness, for the prescription of therapy or for measuring the effectiveness of
the therapy on the patient. MSI has demonstrated the ability to provide accurate
spatio-temporal maps of neurophysiological function which may serve as an
objective measure and, the Company believes, the Magnes systems could fulfill a
major need of physicians dealing with mental disorders. Researchers are in the
early stages of investigating MSI applications for mental illness and therefore
no reliable estimates can be made of the number of patients 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 systems by
collaborating with and promoting the work of a core group of influential medical
centers engaged in applications development. The Company plans to continue
implementation of this strategy by (i) encouraging physicians developing
applications for the Company's Magnes systems to publish their results in
professional journals, (ii) participating in key medical meetings to generate
interest among targeted medical specialists, (iii) direct mailings to encourage
communication between research groups working with the Magnes systems, (iv) site
visits by key customers, (v) public relations activities, and (vi) continuing
its patient referral program.
DISTRIBUTION
The Company has a small direct sales organization with the specialized skills
needed to sell the Company's MSI systems in the United States. The European and
Asian markets are served, respectively, by the Company's branch office in
Germany and by the biomedical division of Sumitomo Metal Industries, LTD.
("SMI") in Japan. In March 1990, the Company entered into a distribution
agreement granting SMI the exclusive rights to market, sell, distribute and
service the Company's MSI products in certain regions of Asia and in Australia
and New Zealand for an initial period of seven years. The agreement 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. This distribution agreement with SMI was extended for an additional
five (5) years on January 23, 1997 with the modification that SMI's distribution
rights outside of Japan would be non-exclusive. BTi is currently seeking
additional representation in other areas of Asia such as Korea and China.
10
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 systems for presurgical functional mapping and epileptic foci
localization. This includes a number of publications in NEUROSURGERY, AMERICAN
JOURNAL OF NEURORADIOLOGY, EPILEPSIA, ANNALS OF NEUROLOGY and THE JOURNAL OF
EPILEPSY AND BRAIN among others. The data 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, more than
100 insurance companies and other healthcare providers have now approved
reimbursement for certain MSI procedures. Although initial results are
encouraging and a number of third-party payors have approved reimbursement,
there is no assurance that third-party reimbursement will become widely
available.
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 the
Company's Magnes I and Magnes II systems received approval from the JMHW for
sales in Japan as clinical devices, Japanese public and private hospitals may
purchase the systems for clinical use on patients. Reimbursement is not yet
available from the Japanese government or Japanese third-party payors, but
private Japanese hospitals are allowed to charge individual patients privately
for procedures with the Magnes systems. The Kyushu University Magnes I system
and the National Epilepsy Center Magnes II system in Shizuoka have been
designated as Highly Advanced Medical Technology Sites by the Japanese
government. This designation is required for application to the JMHW for
reimbursement. SMI, with assistance from the Company, continues to work with
medical centers in Japan in an effort to have the JMHW establish a reimbursement
level for Magnes system procedures that will help support future purchases of
the Magnes system in Japan.
In Europe, the current Magnes sites have concentrated primarily on research and
have not pursued governmental or private approval for reimbursement of MSI
procedures.
11
PRODUCT PRICES AND TERMS OF SALE
The current prices for the Company's MSI systems range from $1.0-$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% upon shipment and
the remaining 20% when installation is completed and final acceptance is
obtained from the customer. For European customers who receive their funding
from governmental agencies, the Company is generally required to provide a bank
guarantee for the amount of the deposit which is usually released upon shipment
and/or acceptance by the customer. The time between placement of an order and
installation typically ranges between six and twelve months. The Company also
enters into special collaboration and sale arrangements with certain medical
centers to promote clinical applications development.
INSTALLATION, SERVICE AND TRAINING
In the medical device market, the ability to provide comprehensive and timely
service is a key competitive advantage and 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 branch office 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 areas.
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 and is included in
the selling price of the system. Physician training in interpreting the
clinical significance of MSI information is currently provided at the Company's
cooperating United States clinical sites.
COMPETITION
The Company operates in an industry characterized by rapid technological change.
New products using other technologies or improvements to existing competing
products may reduce the size of the potential markets for the Company's
products, and may render them obsolete or non-competitive. Competitors may
develop new or different products using technology or imaging modalities that
may provide or be perceived as providing greater value than the Company's
products. Any such development would have a material adverse effect on the
Company's financial condition and results of operations.
Additionally, there has been recently, and continues to be, ongoing significant
price competition from the Company's two current active competitors for the
currently limited number of whole head systems being purchased worldwide. This
aggressive competition is likely to affect future profit margins on sales of the
Company's whole head system, the extent of which is not presently determinable.
12
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 and Daikin, both Japanese companies. Neuromag Ltd. has received FDA
clearance for marketing one of its systems as a clinical device in the United
States. It is being marketed by Picker, Inc. in the United States and Europe,
and by Elekta in Asia. An MSI system produced by CTF Systems, Inc. has been
cleared for sale as a clinical device in Japan by the JMHW. Siemens AG and
Phillips N.V. do not currently manufacture or market integrated large-array MSI
systems. The Company believes that Magnes systems compete favorably with other
MSI systems on the basis of performance for detecting magnetic fields.
The Japanese government funded an extensive long-term program to develop an MSI
system by a consortium of Japanese companies coordinated by the Japan Ministry
of International Trade and Industry ("MITI") This program terminated in 1996
without the introduction of a developed MSI system. Other large multinational
corporations, including GE Corporation, a United States company, have initiated
product investigation programs in magnetic source imaging. The Company's
ability to compete successfully against any of its current or potential future
competitors, many of which have significantly greater financial, manufacturing,
distribution, and technical resources than the Company, will depend upon various
factors, including BTi's ability to continue its technological and market
development leadership role and raise necessary capital for further development
and commercialization.
BACKLOG
As of September 30, 1997, the aggregate amount of firm backlog orders for the
Company's products was $4,763,000, of which the Company expects to fill
approximately $4,100,000 before September 30, 1998. The backlog is composed
primarily of an order for a Magnes 2500 WH shipped, but not accepted by the
customer prior to September 30, 1997, an order for an expanded 248-channel
sensor, and service revenues on systems shipped before September 30, 1997. As of
September 30, 1997, the Company has received related advanced payments from
customers totaling $ 3,050,000. As sales of the Company's systems typically
involve transactions of $1 million or more, the backlog is expected to fluctuate
significantly from year to year depending upon timing of orders received,
installations completed and customer acceptances received during the reporting
period.
PROPRIETARY CORE TECHNOLOGIES
BTi has pioneered the development of technologies associated with MSI. Several
core technologies that have been developed by and are proprietary to the
Company, 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.
13
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 DEG.F or -273 DEG.C), to carry electricity without electrical resistance.
This property enables the detection coil to act as a noise-free antenna to pick
up magnetic fields and transfer them to the SQUID. The SQUID utilizes other
unique electrical properties of superconductors to generate readily measured
voltage changes in response to very small magnetic field changes. Together, the
superconducting detection coil and SQUID amplifier are able to detect magnetic
fields that are at least 1,000 times smaller than is possible with other
magnetic field detectors.
BTi has developed proprietary processes for fabricating highly reliable
superconducting magnetic field detectors and integrating a large number of such
detectors into complex sensors 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. Because of this innovation, the magnetic field
detectors can be used in any orientation with respect to the body, thereby
overcoming limitations of previous designs that have prevented simultaneous
measurements on the entire brain of a patient lying in a horizontal position.
BTi believes this unique ability may provide a competitive advantage for the
Company's future MSI systems. This construction technique and subsequent system
design have received U.S. patent numbers 4,827,217; 5,494,101; 5,494,033;
5,497,828; 5,441,107; 5,471,985 and Canadian patent number 2,155,076. The
Company has applied for additional patents covering innovative work.
The Company has also developed proprietary processes for fabricating detection
coils and SQUIDs from materials that become superconducting at the temperature
of liquid nitrogen, which is significantly higher than the temperature of liquid
helium. The availability of superconducting detection coils and SQUIDs
refrigerated with liquid nitrogen would greatly simplify the design and reduce
the costs to build and operate an MSI system. The Company has built and tested
experimental magnetic detectors fabricated from superconductors operating at
liquid nitrogen temperature. While their noise properties are currently less
favorable than those obtained by using liquid helium superconductors, further
improvements may make them suitable for certain MSI applications. The Company
believes its novel high-temperature SQUID fabrication process is the only
process having the reliability and reproducibility required of a commercial
manufacturing process. The use of those processes has been licensed to
Magnesensors for applications other than in medical equipment.
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
14
automobile traffic, elevators, electrical machinery or even an ordinary wrist
watch worn by a patient. The Company has developed techniques to reduce
interference from magnetic noise. The Company houses its MSI systems in a
shielded room constructed according to the Company's specifications from 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 Magnes
systems sharply reduces their sensitivity to magnetic fields from sources
located more than about 10 inches from the sensor, which allows the Company to
focus the sensors on the specific portion of the body being measured.
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.
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 to
overlay displays, which estimate the location of the analyzed functions relative
to the patient's anatomical images provided by MRI or CT. The Company has
developed or has access to data interfaces compatible with a wide variety of MRI
and CT scanners.
RESEARCH AND DEVELOPMENT
The Company has funded its product research and development primarily through
public and private sales of stock, and revenues from product sales and
product-related services. During fiscal 1997, 1996
15
and 1995, the Company's research and development expenses totaled $2,953,000,
$7,767,000 and $5,507,000, respectively. The Company substantially completed
the design of its Magnes 2500 WH system in fiscal 1996 and decreased
expenditures in 1997 as part of the Company's restructuring.
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
used to determine how the sensor is oriented to the body. The Company currently
is also purchasing its SQUID production requirements. However, through the
Company's joint ownership of Magnesensors, Inc., the Company has the ability to
fabricate SQUIDS from materials that become superconductive at liquid helium and
liquid nitrogen temperatures.
Of the major components of the Magnes system not manufactured by the Company,
the host computer and peripherals are widely available standard items. The
other major purchased components are constructed in accordance with Company
specifications that ensure compatibility with its MSI system. The magnetically
shielded rooms for Magnes systems sold in the United States and Europe are
currently supplied by two European manufacturers. 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 development of which has been completed. The Company believes it has
adequate alternate sources of supply for this major system component from these
four sources.
The Company believes its current manufacturing capacity is sufficient to satisfy
present demand. In order to achieve its long-term objectives, however, the
Company will be required to expand production capabilities, mainly through
additional 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 systems will enable it to modify its
devices to address specific needs of anticipated clinical applications without
significant dependence upon outside suppliers, manufacturers or providers of
technology.
GOVERNMENTAL REGULATION
The Company is subject to various regulations of the FDA and California Health
Services. In particular, the FDA and California Health Services have
promulgated regulations to which the Company must adhere including, but not
limited to, minimum manufacturing standards, product operating effectiveness and
functional safety of the Company's diagnostic products. The FDA regulates
marketing of medical devices, requiring premarket clearance or premarket
approval based upon review of information submitted by the Company relating to
intended product use, labeling, safety and efficacy. The premarket clearance
or approval processes are based upon risk class and degree of equivalence to
devices already marketed that are proven to be safe and effective.
16
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 devices presently apply
to Class II devices, because no performance standards have been developed or
promulgated by the FDA for Class II devices. Examples of Class II devices are
ECG and EEG. Class III devices consist of "critical devices," those represented
to be life sustaining or life supporting, implanted in the body or presenting
potential unreasonable risk of illness or injury. Safety and efficacy must be
demonstrated and supported by clinical data submitted to the FDA for "premarket
approval." Examples are kidney dialysis systems and cardiac pacemakers. Class
I and II devices may be marketed by demonstration of "substantial equivalence"
to existing devices via a Section 510(k) premarket notification, and subsequent
FDA clearance to market. The Magnes I and Magnes II systems have been
determined under the 510(k) process to be substantially equivalent to BTi's
prior Model 607 Neuromagnetometer and to EEG. The Magnes 2500 WH system has
been found to be substantially equivalent to the Magnes II system. The
Company's Magnes MSI systems are classified as Class II devices, and therefore
are subject to the general controls of Class I devices and to performance
standards that have not yet been defined for Class II devices. The Company
believes that its Magnes 1300C system will be found substantially equivalent to
previous Magnes devices. However, no such determination has been made by the
FDA.
The Company has filed, and subsequently received clearance for, Section 510(k)
premarket notifications with the FDA for applications of the Magnes I, Magnes
II and Magnes 2500 WH systems relating to the brain. That clearance enables the
Company to market the Magnes I , Magnes II and Magnes 2500 WH systems as
diagnostic devices for clinical use relating to applications of the brain rather
than research equipment. The Company has not yet applied for clearance for
clinical use to the FDA or similar regulatory agencies for the Magnes 1300C.
The Company's continued compliance with applicable governmental regulations is
assessed by internal audits and by audits of manufacturing operations and
procedures conducted by the FDA and California Health Services. These agencies
have the authority, among other rights, to limit or stop product shipments and
require product recall should a failure to comply with regulations be observed.
The Company has registered with the FDA and California Health Services as a
medical device manufacturer. California Health Services has completed an
inspection of the Company's facilities and manufacturing processes and has
issued the Company a license which permits it to manufacture, sell and ship the
Magnes systems as medical devices for diagnostic purposes. The FDA conducted
an audit of the Company for compliance with federal current Good Manufacturing
Practices ("cGMP") regulation requirements in July 1996. All areas of the
Company's internal cGMP program were observed to be in compliance with the
regulations.
In order to export its products, the Company must comply with United States
export control regulations, which restrict the export of devices containing
certain of the Company's technology to certain foreign nations. Although the
export control regulations have not prohibited the Company from exporting its
MSI systems to foreign nations, there can be no assurance that the Company will
continue to be able to obtain the necessary export licenses in the future. The
Company is currently allowed to
17
export the Magnes systems to many foreign countries, including all Western
European countries and Japan, under a general license that requires no
additional approval prior to shipment.
While Western Europe and Japan have regulatory agencies that are somewhat
similar to the FDA, each country's regulatory requirements for product
acceptance are unique and will require the expenditure of substantial time,
money and effort to obtain and maintain regulatory acceptance for marketing for
clinical use. There can be no assurance that the Company will be able to obtain
and maintain such approvals. The Magnes I system received approval in Japan
from the JMHW in 1992 for sale as a clinical device, the Magnes II system
received JMHW approval in 1995 and the Magnes 2500 WH received JMHW approval in
May 1997.
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 appropriate. As of
September 30, 1997, the Company held 43 patents in the United States. One of
these had counterpart patents issued in the United Kingdom, France, Germany, the
Netherlands and Canada and four others have counterpart patents granted by the
European Patent Organization and one other in Japan. As of September 30, 1997
the Company had filed 5 U.S. patent applications that are in various stages of
the patent prosecution process. The Company has also filed 6 applications with
the European Patent Organization for patent protection in Western Europe, 13
applications in Japan and 2 in Canada. The Company anticipates that patents, if
issued, will be issued (i) within two to 20 months with respect to the pending
patent applications in the U.S., and (ii) within three years with respect to the
pending patent applications in Western Europe. The Company has reserved its
priority with respect to receiving patents on its applications in Japan, and may
pursue those applications in due course.
The Company's patents protect several fundamental aspects of the technology used
in its products. Patents have been issued with respect to superconducting
devices, ultra-low-noise electronics circuits, biomagnetometer design,
biomagnetic signal processing, magnetic shielding techniques, noise suppression
methodologies, cryogenic apparatus construction techniques, and system design
concepts. Patent applications have been filed with respect to a new process for
fabrication of electronic devices using high-temperature superconducting
materials, superconducting device designs, magnetic shielding technology,
cryogenic refrigeration, ultra-low-noise electronic circuits, patient handling
equipment and biomagnetic signal processing and data analysis. The Company
currently is considering additional patent applications covering inventions
already made in these and related fields of technology. BTi is not aware of any
infringement by any of its products on patents issued to others. Rights to
certain of the Company's patents associated with the application of so-called
high temperature superconductors have been assigned to Magnesensors, Inc.,
partially owned by BTi and Quantum Magnetics.
Magnes-Registered Trademark- and Biomagnetic Technologies-TM- (with and without
the design) and BTi-TM- are registered trademarks of the Company by
registration with the State of California and by registration with the U.S.
Patent and Trademark Office.
18
HUMAN RESOURCES
As of September 30, 1997, the Company employed 58 full-time employees at its
facilities in San Diego, California and Germany. None of the Company's
employees are covered by a collective bargaining agreement and the Company has
experienced no work stoppages. The Company believes that it maintains good
relationships with its employees. Beginning in December 1996, the Company
restructured its operations due to lower short-term market projections for its
MSI systems, reducing its workforce by 44 full-time employees during fiscal
1997.
ITEM 2. PROPERTIES.
The Company's executive offices and manufacturing facilities are located in a
55,000 square foot facility at 9727 Pacific Heights Boulevard, San Diego,
California. All domestic operations of the Company are conducted from this
facility, which was first occupied in December 1989. The Company leases this
facility pursuant to a five year lease agreement which expires in February 2003.
Average monthly lease payments over the term of the lease approximate $50,700.
The Company's branch office in Germany leases approximately 3,000 square feet at
Gruener Weg 82, D-5100 Aachen, Germany pursuant to a year-to-year lease
agreement which expires in December 1998. Monthly lease payments are
approximately $1,900. Sales and service for the Company's European operations
are conducted from the German facility.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor its German subsidiary are involved in any litigation
which is expected to have a material adverse effect on the Company's business,
consolidated financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS.
The Company's Common Stock, formerly traded on the Nasdaq National Market under
the symbol "BTIX", was delisted as of March 10, 1997 for lack of compliance
with the net tangible assets requirement of $4 million dollars. It is currently
trading on the Nasdaq Over the Counter Bulletin Board. The following table sets
forth the range of high and low closing sales prices by quarter for the
Company's Common Stock.
Fiscal Year 1997 High Low
---------------- ---- ---
1st Quarter $ 1.00 $ .47
2nd Quarter $ .44 $ .16
3rd Quarter $ .73 $ .20
4th Quarter $ .74 $ .36
Fiscal Year 1996 High Low
---------------- ---- ---
1st Quarter $ 1.88 $ 1.00
2nd Quarter $ 1.94 $ 1.31
3rd Quarter $ 1.53 $ 1.03
4th Quarter $ 1.44 $ .75
As of December 31, 1997, there were approximately 273 holders of record of the
Company's Common Stock. The last reported closing price for the Company's Common
Stock on the Nasdaq Over the Counter Bulletin Board on January 12, 1998 was $.48
per share.
The Company has never declared or paid dividends on its Common Stock. The
Company does not anticipate declaring any dividends on its Common Stock in the
foreseeable future and intends to retain earnings, if any, for the development
of its business.
20
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, 1997 and with respect to the consolidated balance sheets at
September 30, 1997 and 1996, 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, 1994 and 1993 and the balance
sheet data at September 30, 1995, 1994 and 1993 are derived from audited
consolidated financial statements not included in this document. The data set
forth below should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this document. Dollars are
stated in thousands, except per-share amounts.
Years Ended September 30,
--------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(restated)
Total revenues $10,592 $ 733 $ 8,981 $ 3,119 $ 3,891
Net loss (5,242) (15,566) (6,673) (10,313) ( 10,989)
Net loss per share (.11) (.39) (.27) ( 1.03) ( 1.11)
Shares used in computing
net loss per share 45,790 39,950 24,783 9,977 9,912
September 30,
--------------------------------------------------
BALANCE SHEET DATA: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(restated)
Working (deficiency) capital $(2,284) $(785) $10,274 $( 2,114) $ 7,115
Total assets 6,002 16,250 20,124 9,419 14,434
Long term obligations 219 48 493 459 650
Shareholders' (deficit) equity (1,286) 854 13,368 2,283 11,970
See Note 12 of notes to consolidated financial statements included in Part II,
Item 8 regarding restatement of 1996 data.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Except for the historical information contained herein, the following
discussion may contain forward-looking statements that involve risks and
uncertainties. The Company's future results could differ materially from
those discussed here. Factors that could cause or contribute to such
differences include, but are not specifically limited to, failure to satisfy
performance obligations, timely product development, changes in economic
conditions in various markets the Company serves, uncertainty regarding the
Company's patents and propriety rights, as well as the other risks detailed
in this section. The Company does not undertake to update the results
discussed herein as a result of changes in risks or operating results.
OVERVIEW
Since 1984, the primary business of the Company has been the development of MSI
systems that measure magnetic fields generated by the human body and assist in
the noninvasive diagnosis of a broad range of medical disorders. The
measurement of the body's magnetic fields by MSI provides information about the
normal and abnormal functions of the brain, heart and other organs. BTi is
focusing the development of its MSI systems on large potential commercial market
applications such as brain surgery, the diagnosis and surgical planning for
treatment of epilepsy and life-threatening cardiac arrhythmias.
Twenty-one Magnes systems were installed in medical and research institutions
worldwide at the end of fiscal 1997. To date, more than 5,000 MSI examinations
have been performed on patients and control subjects at the Company's
application development sites. Related findings by BTi and its collaborators
have been published in more than 75 scientific and medical papers. Since the
first reimbursement for MSI procedures was received in September 1993, more than
100 insurance companies have approved reimbursement on a case-by-case basis for
certain MSI procedures performed with the Company's Magnes MSI systems.
In fiscal 1995, BTi announced development of the Magnes 2500 WH, an expansion of
the existing Magnes I and Magnes II systems product line. Development of the
Magnes 2500 WH hardware was substantially completed in fiscal year 1996. The
Magnes 2500 WH allows simultaneous examination of the entire brain and is
designed for evaluating ambulatory or critically ill patients in a seated or
fully reclined position. As of September 30, 1997 the Company had shipped eight
Magnes 2500 WH systems and received seven final acceptances from customers.
The current price of BTi's MSI systems ranges from approximately $1.0 to $2.5
million, depending upon system configuration. A significant portion of the
Company's sales have been 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
22
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 periodically enters into forward exchange contracts to partially
hedge such foreign currency exposure.
Due to substantial product research and 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 continued product development rather than near-term operating
performance. Since the development of the Magnes 2500 WH system was
substantially completed in fiscal year 1996, the Company has significantly
reduced product and applications development expenses and expects that such
expenditures will continue at comparatively reduced levels in 1998.
In December 1996, the Company reported a restructuring of its operations due to
lower short-term market projections for its MSI systems. As part of the
restructuring, D. Scott Buchanan, Ph.D. assumed the responsibilities of
President and CEO. The restructuring also resulted in a reduction of 44
employees.
The Company believes that the relatively small number of proven medical
applications for the Magnes systems, the lack of routine reimbursement for
MSI procedures and the uncertainty of product acceptance in the U.S. market
have limited system sales through fiscal 1997. Additionally, it is not
possible to reliably predict the timing and extent of future product sales
due to the uncertainties of medical applications, reimbursement and product
acceptance. The Company does not anticipate multiple sales to the same
end-user and at current sales volumes, the sale of one Magnes system may have
a significant impact on the Company's financial position and results of
operations during any reporting period. As a result, quarterly and annual
operating performance will continue to fluctuate.
RESULTS OF OPERATIONS
The consolidated financial statements and notes thereto which appear in Part II,
Item 8 should be read in conjunction with the following review:
FISCAL YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Results of operations improved in fiscal 1997 compared to fiscal 1996 primarily
due to the receipt of seven final customer acceptances of Magnes 2500 WH systems
and the Company's restructuring which began in December 1996. The restructuring
reduced headcount by 44 employees, resulting in scaling back and cost savings in
general and administrative, marketing and sales, and research and development
expenses.
Product revenues for fiscal 1997 totaled $10,131,000 as compared to $168,000 in
fiscal 1996. Increased product revenues in fiscal 1997 resulted primarily from
customer acceptances of seven Magnes 2500 WH systems. The Company's product
revenues in fiscal 1996 consisted solely of Magnes components as no Magnes
systems were accepted by customers.
23
Service revenues for fiscal 1997 totaled $395,000 as compared to $565,000 in
fiscal 1996, a decrease of 30%. The reduction in service revenue is the result
of first year service contracts on Magnes I and Magnes II systems having been
substantially completed in 1996 for units shipped in 1995. Service contracts
pertaining to the Magnes 2500 WH systems did not commence until final customer
acceptances were received in the second quarter of fiscal 1997.
Product costs totaled $6,333,000 in fiscal 1997 as compared to $2,565,000 in
fiscal 1996. Product costs increased due to sales of seven Magnes systems in
fiscal 1997 as compared to no system sales in fiscal 1996.
Research and development expenses totaled $2,953,000 as compared to $7,767,000
in fiscal 1996. The decrease of 62% is related to substantial completion of
the development of the Magnes 2500 WH system in fiscal 1996 and the Company's
restructuring in fiscal 1997 which resulted in reduced payroll and related
research and development costs.
Marketing and sales expenses totaled $1,902,000 in fiscal 1997 as compared to
$2,798,000 in fiscal 1996, a decrease of 32%. The decrease was primarily due to
the restructuring of operations, including a reduction in marketing and sales
personnel, which commenced in December 1996.
General and administrative expenses totaled $2,190,000 for fiscal 1997 as
compared to $2,958,000 for fiscal 1996, a decrease of 26% attributed to the
restructuring of the Company's operations and reduction of administrative
personnel.
Interest expense totaled $2,339,000 for fiscal 1997 as compared to $788,000
for fiscal 1996. Interest expense consisted primarily of a non-cash cost of
$2,250,000 and $750,000 in fiscal 1997 and 1996 respectively, pertaining to
the conversion feature of a note payable to shareholder. (See Note 12 to
consolidated financial statements included in Part II, Item 8).
FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995
As a result of delays in completion of the Magnes 2500 WH system development, no
systems sales were made during fiscal year 1996, which contributed to the
$8,893,000 increase in the Company's net loss as compared to fiscal 1995.
Research and development expenses increased by $2,260,000 from the prior year as
a result of increased efforts to substantially complete the development of the
Magnes 2500 WH system. In addition, marketing and sales expenditures increased
in fiscal 1996 as compared to fiscal 1995 as a result of the Company's increased
efforts to obtain additional sales contracts in the highly competitive and
limited market in which the Company operates. General and administrative
expenses increased primarily as the result of the $319,000 write-off of certain
patent costs related to the Company's Magnes II system that had been previously
capitalized but are no longer considered to have value due to the Company's
decision to focus primarily on the production of the Magnes 2500 WH system. The
Company will, however, produce Magnes II systems in the future as orders are
received. There can be no assurance that any such orders will be received in
the future.
24
Revenue from product sales and service decreased 92% in fiscal 1996 to $733,000
from $8,981,000 in fiscal 1995. Revenue in fiscal 1996 consisted of service and
components revenue and no Magnes system sales, as compared to fiscal 1995, in
which revenue consisted of both service and components revenue and four Magnes
II systems sales. Sales to SMI represented approximately 6% and 19% of total
sales for fiscal years 1996 and 1995, respectively.
The $2,398,000 excess of production costs over product sales is primarily
attributable to an approximate $900,000 increase in the Company's provision for
obsolescence associated with the Magnes II systems. This provision was made in
light of the Company's decision to focus primarily on the production of the
Magnes 2500 WH system. The Company will resume production of Magnes II systems
in the future if orders are received. However, there can be no assurance that
any such orders will be received in the future.
Research and development expenses increased by 41% in fiscal 1996 to $7,767,000
from $5,507,000 in fiscal 1995. This increase was primarily attributable to the
Company's decision to substantially complete development of the Magnes 2500 WH
system, which included development of a prototype unit that was installed at
Scripps in July 1996. Additionally, $554,000 was incurred in fiscal 1996 under
collaborative agreements with UCSF and Scripps for applications development
performed on behalf of the Company. The Company anticipates that future
expenditures under these collaborative agreements will be reduced to less than
$150,000 on an annual basis.
Marketing and sales expenses increased 18% in fiscal 1996 to $2,798,000 from
$2,370,000 in fiscal 1995. This increase was attributable to higher
expenditures for sales support and marketing activities, including an increase
in salary, travel and trade show expenses.
General and administrative expenses increased 29% in fiscal 1996 to $2,958,000
from $2,300,000 in fiscal 1995. This increase was primarily the result of the
write-off of $319,000 in patent costs that related to the Magnes II system
previously included in other assets determined to no longer have value due to
the Company's decision to focus primarily on the production of the Magnes 2500
WH system.
Interest expense increased 38% in fiscal 1996 to $788,000 from $573,000 in
fiscal 1995 as the net result of a $750,000 non-cash interest charge in 1996
related to the conversion feature of the note payable to shareholder entered
into in August 1996, and the conversion of short-term notes in exchange for the
issuance of common stock that occurred in fiscal 1995.
The Company recorded a net loss of $15,566,000 in fiscal 1996 and $6,673,000 in
fiscal 1995. The increased loss was primarily due to lack of system
acceptances, increased research and development expenses, increased marketing
and sales expenses, and additional production costs, including the increase in
the Company's provision for inventory obsolescence as well as the write-off of
patent costs.
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
25
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 and service increased in fiscal 1995 to $8,981,000
from $3,119,000 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 the total sales for fiscal years
1995 and 1994, respectively. In fiscal 1994 sales to one customer represented
68% of total sales.
The gross profit margin on product sales in fiscal 1995 was 49%, a 28% increase
over 1994. The improvement in gross margin was primarily the result of volume
related manufacturing efficiencies and reduction in production costs.
Research and development expenses declined 18% in fiscal 1995 to $5,507,000 from
$6,735,000 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 was
partially offset by an increase in materials spending associated with the Magnes
WH development program.
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 52% and 127% 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company's current liabilities exceeded current
assets, resulting in a working capital deficiency of $2,284,000. At September
30, 1996, the Company had a working capital deficiency of $785,000. The net
increase in the working capital deficiency is primarily due to the release of
customer deposits that were being held as restricted cash until the final
acceptances of the Magnes 2500 WH systems which reduced the deficiency, offset
by negative cash flows from operations and the $2,250,000 of debt discount
amortization on the convertible note payable to shareholder, which increased the
deficiency. Restricted cash similarly decreased from $6,585,000 to $692,000 as
a result of these final acceptances and payment of executive termination costs.
Cash and cash equivalents and short-term investments, exclusive of any
restricted cash, declined by $1,267,000 to $1,229,000 at September 30, 1997. The
Company's operations were funded by existing cash and short-term
26
investment resources, the release of restricted cash, and a working capital loan
from Dassesta, a principal shareholder.
Capital equipment expenditures totaled $145,000 in fiscal 1997 compared to
$577,000 in fiscal 1996. The Company anticipates that capital equipment
expenditures will amount to less than $100,000 in fiscal 1998.
BTi has financed its operations largely through private and public sales of
equity and debt securities. In August 1996, the Company entered into a loan
agreement with Dassesta International S.A. ("Dassesta") for $3,000,000 bearing
interest at 9% per annum, maturing in February 1997. Under the terms of the
agreement , the note plus accrued interest was convertible at the option of the
company into common shares upon execution of the agreement at $.40 per share or
by Dassesta upon the earlier of maturity, default, or significant change in
ownership of BTi at $.40 per share. The Company converted the $3,000,000 loan
principal and related accrued interest of $87,040 into 7,717,602 shares of the
Company's common stock on December 31, 1996.
In May 1997, the Company entered into a loan facility with Dassesta
International, S.A. ("Dassesta"), the Company's then controlling shareholder.
The loan facility provides for maximum borrowings of $1,700,000 and expires on
December 31, 1998. Interest accrues on outstanding principal at 10% and is
payable on December 31, 1997 and 1998. The loan is collateralized by certain of
the Company's accounts receivable and requires principal repayment upon
collection of such receivables. As of September 30, 1997, the Company had
$975,000 outstanding under the loan which was repaid subsequent to year end.
(see Notes 1 and 8 to consolidated financial statements included in Part II,
Item 8.)
In December 1997, the Company sold 4,000,000 unregistered shares of common stock
to Dassesta and 1,500,000 additional unregistered shares of common stock to Bank
Leu under Regulation S at .50 per share. Consideration received by the Company
in relation to the common stock sales consisted of cash totaling $793,000 and
cancellation of its loan principal of $1,700,000, related accrued interest of
$38,000 and accounts payable of $219,000, all owed to Dassesta.
Based on the Company's current operating plans, capital and working capital
expenditures necessary to support the on-going development and
commercialization of the Company's products through September 30, 1998 are
expected to substantially exceed cash projected to be generated from
operations. Management is currently negotiating with several private overseas
investors, including Dassesta and members of the Company's Board of Directors
to obtain further equity financing. The Company hopes to raise such
additional equity financing and anticipates meeting its obligations in the
normal course of business through fiscal 1998. However, there can be no
assurance that the Company will be able to obtain such additional financing.
Without such additional financing, there is substantial doubt concerning the
Company's ability to operate as a going concern. The Company believes that
its current cash including the proceeds from the December 1997 sale of
5,500,000 unregistered shares of common stock is sufficient to support its
operating needs through February 1998. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty and
27
asset and liability carrying amounts do not purport to represent realizable
settlement values. (See "Risks and Uncertainties")
RISKS AND UNCERTAINTIES
To date the Company has been engaged principally in research and development
activities, and has made only low volume sales to medical research institutions.
The Company incurred net losses of $5,242,000, $15,566,000, and $6,673,000 in
fiscal 1997, 1996, and 1995, respectively and has reported losses in every year
since 1982. The Company also has negative cash flows from operations of
$2,032,000, $12,808,000 and $4,402,000 in fiscal 1997, 1996, and 1995,
respectively. At September 30 1997, the Company has an accumulated deficit of
$85,855,000 and a working capital deficiency of $2,284,000. Management
anticipates that capital and working capital requirements in fiscal 1998 will
substantially exceed cash projected to be generated by operations.
The Company currently anticipates that its existing capital resources, including
the net proceeds from the December 1997 sales of stock to Dassesta and Bank Leu
and the reduction in the scope of its operations will be sufficient to provide
operating capital required to meet its obligations in the normal course of
business through February 1998.
The Company is dependent on its current Magnes 2500 WH system as its principal
product for which there are currently limited clinical applications. Additional
clinical applications development needs to be conducted with the MSI system at
major medical centers before the Company can begin to penetrate the commercial
clinical market. There can be no assurance that a commercial market will
develop for diagnostic or monitoring uses of the MSI system. A continued lack of
clinical applications and commercial market for the Company's Magnes 2500 WH
system would have a material adverse impact on the Company's financial position,
results of operations, and cash flows.
The Company's commercial success is also highly dependent on the availability of
reimbursement for procedures using the MSI system. To date reimbursements from
third party payors are on a case-by-case basis. As of December 31, 1997, there
have been limited reimbursements from third party payors in the U.S. Although
the number of third party payors making reimbursements has increased, there is
no assurance that third party reimbursements will become widely available.
Reimbursements are not currently provided for MSI procedures by the United
States government, nor is there any assurance that the U.S. government will
authorize or budget for such procedures in the future. If widespread
availability of reimbursement from government and private insurers is not
achieved, the Company's financial position, results of operations and cash
flows would be materially adversely affected. The Company also cannot predict
what legislation relating to its business or the health care industry may be
enacted in the future, including legislation relating to third party
reimbursement, or what effect such legislation may have on its financial
position, results of operations and cash flows.
The industry in which the Company operates is characterized by rapid
technological change. New products using other technologies or improvements to
existing products may reduce the size of the potential markets for the Company's
products, and may render them obsolete or non-competitive. Competitors may
develop new or different products using technology or imaging modalities that
may
28
provide or be perceived as providing greater value than the Company's products.
Any such development could have a material adverse effect on the Company's
financial condition, results of operations and cash flows.
Additionally, there has been recently, and continues to be, ongoing significant
price competition from the Company's competitors for the currently limited
number of whole head systems being purchased worldwide. This aggressive
competition is likely to affect future profitability of the Company's Magnes
2500 WH system, the extent of which is not presently determinable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements as of September 30, 1997 and
1996, and for each of the three years in the period ended September 30, 1997 and
the reports of independent accountants are included in this report as listed in
the index on page 31 of this report ( Item 14 (a)).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Information required for this item is set forth in Form 8-K dated September 26,
1997 and filed with the Securities and Exchange Commission on October 2, 1997
and is incorporated by reference as part of this report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required for this item with respect to directors and executive
officers is set forth in the sections entitled "Election of Directors",
"Security Ownership of Management-Business Experience of Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy
Statement and Notice of Annual Meeting of Shareholders "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.
29
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.
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants. . . . . . . . 38
Report of Independent Accountants . . . . . . . . . . . . 39
Report of Independent Accountants on Financial
Statement Schedule. . . . . . . . . . . . . . . . . . . . 40
Consolidated Balance Sheets at September 30, 1997 and
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Operations for the three years
ended September 30, 1997. . . . . . . . . . . . . . . . . 42
Consolidated Statement of Shareholders' (Deficit) Equity
for the three years ended September 30, 1997. . . . . . . 43
Consolidated Statements of Cash Flows for the three years
ended September 30, 1997. . . . . . . . . . . . . . . . . 44
Notes to Consolidated Financial Statements. . . . . . . . 45
(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:
A Current Report on Form 8-K dated September 26, 1997 was filed by the
Company on October 2, 1997 reporting the change in the Company's
independent accountants.
(c) Exhibits
The following documents are exhibits to this Form 10-K:
31
Exhibit
No. Description of Document
3.1 (1) Articles of Incorporation of the Company, as amended.
3.2 (1) Bylaws of the Company, as amended.
3.3 (10) Amendment to the Articles of Incorporation (numbered originally as
10.73)
+10.6 (4) The Company's 1987 Stock Option Plan, as amended.
+10.7 (4) Form of Incentive Stock Option and related exercise documents.
+10.8 (1) The Company's 1985 Incentive Stock Option Plan, as amended.
+10.9 (1) Form of Incentive Stock Option and related exercise documents.
+10.10 (1) The Company's 1985 Non-Qualified Stock Option Plan, as amended.
+10.11 (1) Form of Non-Qualified Stock Option and related exercise documents.
+10.12 (1) The Company's 1984 Incentive Stock Option Plan, as amended.
+10.13 (1) Form of Incentive Stock Option and related exercise documents.
10.17 (1) Option Agreement dated July 16, 1986 between the Company and Quantum
Design, Inc.
10.22 (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.
32
No. Description of Document
10.48 (3)Exclusive Patent and Technology License Agreement dated July 15, 1991
between the Company and Stanford University (with certain
confidential portions omitted).
+10.49 (7) Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan.
Exhibit
+10.55 (6) Employment Agreement, dated July 12, 1993, between the Company and
James V. Schumacher.
+10.56 (6) Form of Trust Agreement between the Company and James V. Schumacher.
+10.57 (8) Amendment to Option Agreements between the Company and Stephen O.
James (numbered originally as Exhibit 10.3).
10.58 (6) Real Estate Lease, dated April 3, 1989, between the Company and
Cornerstone Income Properties, plus First and Second Amendments to
the Real Estate Lease.
10.64 (9) Form of Purchase Option Agreement, as amended.
10.67 (9) Magnetically Shielded Room (MSR) Development and Production Program
Agreement, dated June 6, 1994 (with certain confidential portions
omitted).
10.68 (6) Letter Agreement between the Company and Dassesta International S.A.
regarding the purchase of 25,000,000 Shares of Common Stock of the
Company.
10.69 (6) Loan and Security Agreement with a bank dated December 13, 1994.
10.70 (6) Schedule to Loan and Security Agreement dated December 13, 1994.
10.71 (11) Offshore Subscription Agreement between the Company and Dassesta
International S.A. (Numbered originally as Exhibit 2.1).
10.72 (11) Form of Offer Letter to Holders of 10% Secured Promissory Notes
(Numbered originally as Exhibit 2.2).
10.73(12) Offshore Note Purchase Agreement between the Company and Dassesta
International, S.A. dated August 13, 1996.
10.74(12) Convertible Advance Promissory Note with Dassesta International
S.A.
10.75 Extension of Sumitomo Metal Industries, Ltd. dated January 23, 1997.
21 Subsidiary of the Company (Biomagnetic Technologies, Gmbh)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Price Waterhouse LLP
24 Power of Attorney.
27.1 Financial Data Schedule-1997
27.2 Financial Data Schedule-1996 (restated)
33
(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 Fiscal 1995 Form 10-K
(11) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Company's Current Report on Form 8-K, filed
April 14, 1995.
(12) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in Fiscal 1996 Form 10-K
+ Management contract or compensatory plan or arrangement.
34
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.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIOMAGNETIC TECHNOLOGIES, INC.
By /s/ D. Scott Buchanan January 14, 1998
--------------------- ----------------
D. Scott Buchanan Date
President, Chief Executive Officer
36
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By /s/ D. Scott Buchanan January 14, 1998
--------------------- ----------------
D. Scott Buchanan Date
President, Chief Executive Officer
Director
By /s/ Herman Bergman January 14, 1998
------------------ ----------------
Herman Bergman Date
Vice President Finance, Chief Financial Officer,
Chief Accounting Officer, Corporate Secretary
By * January 14, 1998
----------------
Jerry C. Benjamin, Director Date
By * January 14, 1998
----------------
Martin P. Egli, Director Date
By * January 14, 1998
----------------
Enrique Maso, Chairman of the Board Date
By * January 14, 1998
----------------
James V. Schumacher, Director Date
*By /s/ D. Scott Buchanan
---------------------
D. Scott Buchanan
(Attorney-in-Fact)
37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Biomagnetic Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of Biomagnetic
Technologies, Inc. (a California corporation) and subsidiary as of September
30, 1997, and the related consolidated statements of operations,
shareholders' (deficit) equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Biomagnetic Technologies,
Inc. and subsidiary as of September 30, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from
operations, has net capital and working capital deficiencies and short-term
liquidity concerns that raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II-Valuation and Qualifying
Accounts is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial
statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects, as of and for the year ended
September 30, 1997, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
San Diego, California /s/ ARTHUR ANDERSEN LLP
December 19, 1997
38
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Biomagnetic Technologies, Inc.:
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of changes in shareholders' (deficit) equity and of
cash flows as of and for each of the two years in the period ended September
30, 1996 (appearing on pages 41 through 44 of the Biomagnetic Technologies,
Inc. Form 10-K) present fairly, in all material respects, the financial
position, results of operations and cash flows of Biomagnetic Technologies,
Inc. and its subsidiary as of and for each of the two years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our 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. We have not
audited the consolidated financial statements of Biomagnetic Technologies,
Inc. for any period subsequent to September 30, 1996.
The accompanying consolidated financial statements referred to above have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the consolidated financial statements, the Company has
suffered recurring losses from operations and has an accumulated deficit that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also discussed in Note 1.
The consolidated financial statements referred to above do not include any
adjustments that might result form the outcome of this uncertainty.
As discussed in Note 12 to the consolidated financial statements, the Company
has restated certain 1996 balances to comply with a March 1997 announcement
by the staff of the Securities and Exchange Commission on accounting for
convertible securities having beneficial conversion features.
/s/ PRICE WATERHOUSE LLP
San Diego, California
January 10, 1997, except as to Note 12, which is as of December 19, 1997
39
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Biomagnetic Technologies, Inc.:
Our audits of the consolidated financial statements of Biomagnetic