UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC, 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
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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 ______________________
Commission File Number 1-10285
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4-D NEUROIMAGING
(Exact name of registrant as specified in its charter)
California 95-2647755
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(State or other jurisdiction of (IRS Employer
incorporation 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 (858) 453-6300
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Per Share
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock (which consists solely of shares
of Common Stock) held by non-affiliates of the registrant as of December 20,
2000 was $5,097,198 based on the closing price on that date on the Nasdaq Over
the Counter Bulletin Board. Shares of Common Stock held by each officer,
director, and holder of 10% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The number of shares outstanding of the registrant's Common Stock, no par value,
as of December 20, 2000 was 84,975,008 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of Registrant's Definitive Proxy Statement, to be
filed not later than 120 days after September 30, 2000 pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, in
connection with the 2001 Annual Meeting of Shareholders are
incorporated by reference into Part III of this report where indicated.
2. Certain Exhibits filed with the Registrant's prior registration
statements and reports are incorporated herein by reference into Part
IV of this report.
4-D NEUROIMAGING
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
INDEX
Page
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PART I
Item 1. Business.................................................................... 3
Item 2. Properties.................................................................. 20
Item 3. Legal Proceedings........................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......................... 21
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters........ 21
Item 6. Selected Financial Data..................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................... 28
Item 8. Financial Statements and Supplementary Data................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................... 28
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 28
Item 11. Executive Compensation...................................................... 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 28
Item 13. Certain Relationships and Related Transactions.............................. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 29
Signatures.................................................................. 32
PART I
ITEM 1. BUSINESS.
This Annual Report on Form 10-K may contain forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from any
forward-looking statements and from past performance as a result of such risks
and uncertainties. See the "Factors That May Affect Future Results" section of
this Annual Report.
COMPANY OVERVIEW
4-D Neuroimaging, (formerly Biomagnetic Technologies, Inc.), a California
corporation, ("the Company", "4-D", "we", "us" and "our") was established in
1970 to produce specialized instruments for ultra-sensitive magnetic field and
low temperature measurements. These products were supplied to physicists for
basic research. The Company has been developing its core magnetic sensing
technologies since the early 1970s and has incorporated these technologies into
its Magnetic Source Imaging ("MSI") systems. Since 1984, the primary business of
the Company has been the development of MSI systems that locate and measure
magnetic fields generated by the human body, and assist in the noninvasive
diagnosis of a potentially broad range of medical disorders. These measurements
provide useful information about the normal and abnormal functioning of the
brain, heart, spine and other organs. Currently, the Company is focusing its
efforts on MSI applications for the brain.
The Company is experiencing serious liquidity issues and incurred a net loss of
$8,127,000 and negative cash flows from operations of $5,217,000 in fiscal 2000.
At September 30, 2000, the Company had an accumulated deficit of $106,413,000, a
net capital deficiency of $3,720,000 and a working capital deficiency of
$14,186,000. On December 29, 2000, the Company did not make payment at maturity
of a note payable with principal and accrued interest of approximately $11.9
million. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Notes to Consolidated Financial
Statements for additional information with respect to 4-D Neuroimaging's fiscal
2000 performance and its current liquidity issues.
MSI systems use advanced superconducting technology to non-invasively detect and
characterize naturally occurring magnetic fields that are one billion times
smaller than the earth's magnetic field. This capability can be utilized to
measure the typically very rapid changes in these magnetic fields, such as from
the brain, effectively in real-time - i.e. thousands of times a second. The
Company has successfully identified the usefulness of this technology in the
evaluation and planning for surgical treatment of epilepsy, and the
identification of important functional areas of the brain, e.g. motor and
language-related cortex, that can be at risk during neurological surgery for
tumors and other brain lesions. The Company and certain of its customers are
continuing to investigate the value of the technology for the diagnosis of other
disorders of the brain, such as dyslexia, stroke, mild head trauma,
schizophrenia, depression and other neuropsychiatric disorders, as well as for
problems of the heart, spine, and gastrointestinal system. To date, 4-D, its
competitors and clinical researchers have identified a limited number of
clinically validated diagnostic applications for MSI systems.
MSI differs significantly from other anatomical and functional imaging methods.
Traditional medical imaging technologies such as X-ray, magnetic resonance
imaging (MRI) and computed tomography (CT) provide valuable anatomical detail,
but no direct functional information. Functional imaging methods such as
electroencephalography (EEG), positron emission tomography (PET), single proton
emission tomography (SPECT) and functional MRI (fMRI) have limited spatial or
temporal resolution, or require invasive procedures, such as the injection of
radioactive isotopes or surgical placement of electrodes into the brain, to
locate normally or abnormally functioning areas of the brain. We believe that
MSI is the only method that can noninvasively characterize the normal and
abnormal function of the brain with the high temporal and spatial resolution
necessary to be clinically useful in a wide range of applications. An MSI
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system, when used in conjunction with CT and MRI images, provides the clinician
with information that links anatomy with function to provide a more complete
picture of the patient's condition without the use of radioactive isotopes or
costly invasive procedures.
PRODUCT AND MARKET DEVELOPMENT
In the mid-1980s, 4-D determined that a market for the use of MSI systems in the
diagnosis of neurological and neuropsychiatric disorders was developing. In the
late `80s and early 90s, we released the first clinically-useful MSI systems,
the Magnes I and Magnes II systems. In 1996 we released the Magnes 2500 WH
system, our first "whole head" instrument designed for evaluating brain
function. This versatile product is appropriate for both clinical and basic
research applications. Subsequently we released the Magnes 1300 C, a system for
clinical research in the diagnosis of cardiac and other organ diseases. Since
then, the Company has developed the advanced Magnes 3600 WH for basic research
in neurological and neuropsychiatric disorders. In December 1999, 4-D acquired
all of the issued and outstanding capital stock of Neuromag Oy, one of its main
competitors which is located in Helsinki, Finland, thereby adding the
Vectorview-TM- and Neuromag-TM- systems, which have a strong presence in the
research market, especially in Japan. Similar to 4-D, Neuromag Oy is engaged in
the research, development and manufacturing of MSI systems. 4-D operates
Neuromag Oy as a subsidiary of 4-D and offers both product lines to its
customers. Both product lines will be offered through common distribution
channels throughout the world. See our discussion under "Liquidity and Capital
Resources" under Part II, Item 7 for additional information regarding the
acquisition.
As part of its market development strategy, the Company has targeted as
near-term clinical applications for MSI, the evaluation of patients with
epilepsy who are surgical candidates, and the pre-surgical functional mapping
("PSFM") of patients who are candidates for surgery that would endanger
important functional areas of the brain. MSI systems are being used to assist
physicians specializing in epilepsy to evaluate and surgically treat
drug-resistant epileptic patients by making the process of locating the brain
tissue that triggers such seizures more accurate and efficient. The systems are
also being used for planning the surgical removal of brain tumors and vascular
malformations in order to reduce the risk of neurological injury that might
result in paralysis and expensive rehabilitation therapy.
In the United States alone there are over 100 tertiary care epilepsy centers
that the Company has identified and believes could benefit from the use of MSI
technology. The Company continues to direct its marketing and sales efforts
towards these centers as potential customers for MSI systems in the U.S. These
centers are typically affiliated with academic medical institutions with large
neurosurgical programs that would also benefit from the PSFM application. In
addition, the Company believes there is an equivalent number of epilepsy/PSFM
centers with similar needs throughout the rest of the world.
To assist in the development of these market applications, we have in the past
three years, helped sponsor clinical research efforts to validate the
effectiveness of MSI as a diagnostic tool primarily at Henry Ford Hospital in
Detroit, Michigan and Hermann Hospital in Houston, Texas.
The Company has been seeking to obtain reimbursement authorization approval for
MSI procedures from insurers and health care providers. Since the initial third
party reimbursement was received in September 1993, more than 200 insurance
companies and other health care providers have approved reimbursement for
certain MSI procedures performed with the Magnes, Neuromag and Vectorview
systems. Expanding this reimbursement acceptance continues to be a priority for
the Company over the next fiscal year. The Company will work with leading
institutions in the treatment of epilepsy to establish the efficacy of MSI in
the surgical evaluation of epilepsy patients as well as in PSFM. An important
milestone for reimbursements is to receive a Common Physician Terminology
("CPT") code from the American Medical Association ("AMA"). The establishment
and use of a CPT code makes the reimbursement procedure easier for the physician
and payor. In October 2000, a petition was filed by the
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American Academy of Neurology requesting from the AMA the establishment of a CPT
code for the use of MEG in epilepsy. A review typically takes a year or more
before approval is considered. There can be no guarantee regarding the outcomes
of these efforts.
CURRENT MEDICAL IMAGING TECHNOLOGY
Many debilitating or life threatening disorders of the body, such as stroke,
seizures, dementia, movement disorders, mental illness, cardiac arrhythmias and
gastrointestinal disorders involve a disruption of function. Because electrical
activity plays a critical role in many functions of the body, such activity is
frequently monitored as a means to diagnose functional disorders. The
electrocardiogram ("ECG") and EEG are recordings of electrical activity of the
heart and brain used to obtain information about heart and brain functions,
respectively. Electrical activity is also recorded to diagnose functional
disorders of skeletal muscles, the spine and peripheral nerves.
In the diagnosis and treatment of certain disorders, knowledge of the specific
location of the malfunctioning tissue is a key factor. Numerous medical imaging
technologies have been developed in response to this need. These include imaging
technologies oriented toward organ structure and anatomy, such as CT and MRI,
and imaging technologies oriented toward function, such as PET, SPECT and 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 or there may be multiple structural problems that make
the identification of the problematic location difficult.
Other imaging technologies have been developed specifically to show the location
of certain functional areas. PET and SPECT produce cross-sectional pictures
showing the location where certain radioactively labeled substances have
accumulated after having been injected into the body. Two measures of cell
function, relative levels of metabolic activity and regional blood flow, are
determined by measuring the amount of radiation emitted by different tissues
after administration of the appropriate radioactive tags by the physician.
The technique of fMRI is used to create images related to localized changes in
blood flow and oxygenation in the body. 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 physiological
response time of one to five seconds, which prevents observation of rapidly
changing activities. However, much of the valuable diagnostic information
observed in electrical activity in the body occurs in intervals much less than
one second, typically milliseconds, and is spontaneous in nature. Because of
this technical deficiency, critical information about the sequence of activity,
which is essential for understanding functional disorders such as epilepsy, is
unavailable from these technologies.
Conventional ECG and EEG have a faster response time than fMRI, PET and SPECT,
and provide critical information about the sequence of electrical activity, but
generally lack the ability to locate the source of such activity with sufficient
accuracy to guide diagnosis and 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 recording electrodes on the body
surface. For this reason, electrodes are often surgically implanted into the
brain in an attempt to obtain accurate localization of functional abnormalities
prior to surgery. Prior to ablation procedure, catheters may be surgically
inserted into the heart. These procedures are invasive, generate patient
discomfort, are very costly and involve potentially serious risk of infection
and tissue damage.
MSI TECHNOLOGY
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MSI is based on fundamental properties of electromagnetism. Electrical currents
by their nature produce magnetic fields that are perpendicular to flow of
current; these fields can in turn be detected by our technology. An MSI
instrument detects 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 potentials generated by the body, which
EEG and ECG are based upon, the corresponding magnetic fields are physically
able to pass through surrounding body tissue undistorted and without obscuring
the location of the source. MSI can non-invasively provide information about the
location of the origin of normal and abnormal functional activity, by measuring
and analyzing these magnetic fields. MSI can do this with a combination of
millimeter spatial resolution and millisecond time resolution that has not been
previously available without the use of surgically implanted electrodes,
introducing radioactive or other tracer substances into the body or the use of
other costly, invasive procedures.
THE 4-D MSI SYSTEMS
The Company's MSI systems - the whole-head Magnes 2500 WH, 3600 WH, Neuromag and
Vectorview, and the Magnes 1300 C that is designed for the rest of the body -
are systems consisting of superconducting detection coils and amplifiers called
Superconducting Quantum Interference Devices ("SQUIDs"). Integrated with each
system is a patient support chair/bed and patient monitoring systems isolated
from environmental magnetic fields within a Magnetically Shielded Room ("MSR"),
and a control console, electronic components, stimulus generating devices for
PSFM and analysis workstations in a surrounding suite. These systems, as well as
the older 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 "Patents, Know-How and Proprietary
Rights").
The Magnes 2500 WH system employs a total of 148 magnetometers or gradiometers
(magnetic detectors) incorporated into a sensor unit with a helmet shaped recess
that is placed over the patient's head. The Magnes 3600 WH is almost identical
to the 2500 WH except 248 magnetic detectors are incorporated within it. The
Neuromag system employs two planar gradiometer at each of either 61 or 102
locations with a helmet shaped recess. The Vectorview system employs two planar
gradiometers and a magnetometer at each of 102 locations within a helmet shaped
recess. Such systems are designed for neurological applications. This design
permits examination of the entire brain at once and can evaluate both ambulatory
and critically ill patients in seated or fully reclined positions.
The Magnes 1300 C system employs 67 magnetometers or gradiometers installed in a
sensor unit with a shallow concave lower surface designed to fit the human
chest, abdomen or lower back. This system is designed to measure the functional
activity of cardiac, gastrointestinal or other organ systems of the body and is
also design to be used to assess fetal activity.
MEDICAL APPLICATIONS
The Company believes its Magnes, Neuromag and Vectorview systems have commercial
potential in the diagnosis and treatment of a variety of neurological and other
disorders. However, as a developing diagnostic technology, MSI technology faces
several economic hurdles to commercial success. Sufficient numbers of diagnostic
applications capable of generating cost savings or improved patient care as
compared to competitive techniques need to be available in order for large
numbers of hospitals and clinics to consider purchasing Magnes systems.
Reimbursements for MSI procedures must be obtained from third party payors and
evidence of routine approvals of reimbursements for clinical MSI procedures by
third party payors must be available.
Currently, 4-D believes there are two medically accepted applications for its
MSI systems; planning of surgical treatment for epilepsy, and presurgical
functional mapping of the brain. To date,
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reimbursements from more than 200 insurance companies have been obtained for
both procedures on a case-by-case basis. However, the expected volume of such
procedures at many hospitals under current standard treatment practices may not
provide sufficient operating revenue to completely offset the investment and
operating cost of a MSI system.
Significant clinical research needs to be conducted before MSI systems can be
deemed appropriate for the other applications described below. The Company has
focused primarily on establishing the clinical and functional efficacy of MSI
applications for epilepsy and functional mapping. We are pursuing programs to
increase awareness of MSI technology in its target markets of neurosurgeons,
electrophysiologists, neurologists, psychologists, and epileptologists. There
can be no assurance that 4-D's systems will be accepted for commercial use in
any of the areas mentioned in the foreseeable future.
EPILEPSY SURGERY
As of 1995 there were approximately 2.3 million people in the United States with
recurrent epileptic seizures, with approximately 181,000 new cases emerging
annually. The seizures for many of these people can be controlled with drugs,
but a number require alternative treatments. It is estimated that at least 25
percent of the total epilepsy population have persistent seizures despite
medical treatment, and could possibly benefit from surgical intervention. In
1993, only about 2,500 such procedures were performed. While there has been no
subsequent reliable data published, the Company believes, based on its
discussions with practitioners in the field, that the rate of surgical
interventions has steadily increased and will continue to do so in the near
future.
Over the past decade, a number of research studies have demonstrated that MSI
can noninvasively locate brain tissue suspected of triggering epileptic
seizures. It is this tissue which is the target of epilepsy surgery. In the
absence of a noninvasive method, it is often necessary to implant an array of
electrodes directly on or into the brain to locate this tissue. The invasive
evaluation approach requires lengthy hospitalization in facilities that are
equipped for long-term intensive monitoring of patients, 24 hour nursing care
and participation of a highly trained team of specialists. To date, the cost and
relative scarcity of appropriate facilities for this long-term monitoring
procedure severely limit the number of patients who can benefit from a surgical
approach to epilepsy treatment.
Recent medical literature shows that the information provided by MSI could, in
many cases, improve or even help avoid invasive evaluation procedures. The
Company believes the necessary information can be obtained with its MSI systems
in a clinically acceptable time frame, and at a cost that will allow for routine
use in evaluating patients for epilepsy surgery. In the past three years, the
Company has been working with several epilepsy centers in the U.S. to look at
the effectiveness of MSI in epilepsy in a prospective clinical trial.
PRESURGICAL FUNCTIONAL MAPPING
According to recent statistics, approximately 110,000 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 of the brain vary among healthy
individuals and even more widely among patients with large brain lesions, and
the locations can not be reliably determined solely from anatomical imaging such
as MRI. However, by relating information about the primary sensory function
areas provided by the Company's MSI systems to MRI-generated anatomical images,
a functional map of the brain can be obtained and presented on a screen or
recorded on film. Images thus produced with the Company's MSI systems allow the
surgeon to reliably estimate the risk of damage to the identified functional
areas that might arise from the surgery itself. These images also help the
surgeon to select the best surgical approach, such as where to open the skull,
and from which direction to access the targeted area to minimize the surgical
risk.
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Using the Company's MSI systems, reliable and practical methods of providing a
functional map of the brain have been developed and verified. The functional
areas of the brain that can be localized by MSI include; somatosensory cortex,
motor cortex, visual cortex, auditory cortex and language-related cortex. These
results have been reported in a number of peer-reviewed medical journals.
NEUROPSYCHIATRIC APPLICATIONS
Potential neuropsychiatric applications of MSI include schizophrenia and
depression. It is currently estimated that approximately 3,000,000 people (1
percent of the U.S. population) will develop schizophrenia during the course of
their lives, and at any given time approximately 100,000 people are hospitalized
in public institutions in the U.S. A number of studies indicate that MSI can
detect differences in the brain activity in schizophrenics compared to normal
subjects. The variety and robustness of the differences suggest that MSI may
eventually provide an objective indicator of the disease and be useful for
monitoring treatment. Likewise, depressive illness affects a large number of
adults in the U.S., more that 19,000,000 people each year. Preliminary studies
suggest that MSI may provide an objective indicator of the disease and lead to
more effective treatment.
APPLICATIONS TO LEARNING DISORDERS
Potential applications in learning disorders include dyslexia and autism.
Dyslexia affects between 4 and 10 percent of the population throughout the
world. PET and fMRI studies have indicated differences in metabolic activity in
dyslexic adults compared to normal subjects, however direct evidence of abnormal
neurological function in dyslexia is lacking. Recently, evidence has been
presented from research groups in the U.S. and Europe that MSI may provide a
sensitive and specific objective indicator of the reading disability in
dyslexia. Autism is the third most common developmental disorder and affects
nearly 400,000 people in the U.S. Recently, a subpopulation of children with
autism has been identified that have normal early development, followed by an
autistic regression and who show a distinct MSI pattern of brain activity. The
preliminary data suggest that identification of such patients by MSI may lead to
therapeutic strategies that lead to significant improvement in language and
autistic features.
OTHER NEUROLOGICAL APPLICATIONS
Other applications areas in which MSI may have clinical value include ischemic
disease and stroke, mild brain trauma and Alzheimer's disease.
Ischemia and stroke are common neurological disorders resulting from the
disruption of blood supply to the brain. Each year in the U.S., more than
700,000 people suffer a major cerebrovascular event. The total direct cost to
the U.S. health care system for treatment and rehabilitation of stroke exceeds
$30 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.
It is estimated that approximately 1,000,000 people experience traumatic brain
injury each year in the U.S., of which approximately 400,000 seek medical
attention. In mild brain trauma, significant structural changes are rarely seen,
and functional EEG changes are typically mild and diffuse. MSI may be more
sensitive than EEG and MRI in identifying brain dysfunction in such patients and
correlate well with symptomatic recovery.
Alzheimer's disease affects an estimated 4,000,000 million people in the U.S.
Current diagnostic technologies, PET, SPECT and EEG are not widely accepted as
being valid diagnostic or prognostic indicators of the disease. Preliminary
indications suggest that MSI may show altered responses to sensory stimuli in
Alzheimer's patients, thus providing a tool for diagnosis and treatment.
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APPLICATIONS IN THE BODY
Preliminary studies indicate that MSI could be beneficial in evaluating areas of
the body outside the central nervous system. The various parts of the body that
might be evaluated with MSI include the gastrointestinal tract (gastrointestinal
ischemia), spinal cord function (lower back pain) and adult and fetal heart
monitoring (cardiac arrythmias and fetal development).
SALES TO DATE; CLINICAL COLLABORATIONS
The Company's primary near term objective is to cooperate with researchers and
physicians at key medical centers to accelerate the development, use and
commercialization of its MSI systems. The use of the Company's MSI systems must
continue to be validated by clinical researchers as an effective tool for
mainstream clinical applications in order to establish a commercial market.
Accordingly, the early clinical research sales and collaborations with clinical
sites are strategically important to the Company's overall market development
plan.
As of December 2000, the Company has fifty-three systems installed throughout
the world. Installations are distributed among the United States, Germany,
Austria, Spain, France, Finland, Japan, Taiwan, and China. Fourteen sites
operate the Company's 148-channel Magnes 2500 WH system. Twelve sites operate
the Company's 37-channel Magnes I and 74-channel Magnes II systems. Two sites
operate a Magnes 1300 C system. Ten sites operate a Neuromag 122 system. Seven
sites operate a Neuromag System 204. Eight sites operate a Vectorview system.
MARKETING, SALES AND DISTRIBUTION
MARKET DESCRIPTION
The overall market for the Company's MSI systems can be divided into three
overlapping segments: the basic research market, the clinical research market
and the commercial clinical market. Customers in each market segment are
identified by the focus of their work, the source of purchase funds, and other
characteristics, as described below.
The basic research market consists of scientists working in university and
government laboratories to discover new information about organ function and to
make fundamental advances in their scientific fields. Patient treatment is not
their principal concern. Equipment used by these scientists is generally
purchased with funds provided by government and private research grants. The
basic research market has been to date, and continues to represent, the majority
of the Company's sales.
The clinical research market consists primarily of university medical centers
where the majority of clinical applications development work for new medical
technologies and procedures is normally conducted. Because of their size, buying
power, prestige, and early involvement in assessing and using new medical
technologies, university 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 that are centers of
excellence in neurosurgery, neurology neurophysiology, neuroradiology and
psychiatry.
The potential commercial clinical market for MSI systems, if applications for
various neurological diseases in addition to epilepsy could be developed,
includes hospitals and clinics that could use the MSI systems in routine
diagnosis and therapeutic monitoring of patients. The primary commercial
clinical market in the United States consists of approximately 450 major medical
centers each with 500 or more beds and approximately 780 hospitals each with
between 300 and 500 beds. In addition, independent imaging centers in major
metropolitan areas have often been among the first buyers of new imaging
technologies, and the Company believes this pattern may be applicable for its
MSI systems. Of the top 25 neurology
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centers in the United States, 24 have significant and growing epilepsy centers.
There are approximately 200 epilepsy surgery centers in the United States,
Western Europe and Asia which could be candidates for the Company's MSI systems.
Sales to the commercial clinical market are expected to develop when further
regulatory approvals are obtained, adequate third-party reimbursement for MSI
tests becomes routine, MSI procedure costs decline, and physician and decision
makers in medical institutions conclude that MSI procedures are more beneficial
and economical than existing diagnosis and treatment methods. If the Company is
unable to gain general market acceptance of its MSI systems, the Company's
business, financial position and results of operations will be materially
adversely affected.
The National Institute of Health (NIH) has estimated that there are
approximately 90 million cases annually of neurological and mental illness
disorders in the U.S. Each case represents a separate incident of such disorders
and not necessarily separate patients. In most cases, diagnostic methods for
these disorders remain inadequate. According to NIH estimates, the annual cost
associated with these neurological and mental illness disorders in the U.S. is
more than $285 billion. This amount includes the direct cost of health care and,
in the case of neurological disorders, the indirect cost of income lost due to
illness. The majority of these disorders are functional in nature and are a
major cause of disability and death. In most cases, no noninvasive test exists
to help physicians diagnose or effectively monitor the functional activity
associated with these neurological and mental illness disorders. The Magnes
systems are designed to address this need.
There is substantial medical evidence supporting the view that a significant
percentage of mental illness disorders have a physiological origin that can be
treated by pharmaceuticals or other methods. Currently there are few objective
measures of these physiological problems, making diagnosis and treatment,
including measuring the effectiveness of the treatment, problematic. MSI has
demonstrated the ability to provide accurate spatio-temporal maps of
neurophysiological function that might serve as an objective measure, improving
the clinical process. 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 such as
schizophrenia and depression. Other researchers are investigating learning and
behavioral disorders, such as dyslexia and autism. As yet, no reliable estimates
can be made of the number of patients in these categories who might be aided by
information provided by the Magnes system. However, if the economic value of any
one of these indications is demonstrated, a large and significant market could
result.
MARKETING PROGRAMS
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 MSI 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 MSI systems, (iv) site
visits by key customers, (v) public relations activities, and (vi) involvement
with the Epilepsy Foundation and its local affiliates.
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
market is served by the Company's branch office in Aachen, Germany. Japan and
the Far East excluding the Peoples Republic of China (PRC) are served by the
biomedical division of Elekta K.K. ("Elekta", a Swedish medical equipment
manufacturer and distributor). In the PRC, the Company is represented by Beijing
Medi-Therm Instruments, Inc. (BMTI). In January 2000, the Company entered into a
distribution agreement granting Elekta the
10
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 three years. In April 2000, the Company entered into a
distribution agreement granting BMTI exclusive rights to market, sell,
distribute and service the Company's MSI products in the PRC. The Company
considers its relationship with both Elekta and BMTI to be very good. See Note 4
to our Consolidated Financial Statements for a discussion of segment and
geographic information.
REIMBURSEMENT
The Company's long-term commercial success in the United States is dependent
upon obtaining routine approval of payments for clinical MSI procedures by
third-party payors. The Health Care Financing Administration ("HCFA"), which is
responsible for the administration of Medicare, and the American Medical
Association that administers the use of CPT codes by 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 MSI systems, for presurgical functional mapping and planning for
epilepsy surgery. This includes a number of publications in peer-reviewed
medical journals. The data has been successfully used by a number of medical
centers to receive third-party reimbursement on a case-by-case basis. Since the
first reimbursement was received in September 1993, more than 200 insurance
companies and other healthcare providers have now approved reimbursement for
these MSI procedures. An important milestone for reimbursements is to receive a
CPT code from the AMA. The establishment and use of a CPT code makes the
reimbursement procedure easier for the physician and payor. In October 2000, a
petition was filed by the American Academy of Neurology requesting from the AMA
the establishment of a CPT code for the use of MEG in epilepsy. A review
typically takes a year or more before approval is considered. There can be no
guarantee regarding the outcomes of these efforts. Although initial results are
encouraging and a number of third-party payors have approved reimbursement,
there is no assurance that third party reimbursement will become widely
accepted.
In Japan, a large number of hospitals are government funded and operated. These
hospitals are paid by the Japanese Ministry of Health and Welfare ("JMHW") only
for procedures that have been approved by a reimbursement board of the JMHW. The
JMHW follows guidelines similar to those followed by third-party payors in the
U.S. in determining whether the Japanese government will reimburse a new medical
procedure. Once reimbursement for a procedure is approved by the JMHW, all
hospitals, both public and private, are reimbursed for the procedure at the same
reimbursement rate. Since the Company's Magnes I, Magnes II and Magnes 2500 WH
and Neuromag 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 MSI systems.
In Europe, the current MSI sites have concentrated primarily on research, and
have not in the past pursued governmental or private approval for reimbursement
of MSI procedures. However, several European sites are currently investigating
mechanisms for obtaining reimbursement of MSI examinations. There is no
assurance at this time that these efforts will be successful, nor is an accurate
time frame known to the Company.
PRODUCT PRICES AND TERMS OF SALE
11
The current prices for the Company's MSI systems range from approximately
$1.0-$2.5 million, depending upon system configuration. Standard terms of sale
provide for payments of 30-40% of the purchase price upon placement of the
order, 40-50% upon shipment and the remaining balance when installation is
completed and final acceptance is obtained from the customer. For European
customers who receive their funding from governmental agencies, 4-D is generally
required to provide a bank guarantee for the amount of the deposit that 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 arrangements
with certain medical centers to promote clinical applications development. These
standard terms of sale reflect changes from previous practices to accommodate
customer requirements. The shift of payments from the down payment to the
payment due upon shipping should have minimal effects on cash flow.
INSTALLATION, SERVICE AND TRAINING
In the medical device market, the ability to provide comprehensive and timely
service is a key competitive advantage and is important for establishing
customer confidence. Installation and service for the Company's products in the
United States and Europe is provided from its San Diego, California headquarters
and from the Company's branch office in Aachen, Germany, both of which maintain
customer service departments capable of performing sophisticated systems
installation and equipment maintenance. Elekta 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 included as part of
the standard terms of sale in the United States and Europe. Thereafter, service
and maintenance are available on a time and materials basis or pursuant to a
yearly service agreement for an annual fee.
Initial customer training in the operation of the Company's MSI systems is
provided by the Company's personnel at the customer's site and is included in
the selling price of the system. Physician training in interpreting the clinical
significance of MSI information is currently provided at the Company's
cooperating United States clinical sites.
COMPETITION
The Company operates in an industry characterized by rapid technological change.
New products using other technologies or improvements to existing competing
products may reduce the size of the potential markets for the Company's
products, and may render them obsolete or non-competitive. Competitors may
develop new or different products using technology or imaging modalities that
may provide or be perceived as providing greater value than the Company's
products. Any such development would have a material adverse effect on the
Company's financial position and results of operations.
Historically, there has been ongoing price competition from the Company's main
competitors for the limited number of whole head systems purchased worldwide.
This competition has and may continue to affect profit margins on sales of the
Company's whole head system, the extent of which is not presently determinable.
Companies known to 4-D that currently manufacture an integrated large-array MSI
system are CTF Systems Inc., a Canadian company, Yokagawa Electric, a Japanese
company, Shimadzu, a Japanese company and Daikin, a Japanese company. An MSI
system produced by CTF Systems, Inc. has been cleared for sale as a clinical
device in Japan by the JMHW. Yokagawa Electric has installed one system in the
United States and three systems in Japan. Shimadzu has installed one system in
Japan and Daikin has installed one system in Japan. The Company's ability to
compete successfully, particularly in the Japanese
12
market, may be negatively affected by the emergence of Japanese based
competitors providing similar equipment.
The Company's ability to compete successfully, particularly against any of its
current or potential future competitors, many of which have significantly
greater financial, manufacturing, distribution, and technical resources than the
Company, will depend upon various factors, including 4-D's ability to continue
its technological and market development leadership role, and 4-D's ability to
raise necessary capital for operations, further development and
commercialization. (See "Liquidity and Capital Resources").
BACKLOG
As of September 30, 2000, the aggregate amount of revenue backlog from firm
orders for Company products and services was approximately $10,800,000, compared
to approximately $2,800,000 as of September 30, 1999, of which the Company
expects to fill approximately $10,400,000 before September 30, 2001. The revenue
backlog is composed primarily of orders for four Vectorview systems, two Magnes
3600 WH systems and deferred service revenues on systems accepted before
September 30, 2000. The amount of cash yet to be generated from backlog at
September 30, 2000 is approximately $5,700,000 compared to approximately
$200,000 as of September 30, 1999. As sales of the Company's systems typically
involve transactions of $1 million or more, backlog is expected to fluctuate
significantly from year to year depending upon timing of orders received,
installations completed and customer acceptances received during the reporting
period.
RESEARCH AND DEVELOPMENT
The Company has funded its product research and development primarily through
public and private sales of stock, and funds received from product sales. The
Company spent $3,052,000, $3,729,000, and $1,756,000 for research and
development in fiscal years 2000, 1999, and 1998 respectively. In fiscal 2000,
research and development expenditures decreased due to the completion of
development efforts for software and hardware enhancements for the Magnes 2500
WH, reduced support of the epilepsy clinical testing program at two research
clinics in the United States, and completion of the development of the Magnes
3600 WH system. The Neuromag and Vectorview system development cycle was
completed before the Company acquired Neuromag. In fiscal 1999, research and
development expenditures increased due to development efforts for software and
hardware enhancements for the Magnes 2500 WH, the construction of product
development test equipment, support of the epilepsy clinical testing program at
two research clinics in the United States, and ongoing development of the Magnes
3600 WH system.
New versions of operating software were released during fiscal 2000. For the
Magnes I and Magnes II systems, software version 1.7 was released in August
1999. This update included Y2K compliance updates and Solaris 2 compatibility.
It also brought many of the enhancements available in the newer systems to these
older models. For the Magnes 2500 WH, software version 1.2.5 was released in
July 2000. The Neuromag engineers have made numerous software enhancements for
the Neuromag and Vectorview systems since their introduction.
MANUFACTURING AND MATERIALS
The Company engineers and manufactures every major component of its Magnes
systems, other than the host computer and its peripherals, the MSR which houses
the sensor, and the sensor position indicator hardware used to determine how the
sensor is oriented to the body. The Company is also currently purchasing its
SQUID production requirements. However, through the Company's partial ownership
of Magnesensors, Inc., the Company has the ability to fabricate SQUIDS from
materials that become superconductive at liquid helium and liquid nitrogen
temperatures should such a need arise.
13
The Company's Vectorview systems are manufactured by third parties under
purchase orders, and final assembly and testing takes place at Neuromag's
facility in Finland. Certain components of the Vectorview systems are obtained
from sole source vendors.
Of the major components of the MSI systems 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 MSRs for MSI
systems sold in the United States and Europe are currently supplied by two
European manufacturers, and a third U.S.-based manufacturer has recently
delivered its first MSR. The Company believes it has adequate alternate sources
of supply for this major system component from these sources.
Certain product engineering designs are performed by the manufacturer, as are
certain software and hardware components. The Company believes its use of
outside designers is appropriate for the proven and mature state of the current
systems, and has reduced the need for extensive in-house products engineering
efforts. Currently, such engineering talent is difficult to recruit and retain,
and the use of outside designers has not limited the Company's ability to
produce competitive systems. However, there can be no assurance that the
Company's dependence on outside design capabilities and more standard components
will remain cost effective and timely, or will not limit the innovation of
future systems and products.
The Company believes its current manufacturing and testing capacity in the U.S.
and Finland is sufficient to satisfy present demand. In order to achieve its
long-term objectives, however, the Company will be required to expand production
capabilities, mainly through additional manufacturing personnel and by
potentially subcontracting assembly of additional system components. There can
be no assurance that the Company will be able to increase its level of output.
The Company believes that its control over the development and manufacture of
its MSI systems will enable it to modify its devices to address specific needs
of anticipated clinical applications without significant dependence upon outside
suppliers, manufacturers or providers of technology.
GOVERNMENTAL REGULATION; REGULATORY APPROVALS
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.
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 U.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's U.S. operations for compliance with federal current Good
Manufacturing Practices ("cGMP") regulation requirements in July 1996. The
Company has updated its internal quality systems to be compliant with the
current Quality System Regulations (QSRs) of the FDA. Based on internal audits
the Company believes it is in full compliance with the FDA QSRs. In addition,
the Company has been
14
pursuing compliance with ISO 9001, an internationally recognized quality system
which is compatible with the FDA QSR's and will aid in the Company's ability to
ship systems worldwide, especially to the European Union. The Company believes
it will obtain compliance during fiscal 2001. If the Company would fail to
achieve compliance it would continue to be able to operate as it currently is,
without ISO 9001 compliance.
In order to export its products, the Company must comply with United States
export control regulations, which restrict the export of devices containing
certain of the Company's technology to certain foreign nations. Although the
export control regulations have not prohibited the Company from exporting its
MSI systems to foreign nations, there can be no assurance that the Company will
continue to be able to obtain the necessary export licenses in the future. The
Company is currently allowed to export the Magnes systems to many foreign
countries, including all Western European countries and Japan, under a general
license that requires no additional approval prior to shipment.
Medical devices are placed in one of three classes, depending upon their use or
the degree to which they provide functions critical to sustaining life. Class I
devices are subject to general controls, including Quality System Regulations
(QSR, formally known as Good Manufacturing Practice), and examples of such
devices are tongue depressors and hot water bottles. Class II devices are
subject to general performance standards not yet established by regulation.
General controls of Class I devices presently apply to Class II devices, because
no performance standards have been developed or promulgated by the FDA for Class
II devices. Examples of Class II devices are the ECG and EEG instruments. 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 4-D'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 Magnes 3600 WH system has
been found to be substantially equivalent to the Magnes 2500 WH. The Neuromag
122 was found to be substantially equivalent to the Magnes I, and the Vectorview
system was found to be substantially equivalent to the Neuromag 122. The
Company's Magnes, Neuromag and Vectorview 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.
While Western Europe and Japan have regulatory agencies that are somewhat
similar to the FDA, each country's regulatory requirements for product
acceptance are unique and will require the expenditure of substantial time,
money and effort to obtain and maintain regulatory acceptance for marketing for
clinical use. There can be no assurance that the Company will be able to obtain
and maintain such approvals. The Magnes I system, Magnes II system, Magnes 2500
WH, Neuromag 122 and Neuromag System 204 systems have all received JMHW
approval.
PATENTS, KNOW-HOW AND PROPRIETARY RIGHTS
The Company relies on proprietary technology and seeks to maintain
confidentiality of its trade secrets, unpatented proprietary know-how and other
proprietary information, and seeks to obtain patent protection when appropriate.
As of September 30, 2000, the Company held forty-seven (47) patents in the
United States of which twenty-five (25) pertain to the Company's current whole
head system product line. Twenty-four (24) of the forty-seven (47) patents had
counterpart patents issued in certain member countries of the European Patent
Organization, Canada and Japan. These patents will expire at the earlier of 17
years after the issue date or 20 years after the priority date of record; these
dates of expiration vary
15
over the range from 2007 to 2019. As of September 30, 2000, the Company had
filed one (1) U.S. patent application which has been allowed and will issue in
due course. The Company has also filed five (5) applications with the European
Patent Organization for patent protection in Western Europe, fourteen (14)
applications in Japan, two of which have been allowed, and six (6) applications
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 is either
currently pursuing or may pursue those applications in the future.
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. 4-D 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 4-D, Quantum Magnetics and certain Officers of 4-D.
Magnes-Registered Trademark- and Biomagnetic Technologies-Registered Trademark-
with the logo are registered trademarks of the Company by registration with the
State of California and by registration with the U.S. Patent and Trademark
Office. Biomagnetic Technologies-TM-, Magnetic Source Imaging-TM-, and MSI-TM-
are registered trademarks in the State of California. Neuromag-Registered
Trademark- and Vectorview-Registered Trademark- are registered trademarks of the
Company by registration with the Finnish National Board of Patents and
Registration. The Company has applied for trademark registration with the U.S.
Patent and Trademark Office for the following marks: 4-D Neuroimaging with and
without the logo; and Vectorview.
4-D has pioneered the development of technologies associated with MSI. Several
core technologies that have been developed by and represent proprietary know-how
to the Company include superconducting magnetic field detectors, magnetic noise
reduction, data analysis and clinically useful temporal and overlay displays.
Many of these techniques and technologies are patented. As a result, the Company
believes it has established an industry leadership position in MSI.
HUMAN RESOURCES
As of December 20, 2000, the Company employed a total of 91 permanent full-time
and part-time employees, 13 of whom hold Ph.D. degrees, as follows: 51 at its
facilities in San Diego, California, 12 in Aachen, Germany and 28 at its
Helsinki, Finland based Neuromag subsidiary. 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 its relationships with its employees
has been good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report on Form 10-K may contain forward-looking statements that
involve risks and uncertainties. Such statements include, but are not limited
to, statements containing the words "believes", "anticipates", "expects",
"estimates", and words of similar import. The Company's results could differ
materially from any forward-looking statements, which reflect management's
opinions only as of the date hereof, as a result of factors, such as those more
fully described under "Risks and Uncertainties" as well
16
as described in this Annual Report. The Company undertakes no obligation to
revise or publicly release the results of any revisions to these forward-looking
statements. Readers should carefully review the risk factors set forth below as
well as other factors addressed in this report and in other documents the
Company files from time to time with the Securities and Exchange Commission.
RISKS AND UNCERTAINTIES
We face the following risks associated with our business operations:
WE ARE UNCERTAIN WITH RESPECT TO ADDITIONAL FUNDING, HAVE MISSED A DEBT PAYMENT
OF $11.4 MILLION AT MATURITY AND MAY NOT BE ABLE TO MEET FUTURE CAPITAL NEEDS.
AS A RESULT, THERE IS SUBSTANTIAL DOUBT ABOUT THE COMPANY'S ABILITY TO OPERATE
AS A GOING CONCERN.
We require additional capital to fund the Company's capital, working capital and
debt service requirements on an ongoing basis. We will need to restructure our
$11.4 million AIG loan from the acquisition of Neuromag Oy, our $835,000 BDN
notes payable and our $450,000 Swisspartners note. We will need to obtain
additional financing to fund operations and repay the notes and related
interest. We did not make payment on our $11.4 AIG loan that became due on
December 29, 2000. AIG bank could exercise its rights in its security interests
and take ownership of Neuromag Oy. We may not be able to arrange additional
financing or restructure our debt on terms acceptable to us, if at all.
IF WE CONTINUE TO INCUR OPERATING LOSSES AND NEGATIVE CASH FLOWS FROM
OPERATIONS, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS.
Our financial position reflects that we have been focused on research and
development and a commercial MSI market has not developed, resulting in only low
volume sales to medical research institutions. Our net losses in the last three
years have been as follows:
- $8,127,000 of losses in fiscal 2000,
- $7,464,000 of losses in fiscal 1999, and
- $4,968,000 of losses in fiscal 1998.
In the last three years, our negative cash flows from operations have been as
follows:
- $5,217,000 in fiscal 2000,
- $8,602,000 in fiscal 1999, and
- $5,520,000 in fiscal 1998.
At September 30, 2000, our accumulated deficit was $106,413,000, our
shareholders' deficit was $3,720,000 and we had negative working capital of
$14,186,000. Our negative working capital at September 30, 2000 resulted
primarily from the purchase of Neuromag Oy for cash in December 1999, which was
financed by a short-term loan from AIG Private Bank, Ltd. and continuing loans
from related parties to fund continuing operations. We are developing certain
programs in an effort to address our operational and liquidity problems and our
ability to continue operations is dependent on our maintaining adequate
financing and bringing our cost structure more in line with expected revenues.
If we are not successful in initiating and executing our plans and refinancing
our debt, cash projected to be generated from operations alone will not be
sufficient to meet our capital, working capital and debt service requirements in
fiscal 2001.
IF WE ARE UNABLE TO SATISFY CUSTOMER PERFORMANCE AND SERVICE REQUIREMENTS, WE
MAY BE UNABLE TO COMPETE EFFECTIVELY.
17
Our success may be limited by our ability to satisfy customer performance
requirements for our systems; as well as by our ability to complete, in a timely
fashion, product developments and enhancements to satisfy customer requirements.
In addition, if we or our distributors are not able to respond in a timely
manner to service requirements, our competitiveness may be adversely impacted.
IF WE ARE UNABLE TO IDENTIFY ADDITIONAL CLINICAL APPLICATIONS FOR OUR MSI
SYSTEMS, THERE WILL BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS.
Currently, there are only a few established diagnostic uses for MSI systems that
the medical industry is aware of. Although we have started our own clinical
research and testing to identify new, large application areas, we cannot assure
you that a commercial market will develop for multiple uses of our products. A
continued lack of clinical applications and commercial market for our MSI
systems will have a material adverse impact on our financial position, results
of operations and cash flows.
INTEGRATING 4-D NEUROIMAGING AND NEUROMAG OY WILL BE DIFFICULT.
Our acquisition of Neuromag Oy brought together two previous international
competitors. Risks common to such mergers include:
- Difficulties in attempting to integrate the technologies or operations.
- Difficulties in achieving the possible financial and strategic
advantages such a merger may provide or imply.
- New competitors enter the market.
- Product brand recognition and customer awareness or satisfaction
deteriorates.
- Management is unable to make the changes necessary without their
attention being diverted from normal business operations.
- Employee relationships suffer, and we risk the potential loss of key
employees of the acquired company.
- Geographic separation, language barriers and cultural differences
inhibit effective communication and management effectiveness.
- Increased currency risk exposure.
Also, it is possible that despite a successful integration, future results of
operations of the merged Company do not meet expectations, due to other risks
discussed in this 10-K or other documents filed with the SEC, and other factors.
OUR VENDORS MAY NOT CONTINUE PROVIDING FAVORABLE CREDIT TERMS.
Due to the Company's liquidity issues, the Company has extended vendor payments
beyond normal credit terms. If the Company's major vendors were to decline
further credit or require cash on delivery payments, the Company's financial
position, results of operations and cash flows would be adversely impacted.
IF WE ARE UNABLE TO DEVELOP ADDITIONAL PRODUCTS, OUR ABILITY TO COMMERCIALIZE
OUR PRODUCTS WILL BE ADVERSELY IMPACTED.
Our success may be limited by our dependence on our current line of MSI systems.
We are currently dependent on sales of our MSI systems to basic research
institutions that represent a market of limited size. Our current product line
may not fully meet the needs of a commercial clinical market and we may need to
develop additional products directly suited to an emerging set of needs from
this market. Our financial results may be materially adversely affected if our
current line of MSI products does not fully meet the needs of commercial
applications that emerge, or we are not able to offer new products in a timely
and cost effective manner that meet these emerging needs
18
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR MSI PROCEDURES BY
THIRD PARTY PAYORS, SALES WILL SUFFER.
Our commercial success is also highly dependent on reimbursement for procedures
using the MSI system. Currently, Medicare, insurance companies and other
healthcare providers approve payment for MSI procedures on a case-by-case basis.
As of September 30, 2000, these third party payors have only approved limited
reimbursements in the United States. Although third party payors have
increasingly approved reimbursements, we cannot assure you that third party
reimbursements will become widely available. The United States government does
not currently reimburse for MSI procedures. If reimbursement does not become
more widely available, our financial position and results of operations will be
materially adversely affected. Further, if the Federal government or any state
legislature enacts legislation relating to our business or the health care
industry, including legislation relating to third party reimbursement, our
financial position and results of operations could be negatively affected. In
addition, there is currently no reimbursement for MSI procedures outside of the
United States.
IF OUR PRODUCTS PRODUCE UNRELIABLE DIAGNOSTIC INFORMATION, IT MAY RESULT IN A
LIABILITY, WHICH WOULD ADVERSELY IMPACT OUR FINANCIAL CONDITION.
Although our products are noninvasive and diagnostic in nature, treatment
courses based on the information generated by our instruments may be unreliable
or result in adverse effects. This possibility exposes us to the risk of product
liability claims. While we carry product liability insurance, there is no
assurance that such insurance will be adequate, will be available in the future
at a level and cost that is appropriate, or available at all, or that a product
liability claim would not adversely affect our business, prospects, financial
position, results of operations, and cash flows.
IF DISCOVERIES OR DEVELOPMENTS OF NEW TECHNOLOGIES OCCUR, OUR PRODUCTS AND
TECHNOLOGY MAY BECOME OBSOLETE.
Our industry is characterized by rapid technological change, which may also
impact our commercial success. Competitors may develop products using other
technologies or may improve existing products. This competition may reduce the
size of the potential market for our products or make them obsolete or
non-competitive. Competitors may also develop new or different products using
technology or imaging modalities that provide, or are perceived as providing,
greater value than the Company's products. Our financial position and results of
operations will be materially adversely affected if such competitive
developments occur.
IF WE FAIL TO COMPETE SUCCESSFULLY, OUR REVENUES AND OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.
Historically, our industry has been characterized by ongoing price competition.
Our competitors compete with us for the currently limited number of whole head
systems being purchased worldwide. The future profitability of our systems may
be negatively impacted by this competition.
If new government legislation is enacted or unfavorable medical industry trends
arise, we may be unable to sell our products and our revenues will suffer.
We cannot predict what adverse effect, if any, future legislation or FDA
regulations may have on the MSI market and our financial results. Medical
industry cost containment trends may impose restrictions on sizeable third-party
reimbursements for diagnostic procedures, limiting the market opportunity.
Further, if Federal government agencies or any state legislature enacts
legislation or guidelines relating to our business or the health care industry
that create additional business hurdles, including legislation relating to third
party reimbursement, our financial position and results of operations could be
negatively affected.
A SUBSTANTIAL PORTION OF OUR REVENUES COME FROM INTERNATIONAL CUSTOMERS.
19
A significant portion of our sales to date have been in foreign markets.
Revenues from international sales represented 99% of our revenues of MSI systems
for the year ended September 30, 2000 compared to 71% in fiscal 1999. We expect
that revenues from international sales will continue to represent a significant
portion of our annual revenues. Because we sell in foreign markets, we are
exposed to potential risks of increases and decreases in foreign currency
exchange rates. Although at September 30, 2000 and 1999 we did not have any open
forward exchange contracts, on occasion, we may enter into forward exchange
contracts to partially hedge (or protect) against such foreign currency exchange
risks. Fluctuations may reduce the return in U.S. dollars that we actually
receive on our sales. These risks may become material as our sales increase or
dramatic currency fluctuations occur from outside events.
THE COMPANY'S SUCCESS IS DEPENDENT UPON ITS ABILITY TO ATTRACT AND RETAIN
QUALIFIED SCIENTIFIC AND MANAGEMENT PERSONNEL.
The loss of services of any one of our executive management or key scientific
personnel would delay our ability to execute our business plans and reduce our
ability to successfully develop and commercialize products, maintain good
customer relationships and compete in the marketplace. We also face increasing
difficulties in recruiting qualified personnel in the software and hardware
design areas because of intense competition for such personnel in today's job
market. There can be no assurance that the Company will be able to hire, train
or retain such qualified personnel.
In addition, the loss of the services of the Chief Executive Officer and
Principal Financial Officer, D. Scott Buchanan, would have a materially adverse
effect on our prospects. Currently none of the executive officers of the Company
have an employment agreement or contract with the Company; all are "at-will" and
under no specified term arrangements.
OUR STOCK PRICE IS HIGHLY VOLATILE AND SUBJECT TO SWINGS BASED ON SALES AND
OTHER MARKET CONDITIONS.
The market prices for securities of companies with newly emerging markets have
historically been highly volatile, and their stock price from time to time has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of such companies. Moreover, 4-D's relatively low trading
volume increases the likelihood and severity of volume fluctuations which likely
will result in a corresponding increase in the volatility of 4-D's Common Stock
price. Factors such as announcements of complex technological innovations or new
sales, governmental regulations, developments in patent or other proprietary
rights, developments in the Company's relationships with collaborative partners,
general market conditions and the timing of decisions by existing 4-D
stockholders to sell large positions of our Common Stock may have a significant
effect on the market price of the Company's Common Stock. Fluctuations in
financial performance from period to period, or acceleration of any of our debt
by our lenders, also may have a significant impact on the market price of the
Common Stock. (See "Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters".)
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 U.S. 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. The
average monthly lease payment over the term of the lease is approximately
$62,000. The Company subleases approximately 16,000 square feet of this facility
to two companies, for a net monthly rent of approximately $21,600. During
November 2000, we entered into a third-party sublease, for approximately $17,600
per month, expires in August 2001. Our sublease with Magnesensors, for
approximately $4,000 per month, is on a month to month basis.
20
The Company's branch office in Germany leases approximately 3,000 square feet at
Gruener Weg 82, D-5100 Aachen, Germany pursuant to a year-to-year lease
agreement expiring in December 2000. The Company is in the process of renewing
this lease. Monthly lease payments are approximately $2,000. Sales and service
for the Company's European operations are conducted from the German facility.
The Finland based operation leases approximately 12,750 square feet at
Elimaenkatu 22-24, Helsinki, Finland, under a sublease agreement. Monthly lease
payments are approximately $16,000. The current agreement runs to the end of
2005. The Finland facility lease is cancelable on twenty-four months notice, but
lease expiration can be no earlier than December 31, 2003.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company, nor its German or Finnish subsidiaries, are involved in any
litigation which is expected to have a material adverse effect on the Company's
business, consolidated financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS.
The Company stock is currently trading on the Nasdaq Over the Counter Bulletin
Board under the symbol "FDNX.OB". The following table sets forth the range of
high and low closing sales prices by quarter for the Company's Common Stock as
reported by Nasdaq. Such quotations represent inter-dealer prices without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
Fiscal Year 2000 High Low
---------------- ---- ---
1st Quarter $0.80 $0.11
2nd Quarter $1.28 $0.59
3rd Quarter $0.91 $0.38
4th Quarter $0.56 $0.25
Fiscal Year 1999 High Low
---------------- ---- ---
1st Quarter $0.33 $0.15
2nd Quarter $0.30 $0.13
3rd Quarter $0.25 $0.17
4th Quarter $0.24 $0.15
As of December 20, 2000, there were approximately 275 holders of record of the
Company's Common Stock. The last reported closing price for the Company's Common
Stock on the Nasdaq Over the Counter Bulletin Board on December 20, 2000 was
$.22 per share.
21
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. There are no contractual obligations, preferences or
restrictions related to the declaration or distribution of dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below with respect to 4-D's consolidated
statements of operations for each of the three years in the period ended
September 30, 2000 and with respect to the consolidated balance sheets at
September 30, 2000 and 1999, 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, 1997 and 1996 and the balance
sheet data at September 30, 1998, 1997 and 1996 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: 2000 (A) 1999 1998 1997 1996
--------- ------ ------ ------ ------
Total revenues $ 8,391 $ 3,254 $ 2,839 $ 10,592 $ 733
Operating loss (7,363) (7,532) (4,898) (3,318) (15,467)
Net loss (8,127) (7,464) (4,968) (5,242) (15,566)
Basic and diluted net loss per share $ (.10) $ (.09) $ (.09) $ (.11) $ (.39)
Shares used in computing basic
and diluted net loss per share 84,274 83,367 56,430 45,790 39,950
September 30,
------------------------------------------------------------------------
BALANCE SHEET DATA: 2000 (A) 1999 1998 1997 1996
--------- ------ ------ ------ ------
Working capital (deficiency) $ (14,186) $ 3,273 $ 11,139 $ (2,284) $ (785)
Total assets 22,184 8,870 17,343 6,002 16,250
Notes payable 13,155 - - 975 750
Long term obligations 1,664 359 216 219 48
Shareholders' equity (deficit) $ (3,720) $ 4,106 $ 11,569 $ (1,286) $ 854
(A) Includes the acquisition of Neuromag Oy effective December 31,
1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the consolidated
financial statements and notes contained elsewhere in this report.
OVERVIEW
4-D Neuroimaging is engaged primarily in the business of developing,
manufacturing and selling innovative medical imaging systems to medical
institutions. The MSI systems developed by the Company measure magnetic fields
created by the human body for the noninvasive diagnosis of certain medical
disorders.
22
On December 29, 2000, the Company did not make a principal payment at maturity
of a note payable originating from the acquisition of Neuromag Oy. The Company
is experiencing serious operating and liquidity issues. These issues are
discussed in more detail under "Results of Operations" and "Liquidity and
Capital Resources" below.
The measurement of the body's magnetic fields by MSI provides information about
the normal and abnormal functioning of the brain, heart and other organs. The
Company is focusing on the use of its technology for potential commercial market
applications such as the diagnosis and planning for surgical treatment of
epilepsy, and the functional mapping of areas of the brain at risk during
surgery for tumors and other lesions. The Company is continuing to investigate
the potential applications of its technology for problems of the heart, spine,
and gastrointestinal system, as well as for disorders of the brain such as
closed-head trauma, schizophrenia and other neuro-psychiatric disorders.
As of December 2000, fifty-three (53) MSI systems are installed in medical and
research institutions worldwide, and more than 5,000 MSI examinations have been
performed on patients and control subjects at the Company's application
development sites. Related findings by 4-D and its collaborators have been
published in more than 200 scientific and medical papers. Since the first
reimbursement for MSI procedures was received in September 1993, more than 200
insurance companies have approved reimbursement on a case-by-case basis for
certain MSI procedures performed with the Company's MSI systems
In fiscal 1995, 4-D announced development of the Magnes 2500 WH, an expansion of
the existing Magnes I and Magnes II systems product line. The Magnes 2500 WH
allows for examination of the entire brain at once and is designed for
evaluating ambulatory or critically ill patients in seated or fully reclined
positions. As of September 30, 2000, the Company had shipped fourteen Magnes
2500 WH systems and received twelve final acceptances from customers. In fiscal
2000 4-D completed the development of the Magnes 3600 WH, and has shipped its
first system to a customer.
On December 22, 1999, 4-D acquired all of the issued and outstanding capital
stock ("Shares") of Neuromag Oy pursuant to the terms of a share purchase
agreement, by and between Marconi Medical Systems, Inc. ("Marconi") and 4-D (the
"Share Purchase Agreement"). Under the terms of the Share Purchase Agreement,
4-D paid a total of $10 million in cash to Marconi for the purchase of the
Shares and agreed to pay between a minimum of $2,500,000 and a maximum of
$5,000,000 in royalties to Marconi under an ancillary royalty agreement over the
next 8 years, and additional consideration dependent upon the occurrence of
certain future events. The acquisition was funded by a loan from AIG Private
Bank Ltd. ("AIG").
Similar to 4-D, Neuromag Oy is engaged in the research, development and
manufacturing of MSI systems. Neuromag Oy is located in Helsinki, Finland. 4-D
operates Neuromag Oy as a subsidiary of 4-D. Neuromag Oy developed and sold its
first MSI system, the Neuromag 122 in 1994. Neuromag then introduced its next
generation product, the Vectorview, in 1997. Both are whole head systems,
designed to evaluate brain function.
The current prices of 4-D's MSI systems generally range from approximately $1.0
to $2.5 million, depending upon system configuration. Major portions of the
Company's sales have been in foreign markets. The Company has previously priced
certain of its European sales in the currency of the country in which the
product was sold and the prices of such products in dollars varied as the value
of the dollar fluctuated against the quoted foreign currency price. There can be
no assurance that currency fluctuations will not reduce the dollar return to the
Company on such sales, if made in the future. Although at September 30, 2000 and
1999, the Company did not have any open forward exchange contracts the Company
may in the future enter into forward exchange contracts to partially hedge such
foreign currency exposure, if appropriate.
23
Since concentrating in 1984 on the development of its MSI systems, 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. The Company substantially completed the development of its Magnes
2500 WH system in fiscal 1996 and decreased expenditures in fiscal 1998 and 1999
as part of the Company's restructuring and focus on developing a market for sale
of the Company's Magnes 2500 WH system. In fiscal 1999, research and development
expenditures increased due to development efforts to enhance the Magnes 2500 WH
and efforts to substantially complete the development of the Magnes 3600 WH
system, which were successful. In fiscal 2000, the Company decreased its
expenditures in research and development due to its liquidity position.
The Company believes that the relatively small number of proven medical
applications for MSI 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 2000. The Company does not expect these
factors to change significantly over the next several years. Additionally, it is
not possible to reliably predict the timing and extent of future product sales
due to the uncertainties of the acceptance of medical applications,
reimbursement and product acceptance. The Company does not anticipate multiple
sales to the same end-user at current sales volumes, and the sale of one MSI
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 significantly.
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, 2000 AND 1999
Product revenues for fiscal 2000 totaled $7,577,000 as compared to $2,677,000 in
fiscal 1999. Increased product revenues were the result of recognizing seven
final customer acceptances of systems as compared to three final customer
acceptances of systems in fiscal 1999. The increase in customer acceptances of
units is attributable to the acquisition of Neuromag Oy in fiscal 2000. Of the
seven systems accepted, 5 were Neuromag and Vectorview systems accounting for
revenues of approximately $5.2 million.
On a pro forma basis as if the acquisition of Neuromag Oy had taken place on
October 1, 1998, pro forma fiscal 2000 revenues would have been approximately
$10.4 million and pro forma fiscal 1999 revenues would have been approximately
$8.5 million.
Product costs totaled $6,462,000 in fiscal 2000 as compared to $2,440,000 in
fiscal 1999. Product costs increased due to the sale of seven systems in fiscal
2000 as compared to three systems in fiscal year 1999. Product costs as a
percentage of product revenues amounted to 85% in fiscal 2000 as compared to 91%
in fiscal 1999. This improvement was due to increased volume efficiencies as
well as cost reduction efforts in the sourcing and manufacture of the systems.
Service revenues for fiscal 2000 totaled $814,000 as compared to $532,000 in
fiscal 1999. The increase of 53% is attributable to the sale of additional
service contacts to our customers. Service costs for fiscal 2000 totaled
$580,000 as compared to $743,000 in fiscal 1999. This decrease in cost and
increase in margin is due primarily to the results of service operations of
Neuromag Oy.
Research and development expenses totaled $3,052,000 in fiscal 2000 compared to
$3,729,000 in fiscal 1999, a decrease of 18%. The decrease in research and
development can be attributed to a reduction in the amount of expenses incurred
to build product engineering testing equipment and development of the
24
Magnes 3600 WH system as compared to fiscal 1999. Decreased expenditures are
also a result of the liquidity position of the Company in fiscal 2000.
Marketing and sales expenses amounted to $1,967,000 in fiscal 2000 as compared
to $1,770,000 in fiscal 1999, an increase of 11%. This increase is primarily
attributed to the increased marketing and sales costs expenses associated with
the operation of an additional subsidiary.
General and administrative expenses totaled $3,692,000 in fiscal 2000, an
increase of 79% from $2,063,000 in fiscal 1999. This increase was primarily due
to the acquisition of Neuromag Oy, including goodwill amortization of $1,141,000
for fiscal 2000.
Interest expense totaled $992,000 in fiscal 2000, as compared to $11,000 in
fiscal 1999. This substantial increase was due primarily to the loans
established during fiscal 2000 to acquire Neuromag Oy and to fund continuing
operations, described below in "Liquidity and Capital Resources."
Interest income totaled $89,000 in fiscal 2000, as compared to $330,000 in
fiscal 1999. This substantial decrease was due to the use of cash and
investments to fund operating requirements given the continued net losses and
negative operating cash flows of the Company.
Other income in fiscal 2000 totaled $323,000 as compared to other expense of
$113,000 in fiscal 1999. Other income in fiscal 2000 consisted primarily of
$137,000 of translation gains for the Company's German subsidiary, $95,000 in
revenue sharing from a clinical collaboration agreement and $56,000 in grants
provided to the Company's Neuromag subsidiary.
Loss on investment in Magnesensors was $57,000 in fiscal 2000 as compared to
$137,000 in fiscal 1999. The decrease results from reducing the investment in
Magnesensors to the extent that the Company is guaranteeing indebtedness of
Magnesensors, rather than recognizing the Company's entire proportionate share
of Magnesensors' losses based on ownership percentage as in fiscal 1999.
FISCAL YEARS ENDED SEPTEMBER 30, 1999 AND 1998
Results of operations in fiscal 1999 declined as compared to fiscal 1998
primarily due to an increase of operating costs associated with research and
development efforts and increased marketing expenditures.
Product revenues for fiscal 1999 totaled $2,677,000 as compared to $2,103,000 in
fiscal 1998. Increased product revenues were the result of recognizing three
final customer acceptances of systems in fiscal 1999 as compared to two final
customer acceptances of systems in fiscal 1998.
Product costs totaled $2,440,000 in fiscal 1999 as compared to $1,935,000 in
fiscal 1998. Product costs increased due to the sale of three systems in fiscal
1999 as compared to two systems in fiscal year 1998. Product costs as a
percentage of product revenues amounted to 91% in fiscal 1999 as compared to 92%
in fiscal 1998.
Service revenues for fiscal 1999 totaled $532,000 as compared to $498,000 in
fiscal 1998. The increase of 7% is attributable to the sale of additional
service contacts to our customers. Service costs for fiscal 1999 totaled
$743,000 as compared to $810,000 in fiscal 1998. This decrease of 8% reflects
lower warranty obligations.
Research and development expenses totaled $3,729,000 in fiscal 1999 compared to
$1,756,000 in fiscal 1998, an increase of 112%. The increase in research and
development costs were primarily due to the development efforts for software and
hardware enhancements to the Magnes 2500 WH, the construction
25
of product development testing equipment, support of the epilepsy clinical
testing program at three research clinics in the United States, and ongoing
development of the Magnes 3600 WH system.
Marketing and sales expenses amounted to $1,770,000 in fiscal 1999 as compared
to $1,281,000 in fiscal 1998, an increase of 38%. This increase is primarily
attributed to the increased marketing communication expenses, the addition of
sales, marketing and customer service personnel and related sales activities.
General and administrative expenses totaled $2,063,000 in fiscal 1999, an
increase of 20% from $1,721,000 in fiscal 1998. This increase was primarily due
to costs incurred for a third party market research study and outside services
including legal costs.
Interest income totaled $330,000 for fiscal 1999 as compared to $100,000 in
fiscal 1998. This increase is the result of investing excess cash generated from
the August 1998 financing, described below in "Liquidity and Capital Resources".
Loss on equity investment was $137,000 in fiscal 1999 as compared to $160,000 in
fiscal 1998. The loss in fiscal 1999 represented 4-D's proportionate share of
Magnesensors' losses as compared to fiscal 1998 which included 4-D's
proportionate share of Magnesensors' losses totaling approximately $78,000 and a
write-down of the Company's original investment in Magnesensors of approximately
$82,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company is experiencing serious liquidity issues and incurred net losses of
$8,127,000, $7,464,000, and $4,968,000 in fiscal 2000, 1999 and 1998,
respectively. The Company had negative cash flows from operations of $5,217,000,
$8,602,000, and $5,520,000 in fiscal 2000, 1999 and 1998, respectively.
On December 29, 2000, the Company did not make a principal payment at maturity
of a note payable originating from the acquisition of Neuromag Oy, (the
"Neuromag Note") totaling $11,400,000 and related accrued interest of $540,000.
The Neuromag Note had an original maturity date of June 30, 2000. In June 2000,
the Company obtained loans totaling approximately $835,000 from Brian
Diagnostics Network ("BDN"), a Spanish company owned by three members of the
Company's board of directors. The Company used approximately $485,000 of BDN
loan proceeds to pay interest due AIG at June 30, 2000 in conjunction with
extending the maturity to December 29, 2000. During September 2000, the Company
borrowed approximately $450,000 from Swisspartners Investment Network, Ltd.
("Swisspartners"), for working capital purposes, which is due September 30,
2001. A board member of 4-D is a partner of Swisspartners.
The Company is currently negotiating with AIG to extend the maturity of the
Neuromag Note to December 29, 2001. There can be no assurance that the Company
will be successful in negotiating an extension on terms acceptable to the
Company, if at all. The Neuromag Note is secured by the shares of Neuromag Oy
and is guaranteed by an entity affiliated with a Board member of the Company. As
a result of the non-payment of principal and interest on December 29, 2000, AIG
has the right to exercise its security interest and take ownership of Neuromag
Oy. As of January 11, 2001, AIG has not exercised such right.
In an event of acceleration of the Company's indebtedness, it is possible that
the Company may be required to seek protection under bankruptcy laws, either
voluntarily or involuntarily.
Historically, the Company has been dependent on certain of its shareholders and
board members to raise the capital necessary to fund its operations and meet its
obligations. Management is currently attempting to raise additional capital. In
an effort to address its operational and liquidity issues, management has
26
initiated certain cost reduction measures and is in process of developing a
worldwide plan to bring its cost structure more in line with expected revenues.
If management is not successful in initiating and executing its plans,
management anticipates that capital, working capital, and debt service
requirements in fiscal 2001 will substantially exceed cash projected to be
generated by MSI systems sales. Based on its current operating plans, revenue
expectations, expected capital expenditures, expected working capital
requirements and existing capital resources, the Company anticipates that it
will be able to fund operations through March 2001, assuming that the Company
will be able to extend the maturity of its Neuromag Note as discussed above.
Realization of the Company's operating plans is dependent upon its ability to
successfully close a number of MSI system sales in the current highly
competitive market for the limited number of systems being purchased worldwide.
There can be no assurance that sufficient sales of the Company's MSI systems
will be achieved in order to realize the current operating plans. Even if the
Company meets its operating plans, the Company must continue to fund its
operating needs, and is seeking additional financing, such as corporate
partnerships and the sale of equity or debt securities. There can be no
assurance that such financing will be available on terms acceptable to the
Company, if at all.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed above and as
shown in the accompanying financial statements, the Company has operating and
liquidity concerns that raise substantial doubt about the Company's ability to
continue as a going concern. There can be no assurance that the Company will be
able to successfully restructure its indebtedness or that its liquidity and
capital resources will be sufficient to maintain its normal operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Cash and cash equivalents and short-term investments decreased to $1,083,000 at
September 30, 2000 as compared to $3,135,000 at September 30, 1999. At September
30, 2000, the Company had an accumulated deficit of $106,413,000, a net capital
deficiency of $3,720,000 and a working capital deficiency of $14,186,000. The
decline in cash and cash equivalents and investments in fiscal 2000 and the
Company's net capital and working capital deficiencies primarily resulted from
continued losses and negative cash flows from operations. Additionally, the
working capital deficiency at September 30, 2000 is a result of short term
financing for the acquisition of Neuromag Oy and amounts borrowed for working
capital requirements.
Capital equipment expenditures totaled $336,000 in fiscal 2000, $838,000 in
fiscal 1999 and $95,000 in fiscal 1998. The decrease in fiscal 2000 can be
attributed to the Company's liquidity issues.
In August 1998 the Company received $15,000,000 in proceeds from the sale of
30,000,000 shares of unregistered common stock at $.50 per share to offshore
investors pursuant to Regulation S. Dassesta International S.A. ("Dassesta"), a
major shareholder of the Company since March 1995, purchased 10,000,000 shares,
Caja de Ahorras y Pensiones de Barcelona ("La Caixa"), one of the leading
financial institutions of the Kingdom of Spain, purchased 10,000,000 shares. A
total of 2,000,000 shares were sold to Swisspartners Investment Network LTD, and
the remaining 8,000,000 shares were purchased by two European banks under the
same terms and conditions.
From January to July 1998 the Company had borrowed a total of $2,000,000 from
Dassesta for working capital requirements. In August 1998, out of the proceeds
received from the above offering, the Company paid off the Dassesta principal,
plus $36,000 of accrued interest.
27
In December 1997, the Company sold 4,000,000 unregistered shares of common stock
to Dassesta and an additional 1,500,000 unregistered shares of common stock to
Bank Leu under Regulation S at $.50 per share. Consideration received by the
Company for the sale consisted of cash totaling $793,000 and cancellation of its
then outstanding loan principal of $1,700,000, related accrued interest of
$38,000 and accounts payable of $219,000, all owed to Dassesta.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Revenues denominated in foreign currencies, primarily the Finnish Markka, as a
percentage of total revenues, were 66% in fiscal 2000. Fluctuations in foreign
exchange rates could impact operating results through translation of the
Company's subsidiaries' financial statements.
The Company's variable rate indebtdeness is affected by the general level of
London Interbank Offered Rate ("LIBOR") interest rates. The Company had
$12,685,000 million outstanding under LIBOR based variable rate indebtedness on
September 30, 2000. A 2 percent increase above the interest rate applicable at
September 30, 2000 for such amount would result in a $253,700 increase in annual
interest expense.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements as of September 30, 2000 and
1999, and for each of the three years in the period ended September 30, 2000 and
the report of independent public accountants are included in this report as
listed in the index on page 30 of this report (Item 14 (a)).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 to be filed with the
Commission within 120 days of the Company's fiscal year end (the "Proxy
Statement") and delivered to shareholders in connection with the 2001 Annual
Meeting of Shareholders, which sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information required for this item is set forth in the section entitled
"Executive Compensation and Other Information" in the Proxy Statement, which
section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required for this item is set forth in the section entitled
"Security Ownership of Management" and "Principal Shareholders" in the Proxy
Statement, which sections are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required for this item is set forth in the sections entitled
"Executive Compensation and Other Information" and "Certain Relationships and
Related Transactions" in the Proxy Statement, which sections are incorporated
herein by reference.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants....................33
Consolidated Balance Sheets at September 30, 2000
and 1999....................................................34
Consolidated Statements of Operations for the three year
ended September 30, 2000....................................35
Consolidated Statement of Shareholders' Equity (Deficit)
for the three years ended September 30, 2000................36
Consolidated Statements of Cash Flows for the three years
ended September 30, 2000....................................37
Notes to Consolidated Financial Statements..................38
(2) Financial Statement Schedule
Schedule II - Consolidated Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(3) Exhibits
The Exhibits listed in the accompanying Exhibit Index are
filed or incorporated by reference as part of this report.
(b) Reports on Form 8-K during the fourth quarter:
None.
(c) Exhibits
The following documents are exhibits to this Form 10-K:
29
Exhibit
No. Description of Document
3.1 (1) Fifth Amended and Restated Articles of Incorporation.
3.2 (2) Restated Bylaws .
3.3 (9) Certificate of Amendment of Fourth Restated Articles of
Incorporation (numbered originally as 10.73)
10.1 (5) Loan Agreement between 4-D Neuroimaging and BDN, a company based
in Spain.
10.2 (5) Loan Agreement between 4-D Neuroimaging and BDN, a company based
in Spain.
+ 10.3(12) The Company's 1997 Stock Option Plan, as amended.
+ 10.6 (4) The Company's 1987 Stock Option Plan, as amended.
+ 10.7 (4) Form of Incentive Stock Option and related exercise documents.
+ 10.49(7) Biomagnetic Technologies, Inc. 1992 Employee Stock Purchase Plan.
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(8) Form of Purchase Option Agreement, as amended.
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.
10.71(10) Offshore Subscription Agreement between the Company and Dassesta
International S.A. (Numbered originally as Exhibit 2.1).
10.76(11) Form of Offshore Stock Subscription Agreements For August 1998
Sale of Company Common Stock.
10.77(11) Joint Venture Agreement with Magnesensors.
10.78 Real estate lease, dated March 3, 2000 between Neuromag Oy and
Instrumentarium and an English language summary of such lease.
21 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule
(1) This exhibit was previously filed as part of, and is hereby incorporated
by reference to, the same numbered exhibit in the Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2000, filed with the
Securities and Exchange Commission on May 15, 2000.
30
(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 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.
(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) This exhibit was previously filed as part of, and is hereby incorporated
by reference to, the same numbered exhibit in the Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2000, filed with the
Securities and Exchange Commission on July 15, 2000.
(6) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-1, Registration Statement No. 33-46758,
filed March 26, 1992, as amended by Amendment No. 1, filed May 8, 1992.
(7) These exhibits were previously filed as part of, and are hereby
incorporated by reference to the same numbered exhibits (except as
otherwise indicated) in the Registration Statement filed pursuant to the
Securities Act of 1933 on Form S-8, Registration Statement No. 33-68136
filed August 27, 1993.
(8) These exhibits were previously filed as part of, and are hereby
incorporated by reference to, the same numbered exhibits (except as
otherwise indicated) in Fiscal 1995 Form 10-K.
(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 form 8-K, filed April 14, 1995.
(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 1998 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 Fiscal 1999 Form 10-K.
(12) These exhibits were previously filed as part of, and are hereby
incorporated by, reference to Exhibit 99.1 to the Form S-8, Registration
Statement No. 333-96267 filed February 7, 2000.
+ Management contract or compensatory plan or arrangement.
SUPPLEMENTAL INFORMATION
Proxy materials have not been sent to shareholders as of the date of this
report. The Proxy materials will be furnished to the Company's shareholders
subsequent to the filing of this report and the Company will furnish such
material to the Securities and Exchange Commission at that time.
31
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.
4-D NEUROIMAGING
By /s/ D. Scott Buchanan January 10, 2001
-------------------------------------- ------------------
D. Scott Buchanan Date
President, Chief Executive Officer, Principal
Financial Officer
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 10, 2001
-------------------------------------------- ----------------
D. Scott Buchanan Date
President, Chief Executive Officer, Principal
Financial Officer, Director
By /s/Enrique Maso January 10, 2001
----------------------------------- ----------------
Enrique Maso, Chairman of the Board, Director Date
By /s/Felipe Fernandez-Atela January 10, 2001
-------------------------------------------- ----------------
Felipe Fernandez-Atela, Vice-Chairman of the Board, Date
Director
By
----------------------------------- ----------------
Martin Velasco, Director Date
By /s/Antti Ahonen January 10, 2001
----------------------------------- ----------------
Antti Ahonen, Director Date
By /s/Martin P. Egli January 10, 2001
----------------------------------- ----------------
Martin P. Egli, Director Date
By /s/Galleon Graetz January 10, 2001
----------------------------------- ----------------
Galleon Graetz, Director Date
32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 4-D Neuroimaging:
We have audited the accompanying consolidated balance sheets of 4-D Neuroimaging
(a California Corporation) and subsidiaries as of September 30, 2000 and 1999,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
September 30, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 4-D Neuroimaging and
subsidiaries as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000 in conformity with accounting principles generally accepted
in the United States.
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 historically reported significant net
losses and negative cash flows from operations and has serious liquidity
concerns. As of September 30, 2000, the Company has a working capital deficiency
of $14,186,000 and a shareholders' deficit of $3,720,000. Further, on December
29, 2000, the Company did not make payment at maturity of a note payable to a
bank of $11.9 million, including accrued interest. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II - Valuation and Qualifying
Accounts is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
San Diego, California
January 10, 2001
33
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
4-D NEUROIMAGING
CONSOLIDATED BALANCE SHEETS
September 30,
2000 1999
--------------------------------------------
ASSETS
Cash and cash equivalents $ 1,083,468 $ 440,702
Short-term investments - 2,694,776
Restricted cash 312,500 54,496
Accounts receivable, less allowance for doubtful
accounts of $210,420 in 2000 and $410,420 in 1999 1,245,864 365,164
Inventories 6,345,107 3,982,768
Prepaid expenses and other current assets 1,067,918 140,807
------------------ ------------------
Total current assets 10,054,857 7,678,713
Property and equipment, net 972,592 870,036
Goodwill, net 9,696,187 -
Restricted cash 312,500 165,655
Deferred income taxes 586,273 -
Other assets 562,063 155,797
------------------ ------------------
TOTAL ASSETS $ 22,184,472 $ 8,870,201
================== ==================
LIABILITIES AND
SHAREHOLDERS' EQUITY(DEFICIT)
Notes payable $ 13,154,930 $ -
Accounts payable 3,797,665 1,313,827
Accrued liabilities 1,452,079 607,506
Accrued salaries and employee benefits 594,814 429,492
Customer deposits 4,641,079 1,714,100
Deferred revenues 297,126 317,570
Current portion of royalty obligation 287,000 -
Current portion of capital lease obligations 15,688 23,256
------------------ ------------------
Total current liabilities 24,240,381 4,405,751
Royalty obligation, net of current portion 1,488,000 -
Deferred revenues 134,387 308,140
Capital lease obligations, net of current portion 41,644 50,545
------------------ ------------------
Total liabilities 25,904,412 4,764,436
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock -- no par value; 200,000,000 shares
authorized; 84,975,008 in 2000 and 83,367,112 in 1999 100,102,653 99,391,882
Additional paid-in capital 3,007,500 3,000,000
Accumulated deficit (106,412,794) (98,286,117)
Accumulated other comprehensive loss (417,299) -
------------------- ------------------
Total shareholders' (deficit) equity (3,719,940) 4,105,765
------------------- ------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY (DEFICIT) $ 22,184,472 $ 8,870,201
================== ==================
See Notes to Consolidated Financial Statements
34
4-D NEUROIMAGING
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
2000 1999 1998
------------------- -------------------- -------------------
REVENUES
Product sales $ 7,576,834 $ 2,676,786 $ 2,102,967
Product services 813,691 532,144 497,988
Contract research - 44,684 238,053
------------------ ------------------ ------------------
8,390,525 3,253,614 2,839,008
------------------ ------------------ ------------------
COST OF REVENUES
Product 6,462,489 2,439,938 1,935,049
Product services 579,643 742,609 809,599
Contract research - 41,221 233,860
------------------ ------------------ ------------------
7,042,132 3,223,768 2,978,508
------------------ ------------------ ------------------
GROSS MARGIN 1,348,393 29,846 (139,500)
------------------ ------------------ -------------------
OPERATING EXPENSES
Research and development 3,052,296 3,728,609 1,755,756
Marketing and sales 1,966,960 1,769,997 1,281,428
General and administrative 3,692,433 2,063,119 1,721,032
------------------ ------------------ ------------------
8,711,689 7,561,725 4,758,216
------------------ ------------------ ------------------
OPERATING LOSS (7,363,296) (7,531,879) (4,897,716)
Interest expense (992,205) (10,579) (72,129)
Interest income 88,594 330,340 99,894
Other income (expense), net 323,057 (113,431) 63,115
Loss on investment in Magnesensors (57,027) (137,257) (160,000)
------------------- ------------------- -------------------
LOSS BEFORE PROVISION FOR INCOME TAXES (8,000,877) (7,462,806) (4,966,836)
Provision for income taxes 125,800 800 800
------------------ ------------------ ------------------
NET LOSS $ (8,126,677) $ (7,463,606) $ (4,967,636)
=================== =================== ===================
BASIC AND DILUTED NET LOSS PER SHARE $ (.10) $ (.09) $ (.09)
=================== =================== ===================
Weighted average number of
common shares outstanding 84,274,108 83,367,112 56,429,913
================== ================== ==================
See Notes to Consolidated Financial Statements
35
4-D NEUROIMAGING
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Accumulated
Other
Common Stock Additional Accumulated Comprehensive
Shares Amount Paid-In Capital Deficit Loss Total
--------------- -------------- --------------- --------------- --------------- ---------------
BALANCE, SEPTEMBER 30, 1997 47,720,887 $ 81,568,769 $ 3,000,000 $ (85,854,875) $ - $ (1,286,106)
Exercise of stock options 146,225 73,113 - - - 73,113
Conversion of note payable
to shareholder, related
accrued interest and accounts
payable to common stock 3,914,000 1,957,000 - - - 1,957,000
Sale of common stock 31,586,000 15,793,000 - - - 15,793,000
Net loss - - - (4,967,636) - (4,967,636)
-------------- ------------- ------------- -------------- -------------- --------------
BALANCE, SEPTEMBER 30, 1998 83,367,112 99,391,882 3,000,000 (90,822,511) - 11,569,371
Net loss - - - (7,463,606) - (7,463,606)
-------------- ------------- ------------- -------------- -------------- --------------
BALANCE, SEPTEMBER 30, 1999 83,367,112 99,391,882 3,000,000 (98,286,117) - 4,105,765
Exercise of stock options 1,200,155 548,487 - - - 548,487
Sale of stock under ESPP 315,317 106,830 - - - 106,830
Exercise of warrants 92,424 55,454 - - - 55,454
Compensation expense incurred in
connection with issuance of
options for service - - 7,500 - - 7,500
Net loss - - - (8,126,677) - (8,126,677)
Translation Adjustment - - - - (417,299) (417,299)
--------------
Comprehensive Loss (8,543,976)
-------------- ------------- ------------- ------------- -------------- --------------
BALANCE, SEPTEMBER 30, 2000 84,975,008 $ 100,102,653 $ 3,007,500 $(106,412,794) $ (417,299) $ (3,719,940)
============== ============= ============= ============== =============== ==============
See Notes to Consolidated Financial Statements
36
4-D NEUROIMAGING
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30,
2000 1999 1998
------------------- -------------------- -------------------
OPERATING ACTIVITIES
Net loss $ (8,126,677) $ (7,463,606) $ (4,967,636)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash tax benefit 125,000 - -
Loss on disposition of assets - - 10,752
Depreciation and amortization 1,460,590 271,640 307,163
Imputed interest on royalty obligation 75,000 - -
Issuance of options as compensation for services 7,500 - -
Changes in operating assets and liabilities,
excluding effects of acquisition:
Restricted cash (404,849) 104,197 367,853
Accounts receivable (121,700) 566,997 (533,707)
Inventories (811,339) (992,009) (602,784)
Prepaid expenses and other current assets (596,111) 130,288 (1,638)
Other assets (345,539) 42 183,224
Accounts payable 1,163,838 531,163 (339,328)
Accrued liabilities (8,170) (277,729) (157,523)
Accrued salaries and employee benefits 165,322 (30,990) (51,361)
Customer deposits 2,393,979 (1,195,000) 736,940
Deferred revenue (194,197) (247,273) (471,955)
---------------- --------------- ---------------
Net cash used in operating activities (5,217,353) (8,602,280) (5,520,000)
---------------- ---------------- -----------------
INVESTING ACTIVITIES
Loss on investment in Magnesensors 57,027 137,257 160,000
Change in short-term investments, net 2,745,776 7,387,724 (10,082,500)
Payments on capital leases (16,469) (20,352) -
Payments for property and equipment (335,617) (743,649) (95,345)
Acquisition of Neuromag Oy, net of cash acquired (9,507,000) - -
---------------- --------------- ----------------
Net cash (used in) provided by investing activities (7,056,283) 6,760,980 (10,017,845)
---------------- --------------- -----------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 710,771 - 15,866,113
Proceeds from notes payable 12,622,930 - 2,725,000
Repayment of notes payable - - (2,000,000)
--------------- --------------- -----------------
Net cash provided by financing activities 13,333,701 - 16,591,113
--------------- --------------- ----------------
Effect of exchange rate changes (417,299) - -
--------------- --------------- ----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 642,766 (1,841,300) 1,053,268
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 440,702 2,282,002 1,228,734
--------------- --------------- ----------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 1,083,468 $ 440,702 $ 2,282,002
=============== =============== ================
See Notes to Consolidated Financial Statements
37
4-D NEUROIMAGING
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS, RISKS AND UNCERTAINTIES
4-D Neuroimaging (the "Company" or "4-D"), founded in 1970 as a California
corporation, is engaged primarily in the business of developing, manufacturing
and selling medical imaging systems to medical institutions. The magnetic source
imaging ("MSI") systems developed by the Company measure magnetic fields created
by the human body for the noninvasive diagnosis of certain medical disorders.
On December 22, 1999, 4-D acquired all of the issued and outstanding capital
stock ("Shares") of Neuromag Oy pursuant to the terms of a share purchase
agreement, by and between Marconi Medical Systems, Inc. ("Marconi") and 4-D (the
"Share Purchase Agreement"). Under the terms of the Share Purchase Agreement,
4-D paid a total of $10 million in cash to Marconi for the purchase of the
shares and agreed to pay between a minimum of $2,500,000 and a maximum of
$5,000,000 in royalties to Marconi under an ancillary royalty agreement over the
next 8 years, and additional consideration dependent upon the occurrence of
certain future events (see Note 4). The acquisition was funded by a loan from
AIG Private Bank Ltd. ("AIG") (see Note 3).
Similar to 4-D, Neuromag Oy is engaged in the research, development and
manufacturing of MSI systems. Neuromag Oy is located in Helsinki, Finland. 4-D
operates Neuromag Oy as a subsidiary of 4-D.
The Company is experiencing serious liquidity issues and incurred net losses of
$8,127,000, $7,464,000, and $4,968,000 in fiscal 2000, 1999 and 1998,
respectively. The Company had negative cash flows from operations of $5,217,000,
$8,602,000, and $5,520,000 in fiscal 2000, 1999 and 1998, respectively. At
September 30, 2000, the Company had an accumulated deficit of $106,413,000, a
net capital deficiency of $3,720,000 and a working capital deficiency of
$14,186,000.
On December 29, 2000, the Company did not make a principal payment at maturity
of a note payable originating from the acquisition of Neuromag Oy, (the
"Neuromag Note") totaling $11,400,000, and related accrued interest of $540,000.
The Neuromag Note had an original maturity date of June 30, 2000. In June 2000,
the Company obtained loans totaling approximately $835,000 from Brain
Diagnostics Network ("BDN," a related party) and used approximately $485,000 of
the proceeds to pay interest due AIG at June 22, 2000 in conjunction with
extending the maturity to December 29, 2000. During September 2000, the Company
borrowed approximately $450,000 from Swisspartners Investment Network, Ltd.
("Swisspartners", a related party) for working capital purposes (see Note 3).
The Company is currently negotiating with AIG to extend the maturity of the
Neuromag Note to December 29, 2001. There can be no assurance that the Company
will be successful in negotiating an extension on terms acceptable to the
Company, if at all. The Neuromag Note is secured by the shares of Neuromag Oy
and is guaranteed by an entity affiliated with a member of the Company's Board
of Directors. As a result of the non-payment of principal and interest on
December 29, 2000, AIG has the right to exercise its security interest and take
ownership of Neuromag Oy. As of January 10, 2001, AIG has not exercised such
right.
In an event of acceleration of the Company's indebtedness, it is possible that
the Company may be required to seek protection under bankruptcy laws, either
voluntarily or involuntarily.
Historically, the Company has been dependent on certain of its shareholders and
board members to raise the capital necessary to fund its operations and meet its
obligations. Management is currently attempting to raise additional capital. In
an effort to address its operational and liquidity issues, management is
developing cost reduction measures on a worldwide basis to bring its cost
structure more in line with
38
expected revenues. If management is not successful in initiating and executing
its plans, management anticipates that capital, working capital, and debt
service requirements in fiscal 2001 will substantially exceed cash projected to
be generated by MSI systems sales.
Based on its current operating plans, revenue expectations, expected capital
expenditures, expected working capital requirements and existing capital
resources, the Company anticipates that it will be able to fund operations
through March 2001, assuming that the Company will be able to extend the
maturity of its Neuromag Note as discussed above.
Realization of the Company's operating plans is dependent upon its ability to
successfully close a number of MSI system sales in a highly competitive market
for the limited number of systems being purchased worldwide. There can be no
assurance that sufficient sales of the Company's MSI systems will be achieved in
order to realize the current operating plans. Even if the Company meets its
operating plans, the Company must continue to fund its operating needs, and is
seeking additional financing, such as corporate partnerships and the sale of
equity or debt securities. There can be no assurance that such financing will be
available on terms acceptable to the Company, if at all.
To date, the Company has been engaged principally in research and development
and marketing activities, and has made only low volume sales to clinical
research institutions. The Company is dependent on its current MSI systems as
its principal products for which there are currently only limited clinical
applications. Additional clinical applications development needs to be conducted
with MSI systems at major medical centers before the Company can begin to
develop a commercial clinical market. There can be no assurance that a
commercial market will develop for diagnostic or monitoring uses of the
Company's MSI systems. A continued lack of clinical applications and a
commercial market for the Company's MSI systems 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 performed by the Company's customers using MSI
systems. As of September 30, 2000, there have been limited reimbursements from
third party payors on a case-by-case basis. 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 or Japanese
governments, nor is there any assurance that these governments will authorize or
budget for such procedures in the future. If widespread availability of
reimbursements 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 reimbursements, or what
effect such legislation may have on its financial position, results of
operations and cash flows.
The industry in which the Company operates is characterized by rapid
technological change. New products using other technologies or improvements to
existing products may reduce the size of the potential markets for the Company's
products, and may render them obsolete or non-competitive. Competitors may
develop new or different products using technology or imaging modalities that
may provide or be perceived as providing greater value than the Company's
products. Any such development could have a material adverse effect on the
Company's financial position, results of operations and cash flows.
Historically, there has been ongoing price competition from the Company's
competitors for the currently limited number of whole head systems being
purchased worldwide. This competition may affect potential future profitability
of the Company's MSI systems, the extent of which is not presently determinable.
39
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed above and as
shown in the accompanying consolidated financial statements, the Company has
operating and liquidity concerns, including debt in default of $11.4 million
plus accrued interest (see Note 3), that raise substantial doubt about the
Company's ability to continue as a going concern. There can be no assurance that
the Company will be able to successfully improve its operating results and
restructure its indebtedness or that its liquidity and capital resources will be
sufficient to maintain its normal operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
Biomagnetic Technologies GmbH, a wholly owned foreign subsidiary located in
Germany, and Neuromag Oy, a wholly owned foreign subsidiary located in Finland.
All material intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term highly liquid investments with
original maturities of three months or less. Cash equivalents, consisting
principally of money market accounts, are stated at cost, which approximates
market value.
SHORT-TERM INVESTMENTS
Management determines the appropriate classification of its short-term
investments at the time of purchase and reevaluates such designation as of each
balance sheet date. The Company has classified its short-term investments as
"available-for-sale". The Company's short-term investments have consisted of
commercial paper, bankers acceptances and certificates of deposit stated at fair
value which approximates cost. The Company had no realized or unrealized gains
or losses on short-term investments in fiscal 2000, 1999 and 1998.
RESTRICTED CASH
At September 30, 2000, restricted cash consists of a $625,000 certificate of
deposit set aside for payment of a letter of credit for two years' minimum
royalties due Marconi Medical Systems, Inc. required as a part of the agreement
to purchase Neuromag Oy in December 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments, including
accounts receivable, accounts payable and accrued liabilities approximates fair
value due to their short term nature. Based on borrowing rates currently
available to the Company for credit arrangements with similar terms, the
carrying amounts under lines of credit, long-term debt, capital lease and
royalty obligations approximate fair value.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined on
the first-in, first-out basis and includes material, labor and manufacturing
overhead costs.
40
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is generally computed using the straight-line method over estimated
useful lives of three to ten years. Leasehold improvements are amortized over
the lesser of their estimated useful life or the related lease term. Maintenance
and repairs are charged to expense as incurred and the costs of additions and
betterments that increase the useful lives of related assets are capitalized.
GOODWILL
Goodwill recognized in the acquisition of Neuromag Oy is being amortized on a
straight-line basis over eight years.
LONG-LIVED ASSETS
The Company assesses potential impairments to its long-lived assets on an
exception basis when there is evidence that events or changes in circumstances
have made recovery of the asset's carrying value unlikely. An impairment loss
would be recognized when the sum of the expected future net cash flows is less
than the carrying amount of the asset.
INCOME TAXES
Income taxes are accounted for using the liability method. Deferred income tax
assets or liabilities are recognized based on the temporary differences between
financial statement and income tax bases of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse. Valuation allowances are recorded when the realization of deferred tax
assets are uncertain.
REVENUE RECOGNITION
Standard terms of product sales for 4-D Neuroimaging generally provide for
payment of 30%-40% of the purchase price upon placement of the order, 40%-50%
upon shipment and the remaining balance upon final customer acceptance. Revenue
from product sales is recognized at the time of customer acceptance. Standard
terms for Magnes product sales also include a one year service period following
the sale. The Company defers and recognizes service revenues over the related
service period.
Product service and contract research revenues are recognized as services are
performed.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
Costs relating to the development of software after technological feasibility is
established are required to be capitalized. The Company has expensed all
software development costs as incurred as technological feasibility is not
reached until product testing is complete, which generally coincides with
product release.
STOCK-BASED COMPENSATION ACCOUNTING
The Company has elected to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value method prescribed by
Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and has provided pro forma disclosures as if the fair value
41
based method prescribed by the Statement of Financial Accounting Standards
("SFAS") No. 123 "Accounting for Stock-Based Compensation" had been utilized.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed in accordance with SFAS No. 128
"Earnings Per Share," based upon the weighted average number of common shares
outstanding. Potentially dilutive securities, consisting of stock options, are
anti-dilutive and are excluded from the computation of diluted net loss per
share.
FOREIGN CURRENCY REMEASUREMENT AND TRANSLATION
The functional currency of the Company's German subsidiary is the U.S. dollar.
The monetary assets and liabilities of the German subsidiary are remeasured into
U.S. dollars at the exchange rate in effect at the balance sheet date while
nonmonetary items are remeasured at historical rates. Revenues and expenses are
remeasured at average exchange rates for the period. Remeasurement gains or
losses of the foreign subsidiary are recognized currently in consolidated
operations. For the years ended September 30, 2000, 1999 and 1998, such gains
and losses have not been significant.
The functional currency of the Company's Finnish subsidiary is the Finnish
Markka. Assets and liabilities of the Finnish subsidiary are translated into
U.S. dollars at the exchange rate in effect at the balance sheet date and
revenues and expenses are translated at average exchange rates for the period.
Translation gains and losses are reflected as a component of accumulated other
comprehensive loss in shareholders' equity (deficit).
RECENT AUTHORITATIVE PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" and in June 1999 issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." These statements establish accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. They require that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. The Company will adopt SFAS No. 133, as amended by SFAS No. 137, in
the first quarter of fiscal 2001. As of September 30, 2000 and 1999, the Company
had not entered into any derivative instrument arrangements.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", in which the SEC interprets existing accounting literature related
to revenue recognition. SAB No. 101, as amended, will be adopted by the Company
no later than the fourth fiscal quarter of fiscal 2001. The Company's adoption
of SAB No. 101 in the fourth quarter of fiscal 2001 is not expected to have a
material impact on the Company's consolidated financial position or results of
operations.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF
Issue No. 00-10 requires that all amounts billed to a customer in a sales
transaction related to shipping and handling, if any, represent revenue to the
vendor and should be classified as revenue. There has been no consensus at this
time on the treatment for the related costs. The Company will adopt the
provisions of EITF Issue No. 00-10 in the fourth quarter of fiscal 2001. The
Company has not yet determined what impact, if any, the adoption of EITF Issue
No. 00-10 will have on its consolidated financial position, results of
operations or related disclosures thereto.
42
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the current
year presentation.
NOTE 3. DEBT
In December 1999, the Company obtained a loan from AIG totaling $11 million for
the purchase of all of the outstanding stock of Neuromag Oy. The Neuromag Note
bears interest based on the six month LIBOR rate plus 3.5 percent (10.4 percent
at September 30, 2000) is secured by the shares of Neuromag Oy and is guaranteed
by an entity affiliated with a member of the Company's Board of Directors. A
member of the Company's Board of Directors also serves on the Board of Directors
of AIG. Interest expense related to the Neuromag Note totaled $850,000 in fiscal
2000.
The Neuromag Note originally matured June 30, 2000. In July 2000, the term of
the Neuromag Note was extended until December 29, 2000, and the principal amount
was increased to $11.4 million. On December 29, 2000, the Company failed to make
payment at maturity for the principal amount and related accrued interest of
$11,940,000.
The Company is currently negotiating with AIG to extend the maturity of the
Neuromag Note to December 29, 2001. There can be no assurance that the Company
will be successful in negotiating an extension on terms acceptable to the
Company, if at all. As a result of the non-payment of principal and interest on
December 29, 2000, AIG has the right to exercise its security interest and take
ownership of Neuromag Oy. As of January 10, 2001, AIG has not exercised such
right.
In June 2000, the Company obtained unsecured loans totaling $834,595 from BDN, a
related party, and used approximately $485,000 of the proceeds to pay interest
due AIG at June 30, 2000 in conjunction with extending the maturity of the
Neuromag Note to December 29, 2000. BDN is a Spanish company owned by three
members of the Company's Board of Directors. The BDN loans were originally due
on September 30, 2000. Subsequent to September 30, 2000, the Company has repaid
$150,000 of these loans and has negotiated an extension of the maturities of the
BDN notes until March 31, 2001. The BDN loans bear interest based on the 3 month
LIBOR rate plus 1 percent (7.8 percent at September 30, 2000). Interest expense
related to BDN loans totaled $16,998 in fiscal 2000.
Prior to acquisition by 4-D, Neuromag borrowed a total of FIM 3,140,000
($470,335 at September 30, 2000) from TEKES at the Finnish state base interest
rate minus 1 percent (3.5 percent at September 30, 2000), subject to a minimum
rate of 3 percent. The future repayment date for principal and related accrued
interest outstanding is dependent upon Neuromag generating sufficient
distributable equity, as defined, in accordance with Finnish generally accepted
accounting principles, in the future.
In September 2000, the Company obtained an unsecured loan from Swisspartners, a
related party, totaling $450,000. A member of the Company's Board of Directors
is a partner of Swisspartners. The Swisspartners loan is due on September 30,
2001 and bears interest based on the 3 month LIBOR rate plus 1 percent (7.8
percent at September 30, 2000). Interest expense related to Swisspartners loan
totaled $1,508 in fiscal 2000.
43
In an event of acceleration of the Company's indebtedness, it is possible that
the Company may be required to seek protection under bankruptcy laws, either
voluntarily or involuntarily.
During fiscal 1998, the Company borrowed a total of $2,725,000 from Dassesta
International, S.A. ("Dassesta"), a major shareholder of the Company, at an
interest rate of 8 percent. In December 1997 the Company issued common stock for
cancellation of loan principal due Dassesta of $1,700,000 and repaid additional
loan principal during 1998 totaling $2,000,000. Interest expense in 1998 related
to Dassesta was approximately $72,000.
In February 1998, the Company discounted two customer notes for a net amount of
$355,000 received from Dassesta. The face amount of these notes was 2,200,000
French Francs, equal to approximately $366,000 at the then current exchange
rate.
In May 1997, the Company entered into a loan facility with Dassesta, the
Company's then controlling shareholder. The loan facility provided for maximum
borrowings of $1,700,000 expiring on December 31, 1998. Interest accrued on
outstanding principal at 10 percent. At September 30, 1997, the Company had
borrowed $975,000 against the loan facility. The loan was collateralized by
certain of the Company's accounts receivable and required principal repayment
upon collection of such receivables.
NOTE 4. ACQUISITION OF NEUROMAG OY
The acquisition of Neuromag Oy has been accounted for under the purchase method
of accounting. The Company paid $10 million in cash and agreed to pay an
interest-free minimum royalty obligation of $312,500 per year for eight years
(totaling $2.5 million) to Marconi. The minimum royalty obligation was recorded
at acquisition at a net present value of $1.7 million using an imputed interest
rate of approximately 10 percent. The fair value of net assets acquired was
approximately $900,000. The purchase price in excess of the fair value of net
assets acquired was recorded as goodwill totaling approximately $10.8 million.
The operations of Neuromag Oy have been included in the accompanying
consolidated financial statements from the date of acquisition.
Unaudited condensed pro forma net sales and net loss for the years ended
September 30, 2000 and 1999, assuming the acquisition of Neuromag Oy occurred on
September 30, 1999 and 1998, respectively, are as follows (in thousands):
(Unaudited)
Year Ended September 30,
------------------------
2000 1999
--------------- ----------------
Net revenues $ 10,416 $ 8,512
Net loss $ (8,167) $ (9,579)
NOTE 5. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one segment that includes developing, manufacturing and
selling MSI products. The overall market for the Company's operations can be
further divided into three overlapping segments: the basic research market, the
clinical applications development market, and the commercial clinical market.
Substantially all of the Company's revenues have been derived from, and
substantially all of the Company's assets have been devoted to, the basic
research market. The Company also assesses its operations for 4-D and Neuromag
Oy on a stand-alone basis.
44
Summary data related to 4-D and Neuromag Oy is as follows:
Year Ended
September 30, 2000
------------------
4-D Neuromag
--------------- --------------
Revenues $ 2,817,605 $ 5,572,920
Gross Margin (122,324) 1,470,717
Operating (loss) income (7,774,524) 411,228
Net (loss) income $ (8,432,626) $ 305,949
The following represents our revenues by customer location:
Years Ended September 30,
-------------------------------------------------------------------
2000 1999 1998
---- ---- ----
Revenues:
United States $ 79,098 $ 866,954 $ 814,052
Germany 236,101 387,826 542,956
Finland 948,872 - -
France - 41,152 1,482,000
Spain 1,784,239 - -
Japan 5,342,215 1,957,682 -
------------- -------------- ---------------
$ 8,390,525 $ 3,253,614 $ 2,839,008
============== ============== ===============
The following represents information about operations by geographic region:
Years Ended September 30,
----------------------------------------------------------------
2000 1999 1998
---- ---- ----
Net (Loss) Income:
United States $ (9,132,526) $ (6,893,271) $ (4,311,817)
Germany 699,900 (570,335) (655,819)
Finland 305,949 - -
-------------- -------------- ---------------
$ (8,126,677) $ (7,463,606) $ (4,967,636)
============== ============== ===============
Total Assets:
United States $16,649,360 $ 8,390,076 $ 16,154,310
Germany 982,400 480,125 1,188,268
Finland 4,552,712 - -
-------------- -------------- ---------------
$ 22,184,472 $ 8,870,201 $ 17,342,578
============== ============== ===============
NOTE 6. CONCENTRATIONS OF RISK
CUSTOMER CONCENTRATIONS
On average, the Company's MSI systems generally sell for approximately $1.0 -
$2.5 million, resulting in significant concentrations of revenues and accounts
receivable. For the year ended September 30, 2000, six customers represented
21%, 16%, 16%, 13%, 12% and 11% of product revenues, respectively. For the year
ended September 30, 1999, three customers represented 52%, 26% and 22% of
product revenues,
45
respectively. For the year ended September 30, 1998, two customers represented
76% and 19% of product revenues, respectively.
DISTRIBUTOR AND VENDOR CONCENTRATIONS
In January 2000, the Company entered into an exclusive distributor agreement to
market, sell, distribute and service its MSI products in certain regions of
Asia, including Japan, for an initial period of three years.
Certain components of the Company's Vectorview systems manufactured in Finland
are obtained from sole source venders.
NOTE 7. FINANCIAL STATEMENT INFORMATION
Inventories consist of the following:
2000 1999
---- ----
Finished goods $ 475,000 $ 169,538
Work-in-process 4,851,753 3,562,364
Raw materials 1,018,354 250,866
------------ -------------
$ 6,345,107 $ 3,982,768
============ =============
Net property and equipment consists of the following:
2000 1999
----- ----
Machinery and equipment $ 5,155,307 $ 7,907,701
Office furniture and equipment 2,605,687 324,817
Leasehold improvements 1,334,546 371,156
------------- -------------
$ 9,095,540 $ 8,603,674
Less Accumulated Depreciation (8,122,948) (7,733,638)
-------------- --------------
$ 972,592 $ 870,036
============= =============
Accrued liabilities consist of the following:
2000 1999
---- ----
Warranty allowance $ 350,000 $ 225,000
Investment in Magnesensors 200,000 137,257
Forward loss on product delivery 80,000 125,000
Accrued Interest 322,747 -
Other 499,332 120,249
------------- -------------
$ 1,452,079 $ 607,506
============= =============
Supplemental Disclosures of Cash Flow Information:
In December 1997, the Company exchanged common stock with a value of $1,957,000
for cancellation of a note payable to shareholder of $1,700,000, related accrued
interest of $38,000 and accounts payable of $219,000, all owed to Dassesta.
During the year ended September 30, 1999, the Company purchased $94,153 of
property and equipment under capital leases.
46
During the years ended September 30, 2000, 1999 and 1998, the Company paid
approximately the following for:
2000 1999 1998
---- ---- ----
Interest $ 669,000 $ 11,000 $ 72,000
Income Taxes $ 800 $ 800 $ 800
NOTE 8. INVESTMENT IN MAGNESENSORS
In June 1997, 4-D entered into a collaboration with Quantum Magnetics, Inc. to
form a new company called Magnesensors, Inc. Of the outstanding share capital of
Magnesensors, 4-D owns 38%, Quantum Magnetics owns 10%, certain officers of 4-D
own 28% and management of Magnesensors owns 24%. 4-D licensed certain
technology, assigned certain patents and contributed cash and certain fixed
assets in connection with the formation of Magnesensors. Magnesensors will
continue the development of applications and products using high temperature
superconductors. 4-D will receive royalty-free licenses to any technology
developed by Magnesensors.
4-D accounts for its investment in Magnesensors under the equity method. During
fiscal 1998, 4-D paid Magnesensors $160,000 for certain services rendered. As of
September 30, 2000, the Company's equity investment in Magnesensors has been
reduced to a net liability of $200,000, equal to the amount 4-D is providing for
guarantees of indebtedness for Magnesensors. Magnesensors subleased facility
space from the Company for $56,000, $55,000 and $52,000 in fiscal 2000, 1999 and
1998.
NOTE 9. INCOME TAXES
The Company's provision for income taxes in fiscal 2000 consists of $125,000 in
foreign taxes and $800 of minimum state taxes, and in 1999 and 1998 consists of
minimum state taxes. For tax purposes, the fiscal 2000 foreign tax provision has
been offset by net operating losses purchased in the acquisition of Neuromag Oy
and the offset has been recorded as a reduction of goodwill in the accompanying
consolidated financial statements
The components of deferred tax assets at September 30, 2000 and 1999 are as
follows:
2000 1999
---- ----
Net operating loss carryforwards $ 10,901,000 $ 9,222,000
Tax credits 1,096,000 853,000
Capitalized research and development costs 325,000 297,000
Allowances 2,117,000 1,136,000
Other 959,000 436,000
-------------- ---------------
15,398,000 11,944,000
Valuation allowance (14,812,000) (11,944,000)
--------------- ----------------
Deferred tax assets $ 586,000 $ -
=============== ================
A valuation allowance for substantially all of the deferred tax assets has been
provided because realization of such future tax benefits cannot be assured. The
net deferred tax assets are attributable to the operations of Neuromag Oy. The
Company has approximately $30,000,000 and $12,500,000 of Federal and State net
operating loss carryforwards which will expire at various dates through 2020. As
a result of ownership changes (as defined by Section 382 of the Internal Revenue
Code of 1986, as amended) which occurred in fiscal 1995 and fiscal 1997, the
Company's tax loss carryforwards generated prior to fiscal
47
1997 have been limited to a total of approximately $18,650,000 of which
approximately $930,000 can be utilized per year as of September 30, 2000. Any
additional ownership changes may further limit the utilization of the net
operating loss carryforwards.
The provision for income taxes reconciles to the amount computed by applying the
federal statutory rate to loss before provision for income taxes as follows:
2000 1999 1998
---- ---- ----
Computed expected federal tax benefit $ (2,826,557) $ (2,537,354) $ (1,688,996)
State taxes, net of federal benefit (471,154) (223,884) (287,558)
Change in valuation reserve 2,867,727 1,434,000 1,169,000
Limitation of net operating loss
carryforwards and tax benefits - 630,000 830,000
Goodwill amortization 428,848 - -
Other 126,936 698,038 (21,646)
------------- ------------- --------------
Provision for income taxes $ 125,800 $ 800 $ 800
============= ============= =============
NOTE 10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company purchased certain equipment under capital leases which expire at
various dates through April 2004. Cost of equipment under capital leases
included in property and equipment in the accompanying consolidated balance
sheets totaled $88,769 with related accumulated depreciation of $23,712 as of
September 30, 2000.
The Company leases its office and production facilities and certain equipment
under non-cancelable operating leases expiring at various dates through December
2005. The Company's U.S. facility lease agreement expires in February 2003. The
Company's Finland facility lease expires in December 2005. During November 2000,
the Company sub-leased a portion of its U.S. facility through August 2001.
Approximate minimum future lease payments (net of sub-lease payments) as of
September 30, 2000 are as follows:
Year Ending September 30, Capital Leases Operating Leases
------------------------- -------------- ----------------
2001 $ 15,688 $ 800,000
2002 21,463 950,000
2003 19,004 507,000
2004 10,893 192,000
2005 - 192,000
Thereafter - 48,000
------------- -------------
$ 67,048 $ 2,689,000
=============
Less: amount representing interest (9,716)
--------------
Present value of obligations under
capital leases 57,332
Current portion (15,688)
--------------
$ 41,644
==============
Total rent expense was approximately $816,000, $743,000 and $604,000 for the
years ended September 30, 2000, 1999 and 1998, respectively.
CLINICAL COLLABORATIONS
48
The Company is currently involved with clinical collaboration agreements with
certain medical institutions utilizing the Company's MSI systems for research.
Under terms of the agreements, the Company provides certain services, product
and technical support and under one agreement is entitled to revenue sharing
from medical reimbursements received. During fiscal 2000 and 1999, the Company
incurred $237,000 and $221,000, respectively, of expenses related to those
agreements and at September 30, 2000 is committed to expend approximately
$280,000 through 2003. During fiscal 2000, revenue sharing of $95,000 was
earned.
LEGAL MATTERS
In the ordinary course of business, the Company is subject to claims and, from
time to time, is named in various legal proceedings. In the opinion of
management, the amount of ultimate liability, if any, with respect to any
actions will not materially affect the financial position or results of
operations of the Company.
NOTE 11. SHAREHOLDERS' EQUITY
COMMON STOCK
On August 5, 1998, the Company received $15,000,000 from the sale of 30,000,000
shares of common stock at $.50 per share to offshore investors pursuant to
Regulation S. Of the total 30,000,000 shares, 10,000,000 shares were sold to "La
Caixa", Caja de Ahorros y Pensiones de Barcelona, a financial institution in the
Kingdom of Spain, 10,000,000 shares were sold to Dassesta, a principal
shareholder of 4-D, 2,000,000 shares were sold to Swisspartners, and 8,000,000
shares were sold to other European banks.
In December 1997, the Company sold 4,000,000 unregistered shares of common stock
to Dassesta and an additional 1,500,000 unregistered shares of common stock to
Bank Leu under Regulation S at $.50 per share. Consideration received by the
Company in relation to the common stock sales consisted of cash totaling
$793,000 and cancellation of its then outstanding loan principal of $1,700,000,
related accrued interest of $38,000 and accounts payable of $219,000, all owed
to Dassesta.
STOCK OPTION PLANS
The Company has various incentive and non-qualified stock option plans which
provide that options to purchase shares of common stock may be granted to key
employees and others at an option price of at least fair market value at the
date of grant and vest over a maximum period of four years from the date of
grant. The exercise period for each option is not to exceed 10 years from the
date of grant. On December 31, 1996, the Company's 1987 Incentive Stock Option
Plan which provided options to purchase up to 5,000,000 shares of common stock
expired. At January 1, 1997, the 1997 Incentive Stock Option Plan was approved
by the Board of Directors, authorizing options to purchase 3,000,000 shares of
common stock. In May 1999 and March 2000 shareholders approved amendments of the
1997 Incentive Stock Option Plan, increasing the number of shares authorized for
issuance to 8,000,000 shares of common stock.
49
The following table summarizes common stock option plan activity:
Weighted Average
Options Exercise Price
------- --------------
Outstanding at September 30, 1997 4,327,477 $ 1.18
Granted 2,510,000 .45
Canceled (1,946,422) 1.55
Exercised (146,225) .50
------------ -----------
Outstanding at September 30, 1998 4,744,830 .66
Granted 2,566,000 .22
Canceled (70,900) .52
Exercised - -
----------- -----------
Outstanding at September 30, 1999 7,239,930 .51
Granted 715,500 .59
Canceled (338,120) .42
Exercised (1,200,155) .46
----------- -----------
Outstanding at September 30, 2000 6,417,155 $ .53
=========== ===========
The following table summarizes stock options outstanding as of September 30,
2000:
OUTSTANDING VESTING
------------------------------------------------------------------------------------
WEIGHTED-AVG.
REMAINING
RANGE OF CONTRACTURAL WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS LIFE IN YEARS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------------- ------- ------------- -------------- ------- --------------
$ 0.50 642,105 4.72 $ 0.50 642,105 $ 0.50
0.25- 0.75 804,400 6.26 0.05 804,400 0.50
0.28- 0.50 1,890,000 7.31 0.44 1,151,771 0.44
0.16- 0.26 2,380,150 8.75 0.21 805,249 0.21
0.16- 1.00 700,500 9.28 0.26 139,323 0.25
------------- -----------
$ 0.16-$1.00 6,417,155 7.67 $ 0.35 3,542,848 $ 0.41
============= ===========
If the Company had elected to recognize stock-based employee compensation costs
(including the Company's Employee Stock Purchase Plan) based on the fair value
on the date of grant consistent with the provisions of SFAS No. 123, net loss
and basic and diluted net loss per share would have been increased to the
following amounts:
2000 1999 1998
---- ---- ----
Pro forma net loss $ (9,113,423) $ (8,786,440) $ (6,093,477)
Pro forma basic and diluted net loss per share $ (.11) $ (.11) $ (.11)
The weighted-average fair values at date of grant for options granted during
fiscal 2000 and 1999 were between $.16 and $1.00 and were estimated using the
Black-Scholes option pricing model. The following assumptions were applied in
fiscal 2000, 1999 and 1998: (i) expected dividend yield of 0%, (ii) expected
volatility rates between 2.22 and 2.61, (iii) expected lives between 8 and 10
years, and (iv) risk-free interest rates ranging from 4.47% to 6.88%.
50
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. Option valuation models also require the input of highly
subjective assumptions such as expected option life and expected stock price
volatility. Because the Company's employee stock-based compensation plans have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, the Company believes that the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
those plans.
EMPLOYEE STOCK PURCHASE PLAN
The Company has established an Employee Stock Purchase Plan in which eligible
employees may use funds from accumulated payroll deductions to purchase shares
of common stock at the end of designated purchase periods. Employees may
contribute up to 15% of their base salary toward such purchases, not to exceed
$25,000 per calendar year. The purchase price is the lesser of 85% of the fair
market value of common stock determined at the beginning or end of the purchase
period. A total of 750,000 shares of common stock are authorized for purchase
under the Employee Stock Purchase Plan and 320,632 shares of common stock are
available for future purchases as of September 30, 2000. During the year ended
September 30, 2000, 315,317 shares were issued.
WARRANTS
In April 1995, the Company issued 486,200 warrants to purchase common stock at
$.60 per share in connection with certain debt financing. During fiscal 2000,
92,424 of these warrants were exercised and 393,776 warrants expired
unexercised.
NOTE 12. EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401(k) plan (the "Plan") for
substantially all of its U.S. employees. Those employees who participate in the
Plan are entitled to make contributions of up to 15 percent of their
compensation, limited by IRS statutory contribution limits. Company
contributions to the Plan are discretionary as determined by the Board of
Directors and the Company did not contribute any funds to the Plan in fiscal
2000, 1999, and 1998, respectively.
In accordance with Finnish law, Neuromag is required to make annual
contributions to a pension fund for the benefit of its employees. Pension
contributions are based on a fixed percentage of employees' salaries. Provided
that Neuromag makes such required contributions, it has no further obligations
related to such future employee pension benefits. For the year ended December
31, 2000, Neuromag made pension contributions totaling approximately $137,000.
51
NOTE 13. SELECTED QUARTERLY DATA (UNAUDITED)
Unaudited quarterly data for fiscal 2000, 1999 and 1998 is presented below:
(In thousands, except per share data) First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000
----
Net revenues $ 278 $ 331 $ 5,244 $ 2,538
Gross margin (169) (474) 2,331 (340)
Net loss (1,720) (3,591) (182) (2,634)
Basic and diluted net loss per share $ (.02) $ (.04) $ (.00) $ (.03)
1999
----
Net revenues $ 119 $ 2,648 $ 233 $ 254
Gross margin (204) 1,404 (285) (885)
Net loss (1,750) (875) (2,278) (2,561)
Basic and diluted net loss per share $ (.02) $ (.01) $ (.03) $ (.03)
1998
----
Net revenues $ 324 $ 1,736 $ 616 $ 163
Gross margin 58 488 203 (889)
Net loss (1,285) (597) (1,026) (2,060)
Basic and diluted net loss per share $ (.03) $ (.01) $ (.02) $ (.03)
52
4-D NEUROIMAGING
SCHEDULE II --VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs and End of
Description of Period Expenses Deductions Period
- ----------- --------- ---------- ---------- ------------
Allowance for doubtful accounts
Fiscal Year 2000 $ 410,420 - 200,000(A) $ 210,420
Fiscal Year 1999 $ 10,420 400,000 - $ 410,420
Fiscal Year 1998 $ 10,420 - - $ 10,420
(A) Collection of previously reserved amounts
- ---------------
Allowance for obsolete and slow moving inventory
Fiscal Year 2000 $ 2,341,870 60,000 152,318(B) $ 2,249,552
Fiscal Year 1999 $ 2,300,594 60,000 18,724(B) $ 2,341,870
Fiscal Year 1998 $ 1,710,659 840,191 250,256(B) $ 2,300,594
(B) Sale or disposal of items under allowance
53