UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-10285
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BIOMAGNETIC TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
California 95-2647755
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9727 Pacific Heights Boulevard, San Diego, California 92121-3719
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(Address of principal executive offices) (zip code)
(619) 453-6300
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Registrant's telephone number, including area code)
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(Former name, former address and formal fiscal year, if changed since last
report)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of February 1, 1997 Registrant had only one class of common stock
of which there were 47,691,824 shares outstanding.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BIOMAGNETIC TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31,
1996 SEPTEMBER 30,
(UNAUDITED) 1996
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ASSETS
Cash and cash equivalents $ 1,975 $ 1,752
Short-term investments 2,849 744
Restricted cash and short-term investments 1,542 6,085
Accounts receivable, less allowance for
doubtful accounts of $20 & $10 respectively 25 17
Inventories 6,606 5,627
Prepaid expenses and other current assets 286 338
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Total current assets 13,283 14,563
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Property and equipment 9,509 9,478
Less accumulated depreciation and amortization (8,689) (8,570)
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820 908
Restricted cash 500 500
Other assets 278 279
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Total assets $ 14,881 $ 16,250
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LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Accounts payable $ 2,631 $ 2,633
Accrued liabilities 1,111 1,888
Accrued salaries and employee benefits 774 860
Customer deposits 10,761 9,208
Income taxes payable 9 9
Note payable-related party 3,000
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Total current liabilities 15,286 17,598
Other liabilities 19 48
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Total liabilities 15,305 17,646
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SHAREHOLDERS' (DEFICIT) EQUITY
Common stock -- no par value, 60,000,000 shares
authorized; 47,691,824 and 39,974,222 shares
issued and outstanding in December and
September, respectively 81,555 78,467
Accumulated deficit (81,979) (79,863)
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Total shareholders' (deficit) equity (424) (1,396)
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Total liabilities and shareholders'
(deficit) equity $ 14,881 $ 16,250
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See notes to consolidated financial statements
2
BIOMAGNETIC TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
THREE MONTHS ENDED
DECEMBER 31,
1996 1995
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REVENUES
Product sales $ 33 $ 15
Service Revenues 135 84
Interest income 88 160
Other income (expense) 61 (64)
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Total revenues 317 195
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EXPENSES
Production costs 85 405
Service costs 15 22
Research and development 999 1,524
Marketing, general and administrative 1,264 1,308
Interest expense 69 9
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Total expenses 2,432 3,268
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NET LOSS $ (2,115) $ (3,073)
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NET LOSS PER SHARE $ (0.05) $ (0.08)
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 39,974 39,932
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See notes to consolidated financial statements
3
BIOMAGNETIC TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
DECEMBER 31,
1996 1995
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OPERATING ACTIVITIES
Net loss $ (2,115) $ (3,073)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 119 226
Changes in operating assets & liabilities:
Restricted cash 4,542 (694)
Accounts receivable (8) 52
Inventories (979) (484)
Prepaid expenses and other current assets 52 (45)
Accounts payable (1) 81
Accrued liabilities (776) 628
Accrued salaries and employee benefits (86) (4)
Customer deposits 1,552 2,014
Changes in other operating assets and liabilites (28) (33)
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Net cash used for operating activities 2,272 (1,332)
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INVESTING ACTIVITIES
Change in short-term investments (2,104) 680
Payments for property and equipment (32) (202)
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Net cash provided by (used for) investing activities (2,136) 478
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FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs 3,087 7
Repayment of notes payable (3,000)
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Net cash provided by (used for ) financing activities 87 7
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 223 (847)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,752 2,314
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,975 $ 1,467
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See notes to consolidated financial statements
4
BIOMAGNETIC TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein
include the accounts of Biomagnetic Technologies, Inc. and its subsidiary (the
"Company") and have been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although the Company believes that the
disclosures made in this report are adequate to make the information not
misleading, it is suggested that these financial statements be read in
connection with the financial statements and notes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended September 30,
1996.
In the opinion of the Company, the accompanying unaudited financial statements
contain all adjustments, consisting only of normal recurring accruals,
necessary to present fairly its financial position at December 31, 1996 and the
results of operations and its cash flows for the periods presented.
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
2. NET LOSS PER SHARE
Shares used in computing net loss per share include the weighted average of
common stock outstanding. Common stock equivalents are antidilutive and are
excluded from the computation of net loss per share.
3. INVENTORIES
The composition of inventories is as follows:
December 31, September 30,
1996 1996
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Raw materials $ 419 $ 546
Work-in process 4,082 3,356
Finished goods 2,105 1,725
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$ 6,606 $ 5,627
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4. MAGNES-Registered Trademark- WHOLE HEAD SYSTEM PRODUCTION AND DELIVERY RISK
The Company's backlog at December 31, 1996 amounted to $16,205,000 and is
composed primarily of orders for the new Magnes 2500 Whole Head Magnetic Source
Imaging System ("Magnes 2500 WH"). Although the Company commenced shipments of
its Magnes 2500 WH prior to the end of fiscal year 1996 there were no final
acceptances received from customers. Furthermore, although the Company received
provisional acceptance from two customers, there were no final acceptances
received from customers during the first quarter of fiscal year 1997. The delay
in receipt of customer acceptances is primarily due to a pending hardware
upgrade, the need for which was not identified prior to installing the systems
at customer sites, and additional software development required to meet customer
contractual requirements. Although the Company anticipates that the additional
system hardware upgrade and software development required by the contracts will
be completed during the second and third quarters of fiscal year 1997, there can
be no assurances that this will be accomplished. In the event that the hardware
upgrade and software development are not completed as anticipated, customer
final acceptances could be further delayed, which could have a material adverse
effect on the cash flow and cash resources of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for the historical information contained herein, the following discussion
contains, (and the Notes to the Consolidated Financial Statements contain)
forward-looking statements that involve risks and uncertainties. The Company's
future results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not specifically
limited to, failure to satisfy performance obligations, timely product
development, changes in economic conditions in various markets the Company
serves, and uncertainty regarding the Company's patents and propriety rights,
as well as the other risks detailed in this section. The Company does not
undertake to update the results discussed herein as a result of changes in risks
or operating results.
OVERVIEW
Since 1984, the primary business of the Company has been the development of
magnetic source imaging ("MSI") systems that measure magnetic fields generated
by the human body and assist in the noninvasive diagnosis of a broad range of
medical disorders. The measurement of the body's magnetic fields by MSI
provides information about the normal and abnormal functions of the brain, heart
and other organs. BTi is focusing the development of its MSI system on large
potential commercial market applications such as brain surgery and the diagnosis
of and surgical planning for treatment of epilepsy and life-threatening cardiac
arrhythmias.
Eighteen (18) Magnes systems were installed in medical and research institutions
worldwide at the end of the first quarter 1997. To date, more than 5,000 MSI
examinations have been performed on patients and control subjects at the
Company's application development sites. Related findings by BTi and its
collaborators have been published in more than 75 scientific and medical papers.
Since the first reimbursement for MSI procedures was received in September 1993,
75 insurance companies have approved reimbursement for certain MSI procedures
performed with the Company's Magnes MSI systems.
In fiscal 1995, BTi announced development of the Magnes 2500 WH, an expansion of
the existing Magnes I and Magnes II systems product line. Development of the
Magnes 2500 WH hardware was substantially completed in fiscal year 1996. The
Magnes 2500 WH allows simultaneous examination of the entire brain and is
designed for evaluating ambulatory or critically ill patients in a seated or
fully reclined position. The Company commenced shipments of its Magnes 2500 WH
prior to the end of fiscal year 1996. However, although the Company received
provisional acceptance from two customers, no final acceptances were received
either in fiscal year 1996 or in the first quarter of fiscal year 1997 which
ended December 31, 1996. The delay in receipt of customer final acceptances is
primarily due to a pending hardware upgrade, the need for which was not
identified prior to installing the systems at customer sites, and additional
software development required to meet customer contractual requirements.
The current price of BTi's MSI systems ranges from approximately $1.5 to $2.5
million, depending upon system configuration. A significant portion of the
Company's sales have been, and are expected to continue to be in foreign
markets. The Company generally prices its European sales in the currency of the
country in which the product is sold and the prices of such products in dollars
will vary as the value of the dollar fluctuates against the quoted foreign
currency price. There can be no assurance that currency fluctuations will not
reduce the dollar return to the Company on such sales. The Company periodically
enters into forward exchange contracts to hedge such foreign currency exposure.
RESULTS OF OPERATIONS
Total revenues for the first quarter of fiscal 1997 were $317,000 including
$135,000 of service revenues and $88,000 of interest income compared to $195,000
of total revenue, including $84,000 of service revenues and $160,000 of interest
income in the first quarter of fiscal 1996. Net loss in the first quarter of
fiscal 1997 amounted to $2,115,000 compared to a net loss of $3,073,000 for the
comparable period in the prior fiscal year. There were no Magnes 2500 WH system
and other Magnes system final acceptances in either the first quarter of fiscal
year 1997 or the first quarter of fiscal year 1996. The reduction in loss for
the quarter of approximately $958,000, was primarily due to reduction in
research and development expenses.
6
Research and development expenses amounted to $999,000 for the three month
period ended December 31, 1996. In fiscal year 1996 these expenses amounted to
$1,524,000 for the comparable period. The decrease is entirely due to
reductions of research and development expenses on the Magnes 2500 WH system.
Marketing, general and administrative expenses decreased by $44,000 to
$1,264,000 in the first quarter of fiscal year 1997, versus $1,308,000 in the
comparable period in fiscal year 1996. The current quarter decrease resulted
primarily from lower sales support and marketing expenses.
Order backlog for the Company's products at December 31, 1996 was $16,205,000,
as compared to $12,100,000 at December 31, 1995. Final customer acceptances of
the Magnes 2500 WH systems have been delayed for the reasons stated above.
Therefore, none of the September 30, 1996 system backlog was liquidated through
final customer acceptances and revenue recognition in the first quarter of
fiscal year 1997 ended December 31, 1996.
The amount of revenue which will be recognized in the second and subsequent
quarters of fiscal 1997 is dependent not only upon the orders and shipments but
also upon the completion of customer contractual requirements, and receipt of
final customer acceptances. As sales of the Company's products typically
involve transactions of $1.0 million or more, the backlog is expected to
fluctuate significantly from period to period depending upon orders received and
product installations completed as well as final customer acceptances obtained
during the reporting period.
The Company has an accumulated loss of $81,979,000 as of December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 the Company had a net working capital deficit of
$2,003,000, a reduction of $1,032,000 from net working capital deficit of
$3,035,000 at September 30, 1996. The decline in the net working capital
deficit primarily reflects the conversion of $3,000,000 of a short-term note
payable to the Company's major shareholder Dassesta International, S.A., plus
accrued interest on the note to common stock as of December 31, 1996, and also
reflects the loss of $2,115,000 in the first quarter of this year..
Current liabilities at December 31, 1996 of $15,286,000 include customer
deposits totaling $10,761,000, of which $5,517,000 is secured by standby letters
of credit through a credit facility with a bank.
Based on the Company's current operating plans, capital and working capital
expenditures necessary to support the completion of engineering development and
production of the Company's products, and other Company operations, through
September 30, 1997 are expected to substantially exceed cash generated from
operations, and will result in a further decline in the Company's liquidity. As
of December 31, 1996 the development of the Magnes 2500 WH was not sufficiently
complete to permit final customer acceptances and recognition of revenue. The
Company nevertheless anticipates that existing capital resources together with
its potential ability to borrow on a short-term basis will be sufficient to
complete development of the Magnes 2500 WH system and to provide operating
capital required to meet its obligations in the normal course of business
through fiscal year 1997.
During July 1996, the Company completed negotiations with its principal
shareholder, Dassesta International S.A., for an unsecured working capital loan
of $3,000,000. This advance loan, which carried a maturity date six months
after execution of the note in August 1996, bore interest at 9% per annum. The
principal amount of the loan, and any accrued interest thereon, was convertible
at the option of the Company into common stock at any time during the six months
at $.40 per share, and was also convertible at the option of the Note holder at
the end of the six months or upon default under the note at the same rate of
$.40 per share. The Company exercised its option and converted this $3,000,000
loan, and accrued interest, into 7,717,607 shares of common stock on December
31, 1996, increasing the outstanding shares to 47,691,824 as of December 31,
1996. As a result of this loan conversion, Dassesta is the holder of
approximately 69 percent of the Company's outstanding shares.
The Company's ability to meet its expected cash needs during fiscal 1997 will
depend on a number of factors, including the Company's ability to timely
complete the Magnes 2500 WH hardware upgrade and software development, the
market's acceptance and sales of the Magnes 2500 WH system, as well as the
Company's ability to raise working capital as may be needed, all of which cannot
be accurately predicted at this time. The Company may also attempt to obtain
additional sources of funding through short-term borrowings or other methods
such as through government grants and strategic alliances with other entities.
However, there can be no assurance that additional funds will be available when
needed and on terms favorable to the Company, that grant applications will
7
be approved or funded, that applications of the Company's technology will be
successfully developed, or that any agreements will be reached related to
strategic alliances. Given the Company's current under-capitalized position,
should additional funding not be available, the Company would be required to
significantly reduce the scope of its operations.
ADDITIONAL RISK FACTORS
The Company believes that the Magnes 2500 WH final development will be completed
in fiscal year 1997. Although significant effort continues to be expended to
complete the engineering development so that shipments will be accepted by
customers prior to the end of fiscal year 1997, there can be no assurance that
this will be accomplished. In the event such development is not completed as
anticipated, customer final acceptances will be further delayed, which would
have a further material adverse effect on the Company's cash flow and cash
resources. Furthermore, the Company generally recognizes revenues on a contract
only after customer final acceptance of the system. Thus, there is a delay
varying typically from one month to three or more months (or, in the case of
special problems as have been experienced with Magnes 2500 WH, longer) from the
time shipment takes place and the system is installed at the customer site,
tested and adjusted and final acceptance is obtained from the customer before
revenue is recognized by the Company.
Further delay in final customer acceptances would necessitate the move forward
within the fiscal 1997 year the need to obtain additional working capital, since
$5,517,000 of customer deposits are secured and are, therefore, not available to
be used as working capital until such time as system shipments take place, are
installed and accepted by the customer, and the customer deposit guarantees are
released.
To date the Company has been engaged principally in research and development
activities, and has made only low volume sales to research and medical
institutions primarily in Europe and Japan, and has not made any MSI system
sales for commercial/clinical use in the U.S. Such sales require prior FDA
approval. The Company has secured FDA approval for its Magnes I System, has
received 510(k) clearance to market its Magnes II System in the U.S., and has
recently applied for 510(k) clearance for its Magnes 2500 WH system. There can,
however, be no assurance that the Company will receive such approval in the near
future or at all.
The Company is dependent on its Magnes systems as its principal product for
which there are currently few demonstrated clinical applications. Additional
clinical applications development needs to be conducted with the MSI system at
major medical centers before the Company can begin to penetrate the commercial
clinical market. There can be no assurance that a market will develop for
diagnostic or monitoring uses of the MSI system.
The Company's commercial success is highly dependent on the availability of
reimbursement for procedures using its MSI system. To date reimbursements from
third-party payors are on a case-by-case basis. As of December 31, 1996, and
since the initial payment in September 1993, there have been a total of 153
reimbursements from 75 different third party payors in the U.S. There is no
assurance that third party reimbusements will become more widely available.
Reimbursement is not currently provided for such procedures by the United States
government, nor is there any assurance that the U.S. government will authorize
or budget for such procedures in the future. The Company also cannot predict
what legislation relating to its business or the health care industry may be
enacted in the future, including legislation relating to third party
reimbursement, or what effect such legislation may have on the results of its
operations. Regardless of legislation, industry trends are not favorable for
generous third-party reimbursement of diagnostic procedures requiring big-ticket
equipment.
The Company operates in an industry characterized by rapid technological change.
New products using other technologies or improvement of existing products may
reduce the size of the potential markets for the Company's products, and may
render them obsolete or non-competitive by competitors' development of new or
different products using technology or imaging modalities that may provide or be
perceived as providing greater value than the Company's products.
Additionally, there has been recently, and continues to be, ongoing significant
price competition from the Company's competitors for the currently limited
number of whole head systems being purchased worldwide. This aggessive
competition is likely to affect potential profitability of the Company's whole
head system, the extent to which is not presently determinable.
8
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In August 1996, the Company entered into a loan agreement with Dassesta
International S.A. ("Dassesta"), providing for loans to the Company of up to
$3,000,000 bearing interest at 9% per annum maturing in February 1997. The note
plus accrued interest was convertible into common shares at the option of the
Company at $.40 per share at any time and under certain conditions at the option
of Dassesta. As of September 30, 1996 the Company had borrowed the entire
$3,000,000.
On December 31, 1996 the Company exercised its option to convert the $3,000,000
short term loan from Dassesta, plus $87,040 of accrued interest thereon, into
common stock of the Company. A total of 7,717,602 shares were issued to
Dassesta in reliance upon Securities Act Section 3 (a) (9). The derivative
security (the note) had been issued in reliance upon Regulation S under the
Securities Act.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOMAGNETIC TECHNOLOGIES, INC.
Date February 14, 1997 /S/ James V. Schumacher
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James V. Schumacher
Chairman, Chief Executive Officer
Date February 14, 1997 /S/ Herman Bergman
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Herman Bergman
Vice President Finance, Chief Financial
Officer, Secretary
10