<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission file number: 001-12189
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IMAGE GUIDED TECHNOLOGIES, INC.
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(Exact name of small business issuer as
specified in its charter)
COLORADO 84-1139082
-------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5710-B FLATIRON PARKWAY, BOULDER, CO 80301
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(Address of principal executive offices) (Zip Code)
(303) 447-0248
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(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,702,822 shares of common stock, no
par value, were outstanding on July 31, 1998.
Transitional Small Business Disclosure Format (check one); Yes No X
----- -----
<PAGE>
Table of Contents
Part Item Page
- ---- ---- ----
I FINANCIAL INFORMATION
1. Consolidated Financial Statements
Consolidated Balance Sheet - June 30, 1998 1
Consolidated Statement of Operations -- Three Months 2
and Six Months Ended June 30, 1998 and 1997
Consolidated Statement of Cash Flows -- Six Months 3
Ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 4
2. Management's Discussion and Analysis or Plan of
Operation
Financial Condition and Results of Operations 4
Liquidity and Capital Resources 6
Forward-Looking Statements 7
Other Matters 9
II OTHER INFORMATION
1. Legal Proceedings 9
2. Changes in Securities 9
3. Defaults Upon Senior Securities 9
4. Submission of Matters to a Vote of Security Holders 9
5. Other Information 10
6. Exhibits and Reports on Form 8-K 10
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMAGE GUIDED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 168,000
Accounts receivable, net of allowance for
doubtful accounts of $348,000 2,040,000
Inventories, net 1,617,000
Other current assets 237,000
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Total current assets 4,062,000
Property and equipment, net of accumulated
depreciation of $ 677,000 4,269,000
Goodwill, net of accumulated amortization of $161,000 5,645,000
Other assets 126,000
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Total assets $14,102,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,015,000
Accrued liabilities 496,000
Current portion of capital lease obligations 274,000
Current portion of notes payable 1,540,000
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Total current liabilities 3,325,000
Capital lease obligations 1,145,000
Line of credit 1,834,000
Notes payable, net of discount of $131,000 1,584,000
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Total liabilities 7,888,000
Commitments and contingencies
Shareholders' equity:
Common Stock, no par value; 10,000,000 shares authorized;
3,697,822 shares issued and outstanding 10,447,000
Accumulated deficit (4,233,000)
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Total shareholders' equity 6,214,000
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Total liabilities and shareholders' equity $14,102,000
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-----------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
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IMAGE GUIDED TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $ 3,149,000 $1,324,000 $ 6,913,000 $2,496,000
Cost of goods sold 2,164,000 560,000 4,571,000 1,114,000
----------- ---------- ----------- ----------
Gross profit 985,000 764,000 2,342,000 1,382,000
----------- ---------- ----------- ----------
Operating expenses:
Research and development 386,000 222,000 804,000 414,000
Selling and marketing 429,000 157,000 720,000 318,000
General and administrative 873,000 270,000 1,680,000 525,000
----------- ---------- ----------- ----------
Total operating expenses 1,688,000 649,000 3,204,000 1,257,000
----------- ---------- ----------- ----------
Operating income (loss) (703,000) 115,000 (862,000) 125,000
Other income (expense):
Interest and other expense (197,000) (8,000) (407,000) (12,000)
Interest and other income 14,000 56,000 57,000 125,000
----------- ---------- ----------- ----------
Income (loss) before
extraordinary item (886,000) 163,000 (1,212,000) 238,000
Extraordinary item--loss
on early extinguishment of debt,
net of tax (253,000) --- (253,000) ---
----------- ---------- ----------- ----------
Net income (loss) $(1,139,000) $ 163,000 $(1,465,000) $ 238,000
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Earnings (loss) before
extraoridinary item
Basic $(0.24) $0.05 $(0.33) $0.08
Diluted $(0.24) $0.05 $(0.33) $0.07
Earnings (loss) per share
on net income
Basic $(0.31) $0.05 $(0.40) $0.08
Diluted $(0.31) $0.05 $(0.40) $0.07
Weighted average common
shares outstanding
Basic 3,697,822 3,106,024 3,697,822 3,106,024
Diluted 3,697,822 3,568,178 3,697,822 3,568,178
</TABLE>
The accompanying notes are an integral part of these
financial statements.
2
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IMAGE GUIDED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(1,465,000) $ 238,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 542,000 68,000
Extraordinary loss, net of tax 253,000 ---
Write-off fixed assets --- 8,000
Provision for doubtful accounts 172,000 9,000
Provision for inventory obsolescence 24,000 30,000
Changes in operating assets and liabilities:
Accounts receivable 455,000 (435,000)
Inventories (12,000) (40,000)
Other current assets and other assets 31,000 26,000
Accounts payable 27,000 (125,000)
Accrued liabilities 2,000 (69,000)
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Net cash provided by (used in) operating activities 29,000 (290,000)
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INVESTING ACTIVITIES:
Additions to property and equipment (169,000) (144,000)
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Net cash used in investing activities (169,000) (144,000)
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FINANCING ACTIVITIES:
Proceeds from stock option exercise 4,000 ---
Principal payments on capital leases (175,000) (7,000)
Principal payments on term loan (317,000) ---
Proceeds from debt 5,112,000 ---
Net proceeds from capital line of credit 75,000 ---
Net payments on working line of credit (579,000) ---
Principal payments to extinguish term loan (5,028,000) ---
----------- ----------
Net cash used in financing activities (908,000) (7,000)
----------- ----------
Net decrease in cash and cash equivalents (1,048,000) (441,000)
Cash and cash equivalents at beginning of period 1,216,000 5,240,000
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Cash and cash equivalents at end of period $ 168,000 $4,799,000
----------- ----------
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SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid $ 355,000 $ 6,000
SUPPLEMENTAL NON-CASH INVESTING AND
FINANCING ACTIVITIES
Warrants issued $ 50,000 ---
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
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IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying consolidated financial statements of Image Guided
Technologies, Inc. (the "Company") are unaudited. The term "Company"
includes it wholly owned subsidiary, Brimfield Precision, Inc. ("BPI") unless
the context requires otherwise. In the opinion of management, such
statements reflect all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation. Interim results of
operations are not necessarily indicative of results for the full year.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary from the date of acquisition. All significant
intercompany accounts and transactions have been eliminated in consolidation.
2. Inventories
Inventories are comprised of the following at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $ 612,000
Work-in-process 426,000
Finished goods 664,000
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1,702,000
Less allowance for obsolescence (85,000)
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$1,617,000
----------
----------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the results of operations and financial
condition should be read in conjunction with the financial statements and notes
thereto.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Revenue increased by $1,825,000, or approximately 138%, to $3,149,000 for
the three months ended June 30, 1998, as compared to $1,324,000 for the three
months ended June 30, 1997. This increase was due to the additional revenue
provided by sales of surgical instruments and implants by Brimfield Precision,
Inc. ("BPI"), offset by significantly slower sales for the Company's optical
localizer business, mostly due to fewer orders from a single customer.
4
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Cost of goods sold increased by $1,604,000, or approximately 286%, to
$2,164,000 for the three months ended June 30, 1998, compared to $560,000 for
the three months ended June 30, 1997. Cost of goods sold as a percentage of
revenue increased to 69% for the three months ended June 30, 1998, as
compared to 42% for the three months ended June 30, 1997. This increase in
cost of goods sold was attributable to increased sales provided by BPI and
the increase in cost of goods sold as a percentage of revenue was primarily
attributable to lower margins associated with the manufacture of surgical
instruments and orthopedic implants by BPI and reduced optical localizer
sales.
Research and development expenses increased by $164,000, or approximately
74%, to $386,000 for the three months ended June 30, 1998, compared to $222,000
for the three months ended June 30, 1997. This increase was principally due to
expenses for new image guided surgery product development and to the
consolidation of BPI's research and development expenses.
Selling and marketing expenses increased by $272,000 or approximately 173%,
to $429,000 for the three months ended June 30, 1998 as compared to $157,000 for
the three months ended June 30, 1997. This increase was attributable to a
$150,000 expense to increase bad debt reserve for a potentially uncollectible
receivable identified during the period. The remainder of the increase was due
to the addition of personnel and related expenses for the Company's optical
localizer business, as well as the consolidation of BPI's selling and marketing
expenses.
General and administrative expenses increased by $603,000 or approximately
223%, to $873,000 for the three months ended June 30, 1998, as compared to
$270,000 for the three months ended June 30, 1997. This increase was primarily
attributable to the amortization of goodwill related to the acquisition of BPI,
to additional corporate expenses necessary to restructure debt related to the
acquisition of BPI and to continue to integrate BPI after the acquisition, to
increased salaries, and to the consolidation of BPI's general and administrative
expenses.
Operating income decreased by $818,000 to $(703,000) for the three
months ended June 30, 1998 compared to operating income of $115,000 for the
three months ended June 30, 1997. This decrease was primarily attributable
to a significant decline in the Company's optical localizer sales, to
increased costs associated with the acquisition and integration of BPI, to
product development costs related to the Company's optical localizer
business, and to the non-cash expense to increase bad debt reserves.
Net other income (expense) decreased by $231,000 to $(183,000) for the
three months ended June 30, 1998 as compared to $48,000 for the three months
ended June 30, 1997. This change was primarily due to interest expense on debt
in connection with the acquisition of BPI.
The Company realized an extraordinary loss of $253,000 during the period
for warrants associated with the early extinguishment of debt.
As a result of the foregoing, the Company's net loss was $(1,139,000) for
the three months ended June 30, 1998, compared to net income of $163,000 for the
three months ended June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenue increased by $4,417,000, or approximately 177%, to $6,913,000 for
the six months ended June 30, 1998, as compared to $2,496,000 for the six months
ended June 30, 1997. This increase was primarily due to the additional revenue
provided by sales of surgical instruments and implants by Brimfield Precision,
Inc. offset by significantly lower sales of the Company's optical localizer
systems.
Cost of goods sold increased by $3,457,000, or approximately 310%, to
$4,571,000 for the six months ended June 30, 1998, compared to $1,114,000 for
the six months ended June 30, 1997. Cost of goods sold as a percentage of
revenue increased to 66% for the six months ended June 30, 1998, as compared
to 45% for the six months ended June 30, 1997. This increase in cost of
goods sold was primarily attributable to increased sales provided by BPI and
the increase in cost of goods sold as a percentage of revenue was primarily
attributable to lower margins associated with the manufacture of surgical
instruments and
5
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orthopedic implants by BPI and reduced optical localizer sales.
Research and development expenses increased by $390,000, or approximately
94%, to $804,000 for the six months ended June 30, 1998, compared to $414,000
for the six months ended June 30, 1997. This increase was principally due to
expenses for image guided surgery product development, and to the consolidation
of BPI's research and development expenses.
Selling and marketing expenses increased by $402,000 or approximately 126%,
to $720,000 for the six months ended June 30, 1998 as compared to $318,000 for
the six months ended June 30, 1997. This increase was primarily attributable to
an increase in bad debt reserves for a potentially uncollectible receivable, and
to the consolidation of BPI's selling and marketing expenses.
General and administrative expenses increased by $1,155,000 or
approximately 220%, to $1,680,000 for the six months ended June 30, 1998, as
compared to $525,000 for the six months ended June 30, 1997. This increase was
attributable to the amortization of goodwill related to the acquisition of BPI,
to the additional expenses necessary to acquire and integrate BPI, to increased
salaries, and to the consolidation of BPI's general and administrative expenses.
Operating income decreased by $987,000 to $(862,000) for the six months
ended June 30, 1998 compared to operating income of $125,000 for the six months
ended June 30, 1997. This decrease was primarily attributable to increased
costs associated with the acquisition of BPI and to product development costs.
Net other income (expense) decreased by $463,000 to $(350,000) for the six
months ended June 30, 1998 as compared to $113,000 for the six months ended
June 30, 1997. This change was primarily due to interest expense on debt in
connection with the acquisition of BPI and due to reduced interest income on
cash reserves.
As a result of the foregoing, the Company's net loss was $(1,465,000) for
the six months ended June 30, 1998, compared to net income of $238,000 for the
six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, $29,000 in cash was provided by
operating activities, depreciation and amortization, the write-off of warrants
associated with debt, increases in bad debt reserves, and decreases in accounts
receivable, offset by a net loss. The Company used $169,000 in cash for
investing activities during the six-month period ended June 30, 1998 to purchase
property and equipment. Also during the six-month period ended June 30, 1998,
$908,000 in cash was used in financing activities, principally for payments on
debt and principal payments on capital leases.
As of June 30, 1998, the Company had working capital of $737,000,
compared to working capital of $2,197,000 at December 31, 1997. The change
in working capital was primarily the result of decreases in cash and accounts
receivable. In order to improve cash flow and working capital, the Company
reduced personnel and associated costs related to the optical localizer
business during the period (such reduction was somewhat offset by the
continuing salary and associated costs of the former President and Chief
Operating Officer). The Company has received increased orders for localizers
subsequent to June 30, 1998, which indicates an upward trend in the sales of
optical localizer products.
BPI is projecting lower revenues for the second half of 1998 as compared
to the first half of 1998. As a result of the projected lower revenues, and
to improve operating efficiencies, BPI recently reduced personnel and
associated costs. During the June 30, 1998 quarter, the Company increased its
bad debt reserve by $150,000 to cover its estimated exposure to a $450,000
past due receivable.
On December 12, 1997, the Company finalized the acquisition of all the
outstanding stock of Brimfield Precision, Inc. ("BPI") for a purchase price of
approximately $9,844,000 consisting of approximately $8,069,000 in cash,
$500,000 in a subordinated note payable to Cruttenden Roth, Inc. ("Cruttenden")
and 579,710 shares of the Company's common stock. The purchase price includes
the expenses related to the acquisition. BPI sells surgical instruments and
implants to medical supply companies. Prior to its sale to the Company, BPI was
owned by William and Matthew Lyons. William Lyons has a one-year employment
contract with BPI as its President and has been elected a director of the
Company.
6
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On April 3, 1998, Imperial Bank (which had provided the bank loan for
the acquisition of BPI) assigned its loan to BankBoston. After the
assignment, BankBoston and the Company amended and restated the loan to
provide for a $2,700,000 sixty-month term loan (payable in 58 installments of
$40,000 in principal with a final principal payment of $380,000) at an
interest rate initially equal to the BankBoston base rate plus one-half of
one percent on the unpaid principal balance, and up to $3,000,000 (the actual
amount to be determined by calculating the borrowing base) pursuant to a
twenty-four month revolving loan at an interest rate initially equal to the
BankBoston base rate plus one-quarter of one percent. In addition, the
Company anticipates acquiring additional capital equipment during the
remainder of 1998, and plans to finance such purchases using its equipment
line of credit with BankBoston. The Company had agreed to raise $1,000,000 by
July 2, 1998 to pay off the $500,000 note due Cruttenden and to reduce the
principal amount of the BankBoston term loan by $500,000. BankBoston has
extended the July 2, 1998 funding date to August 31, 1998 and also waived
several June 30, 1998 covenants.
OTHER MATTERS
The Company's common stock is listed on the Nasdaq SmallCap Market and
the Boston Stock Exchange. For continued listing on the Nasdaq SmallCap
Market, a company must maintain, among other things, a least $2,000,000 in
net tangible assets and a minimum bid price of $1.00. For continued listing
on the Boston Stock Exchange, a company must maintain, among other things, at
least $1,000,000 in total assets and stockholders' equity of $500,000. The
Nasdaq Stock Market, Inc. has notified the Company that it must demonstrate
compliance with the Nasdaq SmallCap listing requirements by August 21, 1998
or it will be delisted.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS
131") was issued. SFAS 131 establishes standards for the reporting of segment
operations in annual financial statements. SFAS 131 is effective for annual
financial statements for periods beginning after December 15, 1997.
The Company anticipates that the adoption of SFAS 131 will not have a
material impact on its 1998 results of operations.
FORWARD-LOOKING STATEMENTS
The Company may, in discussions of its future plans, objectives and
expected performance in periodic reports filed by the Company with the
Securities and Exchange Commission (or documents incorporated by reference
therein) and in written and oral presentations made by the Company, include
projections or other forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act
of 1934, as amended. Such projections and forward-looking statements are based
on assumptions that the Company believes are reasonable, but are by their nature
inherently uncertain. In all cases, there can be no assurance that such
assumptions will prove correct or that projected events will occur, and actual
results could differ materially from those projected. Some of the important
factors that could cause actual results to differ from any such projections or
other forward-looking statements follow.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. Since the Company generally
ships its products on the basis of purchase orders, operating results in any
quarter are highly dependent on orders booked and shipped in that quarter and,
accordingly, may fluctuate materially from quarter to quarter. The Company's
operating expense levels are based on the Company's internal forecasts of future
demand and not on firm customer orders. Failure by the Company to achieve these
internal forecasts could result in expense levels that are inconsistent with
actual revenues. Moreover, the Company's results may also be affected by
fluctuating demand for the Company's products, declines in the average selling
prices for its products, and by increases in the costs of the components and
subassemblies acquired by the Company from vendors.
DEBT. The Company has a term loan of $2,600,000 and a revolving loan of up
to $3,000,000 with BankBoston. The Company also owes BankBoston approximately
$1,300,000 in connection with equipment financings and anticipates financing
additional equipment with BankBoston in 1998. The Company also owes Cruttenden
Roth, Inc. $500,000 pursuant to a one-year note due December 12, 1998 with
interest at 12% per annum. There can be no assurance that Bank Boston will
extend the August 31, 1998 funding date or waive any future loan defaults
that may occur.
NEED FOR ADDITIONAL CAPITAL. The Company needs to raise additional
capital to meet its obligations to BankBoston, Cruttenden Roth and to satisfy
its other capital needs. There can be no assurance that such capital will be
available on reasonable terms or at all.
DEPENDENCE ON FEW CUSTOMERS. The Company realizes a majority of its
revenues by sales to relatively few customers. None of these customers has
entered into any long term minimum purchase agreements with the Company. The
loss of, or substantial diminution of purchases from the Company by, any of
these customers could have a material adverse effect on the Company.
7
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TECHNOLOGICAL CHANGE IN THE MEDICAL INDUSTRY AND IN THE COMPANY'S PRODUCT.
There can be no assurance that the Company's competitors will not succeed in
developing or marketing products or technologies that are more effective and/or
less costly and which render the Company's products obsolete or non-competitive.
In addition, new technologies and procedures could be developed for medical and
other industries that replace or reduce the value of the Company's products.
The Company's success will depend in part on its ability to respond quickly to
technological changes through the development and improvement of its products.
The Company believes that a substantial amount of capital will be required to be
allocated to such activities in the future.
THE COMPANY'S ABILITY TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS. The
Company does not have any patents which directly cover its FlashPoint or Pixsys
optical localizers. The Company primarily relies on a combination of trade
secret and copyright laws, together with nondisclosure agreements to protect its
know-how and proprietary rights. There can be no assurance that such measures
will provide adequate protection for the Company's intellectual property rights,
that disputes with respect to ownership of its intellectual property rights will
not arise, that the Company's trade secrets or proprietary technology will not
otherwise become known or be independently developed by competitors or that the
Company can otherwise meaningfully protect its intellectual property rights.
Furthermore, there can be no assurance that others will not develop similar
products or software, duplicate the Company's products or software or that third
parties will not assert intellectual property infringement claims against the
Company. Moreover, there can be no assurance that any patent owned by, or
issued to, the Company will not be invalidated, circumvented or challenged, or
that the rights granted thereunder will provide meaningful competitive
advantages to the Company.
Litigation may be necessary to protect the Company's intellectual property
rights and trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement or invalidity.
Such litigation could result in substantial costs and diversion of resources,
regardless of the outcome of the litigation. If any claims are asserted against
the Company, the Company may be required to obtain a license under a third
party's intellectual property rights. However, such a license may not be
available on reasonable terms or at all.
COMPETITION BY EXISTING COMPETITORS AND POTENTIAL NEW ENTRANTS INTO THE
MARKETPLACE. Companies with substantially greater financial, technical,
marketing, manufacturing and human resources, as well as name recognition, than
the Company may enter markets currently serviced by the Company. Additionally,
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements and to devote substantially greater
resources to the development, marketing and sale of their products than the
Company. The Company's customers may develop their own products to be able to
differentiate their product or for other reasons. Furthermore, such competitors
may develop technologies and/or products other than that currently offered by
the Company that are more effective or economical.
REGULATION BY THE FDA. Noncompliance with applicable requirements of
FDA can result in, among other things, fines, injunctions, civil penalties,
recall or seizure of products, total or partial suspension of production,
failure of the government to grant premarket clearance or premarket approval
for medical devices, withdrawal of marketing approvals and criminal
prosecution. The FDA also has the authority to request repair, replacement
or refund of the cost of any medical device. In addition, international sales
of medical devices are subject to foreign regulatory requirements, which vary
from country to country.
THE RISK OF PRODUCT LIABILITY CLAIMS. The Company faces an inherent
business risk of exposure to product liability claims in the event that the use
of its products is alleged to have resulted in adverse effects. To date, no
product liability claims have been asserted against the Company. The Company
maintains a product liability and commercial general liability insurance policy
with coverage of $1,000,000 per occurrence and an annual aggregate maximum
coverage of $2,000,000 ($1,000,000 for lawsuits outside the United States,
Canada and Puerto Rico). The Company's product liability and general liability
policy is provided on an occurrence basis and is subject to annual renewal.
There can be no assurance that liability claims will not exceed the coverage
limits of such policy or that such insurance will continue to be available on
commercially reasonable terms or at all. If the Company does not or cannot
maintain sufficient liability insurance, its ability to market its products
could be significantly impaired.
8
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YEAR 2000 ISSUES. Many existing computer systems, applications
software, and other control devices rely on only two digits to identify the
year, without considering the impact of the upcoming change in the century.
As a result, such systems and applications could fail or create erroneous
results unless corrected so that they can process data related to the year
2000 (the "Year 2000 Issue"). The Company relies on its systems, applications
and devices in operating and monitoring all major aspects of its business,
including financial systems (such as general ledger and accounts payable
modules), customer service, manufacturing, infrastructure, embedded computer
chips, networks, telecommunications equipment and end products. The Company
also relies, directly or indirectly, on the external systems, software and
devices of business enterprises such as customers, suppliers, creditors,
financial organizations, consultants and governmental entities, both domestic
and international, for accurate exchange of data. The Company's current
estimate is that the costs associated with the Year 2000 Issue will not have
a material adverse effect on the results of operations or financial position
of the Company in any given year. However, the consequences of incomplete or
untimely resolution of the Year 2000 Issue will have a material adverse
effect on the results of operations or financial position of the Company.
Further, even if the Company's internal systems, applications and devices are
not materially affected by the Year 2000 Issue, the Company could still be
adversely affected through disruptions in the operations of other enterprises
with which the Company interacts.
THE COMPANY'S DEPENDENCE ON KEY MANAGEMENT AND TECHNICAL PERSONNEL AND ITS
ABILITY TO ATTRACT NEW PERSONNEL. The Company's success depends in significant
part on the continued contribution of certain key management and technical
personnel. The loss of services of any of these individuals could have a
material adverse effect on the Company. The Company's growth and profitability
also depend on its ability to attract and retain other management and technical
personnel.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
BPI is party to two lawsuits, which, while the outcome cannot be predicted
with certainty, the Company's management expects will not have a materially
adverse affect on the consolidated financial position or results of operations
of the Company.
ITEM 2. CHANGES IN SECURITIES
On May 19, 1998, the Company issued to A. C. Allen & Co., Inc., a five-year
warrant for 75,000 shares of the Company's common stock with an exercise price
of $2.281 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
BankBoston extended the requirement to raise $1,000,000 in equity to
August 31, 1998 and waived cash flow and net worth covenants at June 30,
1998. See "Liquidity and Capital Resources."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 19, 1998. At
the Annual Meeting, directors were elected to the Board, the Company's 1997
Stock Option Plan was amended to increase the number of shares available for
grant to 800,000 shares, an Employee Stock Purchase Plan was approved and the
selection of Price Waterhouse LLP as auditors for fiscal 1998 was ratified.
The results of the balloting were as follows:
9
<PAGE>
ELECTION OF DIRECTORS
FOR WITHHELD
--------- --------
A. Clinton Allen 2,496,671 112,572
Clifford F. Frith 2,486,671 112,572
Terry R. Knapp, M.D. 2,470,671 128,572
William G. Lyons 2,486,671 112,572
Paul L. Ray 2,178,523 470,720
AMENDMENT TO 1997 STOCK OPTION PLAN
FOR AGAINST ABSTAIN
2,360,268 237,475 1,500
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN
FOR AGAINST ABSTAIN
2,366,818 230,925 1,500
RATIFICATION OF APPOINTMENT OF PRICE WATERHOUSE LLP
FOR AGAINST ABSTAIN
2,596,243 0 3,000
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Document
------- -----------------------
10.31 Common Stock Purchase Warrant A. C. Allen & Co. Inc.
10.32 Consulting Agreement A. C. Allen & Co. Inc.
27.1 Financial Data Schedule for current year
See also 10K.
(b) Form 8-K Reports
None
10
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IMAGE GUIDED TECHNOLOGIES, INC.
(Registrant)
By: /s/ Paul L. Ray
---------------------------------
August 14, 1998 Paul L. Ray
Chairman of the Board, President
and Chief Executive Officer
By: /s/ Jeffrey J. Hiller
---------------------------------
August 14, 1998 Jeffrey J. Hiller
Vice President and Chief
Financial Officer (Principal
Accounting Officer)
11
<PAGE>
THIS WARRANT AND THE SHARES OF STOCK TO BE RECEIVED UPON ITS EXERCISE HAVE BEEN
ACQUIRED FOR INVESTMENT AND NEITHER HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 NOR QUALIFIED UNDER APPLICABLE STATE SECURITIES ACTS. THIS WARRANT
AND SUCH STOCK MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OFFERED FOR SALE OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION AND QUALIFICATION UNDER
SUCH ACTS OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH
REGISTRATION AND QUALIFICATION IS NOT REQUIRED.
Right to purchase 75,000
shares of Common Stock of
Image Guided Technologies, Inc.
IMAGE GUIDED TECHNOLOGIES, INC.
COMMON STOCK PURCHASE WARRANT
Image Guided Technologies, Inc., a Colorado corporation (the
"Company"), hereby certifies that, for value received, A. C. Allen & Co. Inc.,
or registered assigns, is entitled, subject to the terms set forth below, to
purchase at any time after the date hereof and on or before May 18, 2003,
seventy-five thousand (75,000) fully paid and nonassessable shares of common
stock, no par value (the "Common Stock"), of the Company at $2.281 per share
(the "Exercise Price").
The Exercise Price and number of shares are subject to adjustment as
provided herein.
I. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in full or in part by the
holder hereof by surrender of this Warrant, with the form of subscription at the
end hereof duly executed by such holder, to the Company, at its principal
office, accompanied by
<PAGE>
payment, in cash or by check payable to the order of the Company, in the
amount obtained by multiplying the number of shares so purchased times the
Exercise Price.
(b) In lieu of delivering the Exercise Price in cash or
check the holder may elect to receive shares equal to the value of the Warrant
or portion thereof being exercised ("Net Issue Exercise"). If the holder wishes
to elect the Net Issue Exercise, the holder shall notify the Company of its
election in writing at the time it delivers to the Company the subscription
form. In the event the holder shall elect Net Issue Exercise, the holder shall
receive the number of shares of Common Stock equal to the (i) product of (x) the
number of shares of Common Stock purchasable under the Warrant, or portion
thereof being exercised and (y) the current market price per share, as defined
below, of one share of Common Stock minus the Exercise Price, divided by (ii)
the current market price per share, as defined below, of one share of Common
Stock. For the purpose of the above computation, the current market price per
share of Common Stock at any date shall be deemed to be the closing price on the
business day immediately preceding such date. The closing price for any day
shall be the last sale price or, in case no such reported sale takes place on
such day, the average of the last reported bid and asked prices, in either case
on the principal national securities exchange on which the Common Stock is
admitted to trading or listed, or if not listed or admitted to trading on such
exchange, as reported by NASDAQ, or other similar organization if NASDAQ is no
longer reporting such information, or if not so available, the fair market price
as determined by the Board of Directors.
(c) If this Warrant is exercised for less than all the
shares of the Common Stock covered hereby, the holder shall be entitled to
receive a new Warrant covering the number of shares for which this Warrant shall
not have been exercised. This
<PAGE>
Warrant will expire at 5:00 p.m., Boulder, Colorado Time on May 18, 2003, at
which time all rights evidenced by this Warrant shall cease and this Warrant
shall become null and void.
2. DELIVERY OF STOCK CERTIFICATES, ETC., ON EXERCISE. As soon
as practicable after the exercise of this Warrant, the Company will cause to be
issued in the name of and delivered to the holder hereof, or as such holder may
direct (subject to the legend set forth on the face hereof), a certificate or
certificates for the number of fully paid and nonassessable shares of Common
Stock to which such holder shall be entitled upon such exercise. The Company
may place a legend on any certificate issued hereunder which it, in its sole
discretion, deems necessary to comply with any applicable law and the Company
may provide any conditions to exercise that it, in its sole discretion, deems
necessary to comply with any applicable law, including, a requirement that the
holder represent that the Common Stock is being purchased only for investment
and without any present intention to sell or distribute the same. All
documentary stamp taxes payable on account of such issue shall be paid for by
the Company.
3. RESERVATION OF COMMON STOCK. The Company will at all times
keep reserved out of the authorized and unissued shares of Common Stock a number
of shares sufficient to provide for the exercise of the Warrant.
4. ADJUSTMENT. The Exercise Price in effect at any time and
the number of securities purchasable upon the exercise of the Warrant shall be
subject to adjustment on the occurrence of any of the following events. In case
the Company shall (i) declare a dividend or make a distribution on its
outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or
reclassify its outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding shares of Common
<PAGE>
Stock into a smaller number of shares, the Exercise Price in effect at the
time of the record date for such dividend or distribution or of the effective
date of such subdivision, combination or reclassification shall be adjusted
so that it shall equal the price determined by multiplying the Exercise Price
by a fraction, the denominator of which shall be the number of shares of
Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Whenever the Exercise Price payable upon
exercise of the Warrant is adjusted pursuant to the preceding sentence, the
number of Shares purchasable upon exercise of this Warrant shall
simultaneously be adjusted by multiplying the number of Shares initially
issuable upon exercise of this Warrant by the Exercise Price in effect on the
date hereof and dividing the product so obtained by the Exercise Price, as
adjusted.
5. LIQUIDATION, MERGER, ETC. Upon the effective date of the
liquidation, dissolution or winding-up of the Company or of a merger or
consolidation of the Company with one or more corporations in which the Company
is not the surviving corporation, the Warrant and any right to purchase shares
thereunder shall terminate, but the holder shall have the right immediately
prior to such effective date to purchase the full (or any part thereof) number
of shares under the Warrant which the holder would otherwise have been entitled
to purchase during the remaining term of the Warrant.
6. NOTICE. The Company may not (i) declare any dividends
(other than stock dividends) or make any other distributions upon its Common
Stock, (ii) liquidate, dissolve or wind up, or (iii) merge or consolidate with
or into another corporation where it is not the surviving entity, without in
each case giving the holder hereof 15 days' written notice in advance of such
event. All notices shall be in writing and shall be deemed given when
<PAGE>
delivered personally or when deposited in the United States mail, postage
prepaid, addressed to the holder at such holder's address appearing on the
books of the Company.
7. TRANSFER OF WARRANTS, ETC. This Warrant is issued upon the
following terms, to all of which each holder or owner hereof by the taking
hereof consents and agrees:
(a) Transfer of this Warrant is subject to the legend set
forth on the face hereof;
(b) Subject to the foregoing, title to this Warrant may be
transferred on the books of the Company, which the Company will maintain for
such purpose at its principal office, by the registered holder hereof or by such
registered holder's attorney; and
(c) Until this Warrant is transferred on the books of
the Company, the Company may treat the registered holder hereof as the
absolute owner and holder hereof for all purposes, notwithstanding any notice
to the contrary. This Warrant does not confer upon the holder hereof any
right whatsoever as a stockholder of the Company.
IN WITNESS WHEREOF, Image Guided Technologies, Inc. has caused this
Warrant to be signed by its President and attested by its Assistant Secretary.
<PAGE>
Dated as of May 19, 1998.
IMAGE GUIDED TECHNOLOGIES, INC.
By: /s/ Paul L. Ray
-------------------------------
President
(Corporate Seal)
ATTEST:
/s/ Jeffrey Hiller
- ---------------------------------
Assistant Secretary
<PAGE>
FORM OF SUBSCRIPTION
To: Image Guided Technologies, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________ shares of Common Stock of Image Guided
Technologies, Inc. and herewith makes payment of $__________ therefor, and
requests that the certificates for such shares be issued in the name of, and
delivered to, ___________________________________________, whose address is
_____________________________________________________________________________.
Dated: ____________________________________, ______.
(The signature must conform in all respects to the
name of holder as specified on the face of the
Warrant.)
<PAGE>
CONSULTING AGREEMENT
Effective March 2, 1998, IMAGE GUIDED TECHNOLOGIES a Colorado corporation
(the "Company"), and A. C. ALLEN & COMPANY (the "Consultant"), hereby agree as
follows:
1. ENGAGEMENT OF THE CONSULTANT: TERM The Company hereby retains the
Consultant for the one (1) year period beginning March 2, 1998 and ending March
2, 1999 to act as a consultant to the Company as hereinafter provided. The term
of this Agreement shall be automatically extended for additional one (1) year
terms effective upon the expiration of the original one (1) year term and each
extended term unless either the Company or the Consultant shall give written
notice to the other thirty (30) days prior to the expiration of the then current
term of its desire to terminate this Agreement as of the end of such then
current term.
2. SERVICES The Consultant agrees to act as a consultant to the Company
with respect to the management of the Company's business. The Consultant's
duties will include advising the Company's management with respect to strategic
planning in all areas of the Company's business including marketing,
acquisitions, operations and finance. It is understood that no minimum number
of hours will be required of the Consultant.
3. COMPENSATION In consideration for the consulting services to be
rendered by the Consultant to the Company hereunder, the Company shall pay to
the Consultant $4,000 per month payable on the fifteenth day of each month
beginning March 2, 1998, throughout the term hereof.
4. EXPENSES The Consultant shall be entitled to reimbursement for all
normal and reasonable expenses necessarily incurred by them in the performance
of their obligations hereunder including without limitation first class airfare.
-1-
<PAGE>
5. AVAILABILITY The Consultant agrees to be available during the period
of this Agreement, upon reasonable notice, for consultation and advice at the
request of the Company from time to time. Any failure of the Company to request
such services shall not terminate this Agreement or alter, change, or diminish
the obligation of the Company to the Consultant hereunder.
6. CONFIDENTIALITY The Consultant acknowledges that in providing its
services hereunder the Consultant will become privy to information, some of
which may be confidential, and proprietary information of the Company. The
Consultant agrees that it shall hold all such confidential and proprietary
information of the Company in its possession in confidence and as proprietary to
the benefit of the Company. The Consultant shall take such steps as it deems
appropriate in order to protect confidentiality of such information.
7. INDEPENDENT CONTRACTOR The Consultant is an independent contractor of
the Company and is not entitled to any benefits, privileges or reimbursements
given or extended by the Company to its employees.
8. ASSIGNABILITY This Agreement shall not be assignable by either party
without the prior consent of the other.
9. NOTICE Any notice hereunder shall be deemed given two (2) days after
it has been mailed by registered or certified mail, postage prepaid, as follows:
To Consultant: Mr. A. Clinton Allen
A. C. Allen & Company, Inc.
1280 Massachusettes Ave., Ste. 200
Cambridge, MA 023138
To Company: Paul L. Ray
Chief Executive Officer
Image Guided Technologies, Inc.
5710-B Flatiron Parkway
Boulder, CO 80301
except that either party may from time to time by written notice to the other
designate another address, which shall thereupon become its effective address
for the purposes of this Section.
-2-
<PAGE>
10. AMENDMENTS All amendments to this Agreement must be set forth in
writing and signed by the parties.
11. GOVERNING LAW This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Massachusettes.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed in duplicate counterparts as of the date first above written.
IMAGE GUIDED TECHNOLOGIES, INC.
By: /s/ Paul L. Ray
--------------------------------
PAUL L. RAY
By: /s/ A Clinton Allen
--------------------------------
A. CLINTON ALLEN
-3-
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 168,000
<SECURITIES> 0
<RECEIVABLES> 2,388,000
<ALLOWANCES> 348,000
<INVENTORY> 1,617,000
<CURRENT-ASSETS> 4,062,000
<PP&E> 4,946,000
<DEPRECIATION> 677,000
<TOTAL-ASSETS> 14,102,000
<CURRENT-LIABILITIES> 3,325,000
<BONDS> 0
0
0
<COMMON> 10,447,000
<OTHER-SE> (4,233,000)
<TOTAL-LIABILITY-AND-EQUITY> 14,102,000
<SALES> 6,913,000
<TOTAL-REVENUES> 6,913,000
<CGS> 4,571,000
<TOTAL-COSTS> 7,775,000
<OTHER-EXPENSES> 350,000
<LOSS-PROVISION> 172,000
<INTEREST-EXPENSE> 366,000
<INCOME-PRETAX> (1,436,000)
<INCOME-TAX> 29,000
<INCOME-CONTINUING> (1,212,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (253,000)
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<EPS-PRIMARY> (.40)
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