U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number 0-21320 February 28,
1998.
MAGNA-LAB INC.
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(Name of small business issuer in its charter)
New York 11-3074326
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(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
P.O. Box 780, Syosset, NY
(formerly P.O.Box 1313, Brentwood, N.Y. 11717) 11791
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number - (516) 595-2111
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock, $.001 par value per share
(Title of Class)
Redeemable Class E Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 NO X
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Check if no disclosure of delinquent files in response to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB (X)
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The issuer's revenues for its most recent fiscal year ended February 28, 1998:
$ 0 .
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The aggregate market value on April 30, 1998 of the publicly trading voting
stock held by non-affiliates (consisting of Class A Common Stock, $.001 par
value) computed on the average bid and asked prices of such stock on that date
was approximately $ 4,000,000.
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As of April 30, 1998, 19,422,142 shares of Class A Common Stock, $.001 par value
and 764,858 shares of Class B Common Stock, $.001 par value, were outstanding.
Transitional small business disclosure format (check one) YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE - None
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
(A) HISTORY/BUSINESS DEVELOPMENT
Magna-Lab Inc. (the "Company") was incorporated as a New York corporation
on February 22, 1991 and commenced operations on February 10, 1992. Prior to
February 10, 1992, the activities of Minkoff Research Labs, Inc. (the
"Predecessor") can be considered a predecessor to the Company. Minkoff Research
Labs, Inc. was formed in October 1989 by Dr. Lawrence A. Minkoff, the Company's
President and Chief Scientific Officer, to, among other things, conduct research
and development of magnet technologies. In February 1992, the Company was
initially funded.
In October 1992, the Board of Directors approved the split (effective in
December 1992) of the Company's shares approximately 21,532 for one. In December
1992, the Company effected a recapitalization pursuant to which all then
outstanding shares of Common Stock were reclassified as Class B Common Stock,
having 5 votes per share. In April and May of 1993, the Company completed the
initial public offering of 1,150,000 units of its equity securities (See Note 8
to Consolidated Financial Statements, Item 7.) yielding net proceeds of
approximately $5.4 million. In July and August 1995, $1,250,000 principal amount
of Bridge Notes together with warrants to purchase 625,000 shares of Class A
Common Stock and an additional $166,667 in cash were converted into 625,000
shares of Class A Common Stock. In January 1996, the Company completed the
public offering of 1,850,000 shares of Class A Common Stock and Class E Warrants
to purchase 925,000 shares of Class A Common Stock yielding net proceeds of
approximately $4.6 million. In February 1997 the Company issued a Note payable
in March 1997 to a shareholder for $75,000 bearing interest at prime plus 2%
until March 1997 and a penalty rate thereafter. In February 1997, the Company
sold 300,000 shares of its Class A Common Stock in a private placement with
accredited investors for $100,000. In December 1997, the Company completed the
private placement, to accredited investors, of 15,072,000 Class A Common Shares
for proceeds of approximately $1,884,000.
In May 1997, the Company vacated its principal executive office and its
address is now P.O. Box 780, Syosset, New York 11791 and its telephone number is
(516) 595-2111. From April 1996 until May 1997, the Company's principal
executive office had been 250Z Executive Drive, Edgewood, N.Y. 11767 and its
telephone number was (516)-595-2111. Prior thereto, the Company's principal
executive office was located at 950 South Oyster Bay Road, Hicksville, New York
11801 and its telephone number was (516) 575-2111.
Since commencement of operations on February 10, 1992, Magna-Lab Inc. and
subsidiary (the "Company") has developed and intended to manufacture and market
the MAGNA-SL, the first of a planned series of anatomy specific MRI (Magnetic
Resonance Imaging) products which are smaller and cost less to own, install and
operate than present "whole body" MRI systems. The Company's efforts to market
and sell the MAGNA-SL did not generate sufficient revenues to sustain the
Company's planned operations.
Since receiving US marketing clearance for the MAGNA-SL in September 1994
from the Food and Drug Administration, the Company sold and delivered four
MAGNA-SL scanners. Three such sales were made to a related party with which the
Company had entered into a sales, marketing and distribution agreement. The
third scanner delivered to this related party has not been paid for by such
related party and the Company has written off this receivable. The Company is
presently unable to support this product and the passage of time may make it
impossible to realize any value from this product.
CURRENT ACTIVITIES - In February 1997, the Company commenced a plan of
restructuring of the Company's operations (the "Plan") to reposition itself into
a royalty and development company in the near-term. The Company's activities
under the Plan in the fiscal year ended February 28, 1998 have included
elimination of Company-directed production, marketing, administration and system
engineering and development related to the MAGNA-SL and attempting to strengthen
the relationship with Elscint Cryomagnetics, Ltd. ("Elscint" - see Note 4 to
Consolidated Financial Statements, Item 7.) which was begun in June 1996. A
critical component of the repositioning involves a new development initiative in
Cardiac MRI (the "Cardiac MRI Initiative") through a joint collaboration with
the Cardiac Institute of the Mount Sinai School of Medicine (New York City)
("MSSM"), as well as raising sufficient financing to pursue the Cardiac MRI
Initiative. The Company has received a proposal from Elscint (the "Elscint
Proposal") to support the license element of the Plan and has continued to have
discussions with Elscint regarding certain work that is integral to the Plan.
The Company has, however, been unable to finalize the Elscint Proposal because
of various difficulties in its negotiation with Elscint, including a lack of
adequate funds and the Company's belief that plans submitted by Elscint did not
represent a sufficient enough opportunity for the Company's shareholders.
In accordance with the Plan, in March 1997, the majority of the Company's
workforce including the entire sales and marketing staff, the production and
engineering and administrative staff were terminated. Further, the Company,
shortly thereafter, vacated its production, development and executive facility
and ceased the need for other assets including leased assets with remaining
non-cancelable terms, and took other measures. The Company recorded a
restructuring charge of approximately $1.5 million to the fourth quarter ended
February 28, 1997 for write downs of fixed assets, inventories, deposits made
with strategic vendors which are non-refundable, as well as accruals for lease
termination and other costs. While the ultimate amount may differ from this
estimate, the Company presently believes that such restructuring charge is
adequate. At February 28, 1998, only the Company's President and Chief
Scientific Officer, is in the full time employ of the Company.
When the Company vacated its principal production, development and
executive facility, it placed certain inventory and equipment in storage and
several key individuals continued the search for new capital and the advancement
of the development collaboration with the MSSM. The Company's operations were,
therefore, severely curtailed.
In December 1997, the Company's efforts to raise additional financing to
advance the Plan and initiate the Cardiac MRI Initiative were successful in
raising $1.884 million in a private placement of 15,072,000 shares of common
stock (the "December 1997 Financing"). Such financing was conditioned on the
Company initiating a program to pay its liabilities on a reduced basis (the
"Debt Reduction Program"). Since December 1997, the Company has: (1) initiated
and advanced the Cardiac MRI Initiative, (2) continued the Debt Reduction
Program and (3) continued to have discussions with Elscint with the objective of
advancing the Elscint Proposal. The December 1997 Financing is believed to be
sufficient to fund the Company's operations for approximately six months (from
December 1997), assuming success in its Debt Reduction program and discussions
with Elscint. Thereafter, or sooner if these assumptions are incorrect, the
Company will require significant additional financing to support the Plan. It is
expected that the Company's ability to obtain such additional financing will be
dependent upon the success of the Debt Reduction Program, negotiations regarding
the Elscint Proposal and the success of development activities with MSSM.
The Company is continuing its efforts to (1) raise additional capital to
support the Plan, (2) complete the Elscint Proposal or enter into a strategic
arrangement with others, (3) complete the Debt Reduction Program and (4) move
forward with the Cardiac MRI Initiative. There is no assurance that any of these
efforts will be successful or that the Company will be able to continue even its
significantly reduced operations, for which the Company will require additional
capital.
GOING CONCERN CONSIDERATION - As indicated in the accompanying consolidated
financial statements as of February 28, 1998, the Company had negative working
capital, approximately $765,000 of liabilities, negative net worth of
approximately ($149,000) and a development agenda which requires additional
financing. Further, as indicated in the accompanying consolidated financial
statements, the Company has incurred a cumulative loss of approximately $15.5
million since inception and has no present revenue. Losses have continued since
February 28, 1998. These factors, among others, indicate that the Company is in
need of significant additional financing and or a strategic business arrangement
in order to continue the Plan in the fiscal year beginning March 1, 1998.
There can be no assurances that management's plans described in the
preceding paragraphs will be realized. These factors, among others, indicate
that the Company may be unable to continue operations as a going concern.
(B) BUSINESS OF ISSUER
GENERAL
The Company has developed and had intended to manufacture and market the
MAGNA-SL(R), the first of a planned series of anatomy-specific MRI products
which are smaller and cost less to own, install and operate than present "whole
body" MRI systems. Further, because the Company's scanners are open on three
sides and require only the part of the body being scanned to be placed inside
the scanner, they should not elicit the claustrophobic responses many patients
have to most whole body scanners. Unlike new "open" whole body systems, which
use "low-field" magnets, the MAGNA-SL uses a "mid-field" permanent magnet and
therefore produces image quality comparable to that of "mid-field" whole body
scanners (which the Company believes represent the majority of the MRI market).
The Company received US marketing clearance for the MAGNA-SL in September
1994 from the Food and Drug Administration ("FDA") through submission of a
510(k) premarket notification. The Company has sold and delivered four MAGNA-SL
scanners. Three such sales were made to a related party with which the Company
has entered into a sales, marketing and distribution agreement. The third
scanner delivered to this related party has not been paid for by such related
party and the Company has provided for this receivable. (See Item 12 - "Certain
Relationships and Related Transactions" and Notes to Consolidated Financial
Statements, Item 7.).
In June 1996, the Company and Elscint signed a definitive agreement
covering a strategic business arrangement in which Elscint would manufacture the
MAGNA-SL for marketing and sale by Elscint in certain non-United States
territories including Europe, the Peoples Republic of China, parts of the Middle
East and Latin America, Australia and other territories. The Company would be
paid royalties on each system manufactured and sold by Elscint. To maintain its
rights under the agreement, Elscint is required to sell a minimum number of
systems. Escint has the right to cure shortfalls by, among other things, making
payment of approximately 87% of the minimum royalties. Upon execution of the
agreement, a nonrefundable deposit of $250,000 was paid to the Company to be
applied to first year royalties. Elscint has a right of first negotiation on
certain new products.
The parties agreed to certain development tasks and enhancements, which, if
not completed by the Company in November 1996, could, if not cured, result in
termination of the agreement by Elscint. Elscint has informed the Company that
it is not satisfied with the completion of certain of the tasks agreed to by the
parties. The parties then negotiated a new completion date for the tasks with
Elscint reserving all of its rights including the right to complete the tasks
itself at the Company's expense or to terminate the agreement. Elscint informed
the Company that it was not satisfied with the Company's completion of the tasks
after the new completion date. Subsequently, Elscint presented to the Company
its proposal (the "Elscint Proposal") to take over the uncompleted tasks and to
initiate a major alteration and improvement of certain systems comprising the
MAGNA-SL. The Elscint Proposal requires a development payment of $500,000 plus
certain support activities from the Company. The Company has agreed to go
forward with Elscint Proposal but has been unable to make any of the required
payments to initiate or complete the Elscint Proposal. In May 1997, the Company
received notification from Elscint that it would reserve the right to terminate
its agreement with the Company and seek damages from the Company as a result of
the Company's failure to cure the deficiencies identified by Elscint or
alternatively to move forward with the Elscint Proposal. Elscint has
subsequently indicated to the Company that it still wished to proceed with the
Elscint Proposal. In May 1998, Elscint indicated to the Company that it is
unsatisfied with the Company's response to it's proposal.
A third party has alleged that the terms of a Company engagement with that
third party call for a fee to them with respect thereto. During October 1997,
the parties agreed to settle this matter for the issuance of 125,000 shares of
Class A Common Stock.
In May 1997, the Company entered into an agreement with Mount Sinai School
of Medicine ("MSSM") and Dr. Valentin Fuster (as principal investigator) for a
collaborative research arrangement devoted to utilizing MRI in cardiac arterial
imaging and requiring payments totaling approximately $1.5 million over three
years. The Company has paid MSSM $300,000 during the fiscal year ended February
28, 1998 to advance the Cardiac MRI Initiative.
INDUSTRY BACKGROUND
MRI, also known as nuclear magnetic resonance imaging, is a medical
diagnostic imaging procedure which produces images of slices of the body
allowing physicians to view the internal human anatomy. MRI has certain
advantages over other imaging procedures such as computerized axial tomography
(CAT), Positron Emission Tomography (PET) and X-ray. MRI does not use X-rays, or
any other ionizing radiation as in other nuclear medicine techniques and can
produce soft tissue contrast differences many times greater than other
procedures. MRI can acquire data in any planar orientation, is not limited to
cross sectional slices and provides greater flexibility in imaging a wide
variety of pathologies. MRI systems create images by analyzing the behavior of
hydrogen atom nuclei in the body. The living body contains a number of hydrogen
atoms, mostly in the form of water. MRI systems typically consist of a large
magnet, radio signal generators, radio signal receivers and computer hardware
and software. By affecting the alignment and behavior of nuclei using an
external magnet and radio waves, MRI systems obtain information and process the
information by a computer to create an image of the internal human anatomy which
is displayed on a video monitor.
MRI systems in use are often categorized into low-field, mid-field and
high-field systems. Such designations refer to the strength of the magnetic
field utilized in the system. Generally, higher field strength equates to
greater resolution and/or speed of production of the images. Published industry
data suggest that mid-field systems are the most prevalent systems. There are
estimated to be over four thousand MRI scanners in operation in the United
States. Substantially all of them require the human body to be placed in a long
tube in which the magnetic field is generated. Whole body MRI machines generally
cost in excess of $1,000,000 and typically require substantial space to install.
Recently, so called "open" machines have entered the marketplace. Such systems
primarily rely on low-field magnets in a more open architecture to accommodate
those persons who cannot tolerate the mid-field and high-field whole body MRI
systems because of the person's size or feelings of claustrophobia. An industry
source has estimated that during 1991 approximately six million four hundred
thousand MRI procedures were performed in the United States. The number of
procedures were estimated, by that industry source, to increase to eleven
million MRI procedures by 1995. Of the 1991 historical estimate and 1995
projected estimate, approximately 31% and 35%, respectively, were estimated to
be head scans, 42% and 39%, respectively, were estimated to be spine scans, 19%
and 19%, respectively, were estimated to be extremities (knees, elbows, wrists,
feet and hands) scans and 8% and 7%, respectively, were estimated to be other
(breasts, cardiac, jaw, abdomen, shoulder and hip) scans.
THE COMPANY'S MRI SYSTEM AND PROPOSED SYSTEMS
THE MAGNA-SL
The Company has developed and, in September 1994, received regulatory
clearance from the FDA to begin marketing, its first MRI scanner, the MAGNA-SL.
The MAGNA-SL is not currently available for sale due to the Company's
curtailment of operations as well as difficulties with vendors and the absence
of a technical workforce to build, install and service such systems. When it was
available, the MAGNA-SL was to have sold for less than $500,000 and have low
installation and operating costs compared to whole body MRI scanners. Four
MAGNA-SL scanners have been delivered to and accepted by customers, including
three scanners which were shipped to a related party, the third of which remains
unpaid. If the Plan is successful, the Company may attempt to enter into
relationships with others (besides Elscint) covering the production, sale and
distribution of the MAGNA-SL.
The MAGNA-SL is approximately two and one-half feet high, three and
one-half feet deep and two feet wide. The magnet structure is open at the top,
bottom and front providing access from three sides thereby permitting
non-claustrophobic scanning. A bed/chair is placed next to the magnet for
various scans and would recline into the magnet for head scans (if such scans
become practical in the future). Sitting or reclining in the moveable bed/chair,
patients may position their leg, knee, arm, elbow, wrist, hand or (possibly)
head in the magnet opening without having to put their entire body into the
scanner. The magnet will rotate 90 degrees into a horizontal position for arm,
elbow, wrist and hand scanning as well as certain positions for knee and leg
scanning. In addition, images of legs or feet may be obtained from either a
weight-bearing position (standing up) or from a sitting or lying down position.
This approach adds to the inherent patient friendliness by having the patient
sitting for many scans where typically they are in a prone position. Separate
from the magnet is the digital and analog MRI electronics and computer terminal
which controls the operation of the magnet and produces the image. The entire
system may be installed in approximately 150 square feet of office space making
it suitable for use in radiology suites, hospital emergency rooms, or offices of
private medical practices. Management believes that, because the MAGNA-SL is
specifically designed for extremities, it may be a more effective MRI scanner
for these areas particularly because of its capability for bent limb and weight
bearing images. Substantially all conventional whole-body MRI systems use
magnets which are larger than the magnet used for the Company's product and
proposed products, which surround patients on all sides, leaving access only
from the front and back. Certain manufacturers have begun to introduce "open"
whole body systems and one manufacturer has introduced a dedicated extremity
system, which systems are less claustrophobic than traditional whole body
systems. These systems, however, use "low-field" magnets. The MAGNA-SL uses a
"mid-field" permanent magnet and therefore produces image quality comparable to
that of "mid-field" whole body scanners (which the Company believes represent
the majority of the MRI market).
The MAGNA-SL was expected initially to have applications in radiology,
orthopedics, pediatrics, chiropractic and podiatry and, if and when possible,
for applications in neurology, vascular and certain areas of dentistry.
OTHER PROPOSED PRODUCTS
The Company had intended to build on the technology of the MAGNA-SL magnet
and system to design and develop other anatomy specific MRI scanners (including
potentially a scanner dedicated to MRI mammography and a back and spine scanner,
among other ideas) but has no resources with which to pursue such intentions.
There is presently no significant development activity related to these
potential products.
The Company is, however, working on two new MRI products which would be
disposable ancillary devices to be used with MRI systems. These products, being
developed in collaboration with MSSM, are:
CARDIAC VIEW
Cardiac View is the first instrument to permit a minimally invasive
approach to definitive diagnosis of coronary artery and other heart diseases.
Cardiac View operates in conjunction with virtually any magnetic resonance
imaging system to generate diagnostic quality images of the gross arterial
structure of the heart. The product consists of a transesophageal or
nasal/gastric probe to screen for coronary artery disease quickly, inexpensively
and without trauma. It is anticipated that this may become the preferred
screening device for coronary artery disease.
ARTERY VIEW
Artery View is the first instrument to permit the cardiologist to see the
composition of atherosclerotic plaque that is the cause of coronary artery
disease. ARTERIAL VIEW is an intra-arterial probe that is threaded through a
catheter to the site of atherosclerotic blockage. The device facilitates the
capture of high resolution magnetic resonance images to provide a diagnostic
view of the fine structures of the arterial wall and various components of
atherosclerotic plaque. This instrument, if successfully developed, has the
potential to revolutionize the treatment of coronary artery disease by
permitting the physician to appreciate the morphology of the lesion that is
causing the distress.
PRODUCTION AND ASSEMBLY
The MAGNA-SL system is comprised of three major subsystems; a magnet
subsystem (assembled by the Company), an MRI computer subsystem (purchased from
a third party with which the Company is now in dispute as a result of the
Company's failure to purchase commercially viable quantities, among other
matters) and a rack of power and electronic components (purchased from third
parties). The Plan and the Elscint Proposal involve replacing the MRI computer
subsystem, among other items, with Elscint manufactured components.
The production plan was to utilize a "Systems Integration Approach," under
which the magnet subsystem is assembled by the Company and then shipped to the
customer's site for integration with the other subsystems shipped directly to
the customer site by qualified suppliers. Early production models were
integrated first at the Company's facility to ensure quality and repeatability.
The customer was to be responsible for certain site preparations, such as the
installation of radio frequency shielding to shield the MRI system from
interference and certain electrical work. The costs of radio frequency shielding
and certain other installation costs, are lower for the MAGNA-SL than for whole
body systems. The magnet subsystem was to be assembled from purchased materials,
tested by Company employees, and then shipped to the customer for integration.
In order to assemble the magnet, the Company has purchased generally
available magnet material, steel and other mechanical components from others.
Using specially manufactured tools and equipment designed by the Company, the
Company has assembled the magnet for each scanner individually.
The MRI computer subsystem was purchased from a supplier in Europe. In
August 1993, the Company established a multi-system purchase relationship with
this vendor by making a $480,000 non-refundable deposit payment. Such agreement,
as amended in July 1994, provided for purchases of MRI computer subsystems and
the license of certain technology underlying the subsystems. The Company had
agreed to purchase initial subsystems which, as amended, would result in an
additional payment of $240,000 beyond the $480,000 paid as a deposit. Of that
additional $240,000, substantially all has been paid at February 28, 1997,
leaving an unamortized deposit of approximately $320,000 at February 28, 1997.
Such remaining deposits have been written off at February 28, 1997 as a result
of the (a) the Company's inability to go forward with purchase commitments, and
(b) the Company's intention to move forward with the Elscint Proposal which
would eliminate this component. The Company believes that its prior relationship
with this vendor may no longer be available. Further, it is possible that this
vendor may assert damages against the Company for the Company's failure to move
forward with plans which affect pricing of units delivered (volume discounts for
volumes not realized) or for other costs or investments made by this vendor as a
result of its relationship with the Company.
The power and electronics components necessary for the MAGNA-SL system are
generally available from a variety of vendors. The Company had established
sources of supply for such components but as a result of non-payment of these
vendors, believes that such sources of supply may no longer be available to it.
The Company's liquidity over the past year has caused severe problems in
vendor relations including pending and threatened litigation as well as certain
judgments against the Company.
The Company's plans with respect to the proposed Cardiac View and Artery
View products involves selecting suitable contract manufacturing organizations
to work with the Company in finalizing design, regulatory and manufacturability
standards and then contract the actual manufacture to such parties.
The Company is also required to conform to FDA Good Manufacturing Practice
("GMP") regulations and various other statutory and regulatory requirements
applicable to the manufacture of medical devices. The Company's production and
assembly operations are subject to FDA inspections at all times. The Company
would not meet the standards of such practices at this time. See "Governmental
Regulation."
MARKETING AND DISTRIBUTION
Prior to cessation of operations related to the MAGNA-SL in March 1997 the
Company was selling and marketing the MAGNA-SL in the United States through a
combination of its own sales force and contractual arrangements with others. The
principal markets for the MAGNA-SL include private practitioners and
institutions initially for applications in radiology, orthopedics, pediatrics,
chiropractic and podiatry and, if and when possible, for applications in
neurology, vascular and certain areas of dentistry. The Company's sales force,
which consisted of three persons (including the Vice President of Sales and
Marketing, and all of whom were terminated pursuant to the Plan), concentrated
primarily on the United States radiology market.
Prior to cessation of operations related to the MAGNA-SL in March 1997, the
Company had entered into several separate distribution and sales representation
agreements, none of which provided the expected results for the Company. Each
agreement granted certain defined exclusive rights. One of these agreements was
with Beta Numerics, Inc. ("Beta"), a private company founded by two directors
and beneficial shareholders, and one former director and continuing shareholder,
of the Company. Beta has not met the minimum number of scanners to be purchased
under the agreement and has not paid for one scanner delivered to it in December
1996. The Company has sold and delivered four MAGNA-SL scanners including three
to Beta, one of which remains unpaid. For a more detailed description of the
relationship with Beta, see Item 12. "Certain Relationships and Related
Transactions."
In June 1996, the Company and Elscint signed a definitive agreement
covering a strategic business arrangement in which Elscint would manufacture the
MAGNA-SL for marketing and sale by Elscint in certain non-United States
territories including Europe, the Peoples Republic of China, parts of the Middle
East and Latin America, Australia and other territories. The Company would be
paid royalties on each system manufactured and sold by Elscint. To maintain its
rights under the agreement, Elscint is required to sell a minimum number of
systems. Elscint has the right to cure shortfalls by, among other things, making
payment of approximately 87% of the minimum royalties. Upon execution of the
agreement, a nonrefundable deposit of $250,000 was paid to the Company to be
applied to first year royalties. Elscint has a right of first negotiation on
certain new products.
The parties agreed to certain development tasks and enhancements, which, if
not completed by the Company in November 1996, could, if not cured, result in
termination of the agreement by Elscint. Elscint has informed the Company that
it is not satisfied with the completion of certain of the tasks agreed to by the
parties. The parties then negotiated a new completion date for the tasks with
Elscint reserving all of its rights including the right to complete the tasks
itself at the Company's expense or to terminate the agreement. Elscint has
informed the Company that it is not satisfied with the completion of the tasks
after the revised completion date. Subsequently, Elscint presented to the
Company its proposal (the "Elscint Proposal") to take over the uncompleted tasks
and initiate a major alteration and improvement of certain systems comprising
the MAGNA-SL and requiring a development payment of $500,000 and certain support
efforts from the Company. The Company has agreed to go forward with Elscint
Proposal but has been unable to make any of the required payments to initiate or
complete the Elscint Proposal. In May 1997, the Company received notification
from Elscint that it would reserve the right to terminate its agreement with the
Company and seek damages from the Company as a result of the Company's failure
to cure the deficiencies identified by Elscint or alternatively move forward
with the Elscint Proposal. Elscint has subsequently indicated to the Company
that it still wished to proceed with the Elscint Proposal. In May 1998, Elscint
has indicated to the Company that it is not satisfied with the Company's
response to the Elscint Proposal.
WARRANTY AND SERVICE
It is customary in the medical equipment industry to warrant that each
scanner will be free from defects in material and workmanship for a period of
one year after acceptance of the scanner and provide routine servicing free of
charge for the first year. After the first year, servicing is customarily
offered to customers on a contract basis or by charges for service calls.
The Company has been unable, due to lack of financial resources, to honor
its obligations for warranty and service since approximately March 1997.
In the medical device market, the ability to provide comprehensive and
timely service can be a key competitive advantage and is important for
establishing customer confidence. The Company's inability to service, for an
extended period of time since March 1997, the four scanners placed in service
creates a serious obstacle to the Company's desire to reenter this market even
upon completion of a financing (which in any case is uncertain).
UNDERWRITERS LABORATORIES INC. OR EQUIVALENT LISTING
The Company's scanners are required to be listed by Underwriters
Laboratories Inc. ("UL")., which is a not-for-profit independent organization,
or by ETL Testing Laboratories, Inc. ("ETL"). The Company's scanners are not
presently listed by such organizations.
Both UL and ETL are entities which test numerous consumer and commercial
products for compliance with nationally recognized safety standards. Listing of
a product indicates that samples of that product have been tested to such safety
standards and found to be reasonably free from foreseeable risk of fire,
electric shock and related hazards. Under the laws of certain states, the
Company will not be permitted to operate and install its products without
obtaining and maintaining such a listing. Even in those states where the Company
is not required by law or otherwise to obtain a listing, if it is unable to
obtain and maintain a listing on an ongoing basis its ability to market and sell
its scanners may be adversely affected. Underwriters Laboratories Inc. or
equivalent testing and review generally can be completed in a two to three month
period, although the process may be extended under certain circumstances. The
cost of obtaining and maintaining such a listing is estimated to be in excess of
$60,000. The Company may be subject to similar requirements in the non-US
countries in which the MAGNA-SL may be sold.
PROPRIETARY RIGHTS
Dr. Lawrence A. Minkoff, President and Chief Scientific Officer and a
Director of the Company, has received one patent relating to the permanent
magnet structure of the MAGNA-SL. In December 1992, Dr. Minkoff assigned his
rights to the magnet technologies to the Company. Additionally, the Company has
filed applications for patent protection internationally, including an
application under the Patent Cooperation Treaty ("PCT"), relating to the
permanent magnet structure, but has permitted its rights under that PCT
application to lapse. The Company has been informed that the PCT application was
published, making it unlikely that additional foreign patent protection with
respect to the permanent magnet structure can now be obtained. The Company does
not believe that failure to obtain such additional patent protection will have a
material adverse effect on the Company's business. In March 1995, the Company
was issued a U.S. patent concerning a certain proprietary imaging sensing coil
assembly. The Company has filed an application for patent protection
internationally, including under the PCT, relating to the imaging sensing coil
assembly. Further, Dr. Minkoff, on behalf of the Company has applied for
provisional and other patent protection (including under the PCT) related to the
Company's Cardiac View and Artery View proposed products.
The Company's policy has been to obtain patents to protect technology,
inventions and improvements that are important to the development of its
business. The Company also relies upon trade secrets, know-how, continuing
technological innovation and licensing opportunities to develop and maintain its
competitive position.
The patent position of any medical device manufacturer, including the
Company, is uncertain and may involve complex legal and factual issues.
Consequently, the Company does not know whether its applications will result in
the issuance of any patents, or, for any patents issued, whether they will
provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications are maintained in the U.S. in secrecy
until patents issue, and since publications of discoveries in the scientific or
patent literature tend to lag behind actual discoveries by several months, the
Company cannot be certain that it was the first creator of inventions covered by
its pending patent application or that it was the first to file a patent
application for such inventions. There can be no assurance that any of the
Company's patent applications will result in any patents being issued or that,
if issued, patents will offer protection against competitors with similar
technology; nor can there be any assurance that others will not obtain patents
that the Company would need to license or circumvent. Moreover, the Company may
have to participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine the priority of inventions, which could result in
substantial cost to the Company.
The Company may utilize technologies, patents or other rights which may be
held by third parties. Certain technologies utilized by the Company in the
MAGNA-SL are covered by patents owned or administered by the British
Technologies Group, PLC. The Company has had discussions with British
Technologies Group, PLC. concerning licensing such technology, and although the
Company believes that such license would be available to it on terms that are
generally available to MRI manufacturers, the Company has been unable to make
the required payment to secure such technologies which are integral to the
MAGNA-SL.
The Company has also relied upon unpatented trade secrets, and no assurance
can be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology, or that the Company can meaningfully
protect its right to unpatented technology.
The Company has, in the past, required its employees, consultants and
advisors to execute confidentiality agreements upon the commencement of an
employment or a consulting relationship with the Company. Each agreement
provided that all confidential information developed or made known to the
individual during the course of the relationship will be kept confidential and
not disclosed to third parties except in specified circumstances. In the case of
employees, the agreements provided that all inventions conceived by an
individual shall be the exclusive property of the Company, other than inventions
unrelated to the Company's business and developed entirely on the employee's own
time. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information. To the extent
that consultants, key employees or other third parties apply technological
information independently developed by them or by others to Company projects,
disputes may arise as to the proprietary rights to such information which may
not be resolved in favor of the Company.
Dr. Minkoff, two of the Company's former executive officers and several of
its former scientists and other former personnel were formerly employed, at
various times prior to November 1989, by a company engaged in the development,
manufacture and sale of MRI devices. Each of Dr. Minkoff and these former
executive officers and senior scientists has informed the Company that he was
not subject to any agreement with such company containing a restrictive covenant
limiting competitive activities at the termination of employment with that
company. However, since the prior employer is a potential competitor of the
Company, it may threaten or commence legal action to deter the development of
the Company's technology alleging, among other things, that it may have rights
to technology developed by the Company through the efforts of such persons. The
prior employer also holds patents relating to MRI devices and has instituted
successful litigation against certain manufacturers of MRI devices including
Hitachi Ltd., General Electric Company and others alleging, among other things,
that the manufacture of MRI devices by such companies constitutes patent
infringement, violations of the Lanham Act and unfair competition. It has been
reported that the prior employer and Hitachi Ltd. have settled their action out
of court and that a jury has rendered a verdict in favor of the former employer
against General Electric in an amount which has been reported to be reduced by a
judge and exceeds $60 million. There can be no assurance that this potential
competitor will not commence a new action against the Company. The costs of
defending such an action, if brought, could require substantial financial
resources. Although no assurance can be given that such claims will not be
instituted against the Company, the Company believes, based upon the advice of
its patent counsel, that the use of its magnet technologies, at its stage of
development in December 1995, in its scanners, will not infringe the patents of
such competitor granted through December 1, 1995.
GOVERNMENTAL REGULATION
The operations of the Company, which have essentially been at least
temporarily suspended, are subject to extensive federal and state regulation.
MRI devices generally, and any scanners the Company has developed or may develop
or its proposed Cardiac View and Artery View proposed products, in particular,
are subject to regulation by the FDA, certain state and federal agencies that
regulate the provision of health care, particularly the Health Care Financing
Administration ("HCFA"), and the Environmental Protection Agency ("EPA"). In the
Company's current state, it could not comply with some of the regulations to
which it is subject.
A. FDA REGULATION
The FDA categorizes devices into three regulatory classifications subject
to varying degrees of regulatory control. Class I devices are those devices
whose safety and efficacy can reasonably be ensured through the general control
provisions. These provisions include requirements that a device not be
adulterated or misbranded, that the device is manufactured in conformity with
GMP regulations and that appropriate FDA premarket notification requirements be
met. Class II devices are those devices whose safety and efficacy can reasonably
be ensured through the use of special controls, such as performance standards,
post-market surveillance, patient registries and FDA guidelines. All other
devices are placed in Class III. Class III devices, which are typically invasive
or life sustaining products, require clinical testing to assure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA also
has the authority to require clinical testing of Class I and Class II devices.
The MAGNA-SL(TM) is a Class II medical device subject to clearance by the
FDA prior to commercialization in the United States. Such FDA clearance was
received in September 1994 through submission of a 510(k) notification
(discussed below). The cessation of the Company's operations in March 1997 calls
into question the Company's previously received FDA clearance.
Pursuant to the Food Drug and Cosmetic ("FDC") Act and regulations
promulgated thereunder, the FDA regulates the manufacture, distribution and
promotion of medical devices in and the exportation from the United States.
Various states and foreign countries in which the Company's products may be sold
in the future may impose additional regulatory requirements.
If a manufacturer or distributor of medical devices can establish that a
device is "substantially equivalent" to a legally marketed Class I or Class II
medical device or to a Class III medical device for which the FDA has not
required premarket approval, the manufacturer or distributor may seek FDA
marketing clearance for the device by filing a 510(k) notification. The 510(k)
notification and the claim of substantial equivalence will almost certainly have
to be supported by various types of data indicating that the device is as safe
and effective for its intended use as a legally marketed predicate device. Until
the FDA issues an order finding that a device is substantially equivalent, the
manufacturer or distributor may not place the device into commercial
distribution. The order may be sent within 90 days of the submission and may
declare the FDA's determination that the device is "substantially equivalent" to
another legally marketed device, and allow the device to be marketed in the
United States. The FDA may, however, determine that the proposed device is not
substantially equivalent, or may require further information, such as additional
test data, before the FDA is able to make a determination regarding substantial
equivalence. Such determination or request for additional information could
delay the Company's market introduction of its products and could have a
materially adverse effect on the Company's continued operations.
If a manufacturer or distributor cannot establish to the FDA's satisfaction
that a new device is substantially equivalent, the device will be considered a
Class III device and the manufacturer or distributor will have to seek premarket
approval ("PMA") or reclassification of the new device. A PMA would have to be
submitted and be supported by extensive data, including preclinical and clinical
trial data, to demonstrate the safety and efficacy of the device. Upon receipt,
the FDA will conduct a preliminary review of the PMA to determine whether the
submission is sufficiently complete to permit a substantive review. If
sufficiently complete, the submission is declared fileable by the FDA. By
statute and regulation, the FDA has 180 days to review a PMA once determined to
be fileable. During that time an advisory committee may also evaluate the
application and provide recommendations to the FDA. While the FDA has responded
to PMA's within the allotted time period, PMA reviews more often occur over a
significantly protracted time period, and generally take approximately two or
more years to complete from the date of filing. A number of devices have never
been cleared for marketing. An application and petition to reclassify a device
can also be extensive in time and cost.
If human clinical trials of a device are required, and the device presents
"significant risk," the manufacturer or distributor of the device will have to
file an investigational device exemption ("IDE") application with the FDA prior
to commencing human clinical trials. The IDE application must be supported by
data, typically including the results of animal and mechanical testing. If the
IDE application is approved, human clinical trials may begin at the specific
number of investigational sites and could include the number of patients
approved by FDA. Sponsors of clinical trials are permitted to sell those devices
distributed in the course of the study, provided such compensation does not
exceed recovery of the costs of manufacturer, research, development and
handling.
In 1988, the FDA reclassified MRI devices and all substantially equivalent
devices of this generic type from Class III to Class II. This encompassed MRI
systems from 13 petitioners. Accordingly, if the Company can demonstrate to the
FDA that its proposed products or any other scanner developed by the Company are
substantially equivalent either to the reclassified MRI devices or to other
currently marketed mammography or back and spine scanning devices, its proposed
products could be considered Class II medical devices which can be cleared for
commercial distribution via 510(k) notification. There can be no assurance that
the FDA will find such products to be substantially equivalent to reclassified
MRI devices or any other legally marketed devices. The FDA may require the
Company or its competitors to file PMAs for new products or technologies if the
devices are sufficiently different from the reclassified MRI devices. Such a
determination by the FDA would delay the Company's market introduction of
products it may in the future (subject to obtaining funding) consider
developing, and could have a material adverse effect on the Company's
operations, should the Company resume operations and pursue development of such
products. FDA recently announced its intent to impose higher safety standards on
premarket clearance of devices that might pose potential risks if they fail.
Such a change in policy could have a material adverse effect on the Company,
should the Company resume operations and pursue development of such products.
The costs associated with the filing of applications with the FDA and of
conducting clinical trials can be significant. While the MAGNA-SL has received
clearance from the FDA, there is no assurance that any of the Company's product
enhancements, if any, or the Company's proposed products, should the Company
resume operations and pursue development of such products will ever obtain the
necessary FDA clearance for commercialization.
If determined to be Class II medical devices under the Safe Medical Devices
Act of 1990, the Company's proposed products are potentially subject to
performance standards and other special controls that the FDA has the authority
to establish. Currently, no such performance standards or special controls
applicable to the Company's products have been established. If any such
performance standards or other special controls are established, obtaining
initial marketing clearance for its products or maintaining continued clearance
will be dependent upon the Company's ability to satisfactorily comply with such
standards or controls.
The MAGNA-SL and any future products distributed by the Company pursuant to
the above described clearances will be subject to pervasive and continuous
regulation by the FDA. Moreover, the FDC Act will also require the Company,
should it ever resume manufacturing products, to manufacture its products in
registered establishments and in accordance with Good Manufacturing Practice
(GMP) regulations. Once registered, the Company's facility, if any, will be
subject to periodic inspections by the FDA. The Company does not presently have
a facility. Labeling and promotional activities are subject to scrutiny by the
FDA and, in certain instances, by the Federal Trade Commission. In addition, the
Company's products, if any, are expected to be subject to technical standards
established by the Federal Communications Commission regarding radio frequency
emission limits. The export of medical devices is also subject to regulations in
certain instances and in certain circumstances to FDA approval as well as to
approval by certain countries to which these devices might be exported. In
addition, the use of the Company's products may be regulated by various state
agencies. There can be no assurance that the Company's products will be able to
comply successfully with any such requirements or regulations. In fact, the
Company's MAGNA-SL does not presently comply with the regulatory standards of
several countries. Moreover, future changes in regulations or enforcement
policies could impose more stringent requirements on the Company, compliance
with which could adversely affect the Company's potential business. Failure to
comply with applicable regulatory requirements could result in enforcement
action, including withdrawal of marketing authorization, injunction, seizure or
recall of products, operating restrictions, refusal of government to approve
product applications or allow a company to enter into supply contracts and
liability for civil and/or criminal penalties.
The Company believes that its proposed Cardiac View would be Class II medical
devices subject to the "substantial equivalence" standard and that its proposed
Artery View may be a Class II medical device.
B. THIRD PARTY COVERAGE, REIMBURSEMENT AND RELATED HEALTH CARE REGULATIONS.
The market for MRI scanners and ancillary devices such as Cardiac View and
Artey View, including the Company's products and proposed products, is affected
significantly by the amount which Medicare, Medicaid or other third party
payors, including private insurance companies, will reimburse hospitals and
other providers for diagnostic procedures using MRI systems. The health care
industry has changed dramatically during the 1980's and the 1990's in reaction
to changes in third party reimbursement systems designed to contain health care
costs. In the MRI market, third party reimbursement issues will focus
principally on whether MRI diagnostic procedures using the Company's products
and proposed products will be covered procedures and, if so, the level of
reimbursement that will be available for the MRI procedure.
HCFA, the agency responsible for administering the Medicare program, sets
requirements for coverage and reimbursement under the program, pursuant to the
Medicare law. In addition, each state Medicaid program has individual
requirements that affect coverage and reimbursement decisions under state
Medicaid programs for certain health care providers and recipients. Private
insurance companies also set their own coverage and reimbursement policies.
Private insurance companies and state Medicaid programs are influenced, however,
by the HCFA requirements.
As of November 22, 1985, under a national policy, Medicare covers certain
diagnostic procedures using MRI technology (as described by Medicare) for
certain clinical indications. There can be no assurance that the Company's
products or proposed products, once available, will be included within the then
current Medicare coverage determination. In the absence of a national Medicare
coverage determination, local contractors that administer the Medicare program,
within certain guidelines, can make their own coverage decisions. Favorable
coverage determinations are made in those situations where a service is of a
type that falls within allowable Medicare benefits and a review concludes that
the service is safe, effective and not experimental. Under HCFA coverage
requirements, FDA approval for the marketing of a medical device, including the
Company's proposed MRI mammography scanning systems and any other MRI technology
devices, will not necessarily lead to a favorable coverage decision. A
determination will still need to be made as to whether the device is reasonable
and necessary for the purpose used. In addition, HCFA has proposed adopting
regulations that would add cost-effectiveness as a criterion in determining
Medicare coverage. Although the Company believes that its products and proposed
products provide a cost effective alternative to "whole body" scanners, no
assurance can be given that the scans utilizing the Company's products will be
covered under Medicare, especially if HCFA changes its coverage policy to
include a cost-effectiveness criterion. Changes in HCFA's coverage policy,
including adoption of a cost-effective criterion could have a material adverse
effect on the Company's prospects, if any, in the MRI market.
Currently, MRI diagnostic services provided on an outpatient basis are
reimbursable under Part B of the Medicare program. The professional and
technical components of radiological procedures which are performed in a
physician's office or freestanding diagnostic imaging center, and the
professional component of radiological procedures performed in a hospital
setting, are currently reimbursed on the basis of a relative value scale which
phased in, beginning January 1, 1992. There can be no assurance that the
implementation of this system, or other governmental actions, will not limit or
decrease reimbursement levels for services using any products developed by the
Company. Any reduction in the willingness of physicians to perform procedures
using the Company's proposed products could have a material adverse effect on
the Company's prospects, if any, in the MRI market.
Medicare reimbursement for the technical component (the operating costs)
for MRI diagnostic services furnished in the hospital outpatient setting
generally is currently calculated on a formula that is the lesser of the
hospital's reasonable costs and a 42/58 blended amount respectively of hospital
reasonable costs and the blended amount of reimbursement for the technical
component of the service if furnished in a physician's office in the same
locality.
The market for the Company's products and proposed products could also be
adversely affected by the amount of reimbursement provided by third party payors
to hospitals or private practitioners for procedures performed using such
products. Reimbursement rates from private insurance companies vary depending
upon the procedure performed, the third-party payor, the insurance plan, and
other factors. Medicare generally reimburses hospitals that are expected to
purchase the Company's products and proposed products for their operating costs
for in-patients on a prospectively-determined fixed amount for the costs
associated with an inpatient hospital stay based on the patient's discharge
diagnosis, regardless of the actual costs incurred by the hospital in furnishing
care. The willingness of these hospitals ("PPS hospitals") or private
practitioners to purchase the Company's products and proposed products, if any,
could be adversely affected if they determined that the prospective payment
amount to be received for the procedures for which the Company's products or
proposed products are used would be inadequate to cover the costs associated
with performing the procedures using the Company's proposed products, or to be
less profitable than using an alternative procedure for the same condition.
Until October 1991, hospitals were generally able to pass their capital
costs on to Medicare which reimbursed such costs on a reasonable basis subject
to percentage limitations. However, under regulations which became effective
October 1, 1991, reimbursement for capital-related costs began to be included in
the prospective payment system. In general, under the new system, which has a 10
year phase-in period, hospitals will be reimbursed for capital costs related to
services provided to inpatients through an add-on payment made to the hospital
based upon the Diagnostic Related Group (DRG) for each such inpatient. While it
is unclear what effects the prospective payment systems will have, it may cause
hospitals to more closely scrutinize new capital expenditures and it could have
an adverse effect on recovery of capital costs for equipment such as the
MAGNA-SL and proposed products. Capital costs for hospital outpatient
departments are currently reimbursed by Medicare in an amount equal to 90% of
their reasonable capital costs.
A number of states, through Certificate of Need ("CON") laws, limit the
establishment of new facility or service or the purchase of major medical
equipment to situations where it has been determined that the need for such
facility, service or equipment exists. The market for the MAGNA-SL and the
Company's proposed products may be adversely affected by CON regulation to the
extent that institutional health care facility purchasers and lessors of the
products are subject to CON regulation. While many states exempt
non-institutional providers from CON coverage, a number of states have extended
CON coverage to physicians' offices or medical groups by restricting the
purchase of major medical equipment wherever located.
C. EPA REGULATION
The Company, and any research facility which it operates, would also be
required to comply with any applicable federal and state environmental
regulations and other regulations related to hazardous materials used,
generated, and/or disposed of in the course of its operations. The Company
presently does not have a facility.
COMPETITION
The health care industry in general, and the market for diagnostic imaging
equipment and ancillary devices in particular, is highly competitive and
virtually all of the other entities known to management of the Company to be
engaged in the manufacture of MRI scanners and ancillary devices possess
substantially greater resources than the Company. At the present time,
manufacturers of whole body scanners include the General Electric Company;
Toshiba; Bruker Medical Imaging Inc.; Elscint, Ltd.; Siemens Corporation;
Philips Medical Systems, a division of Philips Industries, N.V.; Picker
International Corporation; Shimadzu; and Hitachi. The Company believes that the
principal elements of competition which will affect successful marketing of MRI
systems, including any Elscint marketing efforts pursuant to the Proposal, will
include price, product performance, service and support capability, financing
terms and brand name recognition. The Company is aware of one company, Esaote
Biomedica SpA. ("Esaote") engaged in marketing an MRI device for extremity
imaging. Their product, the ARTOSCAN, received FDA marketing clearance in
October 1993, approximately 11 months prior to the Company's receipt of
clearance. The Company believes that the MAGNA-SL had substantial performance
advantages over the ARTOSCAN product including: mid-field rather than low-field
magnet, greater imaging volume, ability to do weight bearing and fully bent limb
scans, greater patient positioning opportunities and superior image quality.
However, Esaote has marketed hundreds of its extremity imaging devices. The list
price of the ARTOSCAN product is believed to be approximately 25% lower than the
Company's list price was for the MAGNA-SL. The Company had planned to compete
with the ARTOSCAN product on the basis of image quality, a wider range of
imaging opportunities and greater patient comfort, including any Elscint
marketing efforts pursuant to the Proposal.
The Company also has experienced competition from the use of x-ray
machines. The Company believes that the use of x-ray machines is widely
established and clinically accepted. Although the Company believes that an MRI
scanner will represent a safer and more effective diagnostic imaging device,
there can be no assurance that any products developed by the Company will be
commercially accepted, especially in light of the cost-savings involved in
purchasing x-ray machines and the familiarity of current practitioners in
operating such devices. While the Company believes that the price of the
MAGNA-SL as well as its low operating costs would permit health care providers
to conduct MRI imaging and diagnostic readings for less cost than is currently
possible, there can be no assurance that the cost of the MAGNA-SL or any other
products developed will be able to successfully compete with conventional x-ray
machines. In addition, although the Company believes that the cost of whole body
MRI scanners will render their use in screening mammography or diagnostic
purposes undesirable, there can be no assurance that this technology or other
technologies will not successfully compete with any MRI scanner designed to
image specific parts of the body. In addition, there can be no assurance that
other technologies will not be developed that will render the Company's proposed
MRI scanners obsolete or uneconomical. To some extent, competition will also
come from the manufacturers of other types of diagnostic imaging systems, such
as ultrasound or thermography.
PRODUCT LIABILITY
Product liability claims relating to the Company's products may be asserted
against the Company. If such claims are asserted against the Company, there can
be no assurance that the Company will have sufficient resources to defend
against any such claim or satisfy any such successful claim. The Company had
product liability insurance which was terminated during 1997 for non-payment of
insurance premiums.
Further, Beta has notified the Company that it is unsatisfied with the
performance of the MAGNA-SL at one or more of its owned sites and has threatened
product liability exposure to the Company. The Company disputes this in part
because of Beta's failure to pay for one machine and keep other commitments to
the Company. The Company presently has little ability to respond to assertions
of product liability exposure because of its limited financial resources,
unsatisfactory vendor relationships and lack of continuing technical personnel,
among other factors. In the event of an uninsured or inadequately insured
product liability claim, the Company's business and financial condition could
further be materially adversely affected.
The Company's agreement with Elscint (which agreement is not presently
operative) requires Elscint to carry product liability insurance, and the
Company may attempt to require any other joint venturers or licensees to carry
product liability insurance. However, there can be no assurance that such joint
venturers or licensees will agree, or will be able, to obtain or maintain
insurance at an acceptable cost or that, if such insurance is obtained, it will
be adequate to cover the Company's potential liability.
HUMAN RESOURCES
At May 15, 1998, the Company has one full time executive, research and
development employee, one part time administrative employee and two consultants
providing general business development/management and financial services. The
Company's current development work is being done in collaboration with
physicians and scientists at the Cardiac Institute of the Mount Sinai School of
Medicine (New York) under the Company's collaboration with MSSM.
During March 1997, the Company indefinitely furloughed 14 of its 20
employees due to insufficient funds for their payroll. The remaining employees
were offered the opportunity to continue with the Company in exchange for
deferred compensation pending successful completion of continuing efforts to
complete a financing. All but one of the remaining employees terminated their
service to the Company during 1997 and approximately two of them have served or
have indicated that they may serve as consultants to the Company.
ITEM 2: DESCRIPTION OF PROPERTY
The Company presently conducts its research operations at the Cardiac
Institute at the Mount Sinai School of Medicine (New York) and in a laboratory
in the personal home of its executive, research and development employee.
Certain corporate and other records, inventory and equipment have been secured
in storage facilities which the Company rents on a month-to-month basis for
approximately $3,000 per month.
From April 26, 1996 until May 1997 the Company leased approximately 16,000
square feet of office, manufacturing and research and development space in
Edgewood, New York. The existing lease was due to expire in May 2003 but was
terminated pursuant to a stipulation and judgment entered in the District Court
of the County of Suffolk (New York), Fifth District Central Islip Part, on April
3, 1997 calling for payment of approximately $120,000. Pursuant to the Company's
Debt Reduction Plan, the Company negotiated a settlement of the stipulation and
judgment in favor of this landlord in exchange for the payment by the Company of
$100,000 (which has been paid). Prior to April 26, 1996, the Company leased
approximately 10,000 square feet of office, manufacturing and research and
development space in Hicksville, New York under a lease which was to expire in
September 1997. Under a "Surrender of Lease Agreement", the Company and the
landlord agreed to the early termination of the lease and the forgiveness of
certain amounts payable under the lease which were overdue.
ITEM 3: LEGAL PROCEEDINGS
As a result of a period of deferral of payment of obligations due to the
lack of cash, the Company has been the subject of several threatened, and
certain actual, litigation actions for nonpayment of obligations (see below) or
for breach of agreements (including possible exposure with respect to the
Elscint agreement, and others). One vendor, Devcom, initiated litigation in the
United States District Court for the Eastern District of New York over certain
contested balances due and certain alleged commitments for services in the
future and, on October 7, 1997, the vendor received a judgment against the
Company in the amount of $300,000. Settlement of this judgment was made in
January 1998 in exchange for the payment by the Company of $150,000 and the
agreement to a satisfaction of judgment by the creditor. The Company has entered
into a stipulation of judgment with its former landlord (Heartland Rental
Properties Partnership) ultimately resulting in payment of approximately
$100,000 to settle this matter (see "Item 2 - "Description of Property"). Other
judgments, for lesser amounts have been entered against the Company and remain
unsettled. The Company has settled the claims of many of its vendors through
payments of reduced amounts in exchange for releases of liability. This process
is ongoing and certain vendors have threatened the Company with litigation to
recover amounts due them.
The Company has been unsuccessful to date in its efforts to restructure the
Elscint agreement in a manner which is satisfactory to the Company. As such, the
Company is exposed to possible litigation from Elscint for its failure to
perform under the Elscint agreement. Elscint paid the Company a non-refundable
advance payment in June 1996 of $250,000 in connection with the Elscint
agreement, as well as certain other subsequent payments, and would likely claim
these payments and additional damages. The Company is unable to estimate an
amount of possible loss exposure for this potential claim or for any offsets or
recoveries it may have as a result of any counterclaims which it may have
against Elscint. The Company and Elscint have continued their discussion on this
matter and have not reached a resolution.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended February 28, 1998.
<PAGE>
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The following sets forth the high and low bid prices for the Company's
Class A Common Stock for each quarter during the last two fiscal years and
through April 15, 1998. The source for the high and low bid information for
periods through April 10, 1997 is Nasdaq and for periods subsequent to that date
is the OTC Bulletin Board. Quotations reflect interdealer prices without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING FEBRUARY 28,
1999 1998 1997
---- ---- ----
HIGH LOW HIGH LOW HIGH LOW
CLASS A COMMON STOCK:
<S> <C> <C> <C> <C> <C> <C>
First Quarter ended May 31, 5/16 1/4 31/32 3/16 4 3
Second Quarter ended August 31, 1 1/32 1/4 4 1/4 13/4
Third Quarter ended November 30, 3/8 1/4 2 1/16 7/8
Fourth Quarter ended February 28, 3/8 1/4 1 1/4 1/2
</TABLE>
The Company's Class A Warrants, Class B Warrants and IPO Units (each
consisting of one share of Common Stock, one Class A Warrant and one Class B
Warrant) are not listed because the Class A Warrants and Class B Warrants
expired according to their terms on March 30, 1998 and the related IPO units
were separated into their components. The Company's Class E warrants are not
listed because their trading value subsequent to the quarter ended May 31, 1997
has been nominal. See Note 7 to "Consolidated Financial Statements" for a
discussion of the terms of the Warrants and Units discussed above.
- --------------
There is no established public trading market for the Company's Class B
Common Stock.
On April 30, 1998, the closing bid price for the Class A Common Stock was
approximately $0.25.
RECENT SALES OF UNREGISTERED SECURITIES AND RELATED MATTERS - During
February 1997, the Company sold 300,000 shares of Class A Common Stock in a
private placement (pursuant to Section 4 (2) under the Securities Act of 1933)
to two accredited investors for $100,000 in cash. There were no selling
commissions or discounts.
In August 1997, the Company issued 125,000 shares of Class A Common Stock
to an investment bank to settle a claim against the Company for an alleged fee
due to that firm in connection with the 1996 Elscint agreement (see Note 4 to
Consolidated Financial Statements). There were no selling commissions or
discounts.
In January 1998, the Company completed the private placement, beginning in
October 1997, of 15,072,000 shares of Class A Common Stock to a group of
accredited investors for gross proceeds of approximately $1,884,000. The
proceeds are to be used to advance the Plan of restructuring outlined above,
including the Debt Reduction Program and the initial funding of the agreement
with the Mount Sinai School of Medicine. The Company claims exemption from
registration of this placement under Rule 506 of Regulation D. There were no
selling commissions or discounts.
(B) APPROXIMATE NUMBER OF EQUITY STOCK HOLDERS
Based upon information supplied from the Company's transfer agent, the
Company believes that the number of record holders of the Company's equity
securities as of April 30, 1998 are approximately as follows:
Title of Class Number of Record Holders
Class A Common Stock 172
Class B Common Stock 53
Class E Warrants 9
The Company believes that the number of beneficial holders of the
Company's Common Stock as of April 30, 1998 is in excess of 300.
(C) DIVIDENDS
The Company has never declared or paid a cash dividend on any class of its
common stock and anticipates that for the foreseeable future any earnings will
be retained for use in its business. Accordingly, the Company does not expect to
pay cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS
OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS AND EVENTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED
(B) MANAGEMENT'S ANALYSIS AND DISCUSSION OR PLAN OF OPERATIONS -
BACKGROUND/HISTORY - Since commencement of operations on February 10, 1992,
Magna-Lab Inc. and subsidiary (the "Company") has developed and intended to
manufacture and market the MAGNA-SL, the first of a planned series of anatomy
specific MRI (Magnetic Resonance Imaging) products which are smaller and cost
less to own, install and operate than present "whole body" MRI systems. The
Company's efforts to market and sell the MAGNA-SL did not generate sufficient
revenues to sustain the Company's planned operations.
Since receiving US marketing clearance for the MAGNA-SL in September 1994
from the Food and Drug Administration, the Company sold and delivered four
MAGNA-SL scanners. Three such sales were made to a related party with which the
Company had entered into a sales, marketing and distribution agreement. The
third scanner delivered to this related party has not been paid for by such
related party and the Company has written off this receivable. The Company is
presently unable to support this product and the passage of time may make it
impossible to realize any value from this product.
See Note 8 to Consolidated Financial Statements (Item 7.) for a discussion
of financings completed since the Company's inception including a private
placement of 15,072,000 shares of class A common stock in the fiscal year ended
February 28, 1998.
CURRENT ACTIVITIES AND PLAN OF OPERATION - In February 1997, the Company
commenced a plan of restructuring of the Company's operations (the "Plan") to
reposition itself into a royalty and development company in the near-term. The
Company's activities under the Plan in the fiscal year ended February 28, 1998
have included elimination of Company-directed production, marketing,
administration and system engineering and development related to the MAGNA-SL
and attempting to strengthen the relationship with Elscint Cryomagnetics, Ltd.
("Elscint" - see Note 4 to Consolidated Financial Statements) which was begun in
June 1996. A critical component of the repositioning involves a new development
initiative in Cardiac MRI (the "Cardiac MRI Initiative") through a joint
collaboration with the Cardiac Institute of the Mount Sinai School of Medicine
(New York City) ("MSSM"), as well as raising sufficient financing to pursue the
Cardiac MRI Initiative. The Company has received a proposal from Elscint (the
"Elscint Proposal") to support the license element of the Plan and has continued
to have discussions with Elscint regarding certain work that is integral to the
Plan. The Company has, however, been unable to finalize the Elscint Proposal
because of various difficulties in its negotiation with Elscint, including a
lack of adequate funds and the Company's belief that plans submitted by Elscint
did not represent a sufficient enough opportunity for the Company's
shareholders.
In accordance with the Plan, in March 1997, the majority of the Company's
workforce including the entire sales and marketing staff, the production and
engineering and administrative staff were terminated. Further, the Company,
shortly thereafter, vacated its production, development and executive facility
and ceased the need for other assets including leased assets with remaining
non-cancelable terms, and took other measures. The Company recorded a
restructuring charge of approximately $1.5 million to the fourth quarter ended
February 28, 1997 for write downs of fixed assets, inventories, deposits made
with strategic vendors which are non-refundable, as well as accruals for lease
termination and other costs. While the ultimate amount may differ from this
estimate, the Company presently believes that such restructuring charge is
adequate. At February 28, 1998, only the Company's President and Chief
Scientific Officer, is in the full time employ of the Company. The Company
utilizes consultants in the management of the affairs of the Company, including
its Chairman and Chief Executive Officer.
When the Company vacated its principal production, development and
executive facility, it placed certain inventory and equipment in storage and
several key individuals continued the search for new capital and the advancement
of the development collaboration with the MSSM. The Company's operations were,
therefore, severely curtailed.
In December 1997, the Company's efforts to raise additional financing to
initiate the Cardiac MRI Initiative were successful in raising $1.884 million in
a private placement of 15,072,000 shares of common stock (the "December 1997
Financing"). Such financing was conditioned on the Company initiating a program
to pay its liabilities on a reduced basis (the "Debt Reduction Program"). Since
December 1997, the Company has: (1) initiated and advanced the Cardiac MRI
Initiative, (2) continued the Debt Reduction Program and (3) continued to have
discussions with Elscint with the objective of advancing the Elscint Proposal.
The December 1997 Financing is believed to be sufficient to fund the Company's
operations for approximately six months, assuming success in its Debt Reduction
program and discussions with Elscint. Thereafter, or sooner if these assumptions
are incorrect, the Company will require significant additional financing to
support the Plan. It is expected that the Company's ability to obtain such
additional financing will be dependent upon the success of the Debt Reduction
Program, negotiations regarding the Elscint Proposal and the development
activities with MSSM.
The Company is continuing its efforts to (1) raise additional capital, (2)
complete the Elscint Proposal or enter into a strategic arrangement with others,
(3) complete the Debt Reduction Program and (4) move forward with the Cardiac
MRI Initiative. There is no assurance that any of these efforts will be
successful or that the Company will be able to continue even its significantly
reduced operations, for which the Company will require additional capital.
The Company believes, based upon its resources at February 28, 1998 and
anticipated operations, that it has the financial resources to fund its
operations for approximately four months without substantial additional capital
or a strategic business arrangement.
GOING CONCERN CONSIDERATION - As indicated in the accompanying consolidated
financial statements, as of February 28, 1998, the Company had negative working
capital, approximately $765,000 of liabilities, negative net worth of
approximately ($149,000) and a development agenda which requires additional
financing. Further, as indicated in the accompanying consolidated financial
statements, the Company has incurred a cumulative loss of approximately $15.5
million since inception and has no present revenue. Losses have continued since
February 28, 1998. These factors, among others, indicate that the Company is in
need of significant additional financing and or a strategic business arrangement
in order to continue the Plan in the fiscal year beginning March 1, 1998. The
Company believes that its cash resources at February 28, 1998 are sufficient to
fund its operations for approximately four months, after which it will be
required to raise additional capital to continue its planned operations.
There can be no assurances that management's plans described in the
preceding paragraphs will be realized. These factors, among others, indicate
that the Company may be unable to continue operations as a going concern.
The Company's belief about its financing plans and prospects, Elscint
Proposal and arrangements with Mount Sinai School of Medicine, as well as other
information contained in this report (including its prospects for surviving as a
going concern over the next twelve months) are based upon present conditions and
anticipated developments. This belief is further based upon estimates and
assumptions including, among other things, completion of additional financing
necessary to fund the planned activities, timely and successful completion of
development milestones, competitive and intellectual property factors,
cooperation of creditors and others with the Debt Reduction Program, and
successful efforts to conclude an arrangement with Elscint or others, among
other matters. In the event that the Company's estimates and assumptions prove
materially incorrect, the Company does not presently have the financial
resources to fund planned operations. The foregoing information constitutes
forward-looking statements within the meaning of Section 21E under the
Securities Exchange Act of 1934, as amended.
RESULTS OF OPERATIONS -
Operations for the fiscal year ended February 28, 1998 utilized
approximately $1,200,000 of cash in order to settle liabilities under the Debt
Reduction Program and commence activities under the agreement with MSSM.
Payments to MSSM totaled approximately $300,000 in the fiscal year ended
February 28, 1998. Net loss of approximately ($13,000) reflects costs of
approximately $1 million reduced by gains of approximately $1 million related to
the settlement of liabilities at amounts less than their recorded balances.
Reference is made to Note 12 to Consolidated Financial Statements (Item 7.)
Revenues and loss from operations for the year ended February 28, 1997
reflect several factors including (i) shipment of two MAGNA-SL's to a related
party, Beta (one of which did not generate cash because it had been paid for
with customer deposits during the prior fiscal year and the other of which
remains unpaid) (ii) shipment of components of approximately $99,000 to Elscint
in order to accommodate the stage of their activities to produce and sell the
MAGNA-SL prior to the Company's failure to complete certain critical development
tasks to Elscint's satisfaction, (iii) receipt and recognition of $250,000 in
non-refundable advance royalties from Elscint and (iv) a charge of approximately
$1.5 million of restructuring costs in connection with the Plan.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
MAGNA-LAB INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Magna-Lab Inc.
We have audited the accompanying consolidated balance sheet of Magna-Lab Inc.
and Subsidiary as of February 28, 1998, and the related consolidated statements
of operations, cash flows and stockholders' deficiency for the years ended
February 28, 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Magna-Lab Inc. and
Subsidiary as of February 28, 1998, and the results of their operations and
their cash flows for the years ended February 28, 1998 and 1997 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company has suffered significant and recurring losses from operations and has an
accumulated deficit and negative working capital at February 28, 1998. In
addition, the Company has been unable to generate adequate cash flow from sales
and production to support its first product and has instead commenced a new
development activity which requires significant capital resources. While the
Company has been able to raise some financing to initiate the new development
activity, it has been unable to complete sufficient financing to assure that it
can continue its planned operations in the coming fiscal year. Furthermore, the
Company has various liabilities and contingent liabilities as a result of its
attempt to develop its first product. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding these matters also are described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
May 23, 1998
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1998
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 599,000
Accounts receivable, net of allowance for doubtful accounts of $356,000 0
--------------
Total current assets 599,000
PROPERTY AND EQUIPMENT, net and all other 17,000
--------------
$ 616,000
==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 254,000
Accrued expenses and other current liabilities 511,000
--------------
Total current liabilities 765,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, par value $.01 per share, 5,000,000
shares authorized, no shares issued
Common stock, Class A, par value $.001 per share, 40,000,000 shares
authorized, 19,322,142 shares issued
and outstanding 19,000
Common stock, Class B, par value $.001 per share,
3,750,000 shares authorized, 1,875,000 shares issued and 764,858 shares
outstanding (after forfeiture and cancellation of
1,000,000 shares effective February 28, 1998) 1,000
Capital in excess of par value 15,334,000
Accumulated deficit (15,503,000)
--------------
Total stockholders' deficiency (149,000)
$ 616,000
==============
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 1998 AND 1997
1998 1997
-------------- ---------------
<S> <C> <C>
REVENUES
Sales $ 0 $ 881,000
Royalty 0 250,000
-------------- ---------------
0 1,131,000
COST OF REVENUES 0 626,000
-------------- ---------------
GROSS PROFIT 0 505,000
-------------- ---------------
OPERATING EXPENSES:
General and administrative 579,000 1,507,000
Selling and marketing 40,000 617,000
Research and development 417,000 1,017,000
Provision for restructuring costs 0 1,489,000
Provision for doubtful accounts, related party 0 256,000
-------------- ---------------
1,036,000 4,886,000
LOSS FROM OPERATIONS (1,036,000) (4,381,000)
-------------- ---------------
OTHER INCOME (EXPENSE):
Gain from disposition of liabilities 1,027,000
Interest and other expense (4,000) (19,000)
Interest income 0 51,000
-------------- ---------------
1,023,000 32,000
-------------- ---------------
NET (LOSS) $ (13,000) $ (4,349,000)
=============== ===============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 7,496,000 4,590,000
============== ===============
NET LOSS PER SHARE, basic and diluted $ (0.00) $ (0.95) .
============== ================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1998 AND 1997
1998 1997
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (13,000) $(4,349,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,000 119,000
Provision for restructuring costs 0 1,489,000
Provision for doubtful accounts 0 256,000
Gain from disposition of liabilities (1,027,000) 0
Other 0 25,000
Changes in operating assets and liabilities:
Accounts receivable 61,000 (355,000)
Inventories 0 (333,000)
Deposits and other current and other assets 0 255,000
Accounts payable and other current liabilities (255,000) (207,000)
--------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (1,233,000) (3,100,000)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES, purchases
of property and equipment 0 (103,000)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of stock 1,884,000 100,000
Proceeds from notes payable 0 75,000
Payments on notes payable (62,000) 0
Principal payments on capital lease obligations 0 (9,000)
-------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,822,000 166,000
-------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 589,000 (3,037,000)
CASH AND CASH EQUIVALENTS:
Beginning of year 10,000 3,047,000
-------------- ---------------
End of year $ 599,000 $ 10,000
============== ===============
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED FEBRUARY 28, 1998 AND 1997
Common
Capital in Stock
Common Stock Excess Subscribed
Class A Class B of Par and to be Accumulated
Shares Amount Shares Amount Value Issued Deficit
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, February 29, 1996 3,736,802 $ 4,000 1,853,198 $ 2,000 $ 13,324,000 - $ (11,141,000)
CONVERT B SHARES TO A 29,049 - (29,049) - - - -
COMMON STOCK TO BE ISSUED
IN CONNECTION WITH
SUBSCRIPTION AGREEMENTS - - - - - 100,000 -
COMMON STOCK TO BE ISSUED
IN SETTLEMENT OF LIABILITY - - - - - 40,000 -
NET LOSS - - - - - - (4,349,000)
---------------------------------------------------------------------------------------------
BALANCES, February 28, 1997 3,765,851 4,000 1,824,149 2,000 13,324,000 140,000 (15,490,000)
ISSUANCE OF SUBSCRIBED
SHARES 425,000 - - - 140,000 (140,000) -
CONVERT B SHARES TO A 59,291 - (59,291) - - - -
PRIVATE PLACEMENT OF
COMMON STOCK 15,072,000 15,000 - - 1,869,000 - -
SHARES FORFEITED BY
FOUNDERS - - (1,000,000) (1,000) 1,000 - -
NET LOSS - - - - - - (13,000)
---------------------------------------------------------------------------------------------
BALANCES, February 28, 1998 19,322,142 $ 19,000 764,858 $ 1,000 $ 15,334,000 - $(15,503,000)
=============================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
MAGNA-LAB INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DISCUSSION OF THE COMPANY'S ACTIVITIES/PRODUCTS AND CASH REQUIREMENTS;
GOING CONCERN CONSIDERATION:
BACKGROUND/HISTORY - Since commencement of operations on February 10, 1992,
Magna-Lab Inc. and Subsidiary (the "Company") has developed and intended to
manufacture and market the MAGNA-SL, the first of a planned series of anatomy
specific MRI (Magnetic Resonance Imaging) products which are smaller and cost
less to own, install and operate than present "whole body" MRI systems. The
Company's efforts to market and sell the MAGNA-SL did not generate sufficient
revenues to sustain the Company's planned operations.
Since receiving US marketing clearance for the MAGNA-SL in September 1994 from
the Food and Drug Administration, the Company sold and delivered four MAGNA-SL
scanners. Three such sales were made to a related party with which the Company
had entered into a sales, marketing and distribution agreement. The third
scanner delivered to this related party has not been paid for by such related
party and the Company has recorded a 100% valuation allowance for this
receivable. The Company is presently unable to support this product and the
passage of time may make it impossible to realize any value from this product.
CURRENT ACTIVITIES - In February 1997, the Company commenced a plan of
restructuring of the Company's operations (the "Plan") to reposition itself into
a royalty and development company in the near-term. The Company's activities
under the Plan in the fiscal year ended February 28, 1998 have included
elimination of Company-directed production, marketing, administration and
systems engineering and development related to the MAGNA-SL and attempting to
strengthen the relationship with Elscint Cryomagnetics, Ltd. ("Elscint" - see
Note 4) which was begun in June 1996. A critical component of the repositioning
involves a new development initiative in Cardiac MRI (the "Cardiac MRI
Initiative") through a joint collaboration with the Cardiac Institute of the
Mount Sinai School of Medicine (New York City) ("MSSM"), as well as raising
sufficient financing to pursue the Cardiac MRI Initiative. The Company has
received a proposal from Elscint (the "Elscint Proposal") to support the license
element of the Plan and has continued to have discussions with Elscint regarding
certain work that is integral to the Plan. The Company has, however, been unable
to finalize the Elscint Proposal because of various difficulties in its
negotiations with Elscint, including a lack of adequate funds and the Company's
belief that plans submitted by Elscint did not represent an adequate opportunity
for the Company's shareholders.
In accordance with the Plan, in March 1997, the majority of the Company's
workforce including the entire sales and marketing staff, the production and
engineering and administrative staff were terminated. Further, the Company,
shortly thereafter, vacated its production, development and executive facility
and ceased the need for other assets including leased assets with remaining
non-cancelable terms, and took other measures. The Company recorded a
restructuring charge of approximately $1.5 million in the fourth quarter ended
February 28, 1997 for write downs of fixed assets, inventories and deposits made
with strategic vendors which are non-refundable, as well as accruals for lease
termination and other costs. While the ultimate amount may differ from this
estimate, the Company presently believes that such restructuring charge is
adequate. At February 28, 1998, only the Company's President and Chief
Scientific Officer, is in the full time employ of the Company.
When the Company vacated its principal production, development and executive
facility, it placed certain inventory and equipment in storage and several key
individuals continued the search for new capital and the advancement of the
development collaboration with the MSSM. The Company's operations were,
therefore, severely curtailed.
In December 1997, the Company's efforts to raise additional financing to
initiate the Cardiac MRI Initiative were successful in raising $1.884 million in
a private placement of 15,072,000 shares of common stock (the "December 1997
Financing"). Such financing was conditioned on the Company initiating a program
to pay its liabilities on a reduced basis (the "Debt Reduction Program" - See
Note 13). Since December 1997, the Company has: (1) initiated and advanced the
Cardiac MRI Initiative, (2) continued the Debt Reduction Program and (3)
continued to have discussions with Elscint with the objective of advancing the
Elscint Proposal. The December 1997 Financing is believed to be sufficient to
fund the Company's operations for approximately six months, assuming success in
its Debt Reduction Program and discussions with Elscint. Thereafter, or sooner
if these assumptions are incorrect, the Company will require significant
additional financing to support the Plan. It is expected that the Company's
ability to obtain such additional financing will be dependent upon the success
of the Debt Reduction Program, negotiations regarding the Elscint Proposal and
the development activities with MSSM.
The Company is continuing its efforts to: (1) raise additional capital, (2)
complete the Elscint Proposal or enter into a strategic arrangement with others,
(3) complete the Debt Reduction Program and (4) move forward with the Cardiac
MRI Initiative. There is no assurance that any of these efforts will be
successful or that the Company will be able to continue even its significantly
reduced operations, for which the Company will require additional capital.
GOING CONCERN CONSIDERATION - As indicated in the accompanying consolidated
financial statements, as of February 28, 1998, the Company had negative working
capital, approximately $765,000 of liabilities, negative net worth of
approximately ($149,000) and a development agenda which requires additional
financing. Further, as indicated in the accompanying consolidated financial
statements, the Company has incurred a cumulative loss of approximately $15.5
million since inception and has no present revenue. Losses have continued since
February 28, 1998. These factors, among others, indicate that the Company is in
need of significant additional financing and/or a strategic business arrangement
in order to continue the Plan in the fiscal year beginning March 1, 1998. The
Company believes that its cash resources at February 28, 1998 are sufficient to
fund its operations for approximately four months, after which it will be
required to raise additional capital to continue its planned operations.
There can be no assurances that management's plans described in the preceding
paragraphs will be realized. These factors, among others, indicate that the
Company may be unable to continue operations as a going concern.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - In December 1997, the Company formed Cardiac MRI,
Inc. as a wholly-owned subsidiary of the Company. The February 1998 consolidated
financial statements include the accounts of Magna-Lab Inc. and its wholly-owned
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation.
The February 1997 financial statements included herein are referred to as
consolidated financial statements.
CASH AND CASH EQUIVALENTS - Included in cash and cash equivalents are deposits
with financial institutions as well as short-term money market instruments with
maturities of three months or less when purchased.
RESEARCH AND DEVELOPMENT COSTS - Costs of research and development activities
are charged to operations when incurred. Items of equipment or materials which
are purchased and have alternative future uses either in production or research
and development activities are capitalized, at cost, as equipment or inventory.
INVENTORIES - Inventories are stated at the lower of cost or market, generally
on the first-in, first-out (FIFO) method. Cost includes materials, labor and
manufacturing overhead (NOTE 10).
PROPERTY AND EQUIPMENT - Property and equipment, including purchased software,
are stated at cost, less accumulated depreciation and amortization. The Company
provides for depreciation and amortization principally using the declining
balance method as follows:
Estimated
Asset Useful life
----- -----------
Machinery and equipment 5-7 years
Purchased software 5 years
REVENUE RECOGNITION - The Company recognized revenue when its products were
shipped to and accepted or first used by the customer. The Company accrued the
cost of the one-year warranty and service it offered to its customers. License
revenue was recorded in the fiscal year ended February 28, 1997 for a
non-refundable advance royalty received from Elscint. See, however, Notes 4 and
12.
INCOME TAXES - Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible amounts and are
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
NET (LOSS) PER SHARE - Net (loss) per share is computed based on the weighted
average number of Class A Common and Class B Common shares outstanding, after,
with respect to losses, subtracting certain shares which are forfeitable (and
have been forfeited) unless certain events occur, from shares outstanding.
During the year ended February 28, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which
requires dual presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted earnings
per share is computed similarly to fully diluted earnings per share pursuant to
Accounting Principles Board Opinion No. 15. SFAS 128 did not have an impact upon
the reported net loss per share for the fiscal year ended February 28, 1998 or
1997.
Since the effect of outstanding options is antidilutive, they have been excluded
from the Company's computation of net (loss) per common share.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair values of the Company's assets
and liabilities which qualify as financial instruments under SFAS No. 107
approximate their carrying amounts presented in the consolidated balance sheet
at February 28, 1998.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets. A loss is
recognized when expected undiscounted future cash flows are less then the
carrying amount of the asset. An impairment loss is the difference by which the
carrying amount of an asset exceeds its fair value.
USE OF ESTIMATES AND ASSUMPTIONS - The preparation of financial statements in
accordance 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 can, and in many cases will, differ
from those estimates.
NOTE 3 - RELATIONSHIP WITH THE CARDIAC INSTITUTE OF THE MOUNT SINAI SCHOOL OF
MEDICINE:
In May 1997, the Company entered into a three-year agreement with the Cardiac
Institute of the Mount Sinai School of Medicine (New York City) and Dr. Valentin
Fuster (as principal investigator) ("MSSM") for a collaborative research
arrangement devoted to utilizing MRI in cardiac arterial imaging (the "Cardiac
MRI Initiative"). Under the agreement, the Company is required to make payments
to MSSM of $600,000 in each of the first and second years and $300,000 in the
third year. The start of the annual periods was delayed and payments of $300,000
have been made to MSSM during the fiscal year ended February 28, 1998. The
Company has also agreed to pay royalties, as defined in the agreement, to MSSM
for the sole and exclusive right to use, make, have made, sell and otherwise
exploit the results of the collaboration.
The Company accrues for the cost of the collaboration with MSSM as research and
development expense monthly, subsequent to the delayed start of payments
mentioned above. At February 28, 1998, one month was accrued.
NOTE 4 - RELATIONSHIP WITH ELSCINT:
In June 1996, the Company and Elscint entered into an agreement covering a
strategic business arrangement in which Elscint would manufacture the MAGNA-SL
for marketing and sale by Elscint in certain non-United States territories,
principally Europe, the Peoples Republic of China, parts of the Middle East and
other territories. The Company would be paid royalties on each system
manufactured and sold by Elscint. To maintain its rights under the agreement,
Elscint was required to sell a minimum number of systems as defined therein, or
to cure, as defined therein, shortfalls. Additionally, Elscint and the Company
agreed to cooperate in various other matters. The Company agreed to provide
certain ongoing research and development support which is no longer practical
given the Company's resources. Elscint was granted a right of first negotiation
on certain new products.
The Company was obligated to complete certain development tasks and
enhancements, which, if not completed by November 1996, could result in
termination of the agreement by Elscint. Elscint has informed the Company that
it is not satisfied with the completion of certain of the tasks agreed to by the
parties and has reserved all of its rights including to complete the tasks
itself at the Company's expense or to terminate the agreement and seek damages
from the Company. Elscint has presented to the Company the Elscint Proposal (SEE
NOTE 1) to assume the uncompleted tasks and make a major alteration and
improvement of certain systems comprising the MAGNA-SL. The Elscint Proposal
requires a development payment of $500,000 plus certain support activities from
the Company. The Company initially agreed to proceed with the Elscint Proposal
but has been unsatisfied with certain aspects of Elscint's expressed plans and
has had difficulties in making the required payments to initiate or complete the
Proposal. The Company is still in discussions with Elscint regarding the Elscint
Proposal but there can be no assurance that this proposal will go forward.
A third party indicated to the Company that it believes the agreement with
Elscint comes within the terms of a Company engagement with that third party and
that a fee is due them with respect thereto. During August 1997, the Company
agreed with this third party to settle this matter for the issuance of 125,000
shares of the Company's Class A common stock.
NOTE 5 - DEPOSITS:
In August 1993, the Company made a $480,000 non-refundable deposit payment
pursuant to an agreement with an unaffiliated European supplier of MRI
components (consoles). Such agreement, as amended in July 1994, provided for
purchases of consoles and the license of certain technology underlying the
consoles. Such consoles would no longer be required under the Elscint proposal.
As a result of the Plan of restructuring described in Note 1, the unamortized
deposit of approximately $320,000 at February 28, 1997 was written off to
restructuring charge. The Company believes that its prior relationship with this
vendor may no longer be available. Further, it is possible that this vendor may
assert damages against the Company for the Company's failure to proceed with
plans which affect pricing of units delivered (volume discounts for volumes not
realized) or for other costs or investments made by this vendor as a result of
its relationship with the Company.
NOTE 6 - PROPERTY AND EQUIPMENT:
Property and equipment at February 28, 1998 consists of the following:
1998
----
Machinery and equipment $ 360,000
Purchased software 49,000
---------
409,000
Less accumulated depreciation and amortization and write-downs (392,000)
---------
$ 17,000
==========
During the year ended February 28, 1997, the Company wrote down its
property and equipment by approximately $400,000 in connection with
the restructuring.
NOTE 7 - NOTES PAYABLE:
In February 1997, the Company issued a $75,000 promissory note payable to a
shareholder, collateralized by certain accounts receivable and a MAGNA-SL system
delivered to a related party but not paid for by that related party. The note is
payable at prime (8.5% at February 28, 1998) plus 2% per annum and was due March
15, 1997. As of February 28, 1998, approximately $62,000 has been repaid and
approximately $13,000 plus interest is in default.
Total cash interest paid in the year ended February 28, 1997 was approximately
$19,000.
NOTE 8 - STOCKHOLDERS' DEFICIENCY:
GENERAL - The Company was incorporated on February 22, 1991 in the State of New
York and commenced operations on February 10, 1992. All references to share or
per share data in the Company's consolidated financial statements refer to
amounts after a stock split, approved by the Board of Directors on October 29,
1992, of approximately 21,532 shares for one.
DESCRIPTION OF CLASS A AND CLASS B COMMON STOCK
The Class A and Class B common stock are identical in most respects except that:
(i) the Class B common stock has five votes per share and the Class A common
stock has one vote per share, (ii) shares of Class B common stock are
convertible into shares of Class A common stock and require conversion to Class
A for sale or transfer to a non-Class B stockholder and (iii) by agreement with
an underwriter, no more Class B common stock can be issued. Holders of Class A
and Class B common stock have equal ratable rights to dividends and, upon
liquidation, are entitled to share ratably, as a single class, in the net assets
available for distribution. Shares of Class A and Class B common stock are not
redeemable, have no preemptive rights or cumulative voting power, and vote as
one class, except in certain circumstances, in matters before the shareholders.
CLASS B COMMON STOCK FORFEITED IN FEBRUARY 1998 - Of the shares of Class B
common stock outstanding, 1,000,000 shares were subject to forfeiture prior to
February 28, 1998 and to be returned to the Company by the holders if certain
conditions were not met by that date. Such conditions were not met and such
shares are to be returned to the Company. Such shares are considered cancelled
in the February 28, 1998 consolidated financial statements.
INITIAL PUBLIC OFFERING OF CLASS A COMMON STOCK AND WARRANTS - During the first
quarter of fiscal 1994, the Company completed its initial public offering of
1,150,000 units of its equity securities (including exercise of the
underwriter's over allotment option) yielding gross proceeds of $6.9 million
(approximately $5.4 million, net of underwriting discounts and expenses). Each
unit consisted of one share of Class A common stock, one redeemable Class A
warrant (which entitled the holder to purchase one share of Class A common stock
initially at $9.00 and included one redeemable Class B warrant) and one
redeemable Class B warrant (which entitled the holder to purchase one share of
Class A common stock initially at $13.50 per share). The Class A and Class B
warrants were exercisable until March 1998 and were subject to redemption by the
Company at $0.05 per warrant, upon 30 days' written notice, based upon
maintenance of certain closing bid prices of the Class A common stock for a
specific period. The warrants were also subject to adjustment under certain
conditions including by virtue of various financings completed from July 1995
through December 1997. On March 30, 1998, such warrants expired according to
their terms.
In connection with the initial public offering, the Company sold an option
permitting the underwriter to purchase 100,000 units at an exercise price of
$7.20 per unit, subject to adjustment upon certain issuances of additional
securities including by virtue of various financings completed from July 1995
through December 1997. The units underlying the underwriter's option are
identical to the units described above except that the Class A and Class B
warrants contained therein are not subject to redemption by the Company. On
March 30, 1998, such option expired according to its terms.
1995 PRIVATE PLACEMENT - During the year ended February 28, 1995, the Company
made a private placement of an aggregate amount of $1.65 million principal
amount of notes payable issued in November and December 1994 and five year
warrants to purchase 825,000 shares of Class A common stock. Approximately
$400,000 of such notes were repaid and the remaining $1,250,000 face amount of
notes, together with accrued interest, warrants to purchase 625,000 shares of
common stock and an additional cash payment were converted into 625,000 shares
of common stock of the Company. The remaining warrants to purchase 200,000
shares are subject to adjustment for anti-dilution in certain circumstances and
grant the holders certain other rights including those summarized below.
The agreement with certain holders of warrants to purchase 200,000 shares of
Class A common stock permit those holders to obtain warrants to purchase 200,000
additional shares if they chose to invest $600,000 in an offering by the Company
of securities and grant such holders certain registration rights. On June 16,
1995, the Company agreed to grant, upon the completion of a public offering,
25,000 shares of stock to such warrant holders in exchange for their agreement,
in connection with a proposed public offering, not to sell their shares prior to
July 1, 1996.
SECOND PUBLIC OFFERING OF CLASS A COMMON STOCK AND WARRANTS - In January 1996,
the Company completed the public offering of 1,850,000 shares of Class A common
stock and 925,000 Class E Warrants sold through an underwriter in units of two
shares and one warrant. Each Class E Warrant entitles the holder to purchase one
share of Class A common stock at $4.375 per share prior to December 26, 2000.
The Class E Warrants are redeemable by the Company at $0.05 per share at any
time that the average closing bid price of the Class A common stock is in excess
of $5.6875 for twenty consecutive trading days. The offering yielded gross
proceeds of $5.8 million (approximately $4.6 million net of offering discounts
and expenses). The net proceeds were used to pay down certain indebtedness and
to fund working capital and other requirements of the Company's production and
sale of its first product, the MAGNA-SL.
1998 PRIVATE PLACEMENT OF COMMON STOCK - Pursuant to a private offering of
securities beginning in October 1997, in December 1997 the Company completed the
offering of 15,072,000 shares of class A common stock to a group of accredited
investors for gross proceeds of approximately $1,884,000. The proceeds are to be
used to advance the Plan of restructuring outlined in Notes 1 and 3, including
the initial funding of the agreement with the Mount Sinai School of Medicine.
STOCK OPTIONS AND WARRANTS - In December 1992, the Company adopted its 1992
Stock Option Plan (the "Plan") which, as amended in 1993 and 1995, provides for
the granting of incentive stock options (ISO) and nonqualified stock options to
purchase 1,000,000 shares of the Company's Class A common stock or stock
appreciation rights (SAR). The exercise price of options granted under the Plan
shall not be less than 100% (110% with respect to certain beneficial holders of
common stock) of the fair market value of the stock at the date of grant.
In May 1997, the Company determined that the purposes of the 1992 Stock Option
Plan were not being adequately achieved with respect to those employees and
consultants holding options that were exercisable above current market value and
that it was in the best interests of the Company and the Company's shareholders
that the Company retain and motivate such employees and consultants. Therefore,
in order to provide such optionees the opportunity to exchange their above
market value options for options exercisable at the current market value, the
Company repriced the outstanding options under the 1992 Stock Option Plan of
selected individuals, who were identified by the Company's Board of Directors to
have a continuing role in the Company's plan of restructure and having exercise
prices above $2.00 per share, with new stock options at an exercise price of
$0.25 per share. In aggregate, 750,000 options were repriced. In addition, in
recognition of their efforts to advance the plan of restructuring, the Company
awarded, subject to shareholders' approval, 910,000 new options at $0.25 per
share to certain individuals. 660,000 of such options were granted for a
five-year term, immediately exercisable, while 250,000 of such options would be
exercisable ratably over three years. The Company may be required to record a
compensation charge in the future for stock option awards which are subject to
stockholder approval. Such charge would be required if the fair market value of
the underlying common stock at the date of shareholder approval is in excess of
the exercise price of the options. Stock option activity for the years ended
February 28, 1998 and 1997 (giving retroactive effect to the May 1997 repricing
to the beginning of the February 28, 1997 period presented) is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ -------------------------
Shares Shares
Under Under
Option Price Option Price
------------------------ -------------------------
<S> <C> <C> <C> <C>
Beginning 950,000 $0.25 - $2.81 983,500 $0.25 - $2.81
Canceled (672,500) $0.25 - $2.81 41,000 $2.50
Granted 910,000 $0.25 7,500 $0.25
-------------------------------------------------------
End 1,187,500 $0.25 950,000 $0.25 - $2.81
=======================================================
</TABLE>
Options granted contain various vesting provisions and expiration dates. Of the
options granted to date, approximately 938,000 and 950,000 were exercisable at
February 28, 1998 and 1997, respectively.
PRO-FORMA INFORMATION - The Company complies with the disclosure-only provisions
of SFAS 123, "Accounting for Stock-Based Compensation". Accordingly, no
compensation expense has been recognized for the Company's stock option plan.
Had compensation cost for the Company's stock option plan been determined on the
fair value at the date of grant of awards in the year ended February 28, 1998
consistent with the provisions of SFAS 123, the Company's net loss and net loss
per common share would have increased to the pro-forma amounts indicated below:
Net loss, as reported $( 13,000)
Net loss, pro-forma $( 65,000)
Loss per common share, basic and diluted, as reported $( 0.00)
Loss per common share, basis and diluted, pro-forma $( 0.01)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to March 1, 1997, the resulting pro-forma compensation cost may
not be representative of that to be expected in the future. The pro-forma
expense for fiscal 1997 was not significant.
The fair value of each option grant under SFAS 123 is estimated on the date of
the grant using a Black-Sholes option pricing model with the following
weighted-average assumptions: risk free rate of 6%; no dividend yield; option
lives of five years and expected volatility of 150%.
COMMON STOCK SUBSCRIBED AND TO BE ISSUED - Pursuant to the January 1997
subscription agreements, the Company sold 300,000 shares of its Class A common
stock in a private placement with accredited investors for $100,000. Such shares
were issued in the fiscal year ended February 28, 1998.
In connection with the August 1997 settlement of a dispute with a third party
(SEE NOTE 3), the Company has agreed to issue 125,000 shares of its Class A
common stock. At the date of settlement, such shares were valued at $40,000
(approximately $0.31 per share).
NOTE 9 - DISTRIBUTION AGREEMENTS/RELATED PARTY RECEIVABLE WRITTEN OFF:
The Company entered into various distribution and sales representation
agreements covering the sale of the MAGNA-SL, all of which are inoperative or
inactive at February 28, 1998. Such agreements included an exclusive arrangement
for fee-for-service leasing, mobile applications, veterinary uses and certain
overseas markets with an entity (Beta Numerics, Inc., "Beta"), a privately held
company whose shareholders included two directors and beneficial owners of the
Company's stock and one former director and still beneficial owner of the
Company's stock who resigned as a Director in December 1996. In the fiscal year
ended February 28, 1997, the Company established a valuation allowance for 100%
of a receivable from Beta, net of deposits (approximately $256,000) due to
non-payment.
NOTE 10 - PROVISION FOR RESTRUCTURING COSTS:
In connection with its plan to restructure its existing business and reposition
itself into a royalty and development company in the near term (SEE NOTE 1), in
February 1997, the Company recorded a restructuring charge of $1,489,000
detailed as follows:
Write down of property and equipment due to the
elimination of production and facility $ 400,000
Inventory write-downs relating to discontinuance
of product line 532,000
Write-off of nonrefundable deposits, net 332,000
Provision for early cancellation of leases 184,000
Other 41,000
---------------
$ 1,489,000
===============
During the fiscal year ended February 28, 1998, the Company utilized
approximately $85,000 of a restructuring accrual primarily for lease termination
costs.
At February 28, 1998, approximately $150,000 of the restructuring reserve
remains on the consolidated financial statements of the Company.
NOTE 11 - INCOME TAXES:
At February 28, 1998, the Company had net operating loss carryforwards of
approximately $13.8 million to offset future income subject to tax and
approximately $480,000 of research tax credits available to offset future taxes
payable. These resulted in an estimated $4.8 million of federal and $1 million
of state deferred tax assets at February 28, 1998. A full valuation allowance
has been established for these deferred tax assets since their realization is
considered unlikely.
A change in the ownership of a majority of the fair market value of the
Company's common stock could possibly delay or limit the utilization of existing
net operating loss carryforwards and credits. The Company believes, based upon
limited analysis, that such a change may have occurred in 1993 at a time when
net operating losses (subject to limitation) were less than $2 million. The
Company believes that other issuances of stock, including a significant issuance
of common stock in December 1997 also triggered an additional change and new
limitation.
Such carryforwards and credits expire through 2013.
NOTE 12 - OTHER MATTERS:
INTELLECTUAL PROPERTY RIGHTS - In connection with an agreement dated February
28, 1992, a founder of the Company assigned his right and interest to certain
MRI technology to the Company. No value is assigned to this right in the
Company's consolidated financial statements.
OBLIGATIONS UNDER CAPITAL LEASES - During the year ended February 28, 1997, the
Company made approximately $83,000 of purchases of property and equipment on a
leased basis which did not involve the outlay of cash. At February 28, 1997, the
Company was in default of its lease arrangements for non-payment and
accordingly, the aggregate unpaid balance of $74,000 has been reflected in
current liabilities at February 28, 1997. The collateral for each of these lease
arrangements was returned subsequent to February 28, 1997 as part of efforts to
settle these leases. Certain lease obligations have been settled and others are
still being discussed with the lessors.
RELATED PARTY TRANSACTIONS - A director of the Company, who is also a principal
owner of a company which owns stock in the Company, is a partner in a law firm
which has provided legal services to the Company. Fees paid to such firm in the
fiscal years ended February 28, 1998 and 1997 were approximately $100,000 and
$125,000, respectively, net of significant amounts written off by that firm.
RENT EXPENSE - Rent expense related to the facility lease that has been
terminated was approximately $57,000 (a portion of which was charged to the
restructuring accrual) and $141,000 for the years ended February 28, 1998 and
1997, respectively.
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
DEBT REDUCTION PROGRAM - By November 30, 1997, the Company had recorded
liabilities of approximately $2,528,000 (unaudited), no cash and no other assets
which were realizable in the near-term. After a period of seeking new investment
into the Company to advance the Plan, new investors were identified. The new
investors indicated their willingness to invest in the Company's Plan if certain
conditions were met including the reduction of recorded liabilities by a very
material amount. In approximately October, 1997, with the assistance of
reorganization counsel retained for this purpose, the Company commenced the Debt
Reduction Program. Under the Debt Reduction Program, the Company commenced a
program of contacting its creditors, informing them of the Company's dire
financial condition, advising such creditors of the Debt Reduction Program
agreed to with the potential new investors and the Company's willingness to
settle liabilities for a reduced amount.
In December 1997, the Company offered to settle claims by non-executive
employees of the Company for unpaid payroll and expenses of an aggregate of
approximately $133,000, representing the approximate amount recorded by the
Company for such liabilities. Executive employees of the Company were offered
the opportunity to settle the liability for amounts due them for compensation
for a reduced amount aggregating approximately $150,000. Virtually all of the
former, and in the case of the Company's President and Chief Scientific Officer,
ongoing employees have agreed to such arrangements and have signed releases of
liability for amounts due them .
The Company has had several judgments entered against it for liabilities. The
largest of these judgments consist of: (1) an October 1997 judgment for $300,000
entered against the Company in an action commenced by a vendor to recover
amounts alleged to be due from the Company and (2) a May 1997 judgment in favor
of a former landlord for approximately $120,000. Prior to December 31, 1997, the
vendor in (1) above agreed to settle the $300,000 judgment for $150,000 and the
former landlord in (2) above agreed to settle the $120,000 judgment for
$100,000. Both settlements are materially less than the amount that had been
accrued.
The Company has offered its trade and other creditors the opportunity to settle
the Company's obligations to them for a reduced amount. As of February 28, 1998,
certain vendor claims have been agreed to be settled for reduced amounts and
efforts are still in process to settle remaining amounts in an orderly manner.
In total, approximately $1,600,000 of liabilities at November 30, 1997 has been
either paid or agreed to be reduced. The difference between recorded payables
and accruals and amounts paid for settlement has been included in other income
in the consolidated financial statements. In additional, approximately $490,000
of recorded liabilities has been evaluated by the Company and written-off as
items which will not require a payment from the Company. Such amount has
similarly been included in other income in the consolidated financial
statements.
The Company has received statements of account from one vendor for amounts
(approximately $132,000 plus claimed interest) materially in excess of amounts
recorded by the Company (approximately $22,000) for amounts alleged to be due
from this vendor. The vendor statements indicate billings of approximately
$83,000 in January 1997 and $16,000 in April 1997 for components fabricated
which were not received by the Company. The Company does not have a record of
being billed for such amounts nor for receipt of such fabricated components.
This matter is being investigated for resolution.
The Company's Debt Reduction Program is ongoing and the Company is the subject
of several threatened, and certain actual, legal actions for nonpayment of
obligations. Various creditors have threatened the Company with litigation to
recover amounts due them and some of these parties have retained counsel who
have contacted the Company regarding these claims. While the Company has had
success in reducing its liabilities and negotiating with its creditors and
others in accordance with the Plan and the Debt Reduction Plan, the ultimate
liabilities in these matters are not known and the vendors, in some cases, may
seek damages in excess of amounts recorded in the consolidated financial
statements. The Company believes, but no assurance can be made, that its
liability will not exceed amounts recorded in the consolidated financial
statements.
WARRANTY, SERVICE, PRODUCT LIABILITY - The Company has been unable to honor its
obligations for warranty and service for the MAGNA-SL since approximately March
1997. Additionally, product liability claims relating to the MAGNA-SL may be
asserted against the Company. If such claims are asserted against the Company,
there can be no assurance that the Company will have sufficient resources to
defend against any such claim or satisfy any such successful claim. The Company
had product liability insurance which was terminated during 1997 for non-payment
of insurance premiums. In the event of an uninsured or inadequately insured
product liability claim, the Company's business and financial condition could
further be materially adversely affected.
AGREEMENT WITH ELSCINT - Elscint has informed the Company on several occasions,
including in May 1998, that it believes the Company to be in default of its
obligations under the June 1996 agreement with Elscint described in Note 4.
Elscint may assert damages against the Company. The Company has not recorded any
liability to its consolidated financial statements for this contingency because
it is unable to determine what, if any, liability it could have to Elscint after
any defenses and counterclaims which it may make against Elscint. The Company's
intention is, and it continues to work toward, a negotiated settlement of the
business issues (including the "Elscint Proposal" described in Note 1) with
Elscint.
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS.
NONE
<PAGE>
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (A) OF THE EXCHANGE ACT:
The Company's Directors and executive officers are as follows:
Name Age Positions with the Company
- ---------------------------------------- ---------------------------------------
Daniel M. Mulvena (2) 50 Chairman of the Board, Chief
Executive Officer and Acting Chief
Financial Officer
Lawrence A. Minkoff, Ph.D. 49 President and Chief Scientific
Officer
Joel Kantor (1) 41 Director
Michael J. Rosenberg (2) 70 Director
Irwin M. Rosenthal, esq. (1)(2) 69 Director
Louis E. Teichholz, M.D. (1) 56 Director
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
DANIEL M. MULVENA has been the Company's Chairman and Chief Executive
Officer since March 1998 and a consultant to the Company since February 1997.
Mr. Mulvena devotes such time as is necessary to the business and affairs of the
Company. Mr. Mulvena is Co-Chairman of the Board of EcoCath, Inc., a publicly
traded medical technology company and serves as a consultant to and/or on the
Boards of several privately-held and publicly-held medical technology companies
including publicly-held companies Thoratec Laboratories, Inc. and Zoll Medical
Corporation. Mr. Mulvena is the principal owner of Commodore Associates, a
private firm providing consulting services to medical technology companies.
Mr. Mulvena has served the Mansfield Division of Boston Scientific
Corporation, a publicly traded corporation which manufactures and sells
minimally invasive medical products ("BSC"), from 1992 through 1995 including as
Vice-President and General Manager and ultimately as Group Vice-President
Cardio/Cardiology responsible for Mansfield, Cardiac Assist and Mansfield
Electrophysiology Divisions of BSC. From 1989 through 1991, Mr. Mulvena was
Chairman, President and Chief Executive Officer of, and from 1991 through 1992
was a consultant to, Lithox Systems, Inc., a developer and manufacturer of
medical devices. From 1980 to 1989, Mr. Mulvena served in various executive
capacities with Bard Implants and Bard Cardiosurgery, all divisions of C.R.
Bard, Inc. C.R. Bard, Inc. is a leading worldwide manufacturer of medical
devices. Mr. Mulvena has served as Co-Chairman of the Board of Directors of Life
Medical Sciences, a publicly traded corporation engaged in the research and
development of technologies for use in medical applications.
LAWRENCE A. MINKOFF, PH.D., the Company's President and Chief Scientific
Officer is a co-founder of the Company and has served as Chairman of the Board,
President and Chief Executive Officer from inception in February 1991 until
March 1998. From October 1989 until February 1991, Dr. Minkoff has served as
President and a director of Minkoff Research Labs, Inc., a predecessor of the
Company. Dr. Minkoff continues as President of Minkoff Research Labs, Inc. The
Predecessor is a principal shareholder of the Company and prior to the formation
of the Company conducted the development activities relating to certain of the
Company's current technology. From October 1989 to February 1992, Dr. Minkoff
was engaged in the development of MRI technology. From July 1978 to October
1989, Dr. Minkoff was an executive vice-president of Fonar Corporation, a
publicly traded corporation engaged in developing and commercializing the use of
nuclear magnetic resonance for scanning the human body. Dr. Minkoff served as a
member of its Board of Directors from January 1985 to February 1989.
JOEL S. KANTOR, has served as a Director of the Company since March 1998.
Mr. Kantor is the Chief Executive Officer of Walnut Financial Services, Inc., a
publicly traded company which provides different forms of financing to small
businesses, including, through its subsidiaries, equity financing to start-up
and early stage businesses, bridge financing and institutional financing.
Mr. Kantor serves on the Boards of several public companies including
Encore Medical Corporation (NMS), Greystone Medical Group, Inc. (OTC Bulletin
Board), I-Flow Corporation (Nasdaq), and Paragon Health Network, Inc. (NYSE).
MICHAEL J. ROSENBERG, has been a Director of the Company since March 1998.
Since 1996, Mr. Rosenberg has been an independent consultant. From 1960 - 1996
Mr. Rosenberg was Executive Vice President of Rosenthal & Rosenthal Inc. Mr.
Rosenberg serves on the Board of several public companies including DVL Inc. and
Deotexis.
IRWIN M. ROSENTHAL, ESQ., has served as a Director of the Company since
February 1992. He has served as a senior partner at Rubin Baum Levin Constant &
Friedman since December 1991. From December 1989 to December 1991, he served as
a partner at Baer Marks Upham, and from 1983 to December 1989, as a senior
partner at Botein Hays & Sklar. Mr. Rosenthal is a director of Life Medical
Sciences, Inc., and EchoCath, Inc. and serves as secretary and director of Magar
Inc., a principal shareholder of the Company.
LOUIS E. TEICHHOLTZ, M.D., has served as a Director of the Company since
March 1998. Dr. Teichholz practices medicine with a specialty in cardiology at
the Hackensack Medical Center in Hackensack, New Jersey.
<PAGE>
ITEM 10: EXECUTIVE COMPENSATION.
The following tables set forth certain information relating to compensation
paid or accrued by the Company for the past three fiscal years to its Chief
Executive Officer and its executive officers whose cash paid compensation
exceeded $100,000 for the year ended February 28, 1998 (the "Named Executive
Officers"). Only those columns which call for information applicable to the
Company or the Named Executive Officers for the periods indicated have been
included in such tables.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
YEAR ANNUAL COMPENSATION
ENDED COMPENSATION OPTION/
NAME & PRINCIPAL POSITION FEB. 28 SALARY ($) BONUS ($) SAR (#)
- ------------------------- ------- ---------- --------- -------
<S> <C> <C> <C> <C>
Daniel Mulvena, Chairman of the Board, 1998 $ 42,000 - 250,000
Chief Executive Officer
Lawrence A. Minkoff, Ph.D., President 1998 $ 93,334(a) - 150,000
and Chief Scientific Officer 1997 $112,000 - -
1996 $112,000 - 100,000
- -------------
(a) Net of approximately $18,666 due to Dr. Minkoff for services rendered and
forgiven by him under the Debt Reduction Program.
</TABLE>
See "Report on Repricing of Options" regarding options granted to Dr. Minkoff in
prior fiscal years.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options granted
during the last fiscal year to the Named Executive Officers of the Company.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
% OF TOTAL
OPTIONS/SARS
OPTIONS/ GRANTED TO EXERCISE OR
SARS EMPLOYEES IN BASE PRICE
NAME GRANTED(#) FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- ----------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Daniel M. Mulvena 250,000 (a) 27% $0.25 May 2003 (1/3),
May 2004 (1/3),
May 2005 (1/3)
Lawrence A. Minkoff, Ph. D. 150,000 (a) 17% $0.25 May 2002
- -----------------
(a) A portion of which are subject to shareholder approval. See "Report on
Repricing of Options" below.
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table sets forth certain information with respect to stock
option exercises by the Named Executive Officers during the fiscal year ended
February 28, 1998 and the value of unexercised options held by them at the
fiscal year-ended February 28, 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED IN-THE MONEY
OPTIONS/SARS AT OPTIONS/SARS
SHARES F/Y END (#) AT F/Y END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Daniel M. Mulvena 0 0 -0-/250,000 $-0-/$15,000
Lawrence A. Minkoff, Ph. D. 0 0 250,000/-0- $15,000/$-0-
- ---------------
(1) Based on a closing price of $.31 per share of Class A Common Stock on
February 28, 1998, less the exercise price.
</TABLE>
REPORT ON REPRICING OF OPTIONS
In May 1997, the Board of Directors of the Company determined that the
purposes of the 1992 Stock Option Plan were not being adequately achieved with
respect to those employees and consultants holding options that were exercisable
above current market value and that it was essential to the best interests of
the Company and the Company's shareholders that the Company retain and motivate
such employees and consultants. The Board concluded that such retention was
particularly important given the Company's severely strained financial situation
and the sacrifices made by the key directors and employees to work without
current pay and put forth their own cash, and other personal sacrifices, to
support the Company's Plan. The Board further determined that it would be in the
best interests of the Company and the Company's shareholders to provide such
optionees the opportunity to exchange their above market value options for
options exercisable at the current market value. On May 7, 1997, the Board of
Directors repriced the outstanding options of selected individuals under the
1992 Stock Option Plan who were identified by the Board to have a continuing
role in the Company's Plan of restructure with exercise prices above $2.00 per
share with new stock options at an exercise price of $0.25 per share. The bid
price for the Class A Common stock on Nasdaq on that date was $0.22. 100,000
options were repriced for each of Messrs. Minkoff & Stutman. In addition, in
recognition of their efforts to advance the Plan, the completion of the
agreement with Mount Sinai School of Medicine and the results of the preliminary
work with Mount Sinai School of Medicine, the Board awarded new options (subject
to the Shareholder Approval) at $0.25 per share to Dr. Minkoff (150,000), Dr.
Stutman (Chief Operating Officer of the Company until June 1997) (125,000), Mr.
Rosenthal (150,000), Dr. Moskowitz (150,000), Mr. Kenneth C. Riscica (Chief
Financial Officer of the Company until April 1997 and a consultant to the
Company thereafter) (75,000) and the consultant for the restructure plan, Mr.
Mulvena (250,000). Each of the new options were granted for a five year period
of exercise with all options except Mr. Mulvena's being immediately exercisable.
Mr. Mulvena's options are exercisable ratably over a three-year period
commencing in May 1997.
EMPLOYMENT AGREEMENTS
There are no employment agreements with any of the Company's employees. Dr.
Minkoff continues to receive compensation at the rate of compensation indicated
in his prior contract which expired on February 28, 1997 as described below.
On February 28, 1992, the Company entered into three year employment
agreements, as extended to February 28, 1997, with Dr. Lawrence A. Minkoff, then
its Chairman of the Board, Chief Executive Officer and President, and Dr. Joel
M. Stutman, then its Vice President, Chief Operating Officer (the "Employment
Agreements"). The Employment Agreements provided for salary of $112,000 per
annum, for the fiscal years ended February 1994, 1995, 1996 and 1997. In June
1997, Dr. Stutman resigned his position as Director and Vice President -
Operations. Each Drs. Minkoff and Stutman had agreed not to disclose to anyone
confidential information of the Company during the term of his employment or
thereafter and will not compete with the Company for a period of 24 months
following termination of his employment. All work, research and results thereof,
including, without limitation, inventions, processes or formulae made, conceived
or developed by Dr. Minkoff or Dr. Stutman during the term of employment which
are related to the business, research and development work or field of operation
of the Company shall be the property of the Company. DIRECTORS' COMPENSATION The
Company does not presently pay cash compensation to its outside Directors for
attendance at Board or committee meetings. Outside Directors may be reimbursed
for expenses incurred by them in acting as a Director or as a member of any
committee of the Board of Directors. In 1993 Mr. Rosenthal was awarded options
to purchase 25,000 shares of Class A Common Stock of the Company at an exercise
price of $6.00 per share and expiring in 1998. In February 1995, Mr. Rosenthal
and Dr. Moskowitz were awarded options to purchase 75,000 and 100,000 shares,
respectively, of Class A Common Stock of the Company at an exercise price of
$2.50 per share, and an option held by Mr. Rosenthal to purchase 25,000 shares
at $6.00 was cancelled and regranted with an exercise price of $2.50. Each such
option expires in February of 2000. In January 1996, Mr. Rosenthal was granted
an option to purchase 25,000 shares of Class A Common Stock at $2.63 and
expiring in 2001. In May 1997, as discussed further in Report on Repricing of
Options, above, the options granted to Messrs. Rosenthal and Moskowitz were
regranted at an exercise price of $0.25 per share and with a five year term.
Additionally, at that time Messrs. Moskowitz and Rosenthal were each granted
(subject to Shareholder Approval) options for an additional 150,000 shares
(each) of Class A Common Stock. See "Option/SAR Grants in Last Fiscal Year"
regarding these options and for options granted to Drs. Minkoff and Stutman and
for options repriced in May of 1997.
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A and Class B Common Stock as of April 30, 1998
for (i) each of the Company's directors and the executive officers named in the
Summary Compensation Table, (ii) each person known by the Company to own
beneficially 5% or more of the outstanding shares of any class of its voting
securities and (iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF TOTAL
CLASS OF SHARES PERCENT CLASS A AND PERCENTAGE OF
NAME AND ADDRESS COMMON BENEFICIALLY OF CLASS B TOTAL VOTING
OF BENEFICIAL OWNER (1) STOCK (2) OWNED(3) CLASS(4) COMMON STOCK(4) POWER (2)(4)
- ----------------------- --------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Daniel M. Mulvena (5) Class A 83,333 0.4% 0.4% 0.4%
Lawrence A. Minkoff, Ph.D. (6)(7) Class A 250,000 2.6%
Class B 238,915 31.2%
-------
488,915 2.4% 6.2%
-------
Irwin M. Rosenthal (8)(9)(11) Class A 650,000 3.2%
Class B 48,496 6.3%
------
698,496 3.5% 3.8%
-------
Robert M. Rubin (13) Class A 2,400,000 12.3% 11.9% 10.3%
Abbe/Berman "Group" (14) Class A 2,000,000 10.3% 9.9% 8.6%
Coleman Abbe (14) Class A 500,000 2.5% 2.5% 2.2%
Richard Abbe (14) Class A 500,000 2.5% 2.5% 2.2%
Leo Abbe (14) Class A 500,000 2.5% 2.5% 2.2%
Jeffrey Berman (14) Class A 500,000 2.5% 2.5% 2.2%
Eileen Kaplan (15) Class A 1,000,000 5.1% 4.9% 4.3%
Lawrence Kaplan and Helaine Kaplan (15) Class A 1,000,000 5.1% 4.9% 4.3%
Fred Kassner (15) Class A 1,050,000 5.4% 5.2% 4.5%
Cynthia R. May(12) Class A 1,109,606 5.7% 5.4% 4.7%
Theodore J. Murin (12) Class A 1,072,706 5.5% 5.3% 4.6%
Dr. Herbert Moskowitz (8)(9)(11) Class A 560,936 2.8%
Class B 267,265 34.9%
-------
828,201 4.1% 8.1%
-------
Minkoff Research Labs, Inc. (7) Class B 238,915 31.2% 1.1% 5.1%
Harry Minkoff (7) Class B 238,915 31.2% 1.1% 5.1%
Dr. Teichholtz (15) Class A 200,000 1.0% 1.0% 0.9%
Joel M. Stutman, Ph.D. (5) Class B 185,969 24.3% 9.8% 4.0%
Magar Inc.(8) Class B 48,496 6.3% 0.2% 1.0%
Martin D. Fife (8)(9) Class B 48,496 6.3% 0.2% 1.0%
All Executive Officers and Directors as Class A 1,183,333 5.8%
a Group (4 persons) Class B 287,411 37.5%
-------
1,470,744 7.0% 6.1%
---------
(see following page for notes)
- ----------------------
</TABLE>
(1) All shares are beneficially owned and sole voting and investment power
is held by the persons named, except as otherwise noted.
(2) Class B Common Stock is entitled to five votes per share but is
otherwise substantially identical to the Class A Common Stock, which
has one vote per share. Each share of Class B Common Stock is
convertible into one share of Class A Common Stock.
(3) Beneficial ownership of Class B Common Stock reflects the forfeiture of
an aggregate of 1,000,000 shares on February 28, 1998 upon the failure
of certain criteria to be achieved.
(4) Based upon 19,422,142 shares of Class A Common Stock and 764,858 shares
of Class B Common Stock outstanding (after subtracting 1,000,000 shares
forfeited by the holders on February 28, 1998) and reflecting as
outstanding, with respect to the relevant owner, the shares which that
beneficial owner could acquire upon exercise of options which are
presently exercisable or become exercisable within the next 60 days.
(5) The address for Mr. Mulvena is c/o Magna-Lab Inc., P.O. Box 780,
Syosset, NY 11791. Includes options which have become exercisable in
May 1998.
(6) The address for Dr. Minkoff is c/o Magna-Lab Inc., P.O. Box 780,
Syosset, NY 11791. Includes currently exercisable options to purchase
250,000 shares of Class A Common Stock, including shares underlying
options which are subject to shareholder approval. Reflects the
forfeiture of 273,042 shares of Class B common stock on February 28,
1998.
(7) Dr. Lawrence A. Minkoff and Harry Minkoff are each officers and
directors and principal shareholders of Minkoff Research Labs, Inc. and
as such may be considered to beneficially own, and to have shared
investment and voting power with respect to, all shares of Class B
Common Stock owned by Minkoff Research Labs, Inc. Harry Minkoff is the
father of Lawrence A. Minkoff. Information relating to shares owned by
each of these individuals assumes that each beneficially owns all
shares of Class B Common Stock owned of record by Minkoff Research
Labs, Inc. Reflects the forfeiture of 273,042 shares of Class B common
stock on February 28, 1998.The address for Minkoff Research Labs, Inc.
and for Harry Minkoff is P.O. Box 338, Locust Valley, NY 11560.
(8) Dr. Moskowitz and Messrs. Rosenthal and Fife are each officers and
directors and principal stockholders of Magar Inc. As such, these
individuals may be considered to beneficially own, and to have shared
investment and voting power with respect to, all shares of Class B
Common Stock owned by Magar Inc. Information relating to shares owned
by each of these individuals assumes that each beneficially owns all
shares of Class B Common Stock owned of record by Magar Inc. The
address of these individuals is c/o Magar Inc., 30 Rockefeller Plaza,
New York, NY 10112.
(9) Includes 48,496 shares (after forfeiture of 55,424 shares on February
28, 1998) of Class B Common Stock owned by Magar Inc.
(10) Class A Common Stock beneficially owned includes 150,900 shares of
Class A Common Stock(including 2,100 shares of stock held by Dr
Moskowitz' wife), approximately 52,345 shares of Class A Common Stock
issuable pursuant to Class A Warrants (exercisable at approximately
$8.16 per share), approximately 77,691 shares of Class A Common Stock
issuable pursuant to Class B Warrants (exercisable at approximately
$12.25 per share), 15,000 shares of Class A Common Stock issuable
pursuant to Class E Warrants (exercisable at $4.375 per share) and
options to acquire an aggregate of 100,000 shares of Class A Common
Stock. Class B Common Stock beneficially owned includes 468,750 shares
held by Dr.Moskowitz and the shares held by Magar Inc. (see notes 7 and
8).
(11) Includes currently exercisable options to purchase an aggregate of
250,000 shares of Class A Common Stock.
(12) Includes 272,706 shares owned by Marathon Investments, L.L.C. and with
respect to which Ms. May & Mr. Murin share investment and voting power.
Amounts for Ms. May also include 826,900 shares of Class A Common Stock
owned of record by GRQ L.L.C. and 10,000 shares of Class A Common Stock
underlying Class E Warrants (exercisable at $4.375 per share) owned of
record by GRQ L.L.C. The address for each of Ms. May & Mr. Murin is c/o
Marathon Investment, L.L.C. is 13260 Spencer Road, Hemlock, Michigan
48626.
(13) The address for Mr. Rubin is c/o Lawrence A. Minkoff, P.O. Box
780, Syosset, NY 11791.
(14) The address for each of Messrs. Coleman Abbe, Richard Abbe, Leo Abbe
and Jeffrey Berman is c/o Hampshire Securities Corp., 640 Fifth Avenue,
New York, NY 10016. Such reporting persons may be deemed to be part
of a "group" and such reporting persons disclaim any such "group"
membership. The "Abbe Group" reflects such amounts as though such
reporting persons were a member of a "group" (which they disclaim).
(15) The address for these individuals is c/o Magna-Lab Inc., P.O.Box
780, Syosset, NY 11791.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Such persons are required by SEC regulations to furnish the Company with copies
of all Section 16(a) reports they file.
To the Company's knowledge, based solely on review of copies of such
reports furnished to the Company, all section 16(a) filing requirements
applicable to the Company's officers, directors and greater than ten percent
shareholders have been complied with during the last fiscal year.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1994, Dr. Moskowitz and Mr. Rosenthal advanced $90,000 and
$10,000, respectively, to the Company for working capital purposes. In November
1994, the Company sold $400,000 principal amount of bridge notes and 200,000
Class C Warrants for $400,000 to five individuals in a private placement. The
bridge notes carried interest at 10% and were repaid at their maturity on May
23, 1995. Dr. Moskowitz and Mr. Rosenthal agreed to pledge certain assets in
connection with these bridge notes and the amounts advanced by Dr. Moskowitz and
Mr. Rosenthal were repaid, in November 1994, out of the proceeds of the notes
and warrants. The Class C Warrants grant the holders the right to purchase a
total of approximately 212,000 shares of Class A Common Stock at a per share
price estimated at $2.70 (subject to adjustment) prior to November 1999 and
carry certain registration rights. The warrant holders also have certain rights
to participate in a private offering of Company securities and, under certain
circumstances in connection therewith, receive additional warrants to purchase
200,000 shares of Class A Common Stock at $2.85 (subject to adjustment). In
connection with a public offering of equity securities completed in January
1996, the Company agreed to issue 25,000 shares of Class A Common Stock to the
Class C Warrantholders in exchange for their agreement to not sell the shares
underlying the Class C Warrants as well as such 25,000 shares before July 1,
1996 and deferral of their registration right relating to the shares underlying
the Class C Warrants.
In December 1994 the Company sold for $1,250,000 a total of $1,250,000
principal amount (including $500,000 to Marathon Investments, L.L.C. and
$500,000 to Fred Kassner) of 12% bridge notes payable in December 1995 (or upon
the earlier completion of a public or private offering of securities) and five
year warrants to purchase a total of 625,000 shares (including 250,000 to
Marathon Investments, L.L.C. and 250,000 to Fred Kassner) of Class A Common
Stock at $2.85 (subject to adjustment) in a private placement. During July and
August 1995, all of the holders of $1,250,000 principal amount of the 12% Notes
converted their 12% Notes (together with accrued interest), Class D Warrants to
purchase 625,000 shares of Class A Common Stock (at an exercise price of $2.85
per share) and an additional $166,667 in cash (including $100,000 from Marathon
Investments, L.L.P. and $66,667 from Fred Kassner) into 625,000 shares of Class
A Common Stock. Ms. Cynthia May, who served on the Board of Directors from
January to December 1996, is a beneficial owner and officer of Marathon
Investments, L.L.C. In November 1995, Ms. May loaned to the Company $100,000
under a 10% note which was paid in January 1996. During December 1995, $75,000
of this amount was repaid and then reborrowed. During February 1997, Fred
Kassner loaned the Company $75,000 under a Note due March 15, 1997, bearing
interest at prime plus 2% and secured by certain amounts receivable form the
taxing authorities of the United Kingdom and the machine delivered to a related
party (Beta Numerics, Inc.-see following paragraph) in December 1996 but not
paid for by that party. $62,000 of the Note has been repaid and $13,000, plus
interest, is in default.
In December 1994, the Company entered into a sales, marketing and
distribution agreement with Beta Numerics, Inc. ("Beta"). Beta is a private
company, two founders and stockholders of which are Dr. Herbert Moskowitz and
Mr. Irwin Rosenthal, each of whom was at the time a director and stockholder of
the Company. Further, the Company believes that Marathon Investments, L.L.P. and
Fred Kassner also have financial investments in Beta. Under the agreement, Beta
was granted the following rights: (i) an exclusive worldwide right to distribute
the Company's MAGNA-SL on a fee-for-service lease basis, (ii) a non-exclusive
right to act as an additional leasing source for customers preferring to lease
rather purchase the Company's scanners, (iii) an exclusive worldwide right to
distribute the MAGNA-SL in the veterinary market, (iv) an exclusive worldwide
right to distribute mobile versions of the MAGNA-SL which may be developed in
the future and (v) an exclusive right to distribute the MAGNA-SL in certain
territories other than the United States. The agreement, which had a term of ten
years (subject to renewal by Beta for an additional ten year period), is
terminable by the Company if Beta fails to place orders for a minimum of eight
scanners in year one, 16 scanners in year two and 24 scanners in each year
thereafter. Beta has not placed such required orders. Under the agreement, the
purchase price to be paid was to be at a minimum discount of 15% from the then
list price. The Company was required to offer Beta any better pricing, or other
terms, with respect to the same number of units, offered to any other customer.
Beta had agreed to fund up to $350,000 of expenses in connection with the
development of a mobile version of the MAGNA-SL, subject to its right to
terminate such funding if it determines that such development is not
advantageous. Beta had not met its minimum unit commitments under the agreement.
Through May 31, 1996, Beta had paid the Company approximately $1,075,000,
representing payment on the first system delivered, deposits on another six
additional scanners and advance payments for development of the mobile version.
Four of the deposits received from Beta do not represent orders, and under the
present relationship with Beta, will not be converted to orders. In February and
April 1996, the Company returned an aggregate of $110,000 in deposits to Beta at
Beta's request. Beta has asserted that the Company is not servicing Beta's
scanners. Under the current circumstances, the continuing viability of the Beta
agreement is unlikely. Beta owed the Company approximately $345,000 with respect
to a machine shipped in December 1996 and the Company owed Beta $100,000 based
on a customer deposit. Both the receivable and payable were written off in
connection with the $1.5 million restructuring charge recorded to the fourth
quarter ending February 28, 1997.
The Company sublet approximately 950 square feet of space at former
Corporate Headquarters to a company of which Magar Inc. is a principal
shareholder and Irwin M. Rosenthal and Dr. Herbert Moskowitz are directors. The
sublease provided for a minimum annual rental commitment of approximately
$18,000 (excluding allocated real estate taxes, utilities and other costs)
through September 1997. During 1995, the sublease was terminated by the Company
after collection of a total of approximately $28,000 of rent and related costs.
Transactions between the Company and its Directors, officers and principal
shareholders have been approved by the disinterested directors of the Company
and determined to be on terms no less favorable than those available from
independent third parties.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No.
(27) Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended February 28, 1998.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MAGNA-LAB INC.
Dated: May 28, 1998
By: /s/Daniel M. Mulvena
Daniel Mulvena
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/Daniel M. Mulvena Chairman of the Board
Daniel M. Mulvena and Chief Executive
Officer (principal executive
and financial officer) May 28, 1998
/s/Lawrence A. Minkoff
Lawrence A. Minkoff, Ph.D. President and Chief May 28, 1998
Scientific Officer
/s/Joel Kantor
Joel Kantor Director May 28, 1998
/s/Michael J. Rosenberg
Michael J. Rosenberg Director May 28, 1998
/s/Irwin M. Rosenthal
Irwin M. Rosenthal Director May 28, 1998
/s/Louis E. Teichholz
Louis E Teichholz, M.D. Director May 28, 1998
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
1.1 Form of Underwriting Agreement between the Company and the
Representative. (7)
1.2 Form of Representative's Warrant Agreement. (7)
1.3 Form of Merger and Acquisition Agreement between the Company and the
Representative. (7)
1.4 Form of Financial Consulting Agreement between the Company and the
Representative. (7)
3.1 Restated Certificate of Incorporation of the Company. (1)
3.1(a) Form of Certificate of Amendment to Restated Certificate of
Incorporation of the Company. (3)
3.1(b) Certificate of Amendment of Restated Certificate of Incorporation (4).
3.2 By-Laws of the Company. (1)
3.2(a) Amendment to By-Laws of the Company. (3)
4.1 Form of Class E Warrant Agreement among the Company, the Representative
and American Stock Transfer and Trust Company. (7)
4.2 Form of Specimen Class A Common Stock Certificate. (3)
4.3 Intentionally omitted
4.4 Intentionally omitted
4.5 Intentionally omitted
4.6 Form of Specimen Class E Warrant Certificate. (7)
5.1 Opinion of Rubin Baum Levin Constant & Friedman re: legality. (7)
10.1 1992 Stock Option Plan of the Company, as amended. (7)
10.2 Form of Stock Restriction Agreement among the Company, Class B Common
shareholders of the Company and D.H. Blair Investment Banking Corp. (2)
10.3 License Agreement, dated February 28, 1992, between the Company and Dr.
Lawrence A. Minkoff. (1)
10.4 Employment Agreement, dated February 28, 1992, between the Company and
Dr. Joel M. Stutman. (1)
10.4(a) Letter Agreement dated February 28, 1995 between the Company and Dr.
Joel M. Stutman. (7)
10.5 Employment Agreement, dated February 28, 1992, between the Company and
Dr. Lawrence A. Minkoff. (1)
10.5(a) Letter Agreement dated as of February 28, 1995 between the Company and
Dr. Lawrence A. Minkoff. (7)
10.6 Form of Subscription Agreement (with certain Exhibits, including form
of Notes and Warrant Agreement) for 10% notes and Class C Warrants.
Incorporated by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended November 30, 1994 (File No.
0-21320)
10.7 Form of Subscription Agreement (with certain Exhibits, including form
of Notes and Warrant Agreement) for 12% Notes and Class D Warrants.
Incorporated by reference to Exhibit 4.2 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended November 30, 1994 (File
No. 0-21320).
10.8 Sales, Marketing and Distribution Agreement between Beta Numerics Inc.
and Magna-Lab Inc. Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
November 30, 1994 (File No. 0-21320).
10.9(a) Medical Advisory Board Agreement, dated as of December 31, 1992,
between the Company and Dr. Kurt Isselbacher. (2)
10.9(b) Medical Advisory Board Agreement, dated as of December 31, 1992,
between the Company and Dr. Valentin Fuster. (3)
10.9(c) Medical Advisory Board Agreement between the Company and Dr. Thomas
Brady. (3)
10.10 Lease dated February 28, 1992 between Grumman Aerospace Corporation and
the Company. (1)
10.11 Form of Indemnification Agreement entered into between the Company
and each officer and Director of the Company . (1)
10.12 Assignment from Dr. Lawrence Minkoff to the Company dated December 22,
1992. (1)
10.13 Agreement, dated November 22, 1991, between the Company and John
Haytaian, as amended. (1)
10.14 Form of Stock Option Agreement between the Company and each officer and
Director of the Company (7)
10.15 Employment Agreement between the Company and Kenneth C. Riscica. (5)
10.16 Form of Consulting Agreement between the Company and D.H. Blair
Investment Banking Corp.(3)
10.18 Agreement between Magna-Lab Inc. and Surrey Medical Imaging Systems
Limited dated August 23, 1993. Incorporated by reference to Exhibit
10.18 to the Company's Quarterly Report on Form 10-QSB for the quarter
ended August 31, 1993 File No. 0-211320)
10.19 Letter Amendment dated December 8, 1993 to Agreement with Surrey
Medical Imaging Systems Limited.Incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
November 30, 1993 (File No. 0-21320)
10.19(a) Letter of amendment dated July 11, 1994 to agreement with Surrey
Medical Imaging Systems Limited. Incorporated by reference to exhibit
10.20 to the Company's Quarterly Report on Form 10-QSB for the quarter
ended May 31, 1994. (File Number 0-21320)
10.20 Foreign Distributorship Agreement and Coordination Foreign Distributor
Agreement between Magna-Lab Inc. and Apic-Medarax dated January 22,
1994. (5)
10.20(a) Letter amendment dated September 1, 1994 to Foreign Distributor
Agreement dated January 22, 1994. Incorporated by reference to Exhibit
10.20(a) to the Company's Quarterly Report on Form 10-QSB for the
quarter ended August 31, 1994. (7)
10.20(b) Letter amendment dated October 20, 1995 to Foreign Distributor
Agreement dated January 22, 1994. (7)
10.21 Form of stock option agreement between the Company and each non
executive option holder. (5)
10.22 Medical Advisory Board Agreement, dated January 19, 1994, between the
Company and Dr. William Abbott. (5)
10.23 Form of Underwriting Agreement, dated March 30, 1993, between the
Company and D.H. Blair Investment Banking Corp. Incorporated by
reference to Exhibit 1.1 to Amendment No. 2 to the Registration
Statement described in notes 1 and 3 to this Exhibit Index.
10.24 Form of Unit Purchase Option, dated April 6, 1993 between the Company
and D.H. Blair Investment Banking Corp. Incorporated by reference to
Exhibit 1.2 to Amendment No. 2 to the Registration Statement described
in notes 1 and 3 to this Exhibit Index
10.25 Form of Warrant Agreement among the Company, D.H. Blair Investment
Banking Corp. and American Stock Transfer and Trust Company.(3)
10.26 Placement Agent Agreement, dated as of June 20, 1995, among the
Company, the Representative and, for purposes of certain sections,
Dreyer & Traub, L.L.P. (7)
10.27 Form of Subscription Agreement, dated as of August 4, 1995, between the
Company and Bridge Note investors. (7)
10.28 Lock-up letters from Bridge Note investors. (7)
10.29 Letter Agreements, dated June 19, 1995, between the Company and Class
C Warrantholders. (7)
10.30 Letter of Intent, dated November 25, 1995, between the Company and
Elscint, Ltd. (7)
10.31 Surrender of Lease agreement dated April 4, 1996 between the Company
and Grumman Aerospace Corporation.(8)
10.32 Lease Agreement, dated April 4, 1996, between the Company and
Heartland Rental Properties Partnership.(8)
10.33 Letter amendment to Lease Agreement, dated April 4, 1996, between the
Company and Heartland Rental Properties Partnership.(8)
10.34 Note Agreement between the Company and Beta Numerics, Inc. dated April
15, 1996.(8)
10.35 Collaborative Research Agreement, dated as of May 7, 1997, between the
Company and Mount Sinai School of Medicine of the City University of
New York. (9)
11 Statement re computation of per share earnings. (6)
27 Financial Data Schedule.
- ----------------------------------
(1) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Registration Statement on Form S-1 (Registration No.
33-56344) filed on December 24, 1992 and declared effective on March
30, 1993 (the "S-1").
(2) Incorporated by reference to the correspondingly numbered exhibit to
Amendment No. 1, filed on March 3, 1993, to the S-1.
(3) Incorporated by reference to the correspondingly numbered exhibit to
Amendment No. 2, filed on March 25, 1993, to the S-1.
(4) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
August 31, 1994 (File No. 0-21320).
(5) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-KSB for the year ended February
28, 1994 (File No. 0-21320).
(6) Current year not required.
(7) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Registration Statement on Form SB-2 (Registration
Statement No. 33-96272) filed on August 28, 1995 including Amendment
No. 1 filed on October 20, 1995 and Amendment No. 2 filed on December
19, 1995.
(8) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-KSB for the year ended February
29, 1996 (File No. 0-21320).
(9) Incorporated by reference to the correspondingly numbered exhibit to
the Company's Annual Report on Form 10-KSB for the year ended February
28, 1997.
<TABLE> <S> <C>
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<LEGEND>
This schedule contains summary financial information
extracted from the Balance Sheet, Statements of Operations
and Statements of Cash Flows, and is qualified in its
entirety by reference to such financial statements.
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<NAME> Magna-Lab Inc.
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