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, 1999.
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 otherjurisdiction 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
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(Title of Class)
Redeemable Class E Warrants
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(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 X NO
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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)
The issuer's revenues for its most recent fiscal year ended February 28, 1999:
$0
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The aggregate market value on April 30, 1999 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 $ 2,600,000. As of April 30, 1999, 21,862,350 shares of Class
A Common Stock, $.001 par value and 738,317 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
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EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT AND THE
FOLLOWING DISCUSSION 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. SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW IN
FACTORS THAT MAY AFFECT FUTURE RESULTS
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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.
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. The Company's activities have been financed
principally by the following transactions. In February 1992, the Company was
initially funded with approximately $1,000,000 in a private placement to
accredited investors. In April and May of 1993, the Company completed the
initial public offering of 1,150,000 units of its equity securities 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 December 1997, the Company completed
the private placement, to accredited investors, of 15,072,000 class A common
stock for proceeds of approximately $1,884,000. In May 1999, the Company
completed the private placement, to accredited investors, of 2,213,667 shares of
class A common stock for proceeds of approximately $332,050. See Notes to
Consolidated Financial Statements, Item 7.
From commencement of operations on February 10, 1992 until 1997,
Magna-Lab Inc. and Subsidiary (the "Company") developed, received U.S. FDA
clearance (September 1994), manufactured and marketed the MAGNA-SL, the first of
a planned series of anatomy specific MRI (Magnetic Resonance Imaging) products.
The Company's efforts to market and sell the MAGNA-SL did not generate
sufficient revenues to sustain the Company's planned operations and such
operations were discontinued. In 1997, the Company was restructured (as outlined
below) and entered into a collaboration with the Cardiac Institute of the Mount
Sinai School of Medicine ("MSSM") to advance its development of a new disposable
medical device to make cardiac MRI imaging more effective for the diagnosis and
as a guide in the treatment of Coronary Artery Disease (the "Cardiac MRI
Initiative"). The Cardiac MRI Initiative is now the Company's principal
activity.
In February 1997, the Company commenced a plan of restructuring (the
"Plan") to reposition itself into its current activity in the Cardiac MRI
Initiative. Under the Plan, in March 1997, the majority of the Company's
workforce were terminated, the Company 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. Certain inventory
and equipment were placed in storage. 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 non-refundable deposits
made with strategic vendors, 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 continues to be adequate.
Capital raising and business development activities for the Cardiac MRI
Initiative were undertaken by key Directors, Officers and consultants. In May
1997, the Company entered into the collaboration with MSSM to advance the
Cardiac MRI Initiative.
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In December 1997, the Company's efforts to raise additional financing
to support the Cardiac MRI Initiative were successful in raising $1.884 million
in a private placement of 15,072,000 shares of Class A 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 Notes to Consolidated Financial Statements). Since
December 1997, the Company has: (1) initiated and advanced the Cardiac MRI
Initiative, (2) continued the Debt Reduction Program (3) sought to realize value
for the Company's investment in the MAGNA-SL through a business relationship
with Elscint or others and (4) raised an additional $332,050 in a private
placement of 2,213,667 shares of class A common stock. Efforts to realize value
for the MAGNA-SL product have been unsuccessful to date and are ongoing.
The Company is continuing its efforts to: (1) raise additional capital,
(2) advance its development program under the Cardiac MRI Initiative, (3)
complete the Debt Reduction Program and (4) realize value for its investment in
the MAGNA-SL. There is no assurance that any of these efforts will be successful
or that the Company will be able to continue its operations, for which the
Company presently requires additional capital.
As indicated in the consolidated financial statements included in Item
7. of this report, at February 28, 1999, the Company had negative working
capital of approximately $764,000 and negative net worth of approximately
$751,000 and further has a development agenda which requires additional
financing. Additionally, as indicated in the accompanying consolidated financial
statements, the Company has incurred a cumulative loss of approximately $16.4
million since inception, negative cash flow from operations of approximately
$849,000 and has no present revenue. Losses have continued since February 28,
1999. 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, 1999. The
Company believes that its cash resources at February 28, 1999 are not sufficient
to fund its operations for any material period of time beyond February 28, 1999
and the Company is attempting 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 address of the Company's principal executive office is 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.
(B) BUSINESS OF ISSUER
GENERAL
The Company's business activities consist principally of development of
disposable diagnostic imaging devices for use in enhancing the effectiveness of
Magnetic Resonance Imaging ("MRI") for the detection and diagnoses of Coronary
Artery Disease ("CAD"). These devices are intended to significantly enhance the
image of MRI to make MRI essential in the diagnosis and as a guide in the
treatment of Coronary Artery Disease.
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The Company also is engaged in attempting to realize value for its
investment in the MAGNA-SL product, after discontinuing development,
manufacturing and marketing activities associated with this product in 1997.
Efforts (which are ongoing) to date have included discussion of the licensing or
sale of the MAGNA-SL and no definitive arrangements have resulted.
The Company believes the market for it's planned Cardiac MRI products
is substantial. The Company believes that over 11.2 million Americans have been
diagnosed as having Coronary Artery Disease and that approximately 6.0 million
people visit U.S. hospitals with CAD complaints annually. The Company believes
that approximately 3.0 million of such people are referred for testing,
observation, or treatment. Annually, the Company believes that approximately 1.5
million people have a heart attack in the U. S. and approximately 500,000 of
these die. This disease is believed to be the leading killer in the U.S. and a
significant part of our healthcare cost.
The company's products under development consist of the following:
1. Cardiac View is a product to permit a non-invasive approach to
definitive diagnosis of coronary artery and other heart diseases. Cardiac View
is being designed to operate in conjunction with a magnetic resonance imaging
system to generate diagnostic quality images of the gross arterial structure of
the heart. The device consists of an MRI micro receiver coil which is introduced
to the patient by means of a probe which is inserted down the throat or nasal
passages and into the esophagus. Positioning in the esophagus, puts the micro
receiver coil directly behind the heart for optimum imaging.
2. Artery View is a minimally invasive product 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 and guidewire to the site of atherosclerotic
blockage. The device is intended to facilitate 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. MRI is the
only imaging technique that permits the differentiation of the chemical
composition of the tissue. This device is intended to aid in the treatment of
CAD by permitting the physician to assess the morphology (structure and form)
and the chemistry of the lesion that is causing the distress.
The company has frozen the design of the Cardiac View probe pending
finalization of animal and human testing and has a working prototype of the
Artery View catheter. The devices are being developed in conjunction with the
Company's principal investigator, Valentin Fuster, M.D., Ph.D., Chairman of the
Cardiac Institute at Mt. Sinai School of Medicine, New York City.
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 were made to MSSM during the fiscal year ended February 28, 1998 and
$50,000 was accrued at February 28, 1998. For the fiscal year ended February 28,
1999, $300,000 was paid and $350,000 (reflecting two quarterly payments in
arrears) was accrued at February 28, 1999 under the agreement. 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.
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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.
The Company believes that MRI would, except for certain limitations
which the Company's products are designed to address, be the preferred
diagnostic tool in diagnosing Coronary Artery Disease because of its particular
effectiveness on soft tissue and because the additional information which it
presents which could definitively diagnose not only the existence, but the type
of arterial lesion. MRI is presently not used extensively in diagnosing Coronary
Artery Disease. The Company believes that its devices will make MRI more
effective for this purpose.
PRODUCTION AND ASSEMBLY
The Company believes that there are qualified, established
manufacturers of cardiac probes and catheters who can be trained by the Company
to manufacture the CARDIAC VIEW and ARTERY VIEW products to the Company's design
and specification. Further, the Company believes that this area of
manufacturing, because it involves products that are minimally invasive, has
very substantial start-up costs and rigorous government regulation. The Company
has had contact with other manufacturers who have already made such investments,
are already subject to such regulations and would be interested in manufacturing
these products for the Company.
ACT Medical, Inc. ("ACT") Newton Ma., a leading contract developer and
manufacturer of medical devices, has been engaged since 1998 to assist the
company in the design, validation and the initial production of the company's
devices. ACT is one of the leading suppliers of these services to the major
companies in the healthcare field. The Company believes that ACT serves or has
served industry giants such as Boston Scientific Corp., Medtronic, Inc. and
Johnson and Johnson.
The Company has carefully followed principles of good manufacturing
practice in the design, documentation and validation of its devices. The Company
has been advised by outside consultants of the documentation that is required to
achieve GMP and ISO certification. The Company is working with regulatory
consultants to be in compliance with accepted standards.
MARKETING AND DISTRIBUTION
Initially, the Company plans to focus its marketing effort on the
clinical validation of the use of CARDIAC VIEW. Working with the research
scientists and clinical staff at MSSM, the Company will explore the practical
application of its technology in carefully controlled studies. Using the
experience gained at Mount Sinai, the Company will expand its study base by
working with top researchers located around the U.S. and in international
markets.
The Company presently expects to establish its own direct sales force
in the United States. The sales force would be made up of experienced sales
people from the cardiology field. The key target accounts will be the largest
teaching hospitals, larger hospitals in metropolitan areas and active
free-standing MRI centers who focus on cardiology. Overseas the company would
expect to employ distributors with a proven track record in diagnostic imaging
and cardiology. The company would expect to employ a representative in each
international market to manage the development of the business. These
representatives would be expected to have technical expertise in the product to
assist the dealers in clinical and service related issues.
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The Company expects to attend the major and regional conferences at
which CARDIAC VIEW and ARTERY VIEW might have a receptive audience including the
meetings of the American Heart Association and American College of Cardiology.
PROPRIETARY RIGHTS
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 Company has filed three patent applications relative to the
proprietary elements of its Cardiac View and Artery View products. Such patent
applications relate to the application and design of our system. Efforts to
advance such patent applications to the non U.S. markets are in process.
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 Company's 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. 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.
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. The Company believes that certain technologies
utilized in its Cardiac View product may need to be licensed from others and the
Company believes that such licenses are generally available on commercial terms.
Certain technologies utilized by the Company in the MAGNA-SL are covered by
patents owned or administered by the British Technologies Group, PLC. British
Technologies Group, PLC. Has offered the Company a license concerning such
technology however the Company has been unable to make the required payment to
secure such technologies which are integral to the MAGNA-SL.
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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, and several of the Company's former scientists 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 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.
GOVERNMENTAL REGULATION
The operations of the Company are subject to extensive federal and
state regulation. Non-invasive and minimally-invasive medical devices and MRI
devices generally 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").
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 Company believes that the Cardiac View product is a Class II
medical device and that the Artery View product may be a Class II medical
device. 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 MAGNA-SL operations in March
1997 calls into question the continuing status of the Company's ongoing
compliance with FDA regulations.
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.
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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. 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 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.
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The costs associated with the filing of applications with the FDA and,
if required, of conducting clinical trials can be significant.
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 is 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 to manufacture its products in registered establishments and in
accordance with Good Manufacturing Practice (GMP) regulations. The Company
presently plans to outsource the production of its Cardiac View and Artery View
products to qualifies FDA approved manufacturers. 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 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 Cardiac View product would be Class II
medical devices subject to the "substantial equivilence" standard and that its
Artery View product 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 Artery View 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.
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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. 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 however not the Cardiac View and Artery View products. Capital costs
for hospital outpatient departments are currently reimbursed by Medicare in an
amount equal to 90% of their reasonable capital costs.
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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 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.
COMPETITION
The health care industry in general, and the market for medical 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 medical
devices possess substantially greater resources than the Company. The Company
will experience competiton both from existing technologies and from others who
may attempt other approaches to Cardiac Arterial MRI. The competing technologies
that physicians utilize to make diagnoses and select treatment options for CAD
include:
Electrocardiography (ECG)
o Stress Tests
X-ray
Computed Tomography (CT) Scan
Echocardiography
o Cardiac Catheterization
Angiography
Most invasive techniques, like cardiac catheterization and angiography, carry a
risk of complications, such as stroke, heart attack or death. Additionally,
stress tests have a risk of heart attack or death. The above techniques are
described below.
ELECTROCARDIOGRAPHY (ECG) - This procedure measures electrical impulses
in the heart - a fast, slow or irregular heart beat can be detected. A physician
can analyze the rhythm of the heart that triggers each heartbeat, the nerve
conduction pathways of the heart and the rate and rhythm of the heart. These
results give clues to the condition of the heart including abnormal blood flow,
and heart rhythms. The test gives some information as to the location, or extent
of the damage, but little or no information of blockage.
EXERCISE TOLERANCE TESTING (STRESS TEST) - The test monitors a person's
Electrcardiogram (ECG) and blood pressure during exercise. For example, if
coronary arteries are partially blocked, the heart may have sufficient blood
flow when the person is resting but not during exercise. This test however gives
no detail of the location of blockages or the composition of materials creating
the blockage.
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X-RAY - Anyone who presents symptoms of coronary disease may be given a
chest x-ray from the front and side. X-rays show the shape and size of the heart
and abnormalities. The condition of blood vessels is also viewed on x-rays and
is helpful identifying an enlargement of the right ventricle of the heart.
This test provides only a gross overview of what may be going on in the heart.
COMPUTED TOMOGRAPHY (CT) SCAN - Newer CT scans can "freeze' the heart
and take a 3-D moving picture. This procedure can assess motion abnormalities.
Ultra-fast systems can see calcium deposits, the hard plaque in the vessels
which is a material associated with blockages. This technique is unable,
however, to get pictures of the "soft" plaque in the vessels which, the Company
believes is more likely to break off and cause the more serious and life
threatening blockages.
ECHOCARDIOGRAPHY - This technique uses high frequency ultrasound waves
emitted by a recording probe (transducer) and bounced off heart and vessel
structures to produce a moving image. A trans-esophageal probe can be is passed
down the patient's throat to analyze structures at the back of the heart. The
test can test heart wall motion, blood volume of each heart beat, thickening of
the sac around the heart and the accumulation of fluid between the pericardium
and the heart. The images from this technique cannot detect soft tissue or the
chemical composition within the vessels.
CARDIAC CATHETERIZATION. - In this procedure, a thin catheter is
inserted through an artery or vein and advanced into the major vessels and heart
chambers. Catheters are for either diagnosis or treatment. The catheter often
contains a measuring instrument at its tip. Often these catheters are used to
measure blood pressure in the major vessels and heart chambers. Blood samples
and biopsies may also be taken through the catheter. A subset of the diagnostic
catheterization is angiography discussed next.
CORONARY ANGIOGRAPHY - A slender catheter is threaded into an artery in
the arm or groin toward the heart and into the coronary arteries. A dye is used
that is visible on X-ray (fluroscopy). Coronary artery disease is manifested by
an irregular or narrowing of the inner wall of the coronary arteries. If
coronary artery disease is detected, an angioplasty may be ordered to widen the
channel in the artery.
COMPETITIVE COMPANIES AND RESEARCH - There are currently several
companies developing systems or devices that provide the capability for
performing cardiac imaging via several technical approaches. The CARDIAC VIEW
and ARTERY VIEW devices are distinguished from these by its proprietary design
and its validation, which is continuing, through research performed at Mount
Sinai School of Medicine in New York. Both devices are breakthroughs in the use
of magnetic resonance imaging of the cardiovascular system and, to the Company's
knowledge there is little direct competition.
The company is aware of certain research activities that could be in
competition with the products of the company.
Surgi-Vision is an MRI based start up company developing products in
conjunction with the imaging center at Johns Hopkins Medical Center. The Company
believes that the focus of their efforts is intravascular catheters to obtain a
better image from a variety of bodily structures including the prostate, colon,
rectum, lungs, uterine and abdominal areas as well as the heart. The Company
does not believe that there products will compete with MLI's CARDIAC VIEW for
screening of heart disease but could compete with ARTERY VIEW. The Company
believes that the intellectual property of Surgi-Vision is not in conflict of
its own patent filings.
The company is aware of other MRI intravascular developments at
Allegheny University and Stanford University. In both cases the work identified
uses much larger diameter catheters which will limit the ability to place it in
the smallest vessels. Schneider, Division of Boston Scientific Corporation, has
a patent on a small diameter guidewire antenna. The status of this development
is unknown.
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The company is aware of developments in surface coil improvements for
MRI at University of Pennsylvania and University of California at San Diego.
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 DISCONTINUED MAGNA-SL PRODUCT
The Company has developed and, in September 1994, received regulatory
clearance from the FDA to begin marketing, its MAGNA-SL MRI scanner. The
MAGNA-SL is not currently available for sale due to the Company's curtailment of
MRI system operations in 1997 including disruptions 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. The Company's plan to realize value for its investment in the MAGNA-SL
has been to restructure its prior licensing arrangement with Elscint (see below)
or license or sell the MAGNA-SL to others. To date such efforts (which are
ongoing) have not resulted in definitive agreements.
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).
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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 during 1997 calls
into question the current state of the Company's previously received FDA
clearance.
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 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.
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 systems manufactured and sold by Elscint. To maintain its
rights under the agreement, Elscint was required to sell a minimum number of
systems. Escint had 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 had 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 required a
development payment of $500,000 plus certain support activities from the
Company. 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. In May 1998, Elscint indicated to the Company that it is
unsatisfied with the Company's response to it's proposal. The Company has
determined not to go forward with Elscint Proposal based upon the inability of
the parties to agree on meaningful and binding sales and marketing targets which
would justify the $500,000 investment under the Elscint Proposal. The Company
believes that Elscint's MRI business was purchased by the General Electric
Company in June of 1998. Since this time, the Company has had little further
contact with Elscint.
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A third party has alleged that the terms of a Company engagement with
that third party call for a fee to them with respect to the June 1996 agreement
with Elscint. During October 1997, the parties agreed to settle this matter for
the issuance of 125,000 shares of Class A Common Stock.
OTHER (PREVIOUSLY) PROPOSED PRODUCTS IN MRI SYSTEMS
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. While there is presently no significant development activity related
to these potential products, certain design and development work had been done
and the Company believes this may have value to a potential licensee or
purchaser.
UNDERWRITERS LABORATORIES INC. OR EQUIVALENT LISTING - MAGNA-SL - The
Company's MAGNA-SL is 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 MAGNA-SL is 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.
PRODUCTION AND ASSEMBLY - MAGNA-SL - 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 has
terminated its relationship 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 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.
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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 had been paid at February 28, 1997,
leaving an unamortized deposit of approximately $320,000 at February 28, 1997.
Such remaining deposits were 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 at the time to move forward with the Elscint Proposal which
would eliminate this component. The Company believes that its prior relationship
with this vendor is no longer be available. Further, it is possible that this
vendor may assert damages against the Company for various matters including
volume discounts for volumes not realized or for other costs or investments made
by this vendor.
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.
It can be assumed that the Company's liquidity problems and its Debt
Reduction Program have had a negative effect on relations with vendors
associated with the MAGNA-SL.
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 - MAGNA-SL - Prior to cessation of
operations related to the MAGNA-SL in 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."
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See above regarding a June 1996 agreement with Elscint under which
Elscint was to manufacture market and sell the MAGNA-SL for distribution in
certain defined non-U.S. territories.
COMPETITION - MAGNA-SL - The health care industry in general, and the
market for diagnostic imaging equipment, 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 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 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 sold 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.
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.
WARRANTY AND SERVICE - MAGNA SL - 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, the four scanners placed in service creates a
potentially serious obstacle to the Company to reenter this market.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results are dependent upon many factors
including, but not limited to the Company's ability to: (i) obtain sufficient
capital or a strategic business arrangement , which is required immediately, to
fund its continued plan of development operations, (ii) pay its debts including
significant payments to trade creditors and to its principal medical
collaborator, which are presently overdue, (iii) successful completion of
development of its planned products, Cardiac View and Artery View, (iv)
successful business development and marketing efforts to, assuming completion of
the development effort in (iii) above, commercialize any products developed, (v)
maintain its relationship with the Cardiac Institute of the Mount Sinai School
of Medicine and with its principal medical investigator, (vi) develop products
which do not infringe the intellectual property rights of others, (vii) protect
its product developments from infringement by others with patents and other
protections, as well as (i) competitive factors and developments beyond the
Company's control and (ii) general economic conditions and conditions in the
financial and technology markets.
HUMAN RESOURCES
At May 15, 1999, the Company has one full time executive, research and
development employee, one part time administrative employee and two consultants
providing executive, 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
full-time service to the Company during 1997, one serves part-time and executive
serves as a consultant 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 Chief Scientific Officer. 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 (see Note 8 to Consolidated Financial Statements), 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.
18
<PAGE>
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 and received,
on October 7, 1997, 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's claim that the
Company failed to perform certain required tasks 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.
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, 1999.
- ---------------------------
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. The
source for the high and low bid information for periods through April 10, 1997
is the Nasdaq SmallCap Market 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.
FISCAL YEAR ENDING FEBRUARY 28,
1999 1998
---- ----
HIGH LOW HIGH LOW
CLASS A COMMON STOCK:
First Quarter ended May 31, 5/16 1/4 31/32 3/16
Second Quarter ended August 31, 9/16 1/8 11/32 1/4
Third Quarter ended November 30 9/32 5/64 3/8 1/4
Fourth Quarter ended February 28, 7/32 1/16 3/8 1/4
The Company's Class E warrants are not listed because their trading
value subsequent to the quarter ended May 31, 1997 has been nominal. There is no
established public trading market for the Company's Class B Common Stock.
19
<PAGE>
On April 30, 1999, the closing bid price for the Class A Common Stock
was approximately $0.12.
(B) RECENT SALES OF UNREGISTERED SECURITIES AND RELATED MATTERS -
DURING THE FISCAL YEAR ENDED FEBRUARY 28, 1999 AND THROUGH MAY 1999 -
Between January and May 1999, the Company completed the private
placement of 2,213,667 shares of Class A Common Stock to a group of accredited
investors for gross proceeds of approximately $332,050. The proceeds were to be
used to advance the Plan of restructuring outlined in other areas of this
report, fund payment under the agreement with the Mount Sinai School of Medicine
and for working capital. The Company claims exemption from registration of this
placement under Rule 506 of Regulation D. There were no selling commissions or
discounts.
During the fiscal year ended February 28, 1999 the Company issued
100,000 shares of common stock to the American Stock Transfer Company ("AST") in
settlement of its unpaid account with AST.
DURING THE FISCAL YEAR ENDED FEBRUARY 28, 1998 -
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 Notes 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, 1999 are approximately as follows:
Title of Class Number of Record Holders
Class A Common Stock 213
Class B Common Stock 53
Class E Warrants 36
The Company believes that the number of beneficial holders of the
Company's Common Stock as of April 30, 1999 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.
20
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS REPORT AND THE
FOLLOWING DISCUSSION 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. SUCH STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW IN
FACTORS THAT MAY AFFECT FUTURE RESULTS
--------------------------------------
(B) MANAGEMENT'S ANALYSIS AND DISCUSSION OR PLAN OF OPERATIONS -
BACKGROUND/HISTORY - From commencement of operations on February 10,
1992 until 1997, Magna-Lab Inc. and Subsidiary (the "Company") developed,
received US FDA clearance (September 1994), manufactured and marketed the
MAGNA-SL, the first of a planned series of anatomy specific MRI (Magnetic
Resonance Imaging) products. The Company's efforts to market and sell the
MAGNA-SL did not generate sufficient revenues to sustain the Company's planned
operations and such operations were discontinued. In 1997, the Company was
restructured (as outlined below) and entered into a collaboration with the
Cardiac Institute of the Mount Sinai School of Medicine ("MSSM") to advance its
development of a new disposable medical device to make cardiac MRI imaging more
effective for the diagnosis of heart disease (the "Cardiac MRI Initiative"). The
Cardiac MRI Initiative is now the Company's principal activity.
CURRENT ACTIVITIES - In February 1997, the Company commenced a plan of
restructuring of the Company's operations (the "Plan") to reposition itself into
its current activity in the Cardiac MRI Initiative. Under the Plan, in March
1997, the majority of the Company's workforce were terminated, the Company
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. Certain inventories and equipment were placed in
storage. 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 non-refundable deposits made with strategic vendors, 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 continues to be adequate. Capital raising and business
development activities for the Cardiac MRI Initiative were undertaken by key
Directors, Officers and consultants. In May 1997, the Company entered into the
collaboration with MSSM to advance the Cardiac MRI Initiative.
In December 1997, the Company's efforts to raise additional financing
to support the Cardiac MRI Initiative were successful in raising $1.884 million
in a private placement of 15,072,000 shares of Class A 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 Notes to Consolidated Financial Statements). Since
December 1997, the Company has: (1) initiated and advanced the Cardiac MRI
Initiative, (2) continued the Debt Reduction Program (3) sought to realize value
for the Company's investment in the MAGNA-SL through a business relationship
with Elscint or others and (4) raised an additional $332,050 in a private
placement of 2,213,667 shares of class A common stock. Efforts to realize value
for the MAGNA-SL product have been unsuccessful to date and are ongoing.
The Company is continuing its efforts to: (1) raise additional capital, (2)
advance its development program under the Cardiac MRI Initiative, (3) complete
the Debt Reduction Program and (4) realize value for its investment in the
MAGNA-SL. There is no assurance that any of these efforts will be successful or
that the Company will be able to continue its operations, for which the Company
presently requires additional capital.
21
<PAGE>
The Company is continuing its efforts to: (1) raise additional capital, (2)
advance its development program under the Cardiac MRI Initiative, (3) complete
the Debt Reduction Program and (4) realize value for its investment in the
MAGNA-SL. There is no assurance that any of these efforts will be successful or
that the Company will be able to continue its operations, for which the Company
presently requires additional capital.
LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN CONSIDERATION
As indicated in the accompanying consolidated financial statements, as of
February 28, 1999, the Company had negative working capital of approximately
$764,000 and negative net worth of approximately $751,000 and further has a
development agenda which requires additional financing. Additionally, as
indicated in the accompanying consolidated financial statements, the Company has
incurred a cumulative loss of approximately $16.4 million since inception,
negative cash flow from operations of approximately $849,000 and has no present
revenue. Losses have continued since February 28, 1999. 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, 1999. The Company believes that its cash
resources at February 28, 1999 are not sufficient to fund its operations for any
material period of time beyond February 28, 1999 and the Company is attempting
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.
RESULTS OF OPERATIONS -
Operations for the fiscal year ended February 28, 1999 utilized
approximately $849,000 of cash principally in connection with activities under
The Cardiac MRI Initiative and the related agreement with MSSM. Payments to MSSM
totaled approximately $300,000 in the fiscal year ended February 28, 1999 and at
February 28, 1999 are approximately $300,000 in arrears. Net loss of
approximately $919,000 reflects costs of approximately $1.2 million reduced by
gains of approximately $0.28 million related to the settlement of liabilities at
amounts less than their recorded balances and related evaluations of payables
and accruals. Reference is made to Note 8 to Consolidated Financial Statements
(Item 7.)
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 and
related evaluations of payables and accruals.
THE YEAR 2000 ISSUE
The Year 2000 issue refers to the fact that many computers and
applications have been programmed with two digit date fields for the year. As
such, as the century date change occurs, date sensitive systems may not be able
to recognize the year 2000 or distinguish it from the year 1900, for example.
This inability to recognize or properly interpret the year 2000 could result in
incorrect or interrupted processing of financial and operational data. The
effect that this could have on information, systems and operations is not
measurable but could be significant.
22
<PAGE>
The Company uses computers in accounting and general administration and
in various technical applications. The software that the Company currently uses
includes versions which are several years old and may, or may not, have year
2000 issues. The Company plans, during 1999, to update its general accounting
and administration software to the latest versions available. The software used
for technical functions is generally more current and believed to be year 2000
compliant. The Company believes that its collaborator, MSSM and its outsourced
developer, Act Medical, Inc. are taking the steps necessary to be year 2000
compliant. The Company's MAGNA-SL uses computer systems which generally are not
time or date sensitive and the Company believes are generally year 2000
compliant. There can be no assurance that the Company will have no disruption as
a result of the year 2000 issue, however, management believes that such issues
would not be significant.
FACTORS THAT MAY AFFECT FUTURE RESULTS
THE COMPANY'S FUTURE OPERATING RESULTS ARE DEPENDENT UPON MANY FACTORS
INCLUDING, BUT NOT LIMITED TO THE COMPANY'S ABILITY TO: (I) OBTAIN SUFFICIENT
CAPITAL OR A STRATEGIC BUSINESS ARRANGEMENT , WHICH IS REQUIRED IMMEDIATELY, TO
FUND ITS CONTINUED PLAN OF DEVELOPMENT OPERATIONS, (II) PAY ITS DEBTS INCLUDING
SIGNIFICANT PAYMENTS TO TRADE CREDITORS AND TO ITS PRINCIPAL MEDICAL
COLLABORATOR, WHICH ARE PRESENTLY OVERDUE, (III) SUCCESSFUL COMPLETION OF
DEVELOPMENT OF ITS PLANNED PRODUCTS, CARDIAC VIEW AND ARTERY VIEW, (IV)
SUCCESSFUL BUSINESS DEVELOPMENT AND MARKETING EFFORTS TO, ASSUMING COMPLETION OF
THE DEVELOPMENT EFFORT IN (III) ABOVE, COMMERCIALIZE ANY PRODUCTS DEVELOPED, (V)
MAINTAIN ITS RELATIONSHIP WITH THE CARDIAC INSTITUTE OF THE MOUNT SINAI SCHOOL
OF MEDICINE AND WITH ITS PRINCIPAL MEDICAL INVESTIGATOR, (VI) DEVELOP PRODUCTS
WHICH DO NOT INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, (VII) PROTECT
ITS PRODUCT DEVELOPMENTS FROM INFRINGEMENT BY OTHERS WITH PATENTS AND OTHER
PROTECTIONS, AS WELL AS (I) COMPETITIVE FACTORS AND DEVELOPMENTS BEYOND THE
COMPANY'S CONTROL AND (II) GENERAL ECONOMIC CONDITIONS AND CONDITIONS IN THE
FINANCIAL AND TECHNOLOGY MARKETS.
23
<PAGE>
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
MAGNA-LAB INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT 24
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET 25
CONSOLIDATED STATEMENTS OF OPERATIONS 26
CONSOLIDATED STATEMENTS OF CASH FLOWS 27
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29-36
24
<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, 1999, and the related consolidated statements
of operations, cash flows and stockholders' deficiency for the years ended
February 28, 1999 and 1998. 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, 1999, and the results of their operations and
their cash flows for the years ended February 28, 1999 and 1998, 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, 1999. 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. The Company
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
June 8, 1999
25
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 67,000
Other current assets 0
---------------
Total current assets 67,000
PROPERTY AND EQUIPMENT, net, and all other 13,000
---------------
$ 80,000
===============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 223,000
Accrued expenses and other current liabilities 608,000
---------------
Total current liabilities 831,000
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, 21,662,350 shares issued
and outstanding 21,000
Common stock, Class B, par value $.001 per share,
3,750,000 shares authorized, 1,875,000 shares issued
and 738,317 shares outstanding 1,000
Capital in excess of par value 15,649,000
Accumulated deficit (16,422,000)
---------------
Total stockholders' deficiency (751,000)
$ 80,000
===============
SEE ACCOMPANYING NOTES.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 28, 1999 AND 1998
1999 1998
-------- -------
<S> <C> <C>
REVENUES $ 0 $ 0
OPERATING EXPENSES:
General and administrative 270,000 579,000
Selling and marketing 0 40,000
Research and development 928,000 417,000
-------------- ------------
1,198,000 1,036,000
LOSS FROM OPERATIONS (1,198,000) (1,036,000)
-------------- -------------
OTHER INCOME (EXPENSE):
Gain from disposition of liabilities 275,000 1,027,000
Interest and other income (expense), net 4,000 (4,000)
-------------- -------------
279,000 1,023,000
NET LOSS $ (919,000) $ (13,000)
============== =============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 20,350,000 7,496,000
============== =============
NET LOSS PER SHARE, basic and diluted $ (0.05) $ (0.00)
============== =============
SEE ACCOMPANYING NOTES
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 28, 1999 AND 1998
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (919,000) $ (13,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,000 1,000
Gain from disposition of liabilities (275,000) (1,027,000)
Changes in operating assets and liabilities:
Accounts receivable 0 61,000
Accounts payable and other current liabilities 341,000 (255,000)
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (849,000) (1,233,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES 0 0
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sales of stock 332,000 1,884,000
Pay costs of stock issued (15,000) 0
Payments on notes payable 0 (62,000)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 317,000 1,822,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (532,000) 589,000
CASH AND CASH EQUIVALENTS:
Beginning of year 599,000 10,000
------------ ------------
End of year $ 67,000 $ 599,000
============ ============
SEE ACCOMPANYING NOTES
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
MAGNA-LAB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED FEBRUARY 28, 1999 AND 1998
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 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 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)
CONVERT B SHARES TO A 26,541 - (26,541) - - - -
SHARES TO SETTLE LIABILITY 100,000 - - - 16,000 - -
PRIVATE PLACEMENT 2,213,667 2,000 - - 330,000 - -
COSTS OF PRIVATE
PLACEMENT - - - - (31,000) - -
NET LOSS - - - - - - (919,000)
---------------------------------------------------------------------------------------------
BALANCES, February 28, 1999 21,662,350 $ 21,000 738,317 $ 1,000 $ 15,649,000 $ - $ (16,422,000)
=============================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
29
<PAGE>
MAGNA-LAB INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DISCUSSION OF THE COMPANY'S ACTIVITIES AND CASH REQUIREMENTS; GOING
CONCERN CONSIDERATION:
BACKGROUND/HISTORY - From commencement of operations on February 10, 1992 until
1997, Magna-Lab Inc. and Subsidiary (the "Company") developed, received US FDA
clearance (September 1994), manufactured and marketed the MAGNA-SL, the first of
a planned series of anatomy specific MRI (Magnetic Resonance Imaging) products.
The Company's efforts to market and sell the MAGNA-SL did not generate
sufficient revenues to sustain the Company's planned operations and such
operations were discontinued. In 1997, the Company entered into a collaboration
with the Cardiac Institute of the Mount Sinai School of Medicine ("MSSM") to
advance its development of a new disposable medical device to make cardiac MRI
imaging more effective for the diagnosis of heart disease (the "Cardiac MRI
Initiative"). The Cardiac MRI Initiative is now the Company's principal
activity.
CURRENT ACTIVITIES - In February 1997, the Company commenced a plan of
restructuring of the Company's operations (the "Plan") to reposition itself into
its current activity in the Cardiac MRI Initiative. The Company's activities in
the fiscal year ended February 28, 1999 included principally the advancement of
the Cardiac MRI Initiative. The Company's activities in the fiscal year ended
February 28, 1998 included entering into the collaborative agreement with MSSM,
capital raising, elimination of Company-directed production, marketing,
administration and systems engineering and development related to the MAGNA-SL
and attempting to strengthen a relationship with Elscint Cryomagnetics, Ltd.
("Elscint" - see Note 8) which was begun in June 1996.
In December 1997, the Company's efforts to raise additional financing to support
the Cardiac MRI Initiative were successful in raising $1.884 million in a
private placement of 15,072,000 shares of Class A 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 8). Since December 1997, the Company has: (1) initiated and advanced
the Cardiac MRI Initiative, (2) continued the Debt Reduction Program (3) sought
to enter into a business relationship with Elscint or others to realize value
for the Company's investment in the MAGNA-SL and (4) raised an additional
$332,050 in a private placement of 2,213,667 shares of class A common stock.
Under the Plan, in March 1997, the majority of the Company's workforce were
terminated. Further, in 1997, the Company 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. Certain
inventories and equipment were placed in storage. 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
non-refundable deposits made with strategic vendors, 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
continues to be adequate.
The Company is continuing its efforts to: (1) raise additional capital, (2)
advance its development program under the Cardiac MRI Initiative, (3) complete
the Debt Reduction Program and (4) realize value for its investment in the
MAGNA-SL. There is no assurance that any of these efforts will be successful or
that the Company will be able to continue its operations, for which the Company
presently requires additional capital.
GOING CONCERN CONSIDERATION - As indicated in the accompanying consolidated
financial statements, as of February 28, 1999, the Company had negative working
capital of approximately $764,000 and negative net worth of approximately
$751,000 and further, has a development agenda which requires additional
financing. Additionally, as indicated in the accompanying consolidated financial
statements, the Company has incurred a cumulative loss of approximately $16.4
million since inception and has no present revenue. Losses have continued since
February 28, 1999. 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, 1999. The
Company believes that its cash resources at February 28, 1999 are not sufficient
to fund its operations for any material period of time beyond February 28, 1999
and the Company is attempting to raise additional capital to continue its
planned operations.
30
<PAGE>
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 - The consolidated financial statements include the
accounts of Magna-Lab Inc. and its wholly-owned subsidiary, Cardiac MRI, Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.
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,
including patent costs, 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.
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
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.
The Company complies with 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. Basic
and diluted loss per share for the fiscal years ended February 28, 1999 and 1998
were the same.
31
<PAGE>
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, 1999.
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
were made to MSSM during the fiscal year ended February 28, 1998 and $50,000 was
accrued at February 28, 1998. For the fiscal year ended February 28, 1999,
$300,000 was paid and $350,000 (including two quarterly payments in arrears) was
accrued at February 28, 1999 under the agreement. 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.
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment at February 28, 1999 consists of the following:
Machinery and equipment $360,000
Purchased software 49,000
--------
409,000
Less accumulated depreciation and amortization and write-downs (396,000)
---------
$ 13,000
==========
NOTE 5 - 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.
32
<PAGE>
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 issued, 1,000,000 shares were forfeited on February 28, 1998 since
certain conditions were not met by that date. Such shares were considered
cancelled at February 28, 1998.
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 expired unexercised in March 1998) and one redeemable Class B
warrant (which expired unexercised in March 1998) In connection with the initial
public offering, the Company sold an option permitting the underwriter to
purchase 100,000 units which expired unexercised in March 1998.
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 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 at, initially, $2.85 per share,
are subject to adjustment for anti-dilution in certain circumstances and grant
the holders certain other rights including those summarized below.
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 - 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.
1999 PRIVATE PLACEMENT OF COMMON STOCK - In February 1999, the Company completed
the private offering of 2,213,667 shares of class A common stock to a group of
accredited investors for gross proceeds of approximately $332,050. The proceeds
are to be used to advance the Cardiac MRI Initiative with the Mount Sinai School
of Medicine and the Plan of restructuring outlined in Note 1. Subsequent to
February 28, 1999, in May 1999, the Company issued 200,000 shares of Class A
common stock to one accredited investor for $30,000.
STOCK OPTIONS AND WARRANTS - In December 1992, the Company adopted its 1992
Stock Option Plan (the "Stock Option 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 Stock Option 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.
33
<PAGE>
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 910,000 new options at $0.25 per share to certain individuals. A portion
of such grant, after considering forfeitures, would be subject to approval of
the shareholders of an increase in the shares available under the Stock Option
Plan. 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, 1999 and 1998
(giving retroactive effect to the May 1997 repricing to the beginning of the
February 28, 1998 period presented) is as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- -------------------------
Shares Shares
Under Under
Option Price Option Price
---------------------- -------------------------
<S> <C> <C> <C> <C>
Beginning 1,222,500 $0.25 950,000 $0.25 - $2.81
Canceled - - (637,500) $0.25 - $2.81
Granted - - 910,000 $0.25
-------------------------------------------------------
End 1,222,500 $0.25 1,222,500 $0.25
=======================================================
</TABLE>
Options granted contain various vesting provisions and expiration dates. Of the
options granted to date, approximately 1,100,000 and 938,000 were exercisable at
February 28, 1999 and 1998, 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:
1998
----
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, basic and diluted, pro-forma $( 0.01)
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%.
34
<PAGE>
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,
the Company has issued 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). Such amount was accrued and such shares were considered as common stock
subscribed and to be issued, at February 28, 1997. In connection with an amount
payable to a third party, 100,000 shares were issued during the fiscal year
ended February 28, 1999 to settle an account payable. Such amount was valued at
approximately $16,000.
NOTE 6 - INCOME TAXES:
At February 28, 1999, the Company had net operating loss carryforwards of
approximately $14.7 million to offset future income subject to tax and
approximately $570,000 of research tax credits available to offset future taxes
payable. These resulted in an estimated $5.0 million of federal and $1.2 million
of state deferred tax assets at February 28, 1999. 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 2019.
NOTE 7 - OTHER MATTERS:
RESTRUCTURING COSTS - In connection with the restructuring of its business, the
Company recorded a February 1997, 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 to discontinue product line 532,000
Write-off of nonrefundable deposits, net 332,000
Provision for early cancellation of leases and other 225,000
-------------------
$ 1,489,000
===================
During the fiscal year ended February 28, 1999 and 1998, the Company utilized
approximately $40,000 and $85,000, respectively, of the restructuring accrual
primarily for lease termination costs and reversed approximately $35,000 during
the fiscal year ended February 28, 1999 as no longer considered necessary. The
remaining accrual at February 28, 1999 is approximately $65,000.
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.
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 (7.75% at February 28, 1999) plus 2% per
annum and was due March 15, 1997. As of February 28, 1999, approximately $62,000
has been repaid and approximately $13,000 plus interest remains in default.
There was no cash interest paid in the fiscal years ended February 28, 1999 or
1998.
35
<PAGE>
RENT EXPENSE - Rent expense for the year ended February 28, 1999 was
approximately $44,000 including storage charges for inventories and other
assets. 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) for the year ended February 28, 1998.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
DEBT REDUCTION PROGRAM - In 1997, the Company identified new investors willing
to invest in the Company's Plan if, among other things, recorded liabilities
(then approximately $2.5 million, unaudited) could be reduced by a very material
amount. In approximately October 1997, reorganization counsel was retained and
the Company commenced a Debt Reduction Program. Under the Debt Reduction
Program, the Company contacted its creditors, informed them of the opportunity
to obtain new financing and requested them to settle liabilities due them for
substantially reduced amounts. Such efforts have continued during the fiscal
years ended February 28, 1999 and 1998 and are ongoing. Additionally, the
Company settled claims by non-executive employees for unpaid payroll and
expenses of approximately $133,000 and settled the claims of executive employees
for a reduced amount aggregating approximately $150,000. Virtually all of the
employee claimants signed releases of liability.
The Company has had several judgments entered against it for liabilities. The
largest of these judgments consisted of: (1) an October 1997 judgment in favor
of a vendor for $300,000 entered against the Company which was settled for
$150,000 and (2) a May 1997 judgment in favor of a former landlord for
approximately $120,000 and settled for approximately $100,000.
In total, approximately $1,400,000 of liabilities have been either paid or
agreed to be reduced by the vendors. The difference between recorded payables
and accruals and amounts paid for settlement has been included in other income
in the consolidated financial statements. Additionally, approximately $270,000
and $490,000, for the fiscal years ended February 28, 1999 and 1998,
respectively, have been evaluated by the Company and written-off (and included
in other income) as items which will not require a payment from the Company.
Approximately $300,000 remains in accruals and accounts payable pending
resolution or write-off.
The Company has a recorded liability to one vendor for approximately $22,000
and, rather than settle, this vendor has continued to invoice the Company for
additional materials which were never received and for interest charges. The
vendor's claim for this $22,000 payable now exceeds $150,000 which the Company,
in consultation with its reorganization counsel, disputes.
While the Company has had success in reducing its liabilities and negotiating
with its creditors and others in accordance with 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 cannot assure, that its
liability will not exceed amounts recorded in the consolidated financial
statements.
LITIGATION - The Company knows of no pending litigation against it although
there are some unpaid judgments against the Company for various claims which the
Company believes do not exceed $25,000. Various creditors and others have
threatened the Company with litigation to recover amounts due them and some of
these parties retained counsel who have contacted the Company regarding these
claims. While the Company has had success in reducing its liabilities and
obtaining releases from its creditors, employees and others in accordance with
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.
36
<PAGE>
The Company is also exposed to potential litigation from agreements entered into
in connection with its discontinued business activities. Some of these
agreements are described in the following paragraphs. The Company has not
recorded liabilities for any contingencies that could arise from these
agreements as it cannot estimate an amount of liability, if any.
AGREEMENT 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 and the Company would be paid royalties. Additionally,
Elscint and the Company agreed on various other matters, including certain
ongoing development support which is no longer practical given the Company's
resources. Elscint paid the Company a non-refundable deposit of $250,000 on
signing the agreement and purchased certain components from the Company and
participated in certain other efforts with the Company in preparation for the
manufacture and sale of the MAGNA-SL.
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 in
November 1996 and again in May 1998 that it is not satisfied with the completion
of certain of the tasks and believes that the Company is in default of its
obligations under the agreement. Various discussions have been had with Elscint
to resolve this matter. No resolution has been reached and the Company has had
little, if any, contact with Elscint since Elscint's MRI business was acquired
by General Electric ("GE") during 1998.
The Company has not recorded any liability to its consolidated financial
statements for this matter because it is unable to determine what, if any,
liability it could have to Elscint after defenses and counterclaims which it
would make against Elscint.
WARRANTY, SERVICE, PRODUCT LIABILITY - The Company has been unable to honor its
obligations for one year 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. The Company is not aware of any
such claims, however, there can be no assurance that such claims will not arise
and be material.
RELATIONSHIP WITH FOREIGN COMPONENT SUPPLIER - As a result of the Plan of
restructuring described in Note 1, the Company terminated its relationship with
a foreign supplier of components in which it had agreements which contemplated
multi-year and multi-system requirements. The Company wrote-off deposits, which
were non-refundable, of approximately $332,000 with this vendor.
RELATIONSHIP WITH RELATED PARTY DISTRIBUTOR - The Company entered into various
distribution and sales representation agreements covering the sale of the
MAGNA-SL, including an exclusive arrangement for certain uses and markets with
an entity (Beta Numerics, Inc., "Beta") 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. In the fiscal year ended
February 28, 1997, the Company established a valuation allowance for 100% of a
receivable from Beta, net of previously received deposits, of approximately
$256,000, net, due to non-payment.
37
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS.
NONE
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) 51 Chairman of the Board, Chief
Executive Officer and Acting
Chief Financial Officer
Lawrence A. Minkoff, Ph.D. 50 Director, President and Chief
Scientific Officer,
Joel Kanter (1) 42 Director
Michael J. Rosenberg (2) 71 Director
Irwin M. Rosenthal, esq. (1)(2) 70 Director
Louis E. Teichholz, M.D. (1) 57 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., a founder of the Company, is presently the
Company's President and Chief Scientific Officer and has also served as its
Chairman of the Board 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 privately
held company engaged in the development of MRI technology. Dr. Minkoff continues
as President of Minkoff Research Labs, Inc. Minkoff Research Labs, Inc. 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
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 Magnetic Resonance Imaging for
scanning the human body. Dr. Minkoff served as a member of its Board of
Directors from January 1985 to February 1989.
38
<PAGE>
JOEL S. KANTER, has served as a Director of the Company since March
1998. Mr. Kanter 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. Kanter 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. From 1996 to the present, 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 Graham & James, LLP since
1998 and at Rubin Baum Levin Constant & Friedman from December 1991 until 1998.
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 and is Director of Cardiology at the Hackensack Medical Center in
Hackensack, New Jersey.
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.
39
<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 $100,000 for the year ended February 28, 1999 (the "Named
Executive Officers"). Only those columns which call for information applicable
to the Company or the Named Executive Officers for the periods indicated have
been included in such tables.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
YEAR ANNUAL COMPENSATION
ENDED COMPENSATION OPTION/
NAME & PRINCIPAL POSITION FEB. 28 SALARY ($) BONUS ($) SAR (#)
- ------------------------- ------- ---------- --------- -------
<S> <C> <C> <C> <C>
Daniel Mulvena, Chairman of the Board, 1999 $114,757 - -
Chief Executive Officer 1998 $ 42,000 - 250,000
1997 - - -
Lawrence A. Minkoff, Ph.D., President 1999 $112,000 -
and Chief Scientific Officer 1998 $ 93,334(a) - 150,000
1997 $112,000 - -
- -------------
(a) Net of approximately $18,666 due to Dr. Minkoff for services rendered and
forgiven by him under the Debt Reduction Program.
See "Report on Repricing of Options" regarding options granted to Dr. Minkoff in
prior fiscal years.
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options
granted during the last fiscal year to the Named Executive Officers of the
Company.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
% OF TOTAL
OPTIONS/SARS
GRANTED TO EXERCISE OR
OPTIONS/ EMPLOYEES IN BASE PRICE
NAME SARS GRANTED(#) FISCAL YEAR ($/SHARE) EXPIRATION DATE
- ---- --------------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Daniel M. Mulvena - - - -
Lawrence A. Minkoff, Ph. D. - - - -
- -----------------
(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
40
<PAGE>
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, 1999 and the value of unexercised options held by them at the
fiscal year-ended February 28, 1999.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF IN-THE MONEY
UNEXERCISED OPTIONS/SARS
SHARES OPTIONS/SARS AT F/Y AT F/Y END ($)
ACQUIRED ON VALUE END (#) EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- ----------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Daniel M. Mulvena 0 0 166,667/83,333 $-0-/$-0-
Lawrence A. Minkoff, Ph. D. 0 0 250,000/-0- $-0-/$-0-
- ---------------
(1) Based on a closing price of $.12 per share of Class A Common Stock on February 28, 1999, 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
in 1997 and the sacrifices made by the key directors, officers, employees and
consultants 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 a price closer to the then
current market value. On May 7, 1997, the Board of Directors repriced the
outstanding options under the 1992 Stock Option Plan of selected individuals 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 the Nasdaq SmallCap Market on that date was $0.22. 100,000 options were
repriced for each of Messrs. Minkoff & Stutman (Mr. Stutman has subsequently
resigned and forfeited his options). 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 (certain of which would be
subject to the shareholder approval of an amendment to increase the number of
shares available under the Stock Option Plan unless forfeitures made such action
unnecessary) at $0.25 per share to Dr. Minkoff (150,000), Dr. Stutman (125,000)
(Chief Operating Officer of the Company until June 1997, which options were
subsequently forfeited according to their terms as they remained unexercised 90
day after his resignation), Mr. Rosenthal (150,000), Dr. Moskowitz (150,000),
Mr. Kenneth C. Riscica (75,000) (Chief Financial Officer of the Company until
April 1997 and a consultant to the Company thereafter) and to Mr. Mulvena
(250,000), the consultant for the restructure plan who was named the Company's
Chairman and Chief Executive Officer in March 1998. 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 ($112,000 per year) which expired on February
28, 1997. Mr. Mulvena provides services to the Company based upon a consulting
agreement which calls for payment based upon time expended on the affairs of the
Company. Mr. Mulvena agrees to spend such time as is necessary to advance the
affairs of the Company.
41
<PAGE>
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 of an increase in the number of shares
available under the Stock Option Plan, if necessary after forfeitures) 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
Dr. Minkoff and for options repriced in May of 1997.
42
<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, 1999 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 CLASS A AND PERCENTAGE OF
NAME AND ADDRESS COMMON BENEFICIALLY PERCENT 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 166,666 0.8% 0.7% 0.7%
Lawrence A. Minkoff, Ph.D. (6)(7) Class A 250,000 1.1%
Class B 238,915 32.4%
-------
488,915 2.1% 5.6%
-------
Irwin M. Rosenthal (8)(9)(11) Class A 725,000 3.3%
Class B 48,496 6.6%
-------
773,496 3.4% 3.8%
-------
Robert M. Rubin (13) Class A 3,400,000 15.6% 15.0% 13.3%
Abbe/Berman "Group" (14) Class A 2,000,000 9.1% 8.9% 7.8%
Coleman Abbe (14) Class A 500,000 2.3% 2.2% 2.0%
Richard Abbe (14) Class A 500,000 2.3% 2.2% 2.0%
Leo Abbe (14) Class A 500,000 2.3% 2.2% 2.0%
Jeffrey Berman (14) Class A 500,000 2.3% 2.2% 2.0%
Eileen Kaplan (15) Class A 1,666,667 5.3% 5.1% 4.6%
Lawrence Kaplan and Helaine Kaplan (15) Class A 1,666,667 5.3% 5.1% 4.6%
Fred Kassner (15) Class A 1,050,000 4.8% 4.7% 4.1%
Cynthia R. May(12) Class A 1,109,606 5.1% 4.9% 4.3%
Theodore J. Murin (12) Class A 1,072,706 4.9% 4.8% 4.2%
Joel Kanter (15)(16) Class A 1,000,000 4.6% 4.4% 3.9%
Dr. Herbert Moskowitz (8)(9)(11) Class A 560,936 2.0%
Class B 267,265 36.2%
-------
828,201 3.1% 6.7%
-------
Minkoff Research Labs, Inc. (7) Class B 238,915 32.4% 1.1% %
Harry Minkoff (7) Class B 238,915 32.4% 1.1% %
Dr. Teichholtz (15) Class A 200,000 0.9% 0.9% 0.8%
Joel M. Stutman, Ph.D. (5) Class B 131,101 17.6% 0.6% 2.6%
Magar Inc.(8) Class B 48,496 6.6% 0.2% %
Martin D. Fife (8)(9) Class B 48,496 6.6% 0.2% %
All Executive Officers and Directors as Class A 2,341,666 10.4%
a Group (4 persons) Class B 287,411 38.9%
---------
2,629,077 11.7% 14.4%
---------
(see following page for notes)
- ----------------------
</TABLE>
43
<PAGE>
The information presented in the table above is based solely upon Forms 13, 15
and 4 filed by the respective holders under the Securities Exchange Act of 1934
and has not been otherwise independently verified by the Company. To the extent
that any required holders have not filed timely reports on such Forms, the
Company would not be in a position to know the current holdings of such persons.
(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 21,862,350 shares of Class A Common Stock and 738,317 shares
of Class B Common Stock outstanding 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. Consists of options which have become exercisable.
(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 orfeiture 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), 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 218,750 shares
(after forfeiture of 250,000 shares on February 28, 1998) 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
275,000 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 Magna-Lab Inc., 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.
(16) Includes the holding of The Kanter Family Foundation and Windy City
Associates to which Mr. Kanter does not have sole voting or investment
power
44
<PAGE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 certain rights in exchange for certain volume order commitments
which were not met by Beta. The agreement was terminated by the Company during
1997. Beta has asserted that the Company is not servicing Beta's scanners. Beta
owed the Company approximately $345,000 with respect to a machine shipped in
December 1996 and the Company owed Beta $100,000 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.
Mr. Rosenthal is a senior partner in a law firm which provides legal
services to the Company from time to time. During the fiscal year ended February
28, 1999, such firm billed the Company approximately $36,000.
There are no other material transactions with related parties during
the two fiscal years ended February 28, 1999. Transactions between the Company
and its Directors, officers and principal shareholders are 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
NONE
(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, 1999.
45
<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: June 14, 1999
By: /s/Daniel M. Mulvena
Daniel M. 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
- --------------------- and Chief Executive
Daniel M. Mulvena Officer (principal executive
and financial officer) June 14, 1999
/s/Lawrence A. Minkoff
- ----------------------
Lawrence A. Minkoff, Ph.D. President and Chief Scientific
Officer June 14, 1999
/s/Joel Kanter
- -------------
Joel Kanter Director June 14, 1999
/s/Michael J. Rosenberg
- -----------------------
Michael J. Rosenberg Director June 14, 1999
/s/Irwin M. Rosenthal
- ---------------------
Irwin M. Rosenthal Director June 14, 1999
/s/Louis E. Teichholz
- ---------------------
Louis E Teichholz, M.D. Director June 14, 1999
46
<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)
47
<PAGE>
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.
- ----------------------------------
48
<PAGE>
(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>
<ARTICLE> 5
<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.
</LEGEND>
<CIK> 0000895464
<NAME> Magna-Lab Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> FEB-28-1999
<EXCHANGE-RATE> 1.000
<CASH> 67,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 67,000
<PP&E> 13,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,000
<CURRENT-LIABILITIES> 831,000
<BONDS> 0
0
0
<COMMON> 21,000
<OTHER-SE> (772,000)
<TOTAL-LIABILITY-AND-EQUITY> 80,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,198,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (919,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (919,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (919,000)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
