SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 1-14190
INTELLIGENT MEDICAL IMAGING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0136178
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
4360 NORTHLAKE BOULEVARD, SUITE 214, PALM BEACH GARDENS, FLORIDA 33410
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 627-0344
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH
REGISTERED:
COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ (NATIONAL MARKET SYSTEM)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY A CHECK MARK IF DISCLOSURE OF DELINQUENT FLIERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED TO THE BEST
OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THE
FORM 10-K. [ ]
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THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT, BASED UPON THE CLOSING PRICE OF SUCH STOCK ON MARCH 6, 1997, AS
REPORTED BY NASDAQ, WAS APPROXIMATELY $54,085,137. SHARES OF COMMON STOCK HELD
BY EACH OFFICER AND DIRECTOR AND BY EACH PERSON WHO OWNS 5 PERCENT OR MORE OF
THE OUTSTANDING COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE
DEEMED TO BE AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS IS NOT
NECESSARILY A CONCLUSIVE DETERMINATION FOR OTHER PURPOSES.
THE NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK ON MARCH 7,
1997, WAS 10,905,054.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR REGISTRANT'S 1997 ANNUAL MEETING OF
SHAREHOLDERS (TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OR
BEFORE APRIL 30, 1997) ARE INCORPORATED BY REFERENCE INTO PART III HEREOF.
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INTELLIGENT MEDICAL IMAGING, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1996
Part I
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Item 1. Business....................................................................1
A. General......................................................................1
B. Financial Information about Industry Segments................................2
C. Description of Business......................................................2
Item 2. Properties................................................................. 9
Item 3. Legal Proceedings..........................................................10
Item 4. Submission of Matters to a Vote of Security Holders........................11
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......12
Item 6. Selected Financial Data....................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................14
A. Overview....................................................................14
B. Results of Operations.......................................................14
C. Liquidity and Capital Resources.............................................15
D. Outlook.....................................................................17
E. Other Factors Relating to Forward-Looking Statements........................18
Item 8. Financial Statements and Supplementary Data...............................F-1
Report of Independent Certified Public Accountants........................F-2
Balance Sheets............................................................F-3
Statements of Operations..................................................F-4
Statements of Shareholders' Equity........................................F-5
Statements of Cash Flows..................................................F-6
Notes to Financial Statements.............................................F-8
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................ 21
Part III
Item 10. Directors and Executive Officers of the Registrant....................... 21
Item 11. Executive Compensation................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 21
Item 13. Certain Relationships and Related Transactions........................... 21
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 22
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Part I.
Item 1. BUSINESS
The following discussion contains trend information and other forward-looking
statements that involve a number of risks and uncertainties. The actual results
of Intelligent Medical Imaging, Inc. ("IMI") could differ materially from IMI's
historical results of operations and those discussed in the forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those identified in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
period references are to IMI's fiscal periods ended December 31, 1996, December
31, 1995, or December 31, 1994, unless otherwise indicated.
A. GENERAL
IMI has developed and is marketing the MICRO21(TM) system, an intelligent,
automated microscope system, for diagnostic use in hospital, commercial
reference and physician group-practice laboratories. The MICRO21 system is
designed to automate a broad range of manual microscopic procedures, potentially
enabling the laboratory to reduce costs and exposure to liabilities, enhance
analytical accuracy and consistency, increase the productivity of medical
technologists and improve patient care. According to industry sources, over 2
billion clinical laboratory microscopic procedures are performed manually by
trained medical technologists each year. When performed manually, these
procedures are costly, time-consuming and subject to varying degrees of accuracy
and consistency. These procedures, which are performed to assist in the
diagnosis of various diseases, including most cancers, AIDS and other sexually
transmitted diseases, anemia, infections and genetic disorders, remain the last
major segment of the clinical laboratory to be automated.
The Company estimates that manual microscopic procedures are conducted in
approximately 31,000 clinical laboratories worldwide, including approximately
10,800 in the United States, which comprised an estimated 5,500 hospital
laboratories, 2,700 commercial reference laboratories and 2,600 large physician
group-practice laboratories. Currently, there are over 50 manual microscopic
procedures used to assist in the diagnosis of various diseases and disorders.
Most of these procedures are performed by trained medical technologists who scan
prepared slides under a microscope to classify, count and examine cells and
other structures. The Company believes the MICRO21 system can replace many
manual microscopic procedures.
IMI was incorporated in Florida in 1989. On January 16, 1996, Intelligent
Medical Imaging, Inc. ("IMI Delaware") was formed as a Delaware corporation for
the purpose of changing the Company's state of incorporation from Florida to
Delaware. Also on January 16, 1996, the Board of Directors declared a
three-for-one stock split, effective upon the merger described below, on IMI
Delaware's common stock in the form of a 200 percent stock dividend, payable
January 18, 1996, to shareholders of record on January 18, 1996. Effective
January 17, 1996, IMI Florida was merged into IMI Delaware. IMI Delaware has
30,000,000 shares of $.01 par value common stock and 2,000,000 shares of $.01
par value preferred stock authorized for issuance. IMI Delaware and its
predecessor, IMI Florida, are referred to herein as the "Company" or "IMI."
On March 27, 1996, the Company completed an initial public offering of 3,450,000
shares of common stock at a price of $11.00 per share. The net proceeds to the
Company from the sale of such common stock were approximately $34,000,000 after
deducting underwriting commissions of approximately $2,700,000 and offering
expenses of approximately $900,000.
The Company has settled its dispute with Coulter Corporation ("Coulter") arising
from the termination of its exclusive sales and distribution agreement (the
"Coulter Agreement") with Coulter. The Company terminated the Coulter Agreement
in the fourth quarter of 1996 because of Coulter's revocation of its commitment
to purchase $5,500,000 of MICRO21 systems during the third and fourth quarters
of 1996 and other breaches of the Coulter Agreement by Coulter. Coulter disputed
the Company's termination of the Coulter Agreement, claiming that the Coulter
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Agreement remained in effect. The parties submitted the dispute to arbitration.
After the close of business on March 27, 1997, the parties settled their dispute
and entered into a settlement agreement (the "Settlement Agreement"). Under the
terms of the Settlement Agreement, the Company granted Coulter the right to
purchase MICRO21 systems for distribution worldwide on a nonexclusive basis, at
transfer prices set by the Company. To the extent and for so long as the Company
sells MICRO21 systems through other distributors, Coulter will have the right to
purchase MICRO21 systems on the same terms on a country by country basis. The
Company and Coulter agreed to arrangements for the provision of service and
support to end users of MICRO21 systems. As part of the settlement terminating
Coulter's exclusive rights of sales and distribution, the Company agreed to pay
to Coulter approximately $4,600,000, subject to certain offsets, in exchange
for: (i) the return of twenty-six (26) of Coulter's used inventory of MICRO21
systems and certain spare parts and equipment; (ii) the assignment of four (4)
of Coulter's customer contract receivables; and (iii) reimbursement to Coulter
for certain costs incurred in connection with the sale and marketing of the
MICRO21 system. In addition, the Company agreed to sell up to twenty-one (21)
MICRO21 systems to Coulter at a special discounted transfer price and Coulter
agreed to purchase four (4) MICRO21 systems promptly for placement in Japan.
While the dispute with Coulter was in effect, the dispute had an adverse effect
on sales and marketing of the MICRO21 by creating confusion in the marketplace
relating to service and pricing, which resulted in the return to Coulter of some
MICRO21 systems previously placed with customers by Coulter for evaluation. The
Company believes that many of the customers who returned systems under
evaluation will order a MICRO21 system for evaluation, purchase or lease now
that the dispute with Coulter is resolved. The Company also believes that the
resolution of the dispute with Coulter will substantially eliminate uncertainty
in the marketplace relating to service and pricing and will facilitate the
Company's efforts to sell MICRO21 systems at prices set by the Company directly
and through other distributors, including Coulter. See "Description of Business
- - Relationship with Coulter Corporation; Sales and Distribution; Settlement of
Dispute" "Item 3. Legal Proceedings," and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
As a result of Coulter's revocation of its purchase commitment as described
above, in the third quarter of 1996, the Company commenced the build-up of its
sales and service organizations and its own sales and marketing efforts which,
with the recruitment of Michael Smith as Vice President of Sales, was
accelerated in January 1997. The Company's sales personnel have increased from 5
to 17, and service personnel have increased from 3 to 7 from October 1, 1996 to
March 1, 1997.
As of June 30, 1996, the Company had sold thirty (30) MICRO21 systems to Coulter
under the Coulter Agreement, of which twenty-six (26) will be returned to the
Company and customer contracts for four (4) systems sold to end users may be
assumed by the Company pursuant to the Settlement Agreement. In addition, during
the first quarter of 1997, the Company sold $750,000 of MICRO21 systems to
Coulter KK Japan and, since November 1996, has placed eleven (11) MICRO21
systems for evaluation by customers.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
IMI does business in one industry segment.
C. DESCRIPTION OF BUSINESS
PRODUCTS
The MICRO21 system consists of the Company's NeuralVision(TM) software platform
integrated with slide delivery, optics, video and monitor hardware subsystems.
The MICRO21 system automatically scans pre-loaded slides to locate, classify,
count, display and store full-color digital images of cells. Up to 100 cell
images, identified and grouped by cell type, can be displayed simultaneously on
a full-color screen. A pen-based, touch-sensitive screen allows a medical
technologist to review, regroup and reclassify cells, and an on-line reference
library can be accessed to assist in cellular analysis. By automating most of
the steps associated with microscopic procedures, the MICRO21 system allows
medical technologists to focus on diagnostic analysis. The Company believes that
the MICRO21 system can substantially reduce review time, thereby decreasing
labor costs and allowing for more efficient use of personnel.
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While the Company intends to apply the MICRO21 system to a variety of diagnostic
tests, the Company implemented the white blood cell ("WBC") differential
("WBC Diff"), including the WBC morphology, the red blood cell morphology ("RBC
Morphology") and the platelet estimate as the first procedure. The WBC Diff is
the most common clinical laboratory microscopic procedure, performed manually
over 240 million times worldwide in 1995, according to Company estimates. A WBC
morphology, RBC Morphology and platelet estimate are commonly performed in
conjunction with, and on the same blood smear used when performing, a WBC Diff.
The Company has received U.S. Food and Drug Administration ("FDA") 510(k)
clearance to market the MICRO21 system for the automated location and display of
nucleated blood cells to assist medical technologists in performing WBC Diffs
and WBC morphological analysis and for the display of full-screen wide-field
images from a slide to assist a medical technologist in assessing RBC
Morphologies and in estimating platelets.
In May 1996, the Company received FDA 510(k) clearances for two additional
commonly performed microscope procedures: reticulocyte count (retic) and
anti-nuclear antibodies (ANAs). The retic procedure, which is now implemented,
measures the number of reticulocytes (immature red blood cells produced in the
bone marrow) and is performed to monitor bone marrow production during the
treatment of particular anemias in order to track the effectiveness of the
therapies being utilized. An ANA analysis is used to identify cells associated
with general connective tissue and autoimmune diseases such as arthritis, lupus
and Graves disease.
Additionally, in January 1997, the Company received clearance for the nDNA
procedure. nDNA is an indirect enzyme antibody test which is used for the
semi-quantitative detection of nDNA antibody in human serum. This procedure is
used as an aid in the diagnosis of systemic lupus erythematosus and other
connective tissue disease.
The Company has an on-going development program to adapt additional procedures
for use on the MICRO21 system and intends to apply for FDA clearances in 1997
for at least five additional procedures:
1. WBC Estimate. The WBC estimate provides the estimated total white blood
cell count for the sample. It is used in conjunction with the total white
blood cell count provided by the automated cell counter to verify the WBC
count.
2. Body Fluids. Analysis of body fluids such as spinal fluid, pleural and
peritoneal exudates, provides critical information on systematic and
organ-specific states of diseases. Body fluid cytology is of particular
significance in acute medical care emergency rooms.
3. Bone Marrow. Analysis of tissue obtained from the marrow to assess blood
cell production and detect abnormalities associated with blood cells such
as leukemia, anemia, infections etc. It is useful in diagnosis and patient
management for many therapeutic regimens.
4. Urinalysis. Routine urinalysis is the second most common clinical
laboratory medical conditions procedure and is used for testing the
chemical and microscopic elements in urine to identify and follow-up on
many clinical medical conditions including diabetes, renal heart, liver
and lung disease.
5. Urine Cytology. Cytological analysis of urine is conducted to detect
disease states such as bladder or kidney tumors and polyps.
The Company believes that, similar to the automation of the WBC Diff, the
automation of these additional procedures will potentially result in cost
reductions, enhanced analytical accuracy and consistency, increased productivity
of medical technologists and improved patient care. No assurances can be given,
however, that the Company will successfully develop the procedures or ultimately
obtain FDA clearance for the MICRO21 system for these tests.
PRODUCT DEVELOPMENT
The Company is concentrating its technological development efforts on the
NeuralVision(TM) software platform to provide continued innovation, feature
enhancements and price/performance competitiveness for the MICRO21 system and
for the development of additional procedures. NeuralVision is the Company's
internally-developed, proprietary software platform, incorporating neural
network, image processing and hardware operation programs.
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NeuralVision's neural network provides the foundation for the MICRO21 system's
visual artificial intelligence. Unlike conventional software, which simply
executes a series of instructions, neural network software is capable of
simulating the human ability to learn from experience and, consequently, to
recognize complex patterns. The Company believes that this capability allows
NeuralVision to be trained to recognize a wide variety of cells and other
structures associated with microscopic analysis. The NeuralVision software
platform was developed using object-oriented programming and an automated
software change management system to facilitate system upgrades and adaptation
for performing many microscopic procedures. To train the neural network,
NeuralVision is "shown" representative samples of various cell types through a
color video camera attached to a microscope and through this process "learns"
characteristic interrelationships that can later be recalled to identify
specific cell types. The Company believes that system upgrades and additional
procedures could enable existing customers to increase utilization of the
MICRO21 system, thereby further reducing costs and enhancing efficiency while
expanding the Company's market base to include lower volume laboratories. The
MICRO21 system utilizes an "open systems" architecture design adaptable to
specific customer requirements, such as the integration with a facility's
existing laboratory information system and the networking of multiple review
stations, archival storage devices and other peripherals. The MICRO21 system's
ability to transmit cell images, commonly known as "telemedicine," allows for
remote review of patient results by supervising physicians and specialists to
provide more timely and enhanced diagnostic results, which should lead to
improved patient care.
In November 1996, IMI and DiaSys Corporation ("DiaSys") entered into a Product
Integration Agreement (the "DiaSys Agreement"). DiaSys designs, develops,
manufactures and distributes workstation products which standardize fluid sample
preparation and reduce the cost of analyzing wet-preparation samples (i.e.,
urine sediment, fecal concentrates and other human and non-human body fluids) by
eliminating the time necessary to prepare slides manually. Under the DiaSys
Agreement, IMI is granted a nonexclusive, nontransferable license to integrate
the patented DiaSys wet-preparation specimen handling system together with the
MICRO21 in order to produce integrated systems for resale to MICRO21 end users.
Such integration will allow a variety of fluid specimens to be delivered
automatically to the MICRO21 review stage for processing without the need for a
technician to prepare a slide or come in contact with the fluid specimen. The
first of the new wet-preparation procedures to be implemented on the integrated
MICRO21 system will be the "routine" urinalysis procedure. According to IMI's
research "routine" urinalysis is performed over 100 million times in the United
States annually, making it the second most frequently performed microscopic
procedure behind the WBC Diff. IMI believes that the addition of the "routine"
urinalysis test will significantly increase the market potential of the MICRO21
by making it more cost-effective in laboratories, regardless of size, while
reducing risks associated with handling the urine specimen. Under the terms of
the DiaSys Agreement, IMI is required to order workstation products from DiaSys
valued at approximately $829,000. In December 1996, IMI issued a purchase order
to DiaSys for workstations valued at approximately $440,000. DiaSys is a
publicly-held corporation (Nasdaq, DIYS) based in Waterbury, Connecticut.
In November 1996, IMI entered into an exclusive worldwide license, distribution
and development agreement (the "MonoGen Agreement") with MonoGen, Inc., a
privately held company based in Herndon, Virginia ("MonoGen"), and parties
affiliated with MonoGen. MonoGen develops systems and disposables for the
preparation of monolayer microscope slides. Under the MonoGen Agreement, IMI
will, among other things, have the exclusive right to use and sell MonoGen
sample preparation kits used to prepare monolayer slides for cytological
samples, which are primarily reviewed to identify or classify cancer progress,
for use with automated microscopy systems including the MICRO21 system. The
prepared monolayer cytological specimens will then be reviewed on an automated
basis by the MICRO21 system. IMI believes that its ability to use the MonoGen
monolayer preparation technique with the MICRO21 system can automate the reading
of cytological samples such as the PAP smear, urine, cerebral and spinal fluid,
bone marrow and others. The first MonoGen sample preparation kit to be
implemented on the MICRO21 system is expected to be urine cytology, used to
evaluate malignant cancer of the bladder and kidney. Urine cytology is a more
time-consuming and costly test than the performance of a "routine" urinalysis.
Under the MonoGen Agreement, IMI intends to distribute the sample preparation
kits for the preparation of urine cytology samples and will generate a per-test
revenue associated with each sample processed on the MICRO21 system. The
agreement requires the Company to pay $150,000, which is nonrefundable, upon the
execution of an initial research and development contract and delivery by
MonoGen of manufacturing documentation. Pending receipt of FDA 510(k) clearance
for the sale of MICRO21 systems incorporating or sold in conjunction with the
MonoGen
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monolayer preparation technique for urine cytology, the Company, at its option,
may elect to terminate or proceed with the license and product development
agreement. If the Company elects to proceed, it will be required to pay to
MonoGen additional fees of at least $350,000 for research and development
contract work and $3,000,000 in cash or common stock (with registration rights)
of the Company, at the Company's option.
IMI also entered into an agreement with Johns Hopkins University in November
1996, pursuant to which IMI and Johns Hopkins University will collaborate in the
development of a bone marrow procedure for use on the MICRO21 system. The
Company believes that performance of the manual microscopic review of bone
marrow is a tedious and time-consuming procedure, and that automation of such a
procedure would be welcomed by the medical diagnostic community.
The Company spent approximately $2,100,000, $1,800,000 and $1,100,000 on
research and development in 1996, 1995 and 1994, respectively.
MANUFACTURING
The Company's manufacturing process consists of final assembly and testing of
major components and is performed at the Company's 20,000 square-foot leased
manufacturing facility in Palm Beach Gardens, Florida. All major assembly,
software download, and final quality test and inspection functions are performed
by the Company. Some of the components of the MICRO21 system are designed to
Company specifications and manufactured by third-party contract manufacturers,
while other components are readily available from a variety of suppliers. Most
of the hardware components constituting the MICRO21 system are readily available
from multiple sources, although the Company obtains certain components from
single-source suppliers. The MICRO21 system was designed for assembly with
third-party manufactured hardware and equipment components to minimize hardware
development costs and to facilitate substitution in the event that technology
improves or more cost-effective components become available.
The Company maintains a comprehensive quality assurance and quality control
program, which includes complete documentation of all material programs and
quality control test methods. Upon final assembly, each MICRO21 system is tested
to assure that electrical, mechanical, computer and other subsystems are
operating within established parameters and that all subsystems are properly
integrated. The Company's in-house medical technologists then perform multiple
WBC Diffs to determine whether the system's location, display and classification
and other functions are performing to specification.
RELATIONSHIP WITH COULTER CORPORATION; SALES AND DISTRIBUTION; SETTLEMENT OF
DISPUTE
In August 1995, the Company and Coulter entered into the Coulter Agreement,
which was amended in January 1996 and provided Coulter with exclusive worldwide
sales and distribution rights. Through March 31, 1996, Coulter was committed to
purchase a minimum number of MICRO21 systems for approximately $4,000,000, of
which $2,600,000 and $1,400,000 were sold by the Company in 1996 and 1995,
respectively. Subsequent to March 31, 1996, the Company was committed under the
Coulter Agreement to deliver a minimum number of systems at a specified sales
price through August 31, 2000, provided that the MICRO21 system met "market
requirements," as to the first contract year ending August 31, 1996, and subject
to modification of minimum purchase amounts by mutual agreement due to market
conditions for subsequent periods through August 31, 2000. The Coulter Agreement
specified that Coulter was to place MICRO21 systems with end users and the
Company and Coulter were to share revenue earned from end users after Coulter
received certain minimum payments.
The Coulter Agreement provided that the Company could terminate the Coulter
Agreement in the event that Coulter failed to make the minimum required
purchases, and Coulter had the right to terminate the Agreement if the MICRO21
system failed to meet "market requirements." The parties each had the right to
terminate the Coulter Agreement under certain other circumstances, including the
breach by the other party of provisions of the Coulter Agreement. In the event
of termination, the Company was required to repurchase inventory purchased by
Coulter at a price to be mutually determined.
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On September 30, 1996, Coulter unilaterally revoked its previous commitment to
purchase $5,500,000 of MICRO21 systems during the third and fourth quarters of
1996. On October 1, 1996, the Company gave Coulter written notice of termination
of the Coulter Agreement and, following the expiration of applicable cure
periods, written notice that the Company deemed the Coulter Agreement to be
terminated. Coulter stated its position that it had not breached the Coulter
Agreement and that the Coulter Agreement remained in effect. The dispute was
submitted to arbitration as specified by the Coulter Agreement, but was settled
pursuant to the Settlement Agreement on March 27, 1997. See "Item 3. Legal
Proceedings."
As a result of Coulter's revocation of its commitment to purchase any MICRO21
systems during the third and fourth quarters of 1996, the Company did not
realize any product sales for the third and fourth quarters of 1996. The
Company's business, results of operations and financial condition in 1996 were
adversely affected by Coulter's failure to meet the minimum purchase
requirements set forth in the Coulter Agreement; Coulter's unilateral revocation
of its commitment to purchase $5,500,000 of MICRO21 systems in the third and
fourth quarters of 1996; and the uncertainty relating to resolution of the
dispute and arbitration proceeding. The dispute between the Company and Coulter
also had an adverse effect on sales and marketing by creating confusion in the
marketplace relating to service and pricing, which resulted in the return to
Coulter of some MICRO21 systems placed with customers by Coulter for evaluation.
The Company believes that many of the customers who returned systems under
evaluation will order a MICRO21 system for evaluation, purchase or lease now
that the dispute with Coulter is resolved. While the Company anticipates that
its business, results of operations and financial condition in 1997 has been and
will be adversely affected by the consequences of its dispute with Coulter, the
Company believes the resolution of the dispute with Coulter will give it greater
flexibility to expand and implement its sales and marketing program for direct
sales and sales through other distributors, including Coulter.
Prior to the Company's termination of the Coulter Agreement, the Company was
dependent on its relationship with Coulter for sales, marketing and service.
After termination of the Coulter Agreement, the Company hired a Vice President
of Sales in January 1997 and a Vice President of Customer Support in November
1996 and systematically built (and continues to build) its internal sales and
marketing and service teams. From October 1, 1996 to March 1, 1997, the
Company's sales personnel have increased from 5 to 17 and service personnel from
3 to 7. The Company believes that its understanding of the nature of and
advantages of the use of the MICRO21 system, the training it provides to its
sales force and technical support personnel, and the ability to sell the MICRO21
system through more than one distributor and directly to end users will
position the Company to achieve better results than the Company has realized or
could achieve by continuing an exclusive distribution relationship with one
distributor.
The Company has concentrated its efforts primarily on the development of the
MICRO21 system and is dependent on the successful commercialization of this
product to generate revenue. The success of the MICRO21 system is dependent upon
many variables, including its acceptance as a reliable, accurate and
cost-effective tool for microscopic analysis as well as on the Company's
manufacturing capacity.
As of June 30, 1996, the Company had sold thirty (30) MICRO21 systems to Coulter
under the Coulter Agreement, of which twenty-six (26) will be returned to the
Company and customer contracts for four (4) systems sold to end users may be
assumed by the Company pursuant to the Settlement Agreement. In addition, during
the first quarter of 1997, the Company has sold $750,000 of MICRO21 systems to
Coulter KK Japan and, since November 1996, has placed eleven (11) MICRO21
systems for evaluation by customers.
THE SETTLEMENT AGREEMENT. The Settlement Agreement provides for acknowledgment
of termination of the Coulter Agreement, and the parties exchanged mutual
releases and stipulated to the dismissal with prejudice of the arbitration
proceedings. Under the terms of the Settlement Agreement, the Company granted
Coulter the right to purchase MICRO21 systems for distribution worldwide on a
nonexclusive basis, at transfer prices set by the Company in its sole
discretion. To the extent and for so long as the Company sells MICRO21 systems
through other distributors, Coulter will have the right to purchase MICRO21
systems on the same terms. Coulter will have such rights as a most favored
distributor to buy MICRO21 systems on the same basis as MICRO21 systems are sold
to other distributors on a country by country basis, including and subject to
all of the conditions of such sale transactions such as price, discounts, and
quantity. The most favored distributor rights will terminate (i) in the
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event the Company terminates the sale and marketing of MICRO21 systems through
distributors other than Coulter, but shall be reinstated if the Company
reinstates such sales through other distributors, or (ii) upon the sale of all
or substantially all of the Company's stock or assets, or in the event of a
merger, consolidation or reorganization of the Company involving a change in
control ("Change in Control Transaction"). In the event of a Change in Control
Transaction within three (3) years after March 27, 1997, Coulter will have the
right to purchase up to twenty (20) MICRO21 systems at a discounted transfer
price.
As part of the Settlement Agreement, the Company and Coulter agreed to
arrangements for the provision of service and support to end users of MICRO21
systems. The Company will have primary responsibility for providing service and
support to its customers in the U.S. Coulter will have primary responsibility
for providing service and support to its foreign accounts, provided that the
Company will provide technical service and support, including software and
applications support and spare parts on consignment, on agreed terms and prices.
Coulter agreed to provide hardware and installation support at a discount off
its published rates in the event the Company or any of its customers or
customers of Coulter wish to use Coulter for such service and support. The
Company also agreed to terms for the purchase by Coulter of new procedures for
use on the MICRO21 system.
The Company agreed to sell up to twenty-one (21) MICRO21 systems (the then
current base system configured for WBC Diff procedure only) to Coulter at a
discounted transfer price and Coulter agreed to purchase four (4) MICRO21
systems at a discount immediately for placement in Japan.
As part of the settlement terminating Coulter's exclusive rights of sales and
distribution, the Company agreed to pay to Coulter approximately $4,600,000,
subject to certain offsets, in exchange for: (i) the return of twenty-six (26)
of Coulter's used inventory of MICRO21 systems and certain spare parts and
equipment; (ii) the assignment of four (4) of Coulter's customer contract
receivables; and (iii) reimbursement to Coulter for certain costs incurred in
connection with the sale and marketing of the MICRO21 system.
The Company believes that any MICRO21 systems reacquired from Coulter can be
resold to customers after refurbishment and upgrades. The Settlement Agreement
does not affect the transaction pursuant to which the Company sold $750,000 of
MICRO21 systems to Coulter KK Japan in the first quarter of 1997.
Under the terms of the Settlement Agreement, as in the Coulter Agreement, the
Company agreed to license its proprietary software and technology to Coulter for
its sale or lease of the MICRO21 system to customers, to indemnify Coulter for
any injury to person or property resulting from the design or manufacture of the
MICRO21 system, and to maintain product liability insurance with a minimum
coverage of $5 million with respect to any such injury. See "Item 3. Legal
Proceedings."
COMPETITION
The MICRO21 system faces competition from several sources, including medical
technologists, software companies and manufacturers of in vitro diagnostic
equipment. The Company believes that the primary competition to the MICRO21
system is the use of medical technologists to perform manual microscopic
analysis. The Company believes that use of the MICRO21 system will permit a
laboratory to reduce costs and potential liabilities, enhance analytical
accuracy and consistency, increase the productivity of medical technologists and
improve patient care. The Company also faces competition from software companies
engaged in the development of neural network-based software with optical
recognition applications. Some of these neural networks may be adapted for uses
competitive with the Company's MICRO21 system. Further, the Company's products
must compete for market share against numerous companies offering products or
services that can assist laboratories in performing hematological analyses and
procedures, whether or not such products or services utilize automated cell
analysis or intelligent microscopes. For example, with regard to the WBC Diff,
the MICRO21 system competes indirectly with flow cytometers performing complete
blood counts and partial WBC Diffs, including flow cytometers manufactured and
sold by Coulter Corporation, Abbott Laboratories and Sysmex as well as with
older image-based systems.
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<PAGE>
The Company is aware of one other intelligent optical system utilizing neural
network software, manufactured and developed by Neuromedical Systems, Inc.
("Neuromedical"). The Company believes that Neuromedical's product has been
developed primarily for the Pap smear procedure. Neuromedical has notified the
Company of its belief that the MICRO21 system may infringe certain patents held
by Neuromedical. In addition, other companies, including NeoPath, Inc. and
International Remote Imaging Systems, Inc. ("IRIS"), are marketing or may market
intelligent optical systems applicable to microscopic testing procedures that
compete or may compete with the MICRO21 system. See "Item 3. Legal Proceedings."
GOVERNMENT REGULATION
The Company's products are subject to stringent government regulation in the
United States and other countries. In the United States, the Food, Drug and
Cosmetics Act and other statutes and regulations govern the testing,
manufacture, distribution, sale, marketing, labeling, storage, record keeping,
advertising and promotion of such products. Failure to comply with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, withdrawal of existing product approvals or
clearances, refusal to approve or clear new applications or notices and criminal
prosecution.
The Company submitted a 510(k) (application for Pre-Market Certification) for
the MICRO21 system in November 1992 and obtained FDA 510(k) clearance in July
1993 to market the MICRO21 system as a Class II automated cell locating device
for the automated location and display of nucleated blood cells to assist
medical technologists in performing WBC Diffs and WBC morphological analysis and
for the display of wide-field images from a blood sample on a slide to assist a
medical technologist in assessing RBC morphologies and in estimating platelet
counts. Since that clearance was obtained, the Company has made a number of
improvements in the device and its labeling. The Company has not sought a new
510(k) clearance for any of these improvements on the basis of the Company's
conclusion, reflected in the Company's technical report addressing this matter,
that none of the improvements could significantly affect the safety,
effectiveness or intended use of the original product. Under the FDA's
regulatory scheme, the decision whether to seek 510(k) clearance for a modified
device is left to the manufacturer in the first instance. There can be no
assurance, however, that the FDA would agree with the Company's conclusion, that
the FDA would not require the Company to cease marketing and obtain 510(k)
clearance for the MICRO21 system (as improved), or that such clearance, if
required, would be obtained.
In May of 1996, the Company received FDA 510(k) clearance to market two new
procedures. The retic procedure allows the MICRO21 to locate, digitally store
and display reticulated red blood cells (retics) to aid the technologist in
performing the reticulocyte count procedure. The ANA procedure enables the
MICRO21 to locate, digitally store and display antinuclear antibody (ANA) images
to aid the technologist in performing an ANA screen for positive or negative
results.
In January 1997, the Company received FDA 510(k) clearance for the nDNA
procedure. nDNA is an indirect enzyme antibody test which is used for the
semi-quantitative detection of nDNA antibody in human serum. This procedure is
used as an aid in the diagnosis of systemic lupus erythematosus and other
connective tissue disease.
EMPLOYEES
As of March 10, 1997, the Company had 87 full-time employees and five part-time
employees. The Company also has consulting arrangements with two additional
persons. Of its total workforce (including the two consultants), 35 persons are
engaged in research and development activities, 21 persons are engaged in
manufacturing and quality assurance, 21 are engaged in sales and marketing, nine
are engaged in customer support and eight are devoted to administrative
functions. None of the Company's employees is covered by a collective bargaining
agreement. The Company believes that it maintains good relations with its
employees.
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<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters are located in approximately 10,000 square feet of
leased office space at 4360 Northlake Boulevard, Palm Beach Gardens, Florida
33410. As extended, the terms of the leases for the Company's office space
expire on February 28, 1998 and May 31, 1999, respectively. In January 1997, the
Company moved its manufacturing division from 1006 W. 15th Street, Riviera
Beach, Florida to 20,000 square feet of leased office and manufacturing space
located at 3960 RCA Boulevard, Palm Beach Gardens, Florida. The lease for the
new space runs from January 1, 1997 to April 30, 1999.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
SETTLEMENT WITH COULTER CORPORATION. The Company settled its dispute with
Coulter on March 27, 1997. The Settlement Agreement provides for the
acknowledgment of the termination of the Coulter Agreement, and the parties
exchanged complete mutual releases and stipulated to the dismissal with
prejudice of the arbitration proceedings. Under the terms of the Settlement
Agreement, the Company granted Coulter the right to purchase MICRO21 systems for
distribution worldwide on a nonexclusive basis, at transfer prices set by the
Company in its sole discretion. To the extent and for so long as the Company
sells MICRO21 systems through other distributors, Coulter will have the right to
purchase MICRO21 systems on the same terms. Coulter will have such rights as a
most favored distributor to buy MICRO21 systems on the same basis as MICRO21
systems are sold to other distributors on a country by country basis, including
and subject to all of the conditions of such sale transactions such as price,
discounts, and quantity. The most favored distributor rights will terminate (i)
in the event the Company terminates the sale and marketing of MICRO21 systems
through distributors other than Coulter, but shall be reinstated if the Company
reinstates such sales through other distributors, or (ii) upon the sale of all
or substantially all of the Company's stock or assets, or in the event of a
merger, consolidation or reorganization of the Company involving a change in
control ("Change in Control Transaction"). In the event of a Change in Control
Transaction within three (3) years after March 27, 1997, Coulter will have the
right to purchase up to twenty (20) MICRO21 systems at a discounted transfer
price.
Under the Settlement Agreement, the Company and Coulter agreed to arrangements
for the provision of service and support to end users of MICRO21 systems. The
Company will have primary responsibility for providing service and support to
its customers in the U.S. Coulter will have primary responsibility for providing
service and support to its foreign accounts, provided that the Company will
provide technical service and support, including software and applications
support and spare parts on consignment, on agreed terms and prices. Coulter
agreed to provide hardware and installation support at a discount off its
published rates in the event the Company or any of its customers or customers of
Coulter wish to use Coulter for such service and support. The Company also
agreed to terms for the purchase by Coulter of new procedures for use on the
MICRO21 system.
The Settlement Agreement provides for the Company to pay Coulter approximately
$4,600,000, subject to certain offsets, in exchange for: (i) the return of
twenty (26) of Coulter's used inventory of MICRO21 systems and certain spare
parts and equipment; (ii) the assignment of four (4) of Coulter's customer
contract receivables; and (iii) reimbursement to Coulter for certain costs in
connection with the sale and marketing of the MICRO21 system.
The Company agreed to sell up to twenty-one (21) MICRO21 systems (the then
current base system configured for WBC Diff procedure only) to Coulter at a
special discounted transfer price and Coulter agreed to purchase four (4)
MICRO21 systems at a discount promptly for placement in Japan. The Settlement
Agreement does not affect $750,000 of MICRO21 systems sold by the Company to
Coulter KK Japan in the first quarter of 1997.
See "Description of Business - Relationship with Coulter Corporation; Sales and
Distribution; Settlement of Dispute" in Item 1 above and see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. The Company settled its litigation
with International Remote Imaging Systems, Inc. ("IRIS") on March 7, 1997. In
November 1994, patent counsel for IRIS notified the Company of its belief that
the MICRO21 system infringes U.S. Patent No. 4,612,614, which was issued to IRIS
in September 1986. In May 1995, IRIS also asserted its belief that the Company's
product infringes IRIS's U.S. Patent No. 4,393,466, which was issued in July
1983. In September 1995, the Company filed a complaint in United States District
Court, Southern District of Florida, seeking a declaratory judgment that the
MICRO21 system does not infringe the two United States patents held by IRIS (the
"IRIS Patents") and that the IRIS Patents are invalid. In November 1995, IRIS
filed a response and counterclaims against the Company generally denying the
Company's claims and seeking a declaration that the IRIS Patents are valid and
are being infringed by the MICRO21 system.
On March 7, 1997, the Company dismissed its complaint against IRIS pursuant to a
settlement agreement and related license agreement (collectively the "IRIS
Settlement Agreement") which resolves all pending litigation between the
parties. Under the IRIS Settlement Agreement, IRIS granted the Company a
fully-paid, royalty-free
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<PAGE>
license for worldwide direct sales of the MICRO21 system by the Company. The
Company agreed to pay a 4 percent royalty on future sales of the MICRO21 system
through third-party distributors in the United States. Since the Company's
current business plan is to sell its products primarily on a direct basis,
without reliance on third-party distributors, the Company does not believe the 4
percent royalty on U.S. sales through distributors will significantly adversely
impact the Company's results of operations during the term of the license. This
license and royalty obligation expires in September 2000, when the IRIS Patents
expire. The Company has the right, but not the obligation, to request a license
from IRIS for sales through third-party distributors outside of the United
States; however, the Company does not believe that the MICRO21 system infringes
any foreign patents held by IRIS and the Company has no current plans to request
such a license.
NEUROMEDICAL SYSTEMS, INC. In 1991, the Company received a letter stating that
the MICRO21 system may infringe a patent of Neuromedical Systems, Inc. The
Company has investigated this matter and believes that the MICRO21 system does
not infringe the specified patent. The Company has received an opinion of its
patent counsel that the MICRO21 system does not infringe any valid claims of
such patent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE>
Part II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the Nasdaq National Market System under
the symbol "IMII." The following table represents the high and low bid prices
for the Company's common stock for each quarter of fiscal 1996, as reported by
the Wall Street Journal.
1996 High Low
4th Quarter $14.25 $ 5.13
3rd Quarter $16.50 $12.00
2nd Quarter $20.25 $ 9.50
1st Quarter * $12.25 $11.00
-----------
* the Company's registered initial public offering was
effective on March 21, 1996
As of March 7, 1997, there were 193 shareholders of record of the Company's
common stock, excluding shareholders whose is held in the nominee or street name
by brokers.
The Company has not paid in the past, and does not anticipate paying in the
forseeable future, any cash dividends. The Company intends to retain future
earnings to develop and expand its business. Any further determination to pay
dividends will be at the discretion of the Company's Board of Directors and are
subject to certain limitations under the General Corporation Law of the State of
Delaware and will depend upon the Company's results of operations, financial
condition and other factors deemed relevant by the Board of Directors.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ------------
STATEMENTS OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Total revenue $ 327,494 $ 106,000 $ 118,173 $ 1,392,883 $ 1,460,675
Costs of sales -- -- -- 1,135,499 1,227,216
----------- ----------- ----------- ----------- ------------
Gross margin 327,494 106,000 118,173 257,384 233,459
Operating expenses:
Selling, general and
administrative 386,487 238,468 1,215,686 2,462,553 3,960,625
Research and development 218,205 195,070 1,101,463 1,793,769 2,113,565
Provision for contract
settlement -- -- -- -- 2,062,000
----------- ----------- ----------- ----------- ------------
Total operating expenses 604,692 433,538 2,317,149 4,256,322 8,136,190
----------- ----------- ----------- ----------- ------------
Loss from operations (277,198) (327,538) (2,198,976) (3,998,938) (7,902,731)
Other income (expense):
Interest income -- -- -- 13,046 1,112,227
Interest expense (82,815) (151,332) (216,879) (175,074) (141,699)
----------- ----------- ----------- ----------- ------------
Other income (expense) (82,815) (151,332) (216,879) (162,028) 970,528
----------- ----------- ----------- ----------- ------------
Loss before extraordinary item (360,013) (478,870) (2,415,855) (4,160,966) (6,932,203)
Extraordinary item--gain on early
extinguishment of debt -- -- -- 173,575 76,475
----------- ----------- ----------- ----------- ------------
Net loss $ (360,013) $ (478,870) $(2,415,855) $(3,987,391) $ (6,855,728)
=========== =========== =========== =========== ============
Loss per common share (1):
Before extraordinary item $ (.07) $ (.09) $ (.42) $ (.64) $ (.70)
Extraordinary item--gain on early
extinguishment of debt -- -- -- .02 .01
----------- ----------- ----------- ----------- ------------
Net loss per common share $ (.07) $ (.09) $ (.42) $ (.62) $ (.69)
=========== =========== =========== =========== ============
Weighted average number of common
shares outstanding (1)
5,332,113 5,332,113 5,721,987 6,468,279 9,937,440
=========== =========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ------------
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Cash and investments available-
for-sale $ -- $ 34,142 $ 1,494,481 $ 75,821 $ 25,081,873
Total assets 87,560 139,746 2,406,769 2,705,330 30,732,023
Total debt and noncurrent
obligations
362,110 1,291,118 3,860,379 2,182,160 --
Accumulated deficit (1,666,271) (2,145,141) (4,560,996) (8,548,387) (15,346,088)
Total shareholders' equity
(net capital deficiency) (1,405,941) (1,493,801) (2,480,816) (1,225,022) 26,866,695
<FN>
- ----------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of net loss per common share and weighted average number of
common shares outstanding.
</FN>
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. OVERVIEW
The Company has developed and is marketing the MICRO21 system, an
intelligent, automated microscope system, for diagnostic use in hospital,
commercial reference and physician-group laboratories. The MICRO21 system is
designed to automate a broad range of manual microscopic procedures, potentially
enabling the clinical laboratory to reduce costs and exposure to liabilities,
enhance analytical accuracy and consistency, increase the productivity of
medical technologists and improve patient care.
In August 1995, the Company entered into the Coulter Agreement with Coulter for
worldwide sales, marketing and service of the MICRO21 system. The Company
terminated the Coulter Agreement in the fourth quarter of 1996 because of
Coulter's revocation of its commitment to purchase $5,500,000 of MICRO21 systems
during the third and fourth quarters of 1996 and other breaches of the Coulter
Agreement by Coulter. Coulter disputed the Company's termination of the Coulter
Agreement and claimed the agreement remained in effect. The parties submitted
the dispute to arbitration, but settled this dispute as of March 27, 1997. The
dispute between the Company and Coulter has had an adverse effect on sales and
marketing and has been a factor in the return of some MICRO21 systems placed
with customers by Coulter for evaluation. The Settlement Agreement provides for
the Company to pay Coulter approximately $4,600,000, subject to offsets, in
exchange for: (i) the return of twenty-six (26) of Coulter's used inventory of
MICRO21 systems and certain spare parts and equipment; (ii) the assignment of
four (4) of Coulter's customer contract receivables; and (iii) reimbursement to
Coulter for certain costs in connection with the sale and marketing of the
MICRO21 system. The Company believes that many of the customers who returned
systems under evaluation will order a MICRO21 system for evaluation, purchase or
lease now that the dispute with Coulter is resolved. See "Item 1. Business -
Description of Business - Relationship with Coulter Corporation; Sales and
Distribution; Settlement of Dispute" and "Item 3. Legal Proceedings."
As a result of the dispute with Coulter, in the third quarter of 1996, the
Company commenced the build-up of its sales and service organizations and its
own sales and marketing efforts which, with the recruitment of a Vice President
of Sales, was accelerated in January 1997. From October 1, 1996 to March 1,
1997, the Company's sales personnel have increased from 5 to 17 and service
personnel have increased from 3 to 7.
The Company anticipates that its business, results of operations and financial
condition will be adversely affected in 1997 as a result of the dispute with
Coulter and delays in building the Company's sales and marketing organization
and implementing its sales and marketing program following termination of the
Coulter Agreement.
As of June 30, 1996, the Company had sold thirty (30) MICRO21 systems to Coulter
under the Coulter Agreement, of which twenty-six (26) will be returned to the
Company and customer contracts for four (4) systems sold to end users may be
assumed by the Company pursuant to the Settlement Agreement. In addition, during
the first quarter of 1997, the Company sold $750,000 of MICRO21 systems to
Coulter KK Japan and, since November 1996, has placed eleven (11) MICRO21
systems for evaluation by customers.
B. RESULTS OF OPERATIONS
Product sales for 1996 of $1,698,675 increased 22.0 percent over 1995, from
$1,392,883. This compares with revenue in 1994 of $118,173. The increase in
product sales for 1996 was primarily due to sales of MICRO21 systems and
peripheral equipment to Coulter. There were no sales of MICRO21 systems to
Coulter in the third quarter or fourth quarters of 1996. In connection with the
Settlement Agreement, the Company recorded, as of December 31, 1996, a sales
allowance of $1,938,000 representing the portion of the settlement amount
estimated to represent a credit for the return of 26 MICRO21 systems and certain
spare parts and equipment. The revenue in 1994 consisted primarily of one-time
license fee of $115,000.
Cost of sales for 1996 of $1,227,216 increased 8.1 percent over 1995, from
$1,135,499. The increase in costs of sales for 1996 was primarily due to sales
of MICRO21 systems and peripheral equipment to Coulter. In connection
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<PAGE>
with the Settlement Agreement, the Company recorded, as of December 31, 1996, a
reduction to cost of sales of $1,700,000 representing the anticipated carrying
amount of MICRO21 systems and certain spare parts and equipment that will be
returned by Coulter. Because the Company was in the development stage through
September 30, 1995, its operating expenses were classified as either general and
administrative or research and development prior to September 30, 1995. Costs of
sales includes materials, labor and overhead attributable to sales of the
MICRO21 systems commencing in August 1995.
Selling, general and administrative expenses were $3,960,625 in 1996, compared
with $2,462,553 in 1995, an increase of 60.8 percent. This compares with a 1995
increase of 102.6 percent over 1994 when selling, general and administrative
expenses were $1,215,686. Selling, general and administrative expenses increased
in 1996 primarily due to the continued growth of the Company and the need for
additional personnel following the Company's notice of termination of the
Coulter Agreement. In 1995, selling, general and administrative expenses
included $450,000 in bonuses to executive officers, consulting fees of $102,000
and the amortization of deferred compensation of $127,337 associated with Common
Stock issued to a member of the Board of Directors, and $165,000 incurred in
connection with the issuance of Common Stock under a consulting agreement in
exchange for services received. Selling, general and administrative expenses
will continue to increase as the Company continues to expand its sales and
service departments in 1997.
Research and development expenses were $2,113,565 in 1996, a 17.8 percent
increase over $1,793,769 in 1995. This compares with a 1995 increase of 62.9
percent over 1994 when research and development expenses were $1,101,463.
Research and development expenses increased in 1996 and 1995 primarily due to
resources being utilized in the development of upgrades, procedures,
technologies and new products for the MICRO21 system. Research and development
expenses will continue to increase in 1997 as new procedures, technologies and
products are developed.
In 1996, the Company recorded a provision for contract settlement of $2,062,000.
As part of the Settlement Agreement, the Company agreed to pay to Coulter
settlement costs of $4,600,000, subject to certain offsets, in exchange for: (i)
the return of 26 of Coulter's used inventory of MICRO21 systems and certain
spare parts and equipment; (ii) the assignment of four (4) of Coulter's customer
contracts; and (iii) reimbursement to Coulter for certain costs and expenses
incurred in its sale and marketing of the MICRO21 systems. As of December 31,
1996, the Company had accrued $2,062,000 representing the amount to be paid to
Coulter for items other than the return of 26 MICRO21 systems and certain spare
parts and equipment. See "Item 1. Business - Description of Business -
Relationship with Coulter Corporation; Sales and Distribution; Settlement of
Dispute" and "Item 3. Legal Proceedings."
In 1996, the Company settled a note payable with a balance of $500,000 for
$423,525 resulting in an extraordinary gain on early extinguishment of debt of
$76,475. In 1995, the Company settled a note payable with a balance of $815,000
plus accrued interest of $133,575 for $775,000 resulting in an extraordinary
gain on early extinguishment of debt of $173,575.
Interest income was $1,112,227 in 1996, $13,046 in 1995 and $0 in 1994. The
increase in 1996 was primarily due to interest income earned on the proceeds
from the Company's initial public offering, which closed on March 27, 1996. The
Company recorded no interest income in 1994.
Interest expense was $141,699 in 1996 and $175,074 in 1995, a decrease of
$33,375. There was a decrease in interest expense of $41,805 from 1994, when
interest expense was $216,879, to 1995. In 1996, the decrease was primarily due
to payment in full of all outstanding indebtedness upon completion of the
Company's initial public offering in March 1996. In 1996, the Company received
advances from a commercial factoring company. The factoring agreement was
terminated on July 6, 1996. In 1995, the decrease in interest expense was
primarily due to decreased balances in outstanding notes payable, which were
repaid with the proceeds of a private placement of the Company's Common Stock.
C. LIQUIDITY AND CAPITAL RESOURCES
The Settlement Agreement provides that the Company will pay to Coulter
approximately $4,600,000. One half of amounts due to Coulter under the
Settlement Agreement are due thirty days from the date of the Settlement
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<PAGE>
Agreement (March 27, 1997) and one half sixty days from the date of the
Settlement Agreement. In addition, the Settlement Agreement requires Coulter to
promptly purchase four current model MICRO21 systems, to replace certain units
returned, at a discounted purchase price.
In March 1996, the Company completed its initial public offering, selling
3,450,000 shares of common stock at $11.00 per share, resulting in approximately
$34,000,000 in net proceeds to the Company. In 1996, the Company paid all
long-term notes payable, indebtedness and amounts due to related parties
totaling approximately $4,300,000. For the year ended December 31, 1996, cash,
cash equivalents and investments increased approximately $25,000,000, primarily
due to net cash provided by proceeds from the initial public offering.
In May 1996, the Company employed investment advisors to manage the cash assets
of the Company subject to specific restrictions and limitations. The advisors
are allowed to buy, sell, exchange and otherwise trade in any stocks, bonds and
other securities consistent with the Company's objectives. The specific
restrictions and limitations limit the advisors to investments characterized as
investment grade only. These investments are classified as available-for-sale.
Investments available-for-sale consist of cash, cash equivalents, asset-backed
securities, corporate bonds and U.S. Government agency bonds. Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date.
Unrealized holding gains and losses on securities classified as available for
sale are reported as separate component of shareholders' equity.
During 1996, 1995 and 1994, the Company had cash flow used in operations of
$(6,966,570), $(4,410,327) and $(1,153,856), respectively. The negative cash
flow was primarily due to the net loss from operations.
For the year ended December 31, 1996, net cash used in investing activities of
$25,501,141 was primarily the result of purchases of investments available for
sale.
For the year ended December 31, 1996, net cash provided by financing activities
of $32,679,891 was primarily the result of proceeds from the sale of common
stock in the initial public offering, offset by repayments of notes payable,
notes payable to related parties and capital leases. During 1995 and 1994, the
Company had cash provided by financing activity of $3,216,574 and $3,119,349,
respectively, primarily due to proceeds from the sale of common stock and
convertible notes in private placements.
At December 31, 1996, the Company had a net operating loss (NOL) carryforward of
approximately $10,100,000 available for income tax purposes that expires through
the year 2011. Section 382 of the Internal Revenue Code, as amended, limits the
amount of federal taxable income that may be offset by pre-existing NOLs of a
corporation following a change in ownership (Ownership Change) of the
corporation. A portion of the Company's NOLs are currently subject to these
limitations because the Company experienced an Ownership Change on June 30,
1995, due to the issuance of common stock.
The Company intends to expend approximately $3,100,000 in 1997 in research and
development to develop new products, procedures and technology. The Company is
committed under the MonoGen Agreement to payment of research and development
fees and a license fee in 1997 of up to $3,500,000 ($500,000 in cash for
research and development contracts and $3,000,000 in cash or common stock, at
the Company's option, as a license fee). The Company has the right to proceed
with or to terminate the MonoGen Agreement within twelve months, pending FDA
clearance of use of the MonoGen technique with the MICRO21 system for urine
cytology, without cause and without liability, other than $150,000 of the cash
for research and development which is nonrefundable.
Under the DiaSys Agreement, the Company is committed to purchasing over $800,000
of equipment in 1997 from DiaSys Corporation to be integrated into the Micro21
System workstation.
The Company is currently negotiating for the purchase of land on which the
Company will construct its new corporate facilities consisting of corporate
offices and, potentially, a manufacturing facility. Such construction is
estimated to begin in 1997 and be completed in late 1998. The total estimated
cost of such purchase and
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<PAGE>
construction is $4,500,000, of which $3,600,000 would be financed, or the
transaction could be structured as a sale leaseback.
The Company believes that cash, cash equivalents and investments held for sale,
together with projected cash flow from operations, will be sufficient to meet
the Company's liquidity and capital requirements for at least two years,
although no assurance exists that the Company will not require additional
capital prior to the end of such period.
D. OUTLOOK
This section captioned "Outlook" and other parts of this Annual Report on Form
10-K include certain forward-looking statements within the meaning of federal
securities laws. Actual results and the occurrence or timing of certain events
could differ materially from those projected in any of such forward-looking
statements due to a number of factors, including those set forth below and
elsewhere in this Form 10-K. See "Other Factors Relating to Forward-Looking
Statements" below.
COULTER'S FAILURE TO PURCHASE MINIMUM PURCHASE REQUIREMENTS; TERMINATION OF
COULTER AGREEMENT; DISPUTE WITH COULTER AND SETTLEMENT AGREEMENT. Coulter's
failure to purchase the minimum number of MICRO21 systems required to be
purchased under the Coulter Agreement, the Company's termination of the Coulter
Agreement and the resulting dispute have adversely affected the Company's
business, results of operation, financial condition and expected performance for
1996 and 1997. The Company believes these events have created confusion in the
marketplace relating to service and pricing and may have led some customers to
question the merits of the MICRO21 system and, in particular, have been a factor
in the decision of some customers to return certain MICRO21 systems placed for
evaluation. The Company firmly believes that the MICRO21 system meets market
requirements and believes that many of the customers who returned evaluation
systems, and other potential customers evaluating or considering an evaluation
of the MICRO21 system, will order a MICRO21 system for evaluation, purchase or
lease now that the dispute between the Company and Coulter is resolved. The
Company also believes that the termination of its exclusive distribution
relationship with Coulter will ultimately better serve the Company, permitting
more flexibility in the development of marketing and sales programs and better
penetration of the market due to greater potential pricing discounts as a result
of higher potential gross margins. Under the Settlement Agreement, to the extent
and for so long as the Company sells the MICRO21 system through distributors
other than Coulter for resale or lease to end users, Coulter shall have "most
favored distributor" rights that consist of the right to purchase MICRO21
systems from the Company on the same terms such systems are sold by the Company
to other distributors on a country by country basis, including and subject to
all of the conditions of such sale transactions such as price, discounts, and
quantity. The "most favored distributor" rights terminate in the event (i) the
Company terminates the sale and marketing of the MICRO21 system through
distributors other than Coulter, but such rights shall be reinstated in the
event the Company recommences sales and marketing of the MICRO21 system through
other distributors, or (ii) of a sale of all or substantially all of the stock
or assets of the Company, or a merger, consolidation, or reorganization of the
Company involving a change in control of the Company. Coulter's "most favored
distributor" rights effectively prevent the Company from entering into exclusive
distribution agreements with a third party distributor. While the Settlement
Agreement contemplates that Coulter may purchase MICRO21 systems at a discount
transfer price or otherwise from the Company, for foreign placements, there are
no minimum purchase requirements under the Settlement Agreement and there is no
assurance that Coulter will actively promote the sale and marketing of the
MICRO21 system.
BUILD-UP OF THE COMPANY'S INTERNAL SALES FORCE. Costs and delays associated with
the Company's efforts to build its internal sales and service force in the wake
of the termination of the Coulter Agreement are expected to adversely affect the
Company's business, results of operations and financial condition in 1997.
However, the Company believes that its understanding of the nature of and
advantages of the use of the MICRO21 system and the training it provides and
will provide to its internal sales, marketing and service force will ultimately
position the Company to achieve better results by selling MICRO21 systems
directly to end users than the Company has realized or could realize with an
exclusive distribution relationship with one distributor. In addition, the
Company's ability to set prices and to sell the MICRO21 system directly to end
users will provide the Company with a greater ability to enter into more
flexible pricing arrangements with end users who lease or purchase a
-17-
<PAGE>
MICRO21 system. Such flexibility may increase the number of end users who are
financially able to purchase or lease a MICRO21 system, result in increased
margins on a per-unit basis, and result in increased gross and net revenues to
the Company for 1998 and beyond. However, there can be no guarantee or assurance
that increased pricing flexibility and direct selling efforts by the Company
will result in an increase in the number of potential end users, an increase in
sales, or greater margins or gross or net revenues. In addition, while the
Company intends to focus its marketing and sales efforts on direct sales, the
Company may continue to sell MICRO21 systems to Coulter pursuant to the
Settlement Agreement and to other distributors for resale to customers, and
substantial sales to distributors may be possible only at transfer prices
substantially lower than projected prices for direct sales.
LABORATORY AUTOMATION; PRODUCT DEVELOPMENT. The Company believes that manual
performance of clinical laboratory microscopic procedures are costly, time
consuming and subject to varying degrees of accuracy and consistency. The
Company anticipates that the demand for automated microscopy and its attendant
ability to reduce laboratory costs and exposure to liability, enhance analytical
accuracy and consistency, increase the productivity of medical technologists and
improve patient care will continue to increase in the future. The Company's
ability to react quickly to a rise in the demand for automated microscopy
products by developing a product or line of products that will perform a broad
number of microscopic procedures will be critical to the Company's success. The
Company intends to seek to develop, either internally or through licensing
arrangements such as those entered into with DiaSys and MonoGen, products that
can meet such demand for a variety of automated microscopic procedures. There
can be no assurance that the Company's competitors will not develop such
products before the Company can, or that any products developed by the Company,
even if timely, will receive sufficient FDA clearance or approval or will meet
with greater market acceptance than those manufactured by the Company's
competitors.
HEALTH CARE COST CONTAINMENT CONSIDERATIONS. The Company believes that pressure
in the health care industry to control and contain patient care costs has
increased and will continue to increase. Such pressure may result in increased
demand for the MICRO21 system from those end users who can benefit from the cost
savings and other benefits provided by the MICRO21 system because they will
continue to perform the same type and volume of clinical laboratory microscopic
procedures. If, however, such cost containment pressures result in an actual
reduction in the number and type of clinical laboratory microscopic procedures
performed (i.e., a reduction in precautionary testing), the cost savings and
other benefits of the MICRO21 systems would decrease, and accordingly, demand
for the MICRO21 system may also decrease.
CONSOLIDATION OF MANAGEMENT OF HEALTH CARE FACILITIES. The continuing trend
toward consolidation of laboratories and hospitals by acquisitions and through
the formation of affiliated and nonaffiliated purchasing groups will create
opportunities for penetration of the market by sales efforts directed at the
principal decision makers for such groups and, at the same time, may make
penetration of the market more difficult if sales of MICRO21 systems are not
made to such large purchasing groups.
LICENSE AND OTHER ARRANGEMENTS WITH OTHER COMPANIES. The Company expects that it
will increase market penetration opportunities through the product integration
arrangement it has made with DiaSys and the license arrangement it has made with
MonoGen. The expense of up to $500,000 for research and development contracts
and $3,000,000, in cash or common stock, as licensing fees under the arrangement
with MonoGen will impact the extent of the Company's liquidity and available
capital, however, these arrangements, including in particular the new procedures
developed, should open new opportunities to expand market penetration.
E. OTHER FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, including, without
limitation, those described under "Outlook" above, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results, performance
or achievements of the Company or events, or timing of events, relating to the
Company to differ materially from any future results, performance or
achievements of the Company or events, or timing of events, relating to the
Company expressed or implied by such forward-looking
-18-
<PAGE>
statements. Such factors include, among others, those described in Item 1.
"Business," Item 3. "Legal Proceedings," and Item 7. "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and the
following:
/bullet/ the delay in the Company's achievement of substantial market
penetration and widespread acceptance of the MICRO21 system;
/bullet/ the delays and impediments to customer acceptance associated with
industry and market perception of the historical dispute between the
Company and Coulter;
/bullet/ the expense, delays and potential setbacks in development of
competent and capable sales and marketing teams and service teams for
penetration of the market;
/bullet/ the risk that expansion of sales in foreign markets may be possible
only through distributors, such as Coulter, at transfer prices too
low for favorable profitability;
/bullet/ the expense of product development and the related delay and
uncertainty as to receipt of any requisite FDA clearance or other
government clearance or approval for new products and new procedures
for use on the MICRO21 system;
/bullet/ the uncertainty of profitability and sustainability of revenues and
profitability;
/bullet/ the uncertainty and potential problems associated with patent
infringement alleged by Neuromedical Systems, Inc. and
the uncertainty of the Company's protection for its unpatented
proprietary technology; and
/bullet/ the uncertainty of availability of capital for future capital needs,
especially in the event of further delays in anticipated market
acceptance and market penetration of MICRO21 systems.
-19-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required by this item can be found at the pages listed in
the following index:
PAGE
----
Report of Independent Certified Public Accountants F-2
Balance Sheets at December 31, 1996 and 1995 F-3
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Statements of Shareholders' Equity (Net Capital Deficiency)
for the years ended December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Intelligent Medical Imaging, Inc.
We have audited the accompanying balance sheets of Intelligent Medical Imaging,
Inc. as of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity (net capital deficiency) and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 financial statements referred to above present fairly, in
all material respects, the financial position of Intelligent Medical Imaging,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with general accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
----------------------
Ernst & Young LLP
West Palm Beach, Florida
February 3, 1997, except for the fourth
and twelfth paragraphs of Note 8, as
to which the dates are March 27,
1997 and March 7, 1997, respectively
F-2
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
BALANCE SHEETS
DECEMBER 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 288,001 $ 75,821
Investments available for sale 24,793,872 --
Inventory 3,541,993 1,655,181
Accounts receivable, net of allowance
for uncollectible accounts of
$40,000 at December 31, 1996 177,096 182,000
Prepaid expenses and other current assets 52,425 3,606
Accrued interest receivable 159,427 --
------------ -----------
Total current assets 29,012,814 1,916,608
Property and equipment, net 1,666,957 686,266
Other assets 52,252 102,456
------------ -----------
$ 30,732,023 $ 2,705,330
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Note payable in default $ -- $ 500,000
Accounts payable 1,062,979 1,034,467
Accrued salaries and benefits 319,217 204,238
Other accrued liabilities 421,132 105,000
Accrued interest payable -- 139,478
Accrued contract settlement costs 2,062,000 --
Due to related parties -- 105,000
Customer advance -- 150,000
Current portion of capitalized
lease obligations -- 36,200
Current portion of long-term
notes payable -- 4,000
Current portion of long-term notes
payable to related parties -- 507,926
------------ -----------
Total current liabilities 3,865,328 2,786,309
Capitalized lease obligations -- 94,114
Long-term notes payable -- 156,000
Long-term notes payable to related parties -- 131,032
Due to officers and related party -- 762,897
Commitments and contingencies
Shareholders' equity (net capital deficiency):
Preferred stock, $.01 par value--
authorized 2,000,000 shares; no
shares issued or outstanding -- --
Common stock, $.01 par value--
authorized 30,000,000 shares;
issued and outstanding, 10,898,055
shares in 1996 and 6,843,246
shares in 1995 108,981 68,432
Additional paid-in capital 42,425,306 7,656,290
Deferred compensation (321,504) (401,357)
Accumulated deficit (15,346,088) (8,548,387)
------------ -----------
Total shareholders' equity (net capital deficiency) 26,866,695 (1,225,022)
------------ -----------
$ 30,732,023 $ 2,705,330
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES
F-3
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Product sales, net (Note 8) $ 1,460,675 $ 1,392,883 $ --
Other -- -- 118,173
----------- ----------- -----------
Total revenue 1,460,675 1,392,883 118,173
Cost of sales 1,227,216 1,135,499 --
----------- ----------- -----------
Gross margin 233,459 257,384 118,173
Operating expenses:
Selling, general and administrative 3,960,625 2,462,553 1,215,686
Research and development 2,113,565 1,793,769 1,101,463
Provision for contract settlement 2,062,000 -- --
----------- ----------- -----------
Total operating expenses 8,136,190 4,256,322 2,317,149
----------- ----------- -----------
Loss from operations (7,902,731) (3,998,938) (2,198,976)
Other income (expense):
Interest income 1,112,227 13,046 --
Interest expense (141,699) (175,074) (216,879)
----------- ----------- -----------
Other income (expense) 970,528 (162,028) (216,879)
----------- ----------- -----------
Loss before extraordinary item (6,932,203) (4,160,966) (2,415,855)
Extraordinary item--gain on early
extinguishment of debt 76,475 173,575 --
----------- ----------- -----------
Net loss $(6,855,728) $(3,987,391) $(2,415,855)
=========== =========== ===========
Loss per common share:
Before extraordinary item $ (.70) $ (.64) $ (.42)
Extraordinary item--gain on early
extinguishment of debt .01 .02 --
=========== =========== ===========
Net loss per common share $ (.69) $ (.62) $ (.42)
=========== =========== ===========
Weighted average number of common shares
outstanding 9,937,440 6,468,279 5,721,987
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
TOTAL
SHAREHOLDERS'
COMMON STOCK ADDITIONAL EQUITY (NET
---------------------- PAID-IN DEFERRED ACCUMULATED CAPITAL
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIENCY)
--------- -------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 2,823,804 $ 28,238 $ 623,102 $ -- $ (2,145,141) $ (1,493,801)
Issuance of $.01 par value common
stock for services rendered
and $2,500 385,764 3,858 253,318 -- -- 257,176
Issuance of $.01 par value common
stock, net of issuance costs
of $329,140 750,402 7,503 1,164,161 -- -- 1,171,664
Net loss -- -- -- -- (2,415,855) (2,415,855)
---------- -------- ----------- --------- ------------ ------------
Balance at December 31, 1994 3,959,970 39,599 2,040,581 -- (4,560,996) (2,480,816)
Issuance of $.01 par value common
stock from converted notes 464,988 4,650 925,350 -- -- 930,000
Issuance of $.01 par value common
stock, net of issuance costs
of $387,639 2,264,598 22,647 4,118,910 -- -- 4,141,557
Issuance of $.01 par value common
stock for services rendered 49,500 495 164,505 -- -- 165,000
Exercise of stock options 104,190 1,041 2,432 -- -- 3,473
Issuance of stock options to
purchase 140,250 shares of
common stock -- -- 404,512 (401,357) -- 3,155
Net loss -- -- -- -- (3,987,391) (3,987,391)
---------- -------- ----------- --------- ------------ ------------
Balance at December 31, 1995 6,843,246 68,432 7,656,290 (401,357) (8,548,387) (1,225,022)
Issuance of $.01 par value
common stock, net of issuance
costs of $3,668,565 3,450,000 34,500 34,246,935 -- -- 34,281,435
Issuance of $.01 par value
common stock from conversion
of notes payable 274,389 2,744 297,256 -- -- 300,000
Exercise of stock options 117,750 1,178 94,913 -- -- 96,091
Exercise of stock purchase
warrants 212,670 2,127 115,932 -- -- 118,059
Issuance of stock options to
purchase 6,000 shares of
common stock -- -- 13,980 (10,480) -- 3,500
Amortization of deferred
compensation -- -- -- 90,333 -- 90,333
Adjustments for unrealized
gains on securities available
for sale -- -- -- -- 58,027 58,027
Net loss -- -- -- -- (6,855,728) (6,855,728)
---------- -------- ----------- --------- ------------ ------------
Balance at December 31, 1996 10,898,055 $108,981 $42,425,306 $(321,504) $(15,346,088) $ 26,866,695
========== ======== =========== ========= ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,855,728) $(3,987,391) $(2,415,855)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 299,338 169,687 80,774
Gain on early extinguishment of debt (76,475) (173,575) --
Services received in exchange for common stock and stock
options 93,833 295,492 127,339
Provision for contract settlement 2,062,000 -- --
Officers' bonus accrual -- 450,000 --
Settlement of product development agreement -- -- 500,000
Changes in operating assets and liabilities:
Inventory (2,401,545) (1,504,833) (255,224)
Accounts receivable 4,904 (182,000) --
Prepaid expenses and other current assets (48,819) (3,606) --
Accrued interest receivable (159,427) -- --
Other assets 50,204 (98,899) 257
Accounts payable 28,512 423,367 536,210
Accrued salaries and benefits 114,979 (40,935) 68,973
Other accrued liabilities 316,132 105,000 (1,700)
Accrued interest payable (139,478) (117,634) 205,370
Due to related party (105,000) 105,000 --
Customer advance (150,000) 150,000 --
------------ ----------- -----------
Net cash used in operating activities (6,966,570) (4,410,327) (1,153,856)
INVESTING ACTIVITIES
Purchases of property and equipment (765,296) (224,907) (505,154)
Purchases of investments available for sale (33,226,690) -- --
Sales of investments available for sale 8,490,845 -- --
------------ ----------- -----------
Net cash used in investing activities (25,501,141) (224,907) (505,154)
</TABLE>
CONTINUED ON NEXT PAGE.
F-6
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from long-term notes payable
and capitalized lease obligations $ 60,000 $ 160,000 $ 1,540,074
Repayment of long-term notes payable
and capitalized lease obligations (773,839) (919,414) (41,500)
Advances from factor 2,216,614 -- --
Repayments to factor (2,216,614) -- --
Proceeds from notes payable to related parties 74,784 -- 505,660
Repayment of notes payable to related parties (1,176,639) (169,042) (59,049)
Proceeds from sale of common stock 34,495,585 4,145,030 1,174,164
------------ ------------ ------------
Net cash provided by financing activities 32,679,891 3,216,574 3,119,349
------------ ------------ ------------
Net increase (decrease) in cash 212,180 (1,418,660) 1,460,339
Cash at beginning of year 75,821 1,494,481 34,142
============ ============ ============
Cash at end of year $ 288,001 $ 75,821 $ 1,494,481
============ ============ ============
SUPPLEMENTAL INFORMATION
Interest paid $ 319,073 $ 159,133 $ 13,447
============ ============ ============
Notes payable and notes payable to related
parties converted to common stock $ 300,000 $ 930,000 $ --
============ ============ ============
Inventory transferred to property and equipment $ 514,733 $ 104,876 $ --
============ ============ ============
Common stock issued in exchange for services $ -- $ 165,000 $ --
============ ============ ============
Prepaid expenses recorded in connection with common stock
issued in exchange for services $ -- $ -- $ 254,676
============ ============ ============
Note payable for product development costs $ -- $ -- $ 500,000
============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Intelligent Medical Imaging, Inc. (IMI Florida), a Florida corporation, was
incorporated on June 5, 1989, for the purpose of developing and marketing
analytical instruments which provide intelligent review capabilities in
automating critical medical visual processes, including microscopic imaging.
On January 16, 1996, Intelligent Medical Imaging, Inc. (IMI Delaware) was formed
for the purpose of changing the Company's state of incorporation from Florida to
Delaware. Also on January 16, 1996, the Board of Directors declared a
three-for-one stock split, effective upon the merger described below, on IMI
Delaware's common stock in the form of a 200% stock dividend, payable January
18, 1996, to shareholders of record on January 18, 1996. Effective January 17,
1996, IMI Florida was merged into IMI Delaware. IMI Delaware has 30,000,000
shares of $.01 par value common stock and 2,000,000 shares of $.01 par value
preferred stock authorized for issuance. IMI Delaware and its predecessor, IMI
Florida, are hereinafter referred to as the Company.
The financial statements have been restated to reflect the newly authorized
shares and to give retroactive recognition to the stock split in prior periods
by reclassifying from additional paid-in capital to common stock, the par value
of the additional shares arising from the split. In addition, all references in
the financial statements to number of shares, per share amounts, stock option
data and market prices of the Company's common stock have been restated.
REVENUE RECOGNITION
Revenue is generally recognized as units are shipped to customers. When
customers, under the terms of specific orders, request that the Company
manufacture and invoice goods on a bill and hold basis, the Company recognizes
revenue based on the completion date required in the order and actual completion
of the manufacturing process. At December 31, 1995, the Company had received
$600,000 in payment of sales of MICRO21 systems which were recognized under a
bill and hold arrangement. There were no sales under bill and hold arrangements
at December 31, 1996.
Sales to one customer, Coulter Corporation (Coulter), the Company's exclusive
worldwide distributor through October 1996, accounted for all sales of equipment
for the years ended December 31, 1996 and 1995 (see Note 8); therefore, the
Company is subject to concentration of credit risk of its accounts receivable.
The Company performs credit evaluations of this customer and does not require
collateral.
CASH
Deposits in banks may exceed the amount of insurance provided on such deposits.
The Company performs reviews of the credit worthiness of its depository banks.
The Company has not experienced any losses on its deposits of cash.
INVESTMENTS AVAILABLE FOR SALE
Investments available-for-sale are carried at fair market value, with resulting
unrealized holding gains and losses, net of tax, reported as a separate
component of shareholders' equity. Realized gains and losses and declines in
value judged to be other-than-temporary on investments available-for-sale are
included in interest income. The cost of securities sold is based on the
specific identification method. Interest on investments classified as
available-for-sale is included in interest income.
F-8
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets ranging from
five to ten years. Property held under capitalized leases are amortized on the
straight-line method over the shorter of the terms of the related leases or the
estimated useful lives of the related assets.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market.
INCOME TAXES
Deferred income tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Prior to December 31, 1994, the Company had elected to be taxed as an S
corporation under the Internal Revenue Code (IRC). As a result, the Company's
taxable income or loss for the periods prior to December 31, 1994, are reported
by the shareholders on their individual income tax returns. Upon the completion
of a private placement of common stock, effective December 31, 1994, the Company
became subject to federal income taxes. Had the Company been subject to income
taxes prior to December 31, 1994, no income tax benefit for the losses incurred
would have been reported in any of these years since realization of the related
deferred tax asset would not have been reasonably assured.
SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards (SFAS) No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, requires
software development costs to be capitalized upon the establishment of
technological feasibility. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs requires
considerable judgment by management with respect to certain external factors
such as anticipated future revenue, estimated economic life and changes in
software and hardware technologies. Capitalizable software development expenses
have not been significant and have been expensed as incurred.
NET LOSS PER SHARE
For the year ended December 31, 1995, pursuant to the requirements of the
Securities and Exchange Commission, common shares and common equivalent shares
issued at prices below the estimated public offering price during the 12 months
immediately preceding the date of the initial filing of the registration
statement (January 26, 1996) have been included in the calculation of common
shares and common share equivalents, using the treasury stock method, as if they
were outstanding for all periods presented whether they are antidilutive or not.
Common stock equivalents are not included in the computation of net loss per
share in 1996 as their effect is antidilutive due to the Company's net operating
losses.
WARRANTY COSTS
The Company provides, by a current charge to operations, an amount it estimates
will be needed to cover future warranty obligations for products sold during the
year. An accrued liability for warranty costs, of approximately $54,000 at
December 31, 1996 and $55,000 at December 31, 1995, are included in the caption
"other accrued liabilities" in the accompanying balance sheets.
F-9
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
primarily with an exercise price equal to the fair value of the shares on the
date of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and accordingly, generally recognizes no compensation expense for
stock options granted. In the unusual circumstance when stock option grants are
issued at less than fair value, the Company recognizes compensation expense over
the vesting period based on the difference between the exercise price and fair
value.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amount reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. INVENTORY
The components of inventory are summarized as follows:
DECEMBER 31
1996 1995
---------- ----------
Finished goods $1,361,038 $ -
Work in process 819,161 838,117
Raw materials 1,361,794 817,064
========== ==========
$3,541,993 $1,655,181
========== ==========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31
1996 1995
---------- -----------
Furniture, fixtures and office equipment $ 461,690 $ 157,617
Computer equipment 1,835,539 859,583
---------- -----------
2,297,229 1,017,200
Accumulated depreciation (630,272) (330,934)
========== ===========
$1,666,957 $ 686,266
========== ===========
4. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
GROSS ESTIMATED
UNREALIZED FAIR
COST GAIN VALUE
----------- ---------- -----------
<S> <C> <C> <C>
Cash and cash equivalents $ 5,389,564 $ 2,950 $ 5,392,514
U.S. Corporate bonds and asset backed
securities 11,820,598 36,908 11,857,506
U.S. Government agency bond and
mortgages 7,525,683 18,169 7,543,852
=========== ======= ===========
$24,735,845 $58,027 $24,793,872
=========== ======= ===========
</TABLE>
In accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES, unrealized holding gains on investments available-for-sale of
$58,027 are included as a separate component of shareholders' equity.
F-10
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
The contractual maturity of debt securities available for sale at December 31,
1996, regardless of their balance sheet classification, follow:
AMORTIZED COST FAIR
VALUE
-------------- -----------
Due within one year $ 4,813,631 $ 4,818,704
Due after one year through five years 2,250,853 2,268,870
Due after five years 2,644,862 2,628,878
Not due at a single maturity date 9,636,935 9,684,906
----------- -----------
$19,346,281 $19,401,358
=========== ===========
Gross realized gains and gross realized losses from the sale of securities
classified as available for sale were not material for the year ended December
31, 1996. For the purpose of determining gross realized gains and losses, the
cost of securities sold is based upon specific identification.
5. NOTES PAYABLE TO RELATED PARTIES
On June 30, 1995, a note payable to a related party of $202,500, including
accrued interest of $2,500 at December 31, 1994, was converted to common stock
at a conversion price of $2 per share.
Long-term notes payable to related parties consisted of the following:
1996 1995
------ ---------
10% promissory note payable to shareholder,
due July 1, 1996, secured by a security
interest in the Company's technology and
computer equipment, converted in 1996 to
common stock at a conversion price of
$1.09 per share $ -- $ 300,000
12% unsecured note payable to a shareholder,
principal and interest due in monthly
installments of $10,000 through October 1997,
repaid in full in 1996 -- 229,989
11% unsecured note payable to a shareholder,
payable in full on demand, repaid in full
in 1996 -- 18,968
11% unsecured notes payable to shareholders,
principal and interest due December 31,
1996, repaid in full in 1996 -- 90,001
------ ---------
-- 638,958
Less current portion of notes payable to
related parties -- (507,926)
------ ---------
Long-term notes payable to related parties $ -- $ 131,032
====== =========
Interest expense on notes payable to related parties and amounts due to related
party, discussed in Note 7, amounted to approximately $15,000, $75,000 and
$89,000 for the years ended December 31, 1996, 1995, and 1994, respectively.
6. NOTES PAYABLE
In June 1993, the Company executed a Letter of Understanding with XL Vision,
Inc. (XL Vision), under which XL Vision agreed to manufacture MICRO21 system
design units. During 1993, XL Vision advanced $240,000 to the Company in
contemplation of an equity investment in the Company. During 1994, an additional
$685,000 was advanced.
F-11
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
Most of the advances were evidenced by promissory notes payable on demand within
30 days' notice. In addition to amounts advanced, XL Vision incurred costs in
developing hardware for the MICRO21 system. The parties were unable to agree to
definitive terms for the equity investment and their manufacturing relationship
and on July 23, 1994, a settlement agreement was reached whereby the Company
issued an $825,000 secured convertible promissory note payable (the $825,000
Note), a $500,000 noninterest-bearing secured promissory note payable (the
$500,000 Note) and a $220,000 purchase order (the Purchase Order) to XL Vision.
During 1994, the Purchase Order was paid in full. The $825,000 Note bore
interest at prime plus 3% and was payable in the amount of $550,000 on July 23,
1996, and all remaining principal on July 23, 1997, subject to certain
prepayment provisions based on future sales or leases of the MICRO21 system. On
July 28, 1995, XL Vision accepted $775,000 in full payment of the $825,000 note
(which had an outstanding principal balance of $815,000 at the time of payoff),
plus accrued interest of $133,575 through the date of the settlement. This
agreement resulted in an extraordinary gain of approximately $173,575 in 1995.
At December 31, 1995, the $500,000 note was in default for nonpayment of
principal. This note was payable in installments of $5,000 for each of the first
ten units sold or leased and $10,000 for each subsequent unit, secured by
software and hardware design rights and was payable in full upon the sale of the
Company's interest in its software or system designs, the sale or disposition of
the Company or the merger of the Company with a public company. During 1996, XL
Vision accepted $423,525 in full payment of the $500,000 note. This agreement
resulted in an extraordinary gain of $76,475 in 1996.
Notes payable at December 31, 1995 consisted of $160,000, 12% unsecured notes
payable under the Coulter Agreement (see Note 8) which provided for borrowings
of $20,000 per unit sold, up to a maximum of $1,100,000, with monthly payments
over a five-year period beginning one year after the sale of the unit or receipt
of proceeds from the borrowing. As of December 31, 1995, monthly installments of
$4,010 were to begin in December 1996; however, the note was paid in full during
1996.
On January 3, 1995, notes payable outstanding at December 31, 1994 of $730,000
bearing interest of 18% were converted to common stock at a conversion price of
$2 per share.
At December 31, 1994, the Company also had notes payable of $75,000 and $39,000,
including accrued interest of $8,020, bearing interest at 11% and 18%,
respectively. On January 3, 1995 and April 24, 1995, the notes totaling $75,000
and $39,020, respectively, and the related accrued interest were repaid.
7. DUE TO RELATED PARTY
In December 1995, the Board of Directors approved bonuses to certain officers
totaling $450,000. These bonuses were paid upon the completion of the Company's
initial public offering in March 1996.
At December 31, 1993, the Company recorded accrued salaries, benefits and
related interest (computed at an annual rate of 11%) payable to a shareholder
totaling $275,000. This amount accrued interest at the prime rate as stated by a
local bank (8.75% at December 31, 1995). At December 31, 1995, this obligation
was classified as long term and included accrued interest of $37,897. The note
became due and payable ten days after the date on which the Company consummated
its initial registered public offering of shares of its common stock. During
1996, this note and the accrued interest were paid in full.
Interest expense on amounts due to related party amounted to approximately
$5,700, $24,000 and $20,000 for the years ended December 31, 1996, 1995, and
1994, respectively.
On December 1, 1993, the Company entered into a six-month consulting agreement
with a member of the Company's Board of Directors (the Consulting Firm) to
identify and introduce the Company to lease/financing participants or marketing
F-12
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
partners. A monthly retainer of $4,000 per month accrued, without interest,
until the earlier of December 1, 1994, or the Company's receipt of $500,000 in
net revenue under this agreement.
This agreement was amended in May 1995, retroactive to December 1994, and the
monthly retainer was increased to $8,500 per month through December 31, 1995.
The agreement included a success fee based on revenue; however, in October 1995,
the agreement was amended, extending the term through December 31, 1999, and
providing for monthly payments of $12,500 during 1996 and $8,500 from 1997
through 1999, and eliminating the success fee. The Company incurred expenses of
$150,000, $102,000, $52,500 for the years ended December 31, 1996, 1995, and
1994, respectively, under this agreement. The 1995 consulting fee plus expenses
of $3,000 were unpaid at December 31, 1995.
Effective December 1, 1993, the Company entered into another six-month
consulting agreement with the president of the Consulting Firm who agreed to
provide consulting advice and introductions for strategic planning. As
compensation for the services to be provided, in January 1994, the Company
issued 385,764 shares of common stock with a fair market value of $257,176, as
determined by the Board of Directors, for $2,500. In accordance with the
agreement, these shares were earned pro rata at the completion of each six-month
period. Compensation expense of $127,339 and $127,337 was recognized in 1994 and
1995, respectively. This agreement was terminated effective November 30, 1995.
8. COMMITMENTS AND CONTINGENCIES
In August 1995, the Company entered into an exclusive sales and distribution
agreement with Coulter which was amended in January 1996 (the Coulter
Agreement). Under the agreement, Coulter was committed to purchase a specified
minimum number of systems by March 31, 1996, for approximately $4,000,000, of
which $2,600,000 and $1,400,000 was sold by the Company in 1996 and 1995,
respectively. Subsequent to March 31, 1996, under the Coulter Agreement, the
Company was committed to deliver a specified minimum number of systems at a
specific sales price through August 31, 2000, provided that the MICRO21 system
met "market requirements," as to the first contract year ended August 31, 1996,
and subject to modification of minimum purchase amounts by mutual agreement due
to market conditions for subsequent periods through August 31, 2000.
On September 30, 1996, Coulter unilaterally revoked its previous commitment to
purchase $5,500,000 of MICRO21 systems during the third and fourth quarters of
1996. On October 1, 1996, the Company gave Coulter written notice of termination
of the Coulter Agreement and, following the expiration of applicable cure
periods, written notice that the Company deemed the Coulter Agreement to be
terminated.
As a result of Coulter's revocation of its commitment to purchase any MICRO21
systems during the third and fourth quarters of 1996, the Company did not
realize any product sales during these periods. The Company's business, results
of operations and financial condition in 1996 have been adversely affected by
Coulter's failure to meet the minimum purchase requirements set forth in the
Coulter Agreement, Coulter's unilateral revocation of its commitment to purchase
$5,500,000 of MICRO21 systems in the third and fourth quarters of 1996, and by
uncertainty in the marketplace related to the Company's relationship with
Coulter.
On March 27, 1997, the Company and Coulter entered into a settlement agreement
(the "Settlement Agreement") in which the parties agreed that the Coulter
Agreement was terminated and that the Company will pay Coulter approximately
$4,600,000, subject to certain offsets, in exchange for: (i) the return of
twenty-six of Coulter's used MICRO21 systems and certain spare parts and
equipment; (ii) the assignment to the Company of four of Coulter's customer
contract receivables; and (iii) reimbursement to Coulter for certain costs in
connection with the sale and marketing of the MICRO21 system. Under the terms of
the Settlement Agreement, the Company granted Coulter the right to purchase
MICRO21 systems for distribution worldwide on a nonexclusive basis, at prices to
be set by the Company, and the Company and Coulter agreed to arrangements for
the provision of service and support to end users of MICRO 21 systems. To the
extent and for so long as the Company sells MICRO21 systems through other
distributors, Coulter will have the right to purchase MICRO21 systems on the
same terms on a country by country basis. In addition, the Company agreed to
sell up to twenty-one MICRO21 systems to Coulter at a special discounted price
and Coulter agreed to purchase four MICRO21 systems at a discount promptly for
F-13
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
for placement in Japan. The Settlement Agreement reinstated the following
provisions from the Coulter Agreement: (i) the Company has agreed to license its
proprietary software and technology to Coulter for its sale or lease of the
MICRO21 system and (ii) the Company is required to indemnify Coulter for any
injury to person or property resulting from the design or manufacture of the
MICRO21 system and to maintain product liability insurance with a minimum
coverage of $5 million with respect to any such injury. As a result of the
Settlement Agreement, the Company recorded, as of December 31, 1996: (i) a sales
allowance of $1,938,000 representing the portion of the settlement amount
estimated to represent a credit for the return of 26 MICRO21 systems and certain
spare parts and equipment that will be returned by Coulter and (ii) a provision
for settlement costs of $2,062,000 representing the amount to be paid to
Coulter, for items other than the return of 26 MICRO21 systems and certain spare
parts and equipment. The Company anticipates that its business, results of
operations and financial condition will be adversely affected in 1997 as a
result of delays in building the Company's sales and marketing organization and
implementing its sales and marketing program related to the termination of the
Coulter Agreement.
During 1996, the Company entered into an agreement whereby the Company committed
to purchase approximately $829,000 of equipment from DiaSys Corporation to be
integrated into the MICRO21 system workstation. As of December 31, 1996, the
Company had purchased $21,000 of product and is committed to purchase
approximately $808,000 of equipment under the agreement.
During 1996, the Company entered into an agreement for the worldwide license
rights for a microscope slide preparing technique. The agreement requires the
Company to pay $150,000, which is nonrefundable, upon the execution of an
initial research and development contract and delivery by MonoGen of
manufacturing documentation. Pending receipt of FDA 510(k) clearance for the
sale of MICRO21 systems incorporating or sold in conjunction with the MonoGen
monolayer preparation technique for urine cytology, the Company, at its option,
may elect to terminate or proceed with the license and product development
agreement. If the Company elects to proceed, it will be required to pay to
MonoGen additional fees of at least $350,000 for research and development
contract work and $3,000,000 in cash or common stock of the Company, at the
Company's option. If the Company elects to terminate the agreement it may do so
without liability other than the $150,000 nonrefundable payment. No payments
were required to be made under the terms of this agreement during 1996.
In October 1996, the Company entered into a contract to purchase land for
approximately $790,000 upon which the Company intends to construct an office and
manufacturing facility. The contract stipulates that the closing shall occur on
the earlier of the date which is 15 days after the Company's receipt of site
plan approval, or 120 days from the date of the contract. The sale is also
contingent upon the Company obtaining acceptable financing or leasing
arrangements.
On December 28, 1995, the Company entered into a factoring agreement with a
commercial factoring company (the Factor) in which the Factor agreed to purchase
a minimum of $3,000,000 of the Company's Coulter receivables, with recourse,
over the six-month term of the agreement for 80% of the net amount of the
Coulter receivables. The processing fee charged by the Factor was 1.15% of the
face amount of each invoice for each 15-day period that the invoice remains
unpaid. The factoring agreement was terminated on July 6, 1996. During 1996, the
Company received advances of approximately $2,216,000 on approximately
$2,775,000 of Coulter accounts receivable, all of which were paid during 1996.
Total interest expense incurred under this arrangement during 1996 was $88,000.
The Company leases office equipment and office and warehouse space under
operating leases through April 1999. In addition to the basic rent payable under
the office leases, the Company is also liable for additional rent on its
proportionate share of building operating expenses. Total rent expense incurred
for the years ended December 31, 1996, 1995, and 1994 was, $196,434, $117,905
and $88,942, respectively.
Future minimum lease payments under operating leases as of December 31, 1996,
are as follows: 1997--$340,813; 1998--$292,879; 1999--$117,085.
F-14
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
The Company has been notified that its product may infringe on patents issued to
two other parties. No infringement claim has been asserted against the Company
in one of these matters and the Company was a party to legal proceedings
regarding the other matter.
On March 7, 1997, the Company entered into a settlement agreement effective
March 1, 1997, that grants the Company a license to use, manufacture and sell
products utilizing certain patents. The Company has the right to sell its
products direct to customers worldwide without payment of any royalty. As
consideration, the Company has agreed to pay a royalty of 4% of the net sales
price of products sold through one or more distributors to end users in the
United States. The Company currently has no agreements to sell products through
distributors in the United States. The royalty obligation and the related
license agreement expire in September 2000.
9. COMMON STOCK, WARRANTS AND OPTION PLAN
On October 16, 1995, the Company issued 49,500 shares of common stock as
compensation for services rendered. Compensation expense of $165,000 was
recorded in connection with the services provided based on a fair market value
of $3.33 per share as determined by the Board of Directors.
In March 1996, the Company completed an initial public offering and issued
3,450,000 shares of common stock, raising proceeds of $34,281,435, net of
issuance costs of $3,668,565.
The Company has an incentive stock option plan which provides for the granting
of incentive stock options to key employees, including officers and directors of
the Company who are full-time employees, based upon the determination of the
Board of Directors. In addition, the plan provides for the granting of
nonqualified stock options to employees, directors or consultants. The Board of
Directors reserved 1,142,400 shares of its common stock for the purpose of
issuing stock options under this plan. In 1994 and 1995, the plan was amended to
increase the number of shares available for grant to 1,567,500 and 2,686,500,
respectively. The exercise price of each incentive stock option granted under
the plan may not be less than 100% of the fair market value of the common stock
at the date of grant, except that in the case of a grant to an employee who owns
10% or more of the outstanding common stock of the Company, the exercise price
shall not be less than 110% of the fair market value at the date of grant. Under
the 1995 amendment, the exercise price of nonqualified stock options granted
must be at least 10% of the fair market value of the common stock on the date of
grant, unless and until the common stock is publicly traded, at which time it
will increase to at least 50% of the fair market value of the common stock. The
1995 amendment also provides for vesting over a four-year period on a pro rata
basis in arrears provided that such vesting will commence on or after an
employee has been employed for six months.
During 1996, the Company granted stock options to employees for the purchase of
6,000 common shares at an exercise price of $7 per share. During 1995, the
Company granted stock options to employees for the purchase of 140,250 common
shares at exercise prices ranging from $2.00-$3.33 per share. Deferred
compensation of $13,980 and $404,512 was recorded in connection with the
issuance of these options based on a fair market value of $9 per share in 1996
and $3.33-$6.67 per share in 1995 as determined by the Board of Directors. The
Company will amortize the deferred compensation over the employees' required
service period of four years. Deferred compensation expense for the years ended
December 31, 1996 and 1995 totaled $93,833 and $3,155, respectively.
In December of 1995, the Company's Board of Directors approved the 1995
Non-Employee Director Stock Option Plan (the Director Plan). Under the Director
Plan, each nonemployee and nonconsultant director, other than the former
president, is eligible to receive options to purchase 19,800 shares of common
stock on the date that they are first elected to the Board of Directors and upon
re-election at every third consecutive term. The options granted under the
Director Plan will generally become exercisable as to one-twelfth of the
optioned shares each fiscal quarter following the date of grant, provided that
the optionee continues to serve on the Board of Directors. A total of 268,650
shares are reserved for issuance under the Director Plan.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
F-15
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
COMPENSATION. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996: risk-free interest rates of 6%; dividend
yields of 0%; volatility factors of the expected market price of the Company's
common stock of 1.074; and a weighted-average expected life of the option of
four years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-16
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
Information regarding these option plans is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF OPTION EXERCISE PRICE
SHARES PRICE
--------- ------------ ----------------
<S> <C> <C> <C>
Options outstanding at January 1, 1994 870,000 $0.03--$0.33 -
Granted 292,269 $1.36--$2.00 -
Canceled (19,869) $0.17 -
---------
Options outstanding at December 31, 1994 1,142,400 $0.03--$2.00 -
Granted 351,000 $2.00--$3.33 -
Exercised (104,190) $0.03 -
Canceled (71,175) $1.36--$2.00 -
---------
Options outstanding at December 31, 1995 1,318,035 $0.04--$3.33 $ 2.00
Granted 422,938 - $ 7.74
Exercised (117,750) - $ 0.82
Canceled (15,600) - $10.58
---------
Options outstanding at December 31, 1996 1,607,623 $ 7.81
=========
Exercisable at December 31,1996 810,459
=========
Reserved for future option grants at
December 31, 1996 856,975
=========
Weighted average fair value of options
granted during 1996 $ 3.90
======
</TABLE>
FASB Statement No. 123 requires disclosure of the weighted average exercise
prices for the current year only in the initial year of adoption.
Exercise prices for options outstanding as of December 31, 1996, ranged from
$.0637 to $20. The weighted average remaining contractual life of those options
is 7.8 years.
F-17
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The effect of
compensation expense from stock option awards on pro forma net income reflects
only the vesting of 1995 awards in 1995 and the vesting of 1996 and 1995 awards
in 1996, in accordance with Statement 123. Because compensation expense
associated with a stock option award is recognized over the vesting period, the
initial impact of applying Statement 123 may not be indicative of compensation
expense in future years, when the effect of the amortization of multiple awards
will be reflected in pro forma net income. The Company's pro forma information
follows:
DECEMBER 31
----------------------------
1996 1995
----------- -----------
Pro forma net loss $(7,000,652) $(4,017,561)
=========== ===========
Pro forma net loss per share $ (.70) $ (.62)
=========== ===========
During 1994 and 1995, the Company sold shares of common stock to certain
investors in private transactions. On December 30, 1994, the Company sold
750,402 shares of common stock at $2 per share realizing cash of $1,171,664, net
of issuance costs of $329,140. During 1995, the Company sold 2,264,598 shares of
common stock at $2 per share, raising an additional $4,141,557 net of issuance
costs of $387,639.
Upon completion of these sales, the Company granted to placement agents,
retained in connection with these sales, warrants for the purchase of 213,288
shares of the Company's common stock at an exercise price of $2 per share, which
expire on July 24, 1999.
On October 5, 1994, warrants to purchase 690,000 shares of common stock, held by
the former president of the Company with an exercise price of $1.67 per share,
were canceled and replaced with warrants to purchase 300,000 shares of common
stock at an exercise price of $1 per share. These warrants are exercisable at
any time through October 5, 2001. At December 31, 1996 and 1995, no warrants had
been exercised.
In April and May 1994, the Company issued 63,693 warrants, each to purchase one
share of stock at $.35, to two holders of notes payable in default. These
warrants are exercisable at any time through April 30, 2004. During 1996, 17,979
warrants were exercised.
On June 29, 1994, the Company also issued 274,389 warrants, each to purchase one
share of stock at $1.09, to a shareholder in conjunction with the issuance of
the $300,000 note payable to that shareholder. These warrants are exercisable
any time through July 1, 1999. During 1996, 68,400 warrants were exercised.
On December 12, 1994, in consideration of a shareholder's guaranty of an
equipment financing agreement, the Company issued to this shareholder, warrants
to purchase 7,500 shares of common stock at an exercise price of $2 per share.
These warrants are exercisable at any time through November 16, 1999.
F-18
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information relative to the Company's warrants:
SHARES PRICE RANGE
-------- ------------
Outstanding at January 1, 1994 707,040 $1.67--$2.50
Granted 645,582 $0.35--$2.00
Canceled (690,000) $ 1.67
--------
Outstanding at December 31, 1994 662,622 $0.35--$2.50
Granted 231,921 $ 2.00
--------
Outstanding at December 31, 1995 894,543 $0.35--$2.50
Exercised (212,670) $0.35--$2.50
Canceled (12,297) $ 2.00
========
Outstanding at December 31, 1996 669,576 $0.35--$2.50
========
Shares of common stock reserved for future issuance at December 31, 1996 are as
follows:
Options 2,733,120
Warrants 669,576
===========
3,402,696
===========
10. INCOME TAXES
Upon completion of the first phase of a private placement of the Company's
common stock in October 1994, effective December 30, 1994, the Company's
election to be taxed as an S corporation for both federal and state tax purposes
was revoked. For all periods prior to December 31, 1994, the Company elected to
be treated as an S corporation for both federal and state taxation purposes.
Accordingly, taxable income of the Company was included in the income tax return
of the shareholders rather than the Company.
At December 31, 1996, the Company had a net operating loss (NOL) carryforward of
approximately $10,100,000 available for income tax purposes that expires through
2011. Section 382 of the IRC, as amended, limits the amount of federal taxable
income that may be offset by the pre-existing NOLs of a corporation following a
change in ownership (Ownership Change) of the corporation. A portion of the
Company's NOLs are currently subject to these limitations because the Company
experienced an Ownership Change on June 30, 1995, due to the issuance of common
stock.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company had net
deferred tax assets totaling approximately $4,856,000 and $2,162,000 at December
31, 1996 and 1995, respectively. However, realization of these deferred assets
is not reasonably assured; therefore, they were fully reserved by a valuation
allowance of $4,856,000 and $2,162,000 at December 31, 1996, and 1995,
respectively.
F-19
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
Significant components of the Company's deferred income taxes are as follows:
DECEMBER 31
1996 1995
----------- -----------
NOL carryforwards $ 3,810,000 $ 1,980,000
Contract settlement 779,000 --
Depreciation 57,000 13,000
Amortization (29,000) (22,000)
Accrued liability 203,000 190,000
Unamortized stock option cost 36,000 1,000
----------- -----------
4,856,000 2,162,000
Less valuation allowances for
deferred tax assets (4,856,000) (2,162,000)
=========== ===========
$ - $ -
=========== ===========
The net change in the valuation allowance for the year ended December 31, 1996,
was an increase of approximately $2,694,000, resulting primarily from net
operating losses generated during the year.
The differences between the benefit for income taxes and the amount which
results from applying the federal statutory tax rate of 34% to the loss before
extraordinary item is due to the increase in the valuation allowance in 1996 and
1995, resulting in no tax benefit reported in any of these years.
11. OTHER RELATED PARTY TRANSACTIONS
During 1996, the Company leased its manufacturing facility from a member of the
Board of Directors. Rent expense incurred under this lease in 1996 was
approximately $50,000. In addition, the Company purchased inventory of
approximately $250,000 from a company owned by this individual.
12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, investments available-for-sale
and short-term borrowings are reflected in the financial statements at fair
value because of the short-term maturity of these instruments. It is not
practicable to estimate the fair value of the Company's long-term debt and other
noncurrent liabilities outstanding at December 31, 1995 because the Company's
incremental borrowing rate could not reasonably be determined.
F-20
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
YEAR EXPENSES OF YEAR
------------ ---------- ----------
<S> <C> <C> <C>
Year ended December 31, 1996:
Deducted from asset accounts:
Valuation allowance for deferred tax assets $2,162,000 $2,694,000 $4,856,000
Allowance for uncollectible accounts -- 40,000 40,000
Allowance for obsolete inventory -- 200,000 200,000
========== ========== ==========
Total $2,162,000 $2,934,000 $5,096,000
========== ========== ==========
Year ended December 31, 1995:
Deducted from asset accounts:
Valuation allowance for deferred tax assets $1,037,000 $1,125,000 $2,162,000
========== ========== ==========
Total $1,037,000 $1,125,000 $2,162,000
========== ========== ==========
Year ended December 31, 1994:
Deducted from asset accounts:
Valuation allowance for deferred tax assets $ -- $1,037,000 $1,037,000
========== ========== ==========
Total $ -- $1,037,000 $1,037,000
========== ========== ==========
</TABLE>
20
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Part III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference is the information which appears under the same
caption in the Proxy Statement to be filed with the Securities and Exchange
Commission relating to the Company's 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference is the information which appears under the same
caption in the Proxy Statement to be filed with the Securities and Exchange
Commission relating to the Company's 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference is the information which appears under the same
caption in the Proxy Statement to be filed with the Securities and Exchange
Commission relating to the Company's 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference is the information which appears under the same
caption in the Proxy Statement to be filed with the Securities and Exchange
Commission relating to the Company's 1997 Annual Meeting of Stockholders.
21
<PAGE>
Part IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
FINANCIAL STATEMENTS
The list of financial statements required by this item is set forth in Item 8,
"Financial Statements and Supplementary Data."
FINANCIAL STATEMENT SCHEDULE
Schedule II - "Valuation and Qualifying Accounts" is set forth at the end of
Item 8.
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of
schedules.
EXHIBITS
3.1 Certificate of Incorporation of the Company. (1)
3.2 Certificate of Merger and Agreement and Plan of Merger between
Intelligent Medical Imaging, Inc., a Florida Corporation, and the
Company approved by a majority of the Company's stockholders on
January 10, 1996.(1)
3.3 By-Laws of the Company.(1)
4.1 Form of Stock Certificate.(1)
10.2 *Distribution Agreement dated August 28, 1995 between Coulter
Corporation and the Company, as amended on January 5, 1996.(1)
10.3 Amended and Restated 1990 Stock Option Plan.(1)
10.4 1995 Non-Employee Director Stock Option Plan.(1)
10.5 Consulting Agreement dated December 1, 1993 between Fritzsche &
Associates, Inc., and the Company, and an amendment thereto dated
October 17, 1995.(1)
10.6 Commercial Lease dated November 1, 1995, between West 15th Street
Associates, Ltd. and the Company.(1)
10.7 Lease Modification Agreement dated August 24, 1995 between Palm Beach
Gardens Limited Partnership and the Company (the "Lease").(1)
10.8 Unconditional Guaranty provided by Tyce M. Fitzmorris to West 15th
Street Associates, Inc., in connection with the Lease.(1)
10.9 Settlement Agreement between the Company and William D. Whittaker dated
October 5, 1994.(1)
10.16 Amended and Restated Registration Rights Agreement by and between R.
Wayne Fritzsche and the Company dated as of December 1, 1994.(1)
10.17 Form of Registration Rights Agreement by and among the Company and
certain stockholders of the Company dated as of December 1, 1994.(1)
10.18 Form of the Company's Employee Disclosure, Confidential Information and
Non-Competition Agreement.(1)
10.19 Letter of Understanding and Agreement between Pacific Growth Equities,
Inc. and the Company dated September 2, 1994, and as amended on
September 7, 1994, October 21, 1994 and March 3, 1995.(1)
10.24 Proprietary Rights Agreement dated July 23, 1994 between the Company
and XL Vision, Inc.(1)
10.25 Product Integration Agreement between the Company and DiaSys
Corporation dated as of November 1, 1996.(2) (Confidential treatment
has been requested for certain portions of Exhibit 10.25. Exhibit 10.25
22
<PAGE>
(including the confiential portions thereof) has been separately filed
with the Securities and Exchange Commission).
10.26 License Agreement between the Company and MonoGen, Inc. dated as of
November 17, 1996.(2) (Confidential treatment has been requested for
certain portions of Exhibit of 10.26. Exhibit 10.26 (including the
confidential portions thereof) has been filed separately with the
Securities and Exchange Commission).
10.27 Settlement Agreement with Coulter Corporation dated as of March 27,
1997.(2)(Confidential treatment has been requested for certain
portions of Exhibit 10.27. Exhibit 10.27 (including the
confidential portions thereof) has been separately filed with the
Securities and Exchange Commission).
11.1 Statement re: Computation of Per Share Earnings.(2)
27.1 Financial Data Schedule.(2)
* Confidential treatment was requested of and approved by the Securities
and Exchange Commission with respect to portions of this exhibit
(1) Incorporated by reference to the same exhibit number in the Company's
Registration Statement on Form S-1 (File No. 33-636) as filed with
Securities and Exchange Commission
(2) Filed herewith
REPORTS ON FORM 8-K
IMI did not file any current reports on Form 8-K during the quarter ended
December 31, 1996.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palm Beach
Gardens, State of Florida, on the 28th day of March, 1997.
Intelligent Medical Imaging, Inc.
By: /s/ GENE COCHRAN
-------------------------------------------
Gene Cochran, Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 1997.
SIGNATURE TITLE
/s/ TYCE M. FITZMORRIS Chairman of the Board, Chief Executive
- ---------------------------- Officer and President
(Tyce M. Fitzmorris)
/s/ GENE M. COCHRAN Chief Financial Officer, Secretary,
- ---------------------------- Treasurer
(Gene M. Cochran)
/s/ JAMES E. DAVIS Director
- ----------------------------
(James E. Davis)
/s/ R. WAYNE FRITZCHE Director
- ----------------------------
(R. Wayne Fritzsche)
/s/ GEORGE MASTERS Director
- --------------------
(George Masters)
/s/ JAMES D. SKINNER Director
- ----------------------------
(James D. Skinner)
/s/ WILLIAM D. WHITTAKER Director
- ----------------------------
(William D. Whittaker)
24
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.25 Product Integration Agreement between the Company and DiaSys
Corporation dated as of November 1, 1996.
10.26 License Agreement between the Company and MonoGen, Inc. dated as of
November 17, 1996.
10.27 Settlement Agreement with Coulter Corporation dated as of March 27,
1997.
11.1 Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.
Exhibit 10.25
PRODUCT INTEGRATION AGREEMENT
This PRODUCT INTEGRATION AGREEMENT ("Agreement") is made effective November
1, 1996 by and between Intelligent Medical Imaging, Inc. with offices at 4360
Northlake Blvd., Suite 214, Palm Beach Gardens, Florida, together with its
subsidiaries and affiliates (collectively "IMI") and DiaSys Corporation, with
offices at 49 Leavenworth Street, Waterbury, Connecticut, together with its
subsidiaries and affiliates (collectively "DSC").
WHEREAS, DSC designs, develops, manufactures and markets proprietary
diagnostic equipment and workstations used in routine microscopic analysis of
fluids;
WHEREAS, DSC currently manufactures and distributes two such workstations
under the brand names R/S 2003 and FE-2 (collectively, and as each is further
described in Schedule 1 hereof), and including all object code form software
utilized by or contained in the foregoing (the "Software"), and as the same may
be enhanced and/or functionally improved from time to time the "Products");
WHEREAS, IMI designs, develops, manufactures and markets a large scale
diagnostic workstation which automates and standardizes routine microscopic
analysis of white blood cells under the brand name Micro 21;
WHEREAS, IMI wishes to physically integrate the Product into IMI's Micro 21
workstation such that the Product becomes mechanically and/or electronically
integrated with the Micro 21 workstation, and controlled remotely through IMI's
mechanical and electronic interfaces ("Integrated Systems");
AND WHEREAS, DSC and IMI wish to enter into a relationship whereby IMI may
purchase Product from DSC, use such Product to create Integrated Systems and to
market, distribute, and service such Integrated Systems under the IMI name and
logo.
NOW THEREFORE, in consideration of their mutual promises and covenants, the
value of which each party deems sufficient, the parties hereto agree as follows:
1. NATURE OF RELATIONSHIP
1.1 USE OF TECHNOLOGY. IMI is hereby granted, subject to the terms of this
Agreement, a non-exclusive, personal, nontransferable, non-assignable license
(the "License") to (i) combine the Products with the Micro 21 in order to
produce Integrated Systems for resale to IMI's customers; and (ii) make any
additions, alterations, changes and/or modifications to the Products that IMI
deems to be necessary or desirable in order to combine and/or integrate the
Products with the Micro21 to produce Integrated Systems (collectively, the
"Integration Modifications"). In connection with the License, DSC will, by the
date of the Delivery of the Products required by the "First Purchase Order" (as
such terms are defined below), equip the DSC R/S 2003 with an RS 232
communication port. In addition, by such date, the parties will agree upon a
"command and status format" software protocol which will enable the electronic
exchange of data between the DSC R/S 2003 Product and the Micro 21 workstation.
Notwithstanding anything to the contrary contained in this Agreement, this
License expressly excludes the right of IMI to, and IMI expressly covenants that
it will not, modify or enhance the Software. Notwithstanding any other term or
provision of this Agreement to the contrary, all Integration Modifications and
all rights therein or appurtenant thereto (including without limitation patent
rights, trade secret rights and other proprietary rights) will be and at all
times remain the sole and exclusive property of IMI, and DSC will have no rights
therein or thereto.
1.2 INDEPENDENT CONTRACTORS. IMI and DSC are independent contractors to and
of one another, and each agrees that neither may make agreements on behalf of or
so obligate the other to any third party, except as provided in this Agreement,
unless so expressly and previously authorized in writing.
- -----------
* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
1.3 SOLE SOURCE CONTRACT. The parties agree that this Agreement establishes
a "sole source" relationship between IMI and DSC regarding the technology
included and/or resident in the Product, its sub-assembles and/or replacement
parts ("Spares"). Accordingly, IMI agrees that for the term of the Agreement and
any extension thereof, IMI will purchase Spares from DSC only. Nothing contained
in this Agreement is intended to restrict IMI's right to manufacture, cause to
manufacture or acquire from any third party any equipment and/or sub-assemblies
and/or replacement parts which perform functions similar to those of Product,
subject to the provisions of this Agreement.
1.4 PROMOTION AND DISTRIBUTION. Subject to Section 1.7 below, neither party
shall be restricted or prohibited from distributing its products in any market
or to any customer by virtue of this Agreement.
1.5 USE OF TRADE NAMES; ADVERTISING. Other than as required by state and
Federal law, neither party shall use any trade name or logo of the other in any
way whatsoever without the express prior written approval of the owner of such
trade name, mark or logo in each instance; provided that DSC hereby grants to
IMI the right to use DSC's names, marks and logos in connection with the sale of
the Integrated Systems.
1.6 GOVERNMENTAL APPROVAL. IMI, at its sole cost and expense, shall obtain
any government or agency approval or certifications for the Integrated Systems
which IMI in its sole discretion deems necessary or advisable. DSC, at its sole
cost and expense, shall obtain and maintain any governmental or agency approval
or certification for the Product and the Spares required by law, rule or
regulation.
1.7 RESTRICTION. During the term of this Agreement, IMI agrees that it will
not, directly or indirectly through any person, firm or entity, manufacture,
procure, promote, distribute and/or sell, on a stand-alone basis, the Products,
or any equipment substantially similar to the Products; provided, however, (i)
that IMI shall have the right to sell Products or Spares to IMI customers which
currently own Micro 21 workstations provided such Products or Spares are used
only for purposes of creating Integrated Systems for such customers, and (ii)
IMI shall have the right to sell Products and Spares to IMI customers which own
Integrated Systems for purposes of replacing Products or Spares in such
Integrated Systems.
2. TRAINING AND SUPPORT
2.1 TECHNICAL INFORMATION AND MARKETING MATERIALS. DSC shall provide IMI
with any reasonable number of copies of technical, advisory and marketing
materials developed by DSC with respect to the Products (collectively the
"Materials") which shall be requested by IMI from time to time. All such
materials shall be printed in the English language. IMI may copy, distribute,
incorporate, reformat and/or translate any and all materials which IMI deems
appropriate for promotion and distribution of the Integrated Systems. IMI shall
defend, indemnify and hold DSC harmless from any damages or claims arising from
errors or misrepresentations caused by such reformation and/or translation. The
Materials will be kept current and up to date by DSC according to the standard
practices of DSC.
2.2 INITIAL TRAINING. DSC shall provide, at no charge to IMI, a two-day
training course in the promotion, installation and service of the Product. The
course shall be held for any number of IMI employees at any IMI facility in the
continental United States. The training course will be held in the English
language, supported by an IMI provided interpreter if necessary. All reading
materials and manuals will be printed in the English language, supported by IMI
provided translations also if necessary.
2.3 ON-GOING SUPPORT. DSC wishes to support IMI to the fullest extent that
it can. Accordingly, DSC shall provide IMI with on-going and continuous training
and instruction by telephone and telefax free of charge. On site support shall
be provided to IMI by DSC at mutually acceptable times and upon mutually
acceptable terms.
- -----------
* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
2.4 AVAILABILITY OF SPARES. DSC shall provide and make Spares available to
IMI for a period of three (3) years following IMI's last order for Spares. In
addition to the foregoing, in the event DSC discontinues the production of any
Spares, DSC agrees to (a) make Spares available to IMI for a period of three (3)
years from the date of such discontinuation; and (b) after such three-year
period to: (i) provide IMI with documentation in reasonable detail necessary to
enable IMI to fabricate, or to engage a third party to fabricate, such Spares
for use solely in order to replace parts in Products previously purchased from
DSC; and (ii) grant to IMI a perpetual, royalty-free, non-transferable,
non-assignable license to fabricate such Spares solely in order to replace parts
in Products previously purchased from DSC.
2.5 RELEASES, UPDATES AND BULLETINS. IMI acknowledges that DSC may make
changes to the hardware, software and/or firmware of the Product or Spares to
increase performance and/or manufacturability and/or reliability which do not
change the form, fit or function of such Product or Spares ("Engineering
Updates"). For a period of three (3) years following IMI's last purchase of
Product or Spares, DSC shall provide IMI with any such Engineering Updates for
each such unit of Product or Spares purchased by IMI, free of charge as such
Engineering Updates becomes available. DSC shall notify IMI of such Engineering
Updates as and when put into effect. Notwithstanding anything to the contrary
contained herein, Engineering Updates expressly do not include new products or
new features which from time to time may be announced by DSC.
3. PRODUCT PRICE, PURCHASE ORDERS, DELIVERY AND PAYMENT
3.1 PRODUCT AND SPARES PRICING. The prices for Product and Spares are set
out at Schedule 2 hereof (the "Product Prices"). The Product Prices are quoted
in United States Dollars, FOB DiaSys.
3.1.1 The Product Prices may not be increased during the term of this
Agreement.
3.1.2 Notwithstanding any other term or provision of this Agreement to
the contrary, IMI will at all times be entitled to pricing on the Products and
Spares equal to or less than the prices paid by any other customer of DSC for an
equivalent purpose, and equivalent amount of Products and Spares on similar
terms and conditions.
3.2 PURCHASE ORDERS.
3.2.1 IMI shall order units of Product and/or Spares by issuing IMI's
standard order form, or telefax, or other written communication which is
reasonably identified as a request to purchase units of Product or Spares (with
each such order being hereafter referred to as a "Purchase Order"). Any such
Purchase Order shall specify: (i) the model or part number(s) of units of
Product or Spares; (ii) the quantity of each such Product or Spares; (iii) the
price of each such Product or Spares ordered; (iv) the desired Delivery date for
such units of Product or Spares ordered; (v) special handling or shipping
instructions if any; (vi) to whom the units of Product or Spares are to be
shipped; and, (vii) to whom the invoice for such shipment(s) shall be addressed.
In accordance with Section 6.19 of this Agreement, in the event that any term or
condition of any Purchase Order conflicts with this Agreement, or adds
obligations to, or bestows additional rights on, any party, such term or
condition of such Purchase Order shall be null and void, and the terms and
conditions of this Agreement shall prevail.
3.2.2 So long as this Agreement is in effect and IMI is not in breach or
default of any provision, DSC shall accept any Purchase Order properly issued
under this Section 3.2. Once issued, a Purchase Order may not be canceled;
provided, however, that the date of Delivery (as defined below) specified in the
Purchase Order may be delayed by IMI upon written notice to DSC for up to six
months from the date of the Purchase Order.
3.3 DELIVERY. Delivery shall mean the date upon which DSC delivers Product
or Spares to the FOB point ("Delivery"). Upon Delivery of the Product and/or
Spares, all risk of loss or damage shall pass to IMI.
- -----------
* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
3.4 PAYMENT TERMS. IMI shall pay each DSC invoice within sixty (60) days
following Delivery of Product and/or Spares. IMI may deduct an additional two
(2) percent of the invoice amount for making payment of such invoice within ten
(10) days following receipt. All such payments shall be made by wire transfer to
the account designated by DSC. In the event that IMI fails to pay for units of
Product or Spares within said sixty (60) days, then in addition to other
remedies available to DSC, DSC may suspend further Delivery of Product and
Spares on order and reject subsequent Purchase Orders. DSC reserves the right to
apply and accrue the maximum legal rate of interest on the balance of any
overdue payments and to receive all reasonable costs and expenses incidental to
the collection of any account, including counsel fees.
3.5 MINIMUM ORDER. Simultaneous with the signing of this Agreement, IMI
shall issue a Purchase Order to DSC for [ * ] units of Product, model R/S 2003
(the "First Purchase Order"). The parties agree that the date of Delivery of the
Product set forth in the First Purchase Order shall be on or before December 31,
1996 and that IMI shall not have the option to delay such date of Delivery (as
set forth in Section 3.2.2). IMI shall order [ * ] additional units of Product
for Delivery prior to June 30, 1997. IMI may order additional Products and
Spares as it deems appropriate during the term of this Agreement, all of which
orders DSC shall accept as provided in Section 3.2.2 above.
3.6 MANUFACTURING; COMPLIANCE. DSC agrees that all Products and Spares shall
be manufactured and shipped in strict compliance with (i) the requirements of
each Purchase Order, (ii) all specifications relating to the Products and/or the
Spares, (iii) all Good Manufacturing Practices required or promulgated by the
Food and Drug Administration as in effect at the time of manufacture and (iv)
all applicable laws, rules, regulations and orders in effect at the time of
manufacture. In addition, DSC's manufacturing facility shall be equipped with a
quality assurance system, product standard documentation, product quality
standard documentation, documented work procedure instructions, work operations
records files and all other procedures required by applicable laws, rules,
regulations and orders. DSC represents and covenants that each Product and Spare
shall not, as of the date of Delivery thereof, (i) be adulterated or misbranded
within the meaning of the Federal Food, Drug and Cosmetic Act, as amended (the
"Act"), or (ii) be an article or item that is prohibited by the Act from being
introduced into interstate commerce.
3.7 INSPECTION; REJECTION. All Products and Spares shall be subject to
inspection by IMI after Delivery to determine conformity with, among other
things, the applicable Purchase Order and Section 3.6, above. IMI shall have the
right to reject any non-conforming Product(s) or Spare(s). IMI shall not waive
any warranty or other rights under this Agreement by inspecting or failing to
inspect any Products or Spares.
4. PRODUCT WARRANTIES
4.1 PRODUCT WARRANTY BY DSC.
4.1.1 SCOPE OF WARRANTY. DSC represents and warrants that the Product and
Spares will conform to and perform in accordance with their published
specifications and be free from defects in material and workmanship under normal
use and service for a period of twelve (12) months from the date of Delivery.
DSC's sole responsibility under this warranty is limited to the repair or
replacement of any defective part of such Product or Spare which repair may, in
the discretion of DSC, be performed at DSC's or IMI's premises. The cost of such
repair or replacement, including labor and parts and shipping by UPS ground, is
the responsibility of DSC.
4.1.2 LIMITATIONS ON WARRANTY. This warranty is void if IMI fails to
maintain electrical power and environmental conditions described in DSC's
published specifications or instructions, or if the Product, Spares, or any part
thereof, have been subject to any unauthorized modification, use with any
unauthorized attachment, device or feature, accident, neglect, misuse, use of
unauthorized software or media, tampering, or any event other than ordinary
and/or authorized use.
- -----------
* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
4.1.3 EXCLUSION OF OTHER WARRANTIES. DSC'S REPRESENTATIONS AND WARRANTIES
UNDER SUBSECTION 4.1.1, SECTION 4.2 AND SECTION 6.1 ARE EXPRESSLY IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
4.2 ADDITIONAL WARRANTIES.
4.2.1 AUTHORITY. DSC represents and warrants (i) that DSC has the full
right, power and authority to grant the License and the other rights granted
herein to IMI, and (ii) upon payment in full of the Product Prices set forth in
this Agreement, that IMI shall receive good and marketable title to all Products
and Spares free and clear of all liens, charges or encumbrances of any kind.
4.2.2 PROPRIETARY RIGHTS.
4.2.2.1 DSC represents, warrants and covenants that, to the best of its
knowledge, neither the Products nor the Spares, nor the use thereof, infringes
or will infringe any patent, copyright, trademark, trade name, trade secret,
license or other proprietary or similar right of any person or entity.
4.2.2.2 IMI represents, warrants and covenants that, to the best of its
knowledge, neither the Integrated Systems (excluding Products and Spares), nor
the use thereof, infringes or will infringe any patent, copyright, trademark,
trade name, trade secret, license or other proprietary or similar right of any
person or entity.
4.2.3 NO VIRUSES. DSC represents, warrants and covenants that it will run
its standard virus scan on the Products and Spares and hereby represents,
warrants and covenants that, to the best of its knowledge, the Products and the
Spares do not, and in the future shall not, contain any program or programs
designed to cause any damage or loss to the Products, the Spares or the
Software, the data utilized by the Products, the Spares or the Software or any
software, data or equipment with which the Products, the Spares or the Software
may directly or indirectly come into contact.
4.2.4 DSC makes no warranties or representations about Product or Spares
other than those expressly set forth in this Article 4.
4.3 ALTERATIONS. IMI shall not make any alterations to the Product and/or
Spares other than alterations which are authorized or permitted by this
Agreement or which are from time to time authorized by DSC in writing.
4.4 SERVICE AND REPAIR.
4.4.1 IN-WARRANTY. If the Product(s) and/or Spares Delivered to IMI
hereunder are found in need of repair or replacement, IMI shall notify DSC
thereof. Upon receipt by DSC of such notice from IMI, DSC shall promptly issue
to IMI a Return Merchandise Authorization number. IMI will return the unit of
Product in need of repair or replacement with the following information: (i)
IMI's name and address; (ii) name and telefax number of IMI's employee(s) to
contact with questions concerning Product; (iii) a description of the defect in
Product if known; and, (iv) a description of any remedial measures taken in the
field to repair such Product. If the Product fails to conform to the Warranty
and is returned within the Warranty period, DSC shall bear all costs associated
with the repair or replacement, at DSC's options, of the defective unit and all
shipping by UPS ground from and to IMI's facility any place in the continental
United States.
4.4.2 OUT-OF-WARRANTY. If IMI requests DSC to repair or replace any unit
of Product after the Warranty Period as set forth in paragraph 4.1, IMI shall
pay all costs for such services including but not limited to
- -----------
* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
all shipping costs from and to IMI's facility wheresoever located. IMI may elect
to repair Product which is out-of-warranty or to provide for such service
through an independent third party. Upon such election, DSC will provide IMI
with assembly and service drawings for the Products and Spares. All such Spares
required by IMI for repair of Product shall be purchased from DSC.
Notwithstanding anything to the contrary contained herein, any repair or
replacement performed by IMI or such third party shall be effected by replacing
Spares only and shall expressly exclude repairs or replacement of "chips" and/or
"board-level" components.
4.5 PRODUCTS LIABILITY.
4.5.1 INDEMNIFICATION BY DSC. DSC hereby agrees to indemnify, defend and
hold IMI harmless from and against any and all claims, demands, actions, suits,
proceedings, costs, expenses (including reasonable attorneys' fees and
expenses), liabilities, losses and/or damages arising from, out of or in
connection with any actual or alleged injury to person(s) or property caused by
a Product and/or any Spare(s), provided that: (i) IMI notifies DSC in writing of
any actual or threatened claim promptly after IMI receives actual notice of such
claim; and (ii) IMI grants to DSC the exclusive right to defend such claim at
DSC's sole cost and expense. The foregoing notwithstanding, (a) IMI shall have
the right to participate in such defense and to retain, at IMI's expense,
counsel of IMI's choosing in connection therewith, and (b) DSC shall have no
authority to settle any such claim without the prior written consent of IMI,
which consent shall not be unreasonably withheld.
4.5.2 INDEMNIFICATION BY IMI. IMI hereby agrees to indemnify, defend and
hold DSC harmless from and against any and all claims, demands, actions, suits,
proceedings, costs, expenses (including reasonable attorneys' fees and
expenses), liabilities, losses and/or damages arising from, out of or in
connection with any actual or alleged injury to person(s) or property caused by
the Integrated Systems (excluding any of the foregoing to the extent caused by
any Products and/or Spares), provided that: (i) DSC notifies IMI in writing of
any actual or threatened claim promptly after DSC receives actual notice of such
claim; and (ii) DSC grants to IMI the exclusive right to defend such claim at
IMI's sole cost and expense. The foregoing notwithstanding, (a) DSC shall have
the right to participate in such defense and to retain, at DSC's expense,
counsel of DSC's choosing in connection therewith, and (b) IMI shall have no
authority to settle any such claim without the prior written consent of DSC,
which consent shall not be unreasonably withheld.
5. PATENTS
5.1 INDEMNIFICATION BY DSC. DSC hereby agrees to indemnify, defend and hold
harmless IMI from and against any and all claims, demands, actions, suits,
proceedings, costs, expenses (including reasonable attorneys' fees and
expenses), liabilities, losses and/or damages arising from, out of or in
connection with any actual or alleged infringement by a Product and/or any
Spare(s) of any patent, copyright, trademark, trade name, trade secret, license
or other proprietary or similar right of any person or entity, provided that:
(i) IMI notifies DSC in writing of any actual or threatened claim promptly after
IMI receives actual notice of such claim; and (ii) IMI grants to DSC the
exclusive right to defend such claim at DSC's sole cost and expense. The
foregoing notwithstanding, (a) IMI shall have the right to participate in such
defense and to retain, at IMI's expense, counsel of IMI's choosing In connection
therewith, and (b) DSC shall have no authority to settle any such claim without
the prior written consent of IMI, which consent shall not be unreasonably
withheld.
5.2 INDEMNIFICATION BY IMI. IMI hereby agrees to indemnify, defend and hold
harmless DSC from and against any and all claims, demands, actions, suits,
proceedings, costs, expenses (including reasonable attorneys' fees and
expenses), liabilities, losses and/or damages arising from, out of or in
connection with any actual or alleged infringement by the Integrated Systems
(excluding any of the foregoing to the extent caused by any Products and/or
Spares) of any patent, copyright, trademark, trade name, trade secret, license
or other proprietary or similar right of any person or entity, provided that:
(i) DSC notifies IMI in writing of any actual or threatened claim promptly after
DSC receives actual notice of such claim; and (ii) DSC grants to IMI the
exclusive right to defend such claim at IMI's sole cost and expense. The
foregoing notwithstanding, (a) DSC shall have the right to
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
participate in such defense and to retain, at DSC's expense, counsel of
DSC's choosing In connection therewith, and (b) IMI shall have no authority to
settle any such claim without the prior written consent of DSC, which consent
shall not be unreasonably withheld.
6. GENERAL TERMS
6.1 AUTHORITY AND OTHER GENERAL WARRANTIES. Each party represents and
warrants (the "Warranting Party") to the other that, except as may be expressly
stated otherwise in this Agreement:
6.1.1 the Warranting Party, if a corporation, partnership, limited
partnership, or other nonnatural person, is duly organized and subsisting under
the laws of the jurisdiction of its incorporation or existence;
6.1.2 the Warranting Party has full power and authority to enter into
this Agreement;
6.1.3 the execution and/or performance of this Agreement does not and
will not violate or interfere with any other agreement of the Warranting Party,
which violation or interference would have a material adverse effect on the
Warranting Party;
6.1.4 the Warranting Party will not enter into any agreement the
execution and/or performance of which would violate or frustrate the purpose of
this Agreement;
6.1.5 the Warranting Party is not presently the subject of a voluntary or
involuntary petition in bankruptcy, does not presently contemplate filing any
such voluntary petition, and is not aware of any intention on the part of any
other person to file such an involuntary petition against it;
6.1.6 the Warranting Party is not presently the subject of, nor the
proponent of, any claim that would have a material adverse effect on the other
party; and
6.1.7 any person executing this Agreement on behalf of the Warranting
Party has actual authority to bind the Warranting Party to this Agreement.
6.2 CONFIDENTIAL INFORMATION. IMI and DSC may find it useful or necessary to
exchange and/or discuss certain aspects of each others' business which involves
disclosure by one party to the other of certain confidential, proprietary and/or
trade secret information including but not limited to announced and unannounced
products, business plans, marketing strategies, customer lists, pricing
strategies, financial data, technical "know-how", source and object code,
firmware, manufacturing procedures or processes and sources for raw materials
and all other such information concerning a party ("Confidential Information").
Such Confidential Information, whether oral or written, in whatever form
provided shall remain the property of the party making such disclosure (the
"Disclosing Party") to the other party (the "Receiving Party"). The Receiving
Party shall use the Confidential Information of the Disclosing Party only for
the benefit of the Disclosing Party and only in accordance with the terms of
this Agreement. Each party expressly warrants that it will disclose the
Confidential Information of the other to those persons within their respective
organization on a "need to know" basis only. Each party also agrees that it will
not disclose any Confidential Information of the other to any third party or use
such Confidential Information for its own benefit or for the benefit of a third
party whether or not the Receiving Party receives a pecuniary benefit for making
such disclosure. The promises contained in this Section 6.2 shall survive any
termination or expiration of this Agreement for a period of five (5) years
following the effective date of such termination or expiration. Notwithstanding
the foregoing, no information shall be deemed Confidential Information which:
6.2.1 is in the public domain at time of disclosure; or,
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
6.2.2 becomes part of the public domain after disclosure but through no
breach of this Agreement; or,
6.2.3 is developed by the Receiving Party independently from and without
knowledge of the disclosures made by the Disclosing Party under this Agreement.
Confidential Information furnished in written and/or tangible form shall not be
duplicated by the Receiving Party except for the purposes of this Agreement.
Upon the Disclosing Party's request, the Receiving Party shall, within five (5)
business days after notification, return all Confidential Information to the
Disclosing Party including originals, copies, and work notes containing
Confidential Information. Each party acknowledges and agrees that money damages
would be an inadequate remedy for the injuries and damage that would be suffered
by the Disclosing Party in the case of the Receiving Party's breach of its
duties and obligations under this Section 6.2. Therefore, the Disclosing Party,
besides any other remedies it may have at law or in equity, shall be entitled to
injunctive and other equitable relief to enforce the provisions of this Section
6.2.
6.3 EXCUSED NON-PERFORMANCE. No party hereto shall be liable to the other
for any delay in performance or failure to perform any term or condition of this
Agreement caused directly or indirectly by: fire, explosion, accident, storm,
flood or earthquake; any third party's labor strike, any transportation embargo
or delay; any judicial action, regulation, rule or act of any Government or
governmental body or authorized agency; or any act of God; any armed conflict or
civil commotion, or, any other cause of similar in character which is beyond the
reasonable control of the aggrieving party.
6.4 LIMITATIONS OF DAMAGE. In no event shall any party to this Agreement be
liable to any other party to this Agreement for indirect, special, incidental,
punitive or consequential damages, including, but not limited to, loss of
anticipated profits or other economic loss, whether arising in contract, tort,
strict liability, negligence or otherwise.
6.5 TERM. This Agreement shall expire on October 31, 1998 unless earlier
terminated by the happening of any of the following events:
6.5.1 Either party becomes insolvent or files a voluntary petition of
bankruptcy; or,
6.5.2 A Receiver or Trustee is appointed for either party; or,
6.5.3 Either party falls under the direct or indirect control of any
company or individual which is then a substantial trade competitor of the other;
or,
6.5.4 Either party assigns, sells or disposes of all or any substantial
part of its business or assets or effects any substantial change in its business
or conduct thereof; or,
6.5.5 The written notice of termination by IMI following the Delivery by
DSC of at least, in the aggregate, [ * ] units of Products during the term of
this Agreement.
Unless this Agreement has been terminated as provided above, this Agreement
shall automatically renew for a period of two (2) years in the event that: (i)
neither party is in breach of the Agreement; (ii) the Agreement is in effect on
October 31, 1998; and, (iii) neither party has given written notice of its
intention not to renew prior to October 31, 1998.
6.6 Survival. The following Sections shall survive any expiration or
termination of this Agreement: 1.1 Use Of Technology; 1.4 Promotion And
Distribution; 1.5 Use of Trade Names; Advertising; 2.1 Technical Information and
Marketing Materials; 2.3 On-going Support; 2.4 Availability Of Spares; 2.5
Releases, Updates and Bulletins; 3.1 Product And Spares Pricing; 3.3 Delivery;
3.4 Payment Terms; 3.5 Minimum Order; 3.6 Manufacturing; Compliance; 3.7
Inspection; Rejection; 4.1 Product Warranty; 4.2 Additional Warranties; 4.4
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
Service and Repair; 4.5 Products Liability; 5.1 Indemnification By DSC; 5.2
Indemnification By IMI; 6.2 Confidential Information; 6.4 Limitations Of Damage;
6.6 Survival; 6.16 Dispute Resolution; 6.17 Compliance With Law; 6.19 Conflict
with Purchase Order, and 6.20 Public Announcements.
6.7 SEVERABILITY. If, for whatever reason, any part, provision or paragraph
of this Agreement is adjudicated illegal or in conflict with any pertinent and
applicable law by a court having competent jurisdiction, then to the extent that
either party will not be deprived of a material benefit intended to be provided
by this Agreement, that part, provision or paragraph shall be severed from this
Agreement and the Parties shall be bound under all remaining parts, provisions
and paragraphs herein.
6.8 NOTICES. (a) Any notice, demand, consent, order or request required or
permitted to be given under or sent pursuant to this Agreement to either party
shall be in writing. If sent by telefax, the same shall be deemed effective when
transmitted; provided that, all telefaxes so transmitted shall be followed by
copies thereof sent forthwith by certified or registered mail.
6.8.1 All such communications shall be sent to the following addresses as
and if required:
6.8.1.1 Tyce Fitzmorris
President
Intelligent Medical Imaging, Inc.
4360 Northlake BLVD, Suite 214
Palm Beach Gardens, Florida
6.8.1.2 Todd M. DeMatteo
President
DiaSys Corporation
49 Leavenworth Street
Waterbury, CT 06488
6.8.1.3 or, to such address(es) as each party may from time to time
designate in writing.
6.9 PARAGRAPH HEADINGS. Paragraph headings are included for convenience
only and are not to be used to construe or interpret this Agreement.
6.10 WAIVER. All rights available to either party under this Agreement or
any other document delivered hereunder or in connection herewith, or allowed it
by law or equity, are and shall be cumulative and may be exercised separately or
concurrently and from time to time without waiver of any other remedies. No
party hereto shall be deemed to have waived any right, power or privilege under
this Agreement unless such waiver shall have been expressed in a written
instrument signed by the waiving party. No delay or failure of either Party in
exercising any right hereunder shall be deemed to constitute a waiver of such
right.
6.11 MODIFICATIONS. No modification, amendment, rescission or other change
shall be binding on either party unless and until made in a single writing and
signed by both parties.
6.12 SCHEDULES. All schedules attached hereto are incorporated herein and
made a part hereof as if fully set forth herein.
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
6.13 ASSIGNMENT. This Agreement may not be assigned without the express
written approval of each party hereto.
6.14 BINDING EFFECT. This Agreement shall be binding upon the heirs,
successors, and beneficiaries of each party.
6.15 ENTIRE AGREEMENT. This Agreement supersedes and replaces all previous
Agreements and commitments, if any, whether written or oral, between the parties
except for the terms of a certain Mutual Confidentiality Agreement dated October
24, 1996 between the parties which Agreement shall remain in effect for the
Confidential Information disclosed between the parties prior to the effective
date of this Agreement. This Agreement represents the entire agreement of the
Parties with respect to the subject matter hereof.
6.16 DISPUTE RESOLUTION.
6.16.1 Any dispute, disagreement, controversy or claim arising out of or
with respect to this Agreement (each a "Dispute"), that is not resolved by the
agreement of the parties must be resolved exclusively as set forth below:
6.16.2 The parties shall attempt in good faith to resolve any Dispute
arising out of and/or relating to this Agreement promptly by negotiation between
executives who have authority to settle the controversy. In the event the
parties are unable to resolve the Dispute on an informal basis, either party may
give the other party a formal written notice of the Dispute (each a "Dispute
Notice"). Within 15 days after receiving a Dispute Notice, the receiving party
shall submit to the other a written response. The Dispute Notice and the
response shall include: (a) a statement of each party's position and a summary
of arguments supporting that position; and (b) the name and title of the
executive who will represent that party in connection with the Dispute. Within
30 days after receipt of the Dispute Notice by the other party, the executives
of both parties shall meet at a mutually acceptable time and place, and
thereafter as often as they reasonably deem necessary, to attempt to resolve the
Dispute. All negotiations pursuant to this clause are confidential and shall be
treated as compromise and settlement negotiations for purposes of the Federal
Rules of Evidence and state rules of evidence.
6.16.3 If the Dispute has not been resolved within ninety (90) days after
receipt of the Dispute Notice by the receiving party or if the parties fail to
meet within thirty (30) days after the receipt of the Disupute Notice by the
receiving party, then any party may submit the Dispute to final and binding
arbitration (without appeal or review) in Palm Beach, Dade or Broward Counties,
Florida, if submitted by DSC, or in Hartford, Connecticut if submitted by IMI,
administered by and in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA"). IMI will appoint one (1) arbitrator
and DSC will appoint one (1) arbitrator, and the two (2) arbitrators so selected
shall appoint a third arbitrator. Each arbitrator must be appointed in
accordance with the rules of the AAA, and must not have any conflict of
interest. The decision of a majority of the three arbitrators with respect to
any Dispute shall be binding and conclusive upon the parties to this Agreement.
Such decision shall be written and shall be supported by written findings of
fact and conclusions, and shall set forth the award, judgment, decree or order
awarded by the arbitrators. The judgment and any award rendered by the
arbitrators may be enforced under applicable judicial procedures, including
procedures for the entry and enforcement of arbitration awards by any federal or
state court having jurisdiction.
6.16.4 The parties will share equally the costs, including fees, of any
mediator or arbitrator selected or appointed hereunder, but each party will
otherwise be responsible for its own fees, costs and expenses in connection with
any Dispute.
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
6.16.5 The provisions of this Section 6.16 shall not prevent or restrict
either party from seeking or obtaining injunctive relief against the other party
from any judicial or administrative authority pending the resolution of a
Dispute as provided above.
6.16.6 Each party is required to continue to perform its obligations
under this contract pending final resolution of any Dispute arising out of or
relating to this contract.
6.17 COMPLIANCE WITH LAW. In the parties' performance and completion of
their respective duties and obligations under this Agreement, the parties shall
at all times fully comply with all applicable federal, state and local laws,
statutes, ordinances, rules, regulations and orders.
6.18 CONSTRUCTION. Unless the context of this Agreement otherwise clearly
requires, (i) references in this Agreement to the plural include the singular,
the singular the plural, the masculine the feminine, the feminine the masculine
and the part the whole and (ii) the word "or" will not be construed as exclusive
and the word "including" will not be construed as limiting.
6.19 CONFLICT WITH PURCHASE ORDER. In the event that any term or condition
of any Purchase Order conflicts with this Agreement, or adds obligations to, or
bestows additional rights on, any party, such term or condition of such Purchase
Order shall be null and void, and the terms and conditions of this Agreement
shall prevail.
6.20 PUBLIC ANNOUNCEMENTS. Each party agrees that, prior to disseminating
any announcement related to the subject matter of this Agreement, it shall seek
the approval of such announcement from the other party.
IN WITNESS WHEREOF, the duly authorized officers of the parties hereto have
hereunto set their hands and seals as of the day and year above first written.
Intelligent Medical Imaging DiaSys Corporation
Inc.
By: /s/ Tyce M. Fitzmorris By: /s/ Todd M. DeMatteo
----------------------------- ---------------------------
Tyce M. Fitzmorris, President Todd M. DeMatteo, President
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
SCHEDULE 1 - PRODUCT
Product shall mean the R/S 2003 and FE-2 as further described by the attached
published specification.
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
SCHEDULE 2 - PRODUCT PRICE
So long as IMI is not otherwise in breach of the Agreement, IMI may purchase
Product and Spares from DSC as follows:
- ------------------------------------------------------------------------------
PRODUCT: MODEL R/S 2003
- ------------------------------------------------------------------------------
ITEM: R/S 2003
PART NUMBER: RS-2003
PRICE: USD [ * ]
INCLUDES: [ * ] Control Console; [ * ] Automatic Aspirator; [ * ] Optical
Slide Assembly; Connective Tubing; [ * ] Allen Wrenches ([ * ]
each); [ * ] 24-Tube Rack; [ * ] Purge Tanks; [ * ] Wall Mounted
Power Supply; [ * ] Instruction Manual; and [ * ] Shipping
Container and Packing Material.
- ------------------------------------------------------------------------------
SPARES: MODEL R/S 2003
- ------------------------------------------------------------------------------
ITEM: Enclosure and Wire Assembly
PART NUMBER: 9005-5001-000
PRICE: USD [ * ]
INCLUDES: [ * ] Pump Controller P.C.B.; Cycle Time Indicator P.C.B.;
Finished Metal Enclosure with Overlay; Push Button Switch Cable
Assemblies ([ * ]); P.C.B. Mounting Hardware; P.C.B. Interconnect
Cable Assembly; and Diagnostic and Power Indication LED Cable
Assemblies.
ITEM: Motor Assembly
PART NUMBER: 9003-3002-000
PRICE: USD [ * ]
INCLUDES: Unipolar Stepper Motor w/Molex Connector; Pump Mounting Block;
Pump Mounting "L" Bracket; and Compliant Isolation Mounts ([ * ]).
ITEM: Hydraulic Assembly
PART NUMBER: 9003-3005-000
PRICE: USD [ * ]
INCLUDES: Hydraulics Mounting Bracket; 3-Way Valve and Cable Assemblies
([ * ]); Pressure Sensor and Cable Assembly; Valve Mounting
Brackets ([ * ]); Rear Enclosure Cover; Tubing Assembly; Pump
Roller; and Plexiglass Panel.
ITEM: R/S 2003 Automatic Aspirator
PART NUMBER: RS300A
PRICE: USD [ * ]
INCLUDES: [ * ] Units
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
ITEM: R/S 2003 Optical Slide Assembly Kit
PART NUMBER: RS300K
PRICE: USD [ * ]
INCLUDES: [ * ] Units, each of which include: [ * ] Glass Flow Cell; [ * ]
Carrier; Connective Tubing; and Terminated with Luer Lock on Panel
Slide of Carrier.
ITEM: R/S 2003 Connective Tubing Kit
PART NUMBER: RS300T
PRICE: USD [ * ]
INCLUDES: [ * ] Units, each of which includes: [*] each Pre-Cut Tubing
Lengths for Peristaltic Pump, Tubing between Aspirator and Optical
Slide Assembly; and Tubing between Optical Slide Assembly and the
Control Console.
ITEM: R/S 2003 Allen Wrenches
PART NUMBER: RS300W
PRICE: USD [ * ]
INCLUDES: [ * ] Units of each Type
ITEM: R/S 2003 24 Position Tube Rack
PART NUMBER: RS300R
PRICE: USD [ * ]
INCLUDES: [ * ] Units
ITEM: R/S 2003 Purge Tank
PART NUMBER: RS300PT
PRICE: USD [ * ]
INCLUDES: [ * ] Units
ITEM: R/S 2003 Wall Mounted Power Adapter
PART NUMBER: RS300PS
PRICE: USD [ * ]
INCLUDES: [ * ] Units
* * *
- ------------------------------------------------------------------------------
PRODUCT: MODEL FE-2
- ------------------------------------------------------------------------------
ITEM: FE-2
PART NUMBER: FE2
PRICE: USD [ * ]
INCLUDES: [ * ] Control Console; [ * ] Stain Delivery Unit; [ * ] Dual
Automatic Aspirator; [ * ] Dual Optical Slide Assembly; Connective
Tubing; [ * ] Allen Wrenches ([ * ] each); [ * ] 15mL or 50 mL
Tube Rack; [ * ] Purge Tank; [ * ] Stain Delivery Tank; [ * ] Wall
Mounted Power Supply; [ * ] Instruction Manual; and [ * ] Shipping
Container and Packing Material.
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
- ------------------------------------------------------------------------------
SPARES: MODEL FE-2
- ------------------------------------------------------------------------------
ITEM: Main Console Enclosure and Wire Assembly
PART NUMBER: 9004-4001-000
PRICE: USD [ * ]
INCLUDES: Finished Metal Enclosure with Overlay; [ * ] Pump Controller P.C.
Board; Cycle Time Indicator P.C. Board; Push Button Switch
Cable Assemblies ([ * ]); Cable Assembly Diagnostic (Stained);
Cable Assembly Stain Delivery Unit Power Receptacle; Cable
Assembly Power Indicator; Cable Assembly Cycle Time Indicator
Board; and Connective Tubing.
ITEM: Stain Delivery Enclosure and Wire Assembly
PART NUMBER: 9004-4002-000
PRICE: USD [ * ]
INCLUDES: Base Welding Assembly with Overlay; Top Cover; Isolation Valve;
Power Cable Sub-Assembly; and Connective Tubing.
ITEM: Motor Assembly
PART NUMBER: 9003-3005-000
PRICE: USD [ * ]
INCLUDES: Unipolar Stepper Motor w/Molex Connector; Pump Mounting Block;
Pump Mounting "L" Bracket; Pump Roller Assembly; and Vibration
Mount Square Double Stud ([ * ]).
ITEM: Hydraulic Assembly
PART NUMBER: 9004-4015-000
PRICE: USD [ * ]
INCLUDES: Hydraulic Mounting Bracket; Power Values with DC Mounting Jack;
Fuse Holder and Power Switch Cable Assembly; Mounting Clip; Pinch
Values ([ * ]); Assembly Pressure Sensor; Cable Assembly Pressure
Sensor and Pinch Valves; Color Coded Connective Tubing; Valve
Mounting Brackets ([ * ]); Rear Enclosure Cover; Tubing Assembly;
and Plexiglass Panel.
ITEM: FE-2 Dual Automatic Aspirator
PART NUMBER: FE2A
PRICE: USD [ * ]
INCLUDES: [ * ] Units
ITEM: FE-2 Dual Optical Slide Assembly Kit
PART NUMBER: FE2K
PRICE: USD [ * ]
INCLUDES: [ * ] Units, each of which include: [ * ] Glass Flow Cells; [ * ]
Carrier; Connective Tubing; and Terminated with Luer Locks on
Panel Slide of Carrier.
ITEM: FE-2 Pump Tubing
PART NUMBER: FE2T
PRICE: USD [ * ]
INCLUDES: [ * ] Units, each of which includes [ * ] each Pre-Cut Tubing
Length for Peristaltic Pump, Terminated with Color Coded
Connectors.
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
ITEM: FE-2 Allen Wrenches
PART NUMBER: FE2W
PRICE: USD [ * ]
INCLUDES: [ * ] Units of each Type
ITEM: FE-2 15mL Tube Rack
PART NUMBER: FE2RS
PRICE: USD [ * ]
INCLUDES: [ * ] Units
ITEM: FE-2 50mL Tube Rack
PART NUMBER: FE2RL
PRICE: USD [ * ]
INCLUDES: [ * ] Units
ITEM: FE-2 Purge Tank
PART NUMBER: FE2W
PRICE: USD [ * ]
INCLUDES: [ * ] Units
ITEM: FE-2 Iodine Tank
PART NUMBER: FE2I
PRICE: USD [ * ]
INCLUDES: [ * ] Units
ITEM: FE-2 Wall Mounted Power Adapter
PART NUMBER: FEPS
PRICE: USD [ * ]
INCLUDES: [ * ] Units
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* Denotes confidential material omitted and filed separately with the
Securities and Exchange Commission.
Exhibit 10.26
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (this "Agreement") is made and entered into as of
this 17th day of November, 1996, by and between Intelligent Medical Imaging,
Inc., a Delaware corporation ("IMI"), and Dr. Raouf Guirguis ("Dr. Guirguis"),
La Mina, Inc., a Delaware corporation ("La Mina"), and MonoGen, Inc., a Nevada
corporation ("MonoGen") (with Dr. Guirguis, La Mina and MonoGen being
hereinafter collectively referred to as the "Licensors").
RECITALS
A. The Licensors hold all right, title and interest in and to the
Patents, the Monolayer Technology and the Monolayer Products.
B. IMI desires to acquire from the Licensors, and the Licensors
desire to grant to IMI, an exclusive license for the use of the Monolayer
Products and other products in automated image analysis systems for the
preparation of monolayer slides (non-gynecological and gynecological pathology
specimens).
NOW, THEREFORE, in consideration of the obligations herein made and
undertaken, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties, intending to be
legally bound hereby, covenant and agree as follows:
1. DEFINITIONS. Whenever used in this Agreement, the following terms
shall have the meanings set forth below:
(a) "Automated System" means any automated image analysis system,
which is defined as an apparatus having an integrated light microscope that
scans microscope slides for both intracellular and extracellular components and
converts the images scanned from the slide into digital or analog data that can
be analyzed utilizing any analytical algorithm. The Micro21 System is an
Automated System.
(b) "Manifold System" means the apparatus to be designed and developed
for use with the Micro21 System in accordance with this Agreement, which
apparatus will utilize a manifold system for the simultaneous preparation and
processing of monolayer preparations and other preparations utilizing the
Monolayer Products, including all related single-use or disposable items used in
connection therewith.
c) "Micro21 System" means IMI's Micro21 System, as the same may be
developed, enhanced, modified, added to or improved from time to time.
(d) "Monolayer Products" means (i) the products and procedures claimed
in the Patents (and any improvements thereto claimed in any future patents)
and/or that are based upon or that utilize the Monolayer Technology, (ii) the
Monolayer Technology, (iii) the Manifold System, (iv) all improvements or
additions to any of the foregoing, (v) all components and parts of any of the
foregoing and (vi) all ancillary reagents, materials, and devices used in
connection with any of the foregoing.
(e) "Monolayer Technology" means the inventions claimed in or covered
by the Patents and any improvements or additions thereto claimed in any future
patents.
- ---------------
* DENOTES CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE>
(f) "Patents" means U.S. patent numbers 5,471,994 and 5,301,685, and
any future patents related to, encompassing or underlying the Monolayer
Products.
2. LICENSE. The Licensors hereby grant to IMI the exclusive worldwide
perpetual license (the "License") conveying all rights to use and sell (but not
to manufacture (except as provided in Section 6 of this Agreement)) the
Monolayer Products for preparing or processing diagnostic microscope slides or
any transport vehicle for use with Automated Systems. The License shall also be
deemed to include the transfer to IMI of all of the Licensors' rights under the
Patents as such rights relate to the use of the Monolayer Products in connection
with any Automated Systems, including, without limitation, the right to
maintain, prosecute and defend such Patents and all follow on, continuation,
improvement and other new and related patents and improvements to the Monolayer
Products. Title and ownership in the Patents shall be retained by the Licensors
(specifically, Dr. Guirguis and La Mina), subject to the terms of this
Agreement.
IMI shall pay for all future costs to maintain, prosecute and defend
the Patents (collectively, "Patent Costs"); provided that in the event that
Licensor sells any Monolayer Product to any person or entity other than IMI, or
grants any right to use, sell, manufacture or have manufactured any Monolayer
Product to any person or entity other than IMI, then Licensor shall thereafter,
upon IMI's demand, pay to IMI an amount equal to [ * ] of all ongoing Patent
Costs. Licensor shall at all times provide IMI with all information, cooperation
and materials necessary to maintain, prosecute and defend the Patents and to pay
all Patent Costs. In the event that IMI does not pay all Patent Costs as
provided above, Licensor shall have the right to terminate the License upon
written notice to IMI; provided, however, that (i) Licensor gives IMI written
notice of such failure and IMI does not cure such failure within a period of
ninety (90) days from and after the date IMI receives such notice and (ii)
Licensor has at the time of such notice paid [ * ] of all Patent Costs as
provided above.
In the event that IMI decides not to pay the Patent Costs at any time,
IMI shall notify the Licensors of such decision in a manner and at a time
sufficient to prevent the loss of rights associated with the Patents.
3. RESEARCH & DEVELOPMENT CONTRACTS.
(a) In connection with this Agreement, the Licensors and IMI agree to
use good faith best efforts to enter into Research & Development Contracts (each
an "R&D Contract") pursuant to which the Licensors shall develop and, if
necessary, modify the Monolayer Products and their devices and components for
commercial use with respect to the performance of certain diagnostic procedures
on the Micro21 System. IMI shall submit proposals for specified procedures. Each
R&D Contract shall include specific performance and design requirements and
specifications, as well as milestones and completion dates (to be discussed and
determined on case by case basis) and related installment payments for the
compensation to be paid by IMI to the Licensors for each procedure.
(b) IMI's proposals shall specify the procedure(s) contemplated and
required specifications and performance characteristics. The Licensors shall
develop the appropriate device or devices to "optimize" throughput and
readability for use with the Micro21 System. The Licensors shall also develop
and optimize the appropriate fixers and reagents for throughput, reliability,
stability, readability and accuracy.
(c) In the event the Licensors and IMI do not reach an agreement and
fail to execute an R&D Contract as to a specified procedure within sixty (60)
days after IMI's submission of a proposal or, with respect to the proposed
completion of the design of the "Manifold System" described in Section 4 below,
if the parties do not enter into an R&D Contract with respect to the Manifold
System within sixty (60) days after the date of this Agreement, then IMI shall
be free and shall have the full right and authority and shall have all rights
necessary to perform, and to engage a third party to perform, the development
and/or design work (including development or design work in connection with the
Manifold System); provided that any third party developer
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(each a "Third Party Developer") shall not have any rights to use the
technology, other than the right to perform the development or design work for
IMI under a research and development contract. The rights to any modifications
or improvements to the Monolayer Products or the Manifold System made by any
Third Party Developer shall belong to the Licensors, and IMI shall have the full
right to use and sell such modifications and improvements pursuant to the
License. The Licensors shall retain manufacturing rights as contemplated herein
(subject to the contingent grant of manufacturing rights under Section 6
herein), with respect to procedures developed by any Third Party Developers.
(d) The Licensors hereby grant to IMI the exclusive right, pursuant to
the License, to use and sell all of the Monolayer Products (and all components
thereof), fixers and reagents developed by the Licensors (or any of them) under
any R&D Contract or developed by IMI or by any Third Party Developer, including
all applicable present and future patents and patent rights, for use with
Automated Systems. IMI shall retain all rights to the Micro21 System, including
any improvements or modifications to the Micro21 System developed by the
Licensors or any of their affiliates or agents (collectively, "Improvements"),
and the Licensors each hereby expressly transfer, assign and convey all of their
rights in or to the Improvements to IMI. The Licensors shall retain the right to
sell the Monolayer Products, fixers and reagents (other than disposables
developed for use in connection with the Manifold System) for use with
applications other than in connection with or with respect to Automated Systems.
(e) The first procedure to be fully developed by the Licensors shall
be monolayer preparation for urine cytology. The R&D Contract with respect to
urine cytology and other procedures shall include the following payment terms:
(i) Initial nonrefundable payment of $150,000 payable upon
execution of the initial R&D Contract for urine cytology and delivery of the
"Manufacturing Documentation" (as defined in Section 6(b) herein).
(ii) Subject to Section 3(e)(iii), $350,000 shall be paid by IMI
upon IMI's receipt of FDA 510(k) clearance for use of the Micro21 System (as
substantially equivalent to the manual procedures) with respect to the use of
the Monolayer Products for monolayer preparation for urine cytology (in
connection with hematuria and red cell counting, uroepithial atypical
identification (not classification), and capture and presentation of "casts" and
crystals) (the "Micro21 Urine Cytology 510(k) FDA Clearance").
(iii) The $350,000 payment referred to in Section 3 (e)(ii) shall
be applied by IMI and the Licensors to IMI's initial payment obligations under
any R&D Contracts (including the initial contract for urine cytology to the
extent the development expense under such initial R&D Contract exceeds $150,000)
entered into during the first year following the date of this Agreement. The
Licensors shall promptly after execution of this Agreement submit a proposal for
the R&D Contract for urine cytology, including the Licensors' proposed cost of
development to be paid by IMI. Notwithstanding the foregoing, in the event the
payment has not been made under Section 3(e)(ii) within such one-year period and
provided IMI does not elect to terminate this Agreement during such one-year
period (and it remains in effect), then IMI shall pay the $350,000 payment to
the Licensors on the third business day following the anniversary of the date of
this Agreement.
4. MANIFOLD SYSTEM. IMI acknowledges that the Licensors are working on
a design for a Manifold System. The Licensors shall promptly after execution of
this Agreement submit a proposal for completion of the design and development of
the Manifold System for use with the Micro21 System, including the Licensors'
proposed cost of design and development to be paid by IMI. The Licensors shall
complete the design and development of the Manifold System pursuant to an R&D
Contract entered into by the parties with respect thereto, provided, if the
Licensors and IMI fail to enter into such an R&D Contract within the time period
specified in Section 3(c), then IMI shall have the right to design and develop,
and to engage a Third Party Developer to design
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and develop, the Manifold System as provided in Section 3(c). To the
extent the Manifold System is designed for use with or by any Automated System
and/or as an integrated part of the Micro21 System, the Licensors hereby grant
to IMI the exclusive right, pursuant to the License, to use and sell, including
an assignment of all applicable present and future patent rights, but not the
right to manufacture (subject to the contingent grant of manufacturing rights
under Section 6 herein) the Manifold System. The Manifold System shall be deemed
to be one of the Monolayer Products for the purposes of this Agreement and the
License. The Licensors hereby grant to IMI the first right to negotiate a
license or other grant of rights with respect to any enhancement, improvement or
further development of the Manifold System.
5. LICENSE FEE. The license fee to be paid to the Licensors by IMI
under this Agreement shall consist of (a) the cash payment contemplated under
Section 3(e)(i) for services to be rendered by the Licensors as contemplated in
Section 3 herein, and (b) Three Million Dollars ($3,000,000), payable in any
combination of cash or IMI common stock ("Shares"), as determined by IMI in its
sole discretion (the "Additional Payment"). The number of Shares included in the
Additional Payment shall be based upon the average closing price of the Shares
on the twenty (20) trading days prior to the date the Additional Payment is paid
by IMI. The Additional Payment shall be paid by IMI within five (5) business
days after IMI's receipt of FDA 510(k) clearance or other FDA approval for the
sale of Micro21 Systems incorporating or sold in conjunction with Monolayer
Products. In the event FDA clearance is not required, the Additional Payment
shall be paid within five (5) business days after actual commercial retail sales
of Micro21 Systems that incorporate or are sold in conjunction with Monolayer
Products. IMI, but not the Licensors, shall have the right to terminate this
Agreement at any time without cause and without liability upon written notice to
the Licensors, provided that this right to terminate without cause shall expire
on the earlier of (i) the date of IMI's receipt of FDA 510(k) clearance for
Micro21 Systems incorporating or sold in conjunction with Monolayer Products,
(ii) the first anniversary of the date of this Agreement or (iii) commercial
retail sales by IMI of Monolayer Products. IMI shall grant to the Licensors
"piggyback" registration rights in connection with any Shares issued to the
Licensors (which rights shall be comparable to any "piggyback" registration
rights granted to IMI's existing stockholders) pursuant to a registration rights
agreement mutually agreed to by the parties (and if necessary the other
shareholders of IMI).
6. MANUFACTURING RIGHTS.
(a) The Licensors hereby agree to manufacture and deliver, and cause
and require their third party contractors to manufacture and deliver, such
quantities of the Monolayer Products, including all components thereof and the
related fixers and reagents, as may be requested or specified from time to time
by IMI. All such manufacturing and delivery (i) shall be performed and completed
in strict conformance with (A) all of IMI's commercially reasonable (in the
medical device industry) specifications and requirements, including, without
limitation, those related to time of delivery, volume, design, appearance,
performance and pricing and (B) the terms and conditions of all applicable IMI
purchase orders, and (ii) shall strictly comply with all Good Manufacturing
Practices ("GMP") required or promulgated by the FDA from time to time (with all
of the foregoing requirements being hereinafter referred to as the
"Manufacturing Requirements"). IMI shall at all times have the right of audit,
use and access to the manufacturing data (including component supplier contact
information), facilities and know-how of the Licensors and their third party
manufacturing contractors, for the sole purpose of confirming that the Licensors
or their contractors are complying with all Manufacturing Requirements.
(b) With respect to the Monolayer Products, in the event the Licensors
or their contractors at any time fail to perform their obligations with respect
to manufacturing and delivery of any of the Monolayer Products (including,
without limitation, failure to fully comply with the Manufacturing
Requirements), then IMI shall have, in addition to all other rights granted to
IMI under this Agreement, the right to manufacture or cause to be manufactured
such Monolayer Products and all components thereof and the related disposables,
fixers and reagents. With respect to the Manifold System, in the event the
Licensors abandon their development effort, or in the event the Licensors or
their third party contractors fail to produce a working prototype ready for beta
site
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testing within six (6) months of the date of this Agreement, or fail
to perform their obligations with respect to manufacturing and delivery of the
Manifold System (including without limitation failure to fully comply with the
Manufacturing Requirements), then IMI shall have, in addition to all other
rights granted to IMI under this Agreement, the right to manufacture or cause to
be manufactured the Manifold System and all components thereof and all related
disposables. The intent of the parties is that the Licensors shall be
responsible for the manufacturing the Monolayer Products, fixers and reagents
and the Manifold System, however, the foregoing contingent manufacturing rights
are necessary to ensure that IMI shall not be precluded from full exercise of
its rights to use and sell the Monolayer Products, fixers and reagents and the
Manifold System. In this regard, the Licensors shall, on the date of this
Agreement, deliver to IMI copies of all relevant manufacturing data and
component supplier and third party manufacturing contractor contact information
and know-how and specifications which would be necessary for IMI's independent
exercise of its contingent manufacturing rights, including without limitation
such documentation relating to the Urine Cytology procedure (the "Manufacturing
Documentation"). Throughout the term of this Agreement, at the request of IMI or
upon any material change in the Manufacturing Documentation or creation of new
Manufacturing Documentation covering any of the Manifold System or Monolayer
Products, fixers or reagents, the Licensors shall promptly deliver any updates
or modifications of the Manufacturing Documentation to IMI. IMI shall not use
such Manufacturing Documentation except in connection with the exercise of its
contingent manufacturing rights.
7. TRANSFER PRICES.
(a) IMI shall pay the Licensors a unit transfer price for each
of the Monolayer Products and the Manifold Systems manufactured by the Licensors
and delivered to IMI equal to [ * ]. Transfer prices shall be paid on
a calendar quarterly basis based upon the amounts actually collected by IMI
during the immediately preceding calendar quarter; provided, however, to the
extent IMI does not collect any amount due with respect to a product within
ninety (90) days after the product is shipped to the customer, the price charged
for such product shall be added to the actually collected amounts in the
calendar quarter in which such ninety (90) day period ends. The transfer prices
may be modified by mutual written consent to adjust for factors beyond the
control of IMI or the Licensors, such as excessive cost for a reagent. All
retail or negotiated prices for said products shall be set, and may be changed
from time to time, by IMI in its sole discretion.
(b) If IMI assumes the contingent manufacturing rights to
manufacture any Monolayer Products or the Manifold System as described in
Section 6, IMI shall pay a royalty of [ * ]. Royalties shall be paid
on a calendar quarterly basis based upon amounts actually collected by IMI
during the immediately preceding calendar quarter.
(c) Upon reasonable notice, IMI and its representatives shall
have the reasonable right to audit, access and inspect the books, records and
facilities of the Licensors for purposes of confirming the Licensors' production
costs and compliance with the Manufacturing Requirements. Upon reasonable
notice, the Licensors shall have the reasonable right to audit, access and
inspect the books and records of IMI for purposes of confirming IMI's net sales
of Monolayer Products and Manifold Systems under Sections 7(a) or 7(b) above.
8. MINIMUM PURCHASES FOLLOWING FIRST YEAR. Upon the completion of the
first year of commercial sales of the Monolayer Products under this Agreement,
and provided IMI has not terminated this Agreement, IMI shall enter into good
faith negotiations with the Licensors with respect to the minimum number of
Monolayer Products covered under the License to be ordered by IMI.
9. ANNOUNCEMENTS; CONFIDENTIALITY.
(a) The parties hereto acknowledge that IMI is a public reporting
company and that the matters covered by this Agreement are and shall remain
confidential. The parties hereto agree that they shall not
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make any announcement to the press or to any third parties about this
Agreement, the terms hereof or the transactions contemplated hereby without the
prior written approval of all parties.
(b) All IMI Information (i) shall be and at all times remain the sole
and exclusive property of IMI, (ii) shall not be used by the Licensors for any
reason or purpose except in direct connection with the Licensors' performance of
their duties and obligations under this Agreement and (iii) shall not, without
the express prior written consent and approval of IMI, be disclosed in whole or
in part to any person or entity. For the purposes of this Agreement, "IMI
Information" shall mean and include all information, materials or documents in
any way regarding or relating to IMI or any of its affiliates or their
respective businesses, whether provided to or obtained by the Licensors,
including, without limitation, all customer lists, all technical data, research
or information and all trade secrets and other proprietary ideas, concepts,
know-how and methodologies. The Licensors acknowledge that money damages would
be an inadequate remedy for the injuries and damage that would be suffered by
IMI in the case of the Licensors' breach of this Section 9(b). Therefore, IMI,
besides any other remedies it may have at law or in equity, shall be entitled to
injunctive relief to enforce the provisions of this Section 9(b). The Licensors'
respective duties and obligations under this Section 9(b) shall survive the
termination or cancellation of this Agreement for any reason.
(c) All Licensor Information (i) shall be and at all times remain the
sole and exclusive property of the Licensors, (ii) shall not be used by IMI for
any reason or purpose except in direct connection with IMI's performance of its
duties and obligations under this Agreement and (iii) shall not, without the
express prior written consent and approval of IMI, be disclosed in whole or in
part to any person or entity. For the purposes of this Agreement, "Licensor
Information" shall mean and include all information, materials or documents in
any way regarding or relating to the Licensors or any of their affiliates or
their respective businesses, whether provided to or obtained by IMI, including,
without limitation, all customer lists, all technical data, research or
information and all trade secrets and other proprietary ideas, concepts,
know-how and methodologies. IMI acknowledges that money damages would be an
inadequate remedy for the injuries and damage that would be suffered by the
Licensors in the case of IMI's breach of this Section 9(c). Therefore, the
Licensors, besides any other remedies they may have at law or in equity, shall
be entitled to injunctive relief to enforce the provisions of this Section 9(c).
IMI's duties and obligations under this Section 9(c) shall survive the
termination or cancellation of this Agreement for any reason.
10. NONCOMPETITION.
(a) In recognition of the highly competitive nature of IMI's business,
the Licensors each covenants and agrees that he, she or it shall not, without
the express prior written consent of IMI in each instance (which consent may be
granted or denied by IMI in its sole and unfettered discretion), directly or
indirectly from and after the date of this Agreement and for one (1) year from
and after any termination of this Agreement (i) engage in (whether as an owner,
officer, director, employee, partner, consultant, advisor, agent, sales
representative, distributor, broker, marketing agent, trustee, joint venturer or
otherwise) any business or other activity or activities which are competitive
with the Automated Systems business of IMI, (ii) license to, or otherwise permit
the use, sale, development or manufacture of the Monolayer Products (or any of
them or any portion or component thereof) by any party who shall or could use
the Monolayer Products (or any of them or any portion or component thereof) in
competition with IMI in connection with any Automated System or (iii) assist or
facilitate any other person or entity in engaging in any activities prohibited
to the Licensors under this Section 10(a). The foregoing notwithstanding, and
except in cases where IMI exercises its contingent manufacturing rights as
provided in Section 6(b) above, in the event IMI obtains any reagent or device
ancillary to a Monolayer Product from any party other than Licensor or a
contractor or agent of Licensor, then thereafter Licensor shall be free to sell
such reagent or device to third parties.
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(b) The Licensors each acknowledge and agree that the breach of any of
the provisions of this Section 10 by any of the Licensors shall cause
irreparable harm to IMI which shall not be adequately compensated by monetary
damages. In recognition of this fact, in the event of a breach or threatened
breach of any of the provisions of this Section 10 by any of the Licensors, and
without the showing or proving of actual damages, it is agreed that, in addition
to IMI's remedies at law, IMI shall be entitled to immediate equitable relief in
the form of specific performance, temporary restraining order, temporary or
permanent injunction or any other equitable remedy which may then be available
from any court of competent jurisdiction against the Licensors and any third
parties whose joinder may be necessary to effect a full and complete relief from
such breach or threat of breach. Nothing herein contained shall be construed as
prohibiting IMI from pursuing any other remedies available to it. The Licensors'
respective duties and obligations under this Section 10 shall survive the
termination or cancellation of this Agreement for any reason for one (1) year.
11. DISPUTE RESOLUTION. Except for any claim or action by a party
pursuant to Section 9 or Section 10 of this Agreement, any dispute,
disagreement, controversy or claim arising out of or with respect to this
Agreement (each a "Dispute") that is not resolved by the agreement of the
parties must be resolved exclusively as set forth below:
(a) All Disputes must first be submitted to non-binding mediation in
Virginia if brought by IMI or in Palm Beach County, Florida if brought by any
Licensor in accordance with the mediation procedures of the American Arbitration
Association (the "AAA"). The parties agree to participate in not less than five
(5) hours of mediation within thirty (30) days after such submission. The
mediator shall be appointed in accordance with the rules of the AAA, but the
mediator must not have any conflict of interest. The mediation proceedings shall
be completely confidential and not discoverable. The mediation procedure shall
be deemed complete with respect to a Dispute if (i) the mediation is completed
and an agreement to resolve the Dispute is entered into by the parties or (ii)
the mediation is completed and the Dispute is not resolved within five (5) days
thereafter. If a party submits a dispute to mediation and the other party fails
to appear or participate in good faith in mediation within thirty (30) days
after having received written notice of the submission of the Dispute, then the
party submitting the Dispute may consider the mediation procedure to be
completed.
(b) If any Dispute remains between the parties after completion of the
mediation process in connection with such dispute, then any party may submit the
Dispute to final and binding arbitration (without appeal or review) in Virginia
if brought by IMI or in Palm Beach County, Florida if brought by any Licensor,
administered by and in accordance with the rules of the AAA. IMI shall appoint
one (1) arbitrator and the Licensors shall together appoint one (1) arbitrator,
and the two (2) arbitrators so selected shall appoint a third arbitrator. Each
arbitrator must be appointed in accordance with the rules of the AAA, and must
not have any conflict of interest. The decision of a majority of the three
arbitrators with respect to any Dispute shall be binding and conclusive upon the
parties to this Agreement. Such decision shall be written and shall be supported
by written findings of fact and conclusions, and shall set forth the award,
judgment, decree or order awarded by the arbitrators. The judgment and any award
rendered by the arbitrators may be enforced under applicable judicial
procedures, including procedures for the entry and enforcement of arbitration
awards by any federal or state court having jurisdiction.
(c) The parties shall share equally the costs, including fees, of any
mediator or arbitrator selected or appointed hereunder, but each party shall
otherwise be responsible for its own fees, costs and expenses in connection with
any Dispute.
(d) The provisions of this Section 11 shall survive the termination or
cancellation of this Agreement for any reason.
12. REPRESENTATIONS AND WARRANTIES.
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(a) The Licensors each hereby represent and warrant to IMI that (i)
the Licensors have the full power and authority to execute and deliver this
Agreement, to perform all of their duties and obligations under this Agreement
and to grant all of the rights granted by this Agreement, (ii) to the best
knowledge of the Licensors, neither the Patents, nor the Monolayer Products nor
the Manifold System, nor IMI's use, sale or manufacture thereof, violates or
infringes the rights of any person or entity in or to any patent, trademark,
trade name, copyright, trade secret, license or other proprietary or similar
right and (iii) the Licensors are the sole and lawful owners of the Patents, the
Monolayer Products, the Manifold System, the components thereof and all rights
therein or ancillary thereto.
(b) IMI represents and warrants to the Licensors that (i) the IMI has
the full power and authority to execute and deliver this Agreement and to
perform all of its duties and obligations under this Agreement, (ii) to the best
knowledge of IMI, the Micro21 System does not violate or infringe the rights of
any person or entity in or to any patent, trademark, trade name, copyright,
trade secret, license or other proprietary or similar right and (iii) IMI is the
lawful owner or licensee of the Micro21 System, the components thereof and all
rights therein or ancillary thereto.
13. INDEMNIFICATION.
(a) In addition to all other remedies available to IMI at law or in
equity, the Licensors each hereby indemnify and agree to defend and hold IMI
harmless from and against any and all fines, suits, proceedings, claims,
demands, causes of action, losses, liabilities, damages, costs, charges and/or
expenses of any kind or nature (including, without limitation, reasonable
attorneys' fees and expenses) arising out of or otherwise relating to or
connected with any actual or threatened claim that any of the Patents, the
Monolayer Products, the Manifold System or any of the components thereof violate
or infringe any patent, trademark, trade name, copyright, trade secret, license
or other proprietary or similar right of any third party. The Licensors'
respective duties and obligations under this Section 13(a) shall survive the
termination or cancellation of this Agreement for any reason.
(b) In addition to all other remedies available to the Licensors at
law or in equity, IMI hereby indemnifies and agrees to defend and hold the
Licensors harmless from and against any and all fines, suits, proceedings,
claims, demands, causes of action, losses, liabilities, damages, costs, charges
and/or expenses of any kind or nature (including, without limitation, reasonable
attorneys' fees and expenses) arising out of or otherwise relating to or
connected with any actual or threatened claim that the Micro21 System or any of
the components thereof (other than any of the Patents, the Monolayer Products,
the Manifold System or any of the components thereof) violate or infringe any
patent, trademark, trade name, copyright, trade secret, license or other
proprietary or similar right of any third party. IMI's obligations under this
Section 13(b) shall survive the termination or cancellation of this Agreement
for any reason.
14. BANKRUPTCY. Notwithstanding any other term or provision of this
Agreement, if any Licensor, or any successor in interest to any Licensor
hereunder, voluntarily seeks protection under or is involuntarily subjected to
the provisions of the Bankruptcy Code, IMI may, at its sole option and
discretion, elect, by written demand to such Licensor or its trustee in
bankruptcy, to retain IMI's rights under this Agreement including, without
limitation, IMI's right to demand: (i) performance of this Agreement; (ii) the
use of all rights or items licensed or sublicensed hereunder to IMI as provided
herein and without interference by Licensor or its trustee in bankruptcy; and
(iii) any other rights available to IMI under Section 365 of the Bankruptcy Code
or any successor section or sections thereto. Failure by IMI to assert its
rights to retain its benefits under this Agreement pursuant to Section
365(n)(1)(B) of the Bankruptcy Code, or any successor section or sections
thereto, under an executory contract rejected during bankruptcy proceedings
shall not be construed by the courts as a termination of this Agreement by IMI
under Section 365(n)(1)(A) of the Bankruptcy Code, or any successor section or
sections thereto.
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15. Notices. No notice or other communication shall be deemed given
unless sent in any of the manners, and to the persons, specified in this
Section. All notices and other communications hereunder shall be in writing and
shall be deemed given (a) upon receipt if delivered personally (unless subject
to clause (b)) or if mailed by registered or certified mail, (b) at noon on the
date after dispatch if sent by overnight courier or (c) upon the completion of
transmission (which is confirmed by telephone or by a statement generated by the
transmitting machine) if transmitted by telecopy or other means of facsimile
which provides immediate or near immediate transmission to compatible equipment
in the possession of the recipient, in any case to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy number for a
party as shall be specified by like notice):
if to IMI:
Intelligent Medical Imaging, Inc.
4360 Northlake Blvd.
Suite 214
Palm Beach Gardens, 33418
Attention: Tyce Fitzmorris
Telecopy Number: (561) 627-0409
Confirmation Number: (561) 627-0344
or if to the Licensors:
Dr. Raouf Guirguis
La Mina, Inc.
MonoGen, Inc.
2190 Foxmill Road
Herndon, VA 20171
Telecopy Number: (703) 713-3474
Confirmation Number: (703) 713-3380
16. ENUMERATION AND HEADINGS. The enumeration and headings contained
in this Agreement are for convenience of reference only and shall not control or
affect the meaning or construction of any of the provisions of this Agreement.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original, but all of which shall together constitute one and the same agreement.
18. SUCCESSORS AND ASSIGNS. This Agreement and the terms, covenants,
provisions and conditions hereof shall be binding upon, and shall inure to the
benefit of, the respective heirs, successors and assigns of the parties hereto;
provided, however, that the Licensors shall not subcontract or assign this
Agreement (by operation of law or otherwise), or otherwise sell, assign,
transfer, convey or dispose of all or any portion of their right, title or
interest herein, to any person or entity without the express prior written
consent of IMI.
19. SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable for any reason, such provision shall be conformed to
prevailing law rather than voided, if possible, in order to achieve the intent
of the parties and, in any event, the remaining provisions of this Agreement
shall remain in full force and effect and shall be binding upon the parties
hereto.
20. WAIVER. All rights available to either party under this Agreement
or any other document delivered hereunder or in connection herewith, or allowed
it by law or equity, are and shall be cumulative and may
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be exercised separately or concurrently and from time to time without
waiver of any other remedies. No party hereto shall be deemed to have waived any
right, power or privilege under this Agreement unless such waiver shall have
been expressed in a written instrument signed by the waiving party. The failure
of any party hereto to enforce any provision of this Agreement shall in no way
be construed as a waiver of such provision or a right of such party to
thereafter enforce such provision or any other provision of this Agreement.
21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous agreements and understandings, oral
or written, relating to said subject matter.
22. TERMINATION. If any Licensor breaches this Agreement, IMI shall be
entitled, without limitation as to any other available remedy, at its option and
to the extent it so elects to terminate this Agreement, any such termination not
to relieve the Licensors of any of their obligations under this Agreement.
Except as otherwise provided in this Agreement, if IMI breaches this Agreement,
the Licensors shall be entitled, without limitation as to any other available
remedy, at their option and to the extent they so elect to terminate this
Agreement, any such termination not to relieve IMI of any of its obligations
under this Agreement.
23. NAMES. The Licensors shall not use IMI's or any of IMI's
affiliates' names, marks, logos or other designations for any reason (including,
without limitation, advertising, publicity and promotional materials) without
IMI's express prior written consent in each instance, and all such names, marks,
logos and other designations of IMI shall at all times be and remain the sole
and exclusive property of IMI. IMI shall not use any Licensor's or any of such
Licensor's affiliates' names, marks, logos or other designations for any reason
(including, without limitation, advertising, publicity and promotional
materials) without such Licensor's express prior written consent in each
instance, and all such names, marks, logos and other designations of such
Licensor shall at all times be and remain the sole and exclusive property of
such Licensor.
24. GOVERNING LAW. This Agreement and the respective rights and
obligations of the parties hereto shall be governed by and construed in
accordance with the laws of the State of Florida, without regard to its
conflicts of laws provisions.
25. CONSTRUCTION. Unless the context of this Agreement otherwise
clearly requires, (i) references in this Agreement to the plural include the
singular, the singular the plural, the masculine the feminine, the feminine the
masculine and the part the whole and (ii) the word "or" shall not be construed
as exclusive and the word "including" shall not be construed as limiting. The
Licensors shall be jointly and severally liable with respect to their respective
duties and obligations under this Agreement.
26. AMENDMENT. This Agreement may not be amended or modified in any
manner except by a written agreement executed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
INTELLIGENT MEDICAL IMAGING, INC.
By: /s/ Tyce M. Fitzmorris
----------------------------
Tyce M. Fitzmorris, President
- ---------------
* DENOTES CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
<PAGE>
MONOGEN, INC.
By: /s/ Raouf Guirgius
------------------------------
Dr. Raouf Guirguis, President
LA MINA, INC.
By: /s/ Raouf Guirgius
-----------------------------
Dr. Raouf Guirguis, President
/s/ Raouf Guirgius
------------------------------
Dr. Raouf Guirguis, Individually
- ---------------
* DENOTES CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION.
Exhibit 10.27
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT ("Agreement") is made and entered into this 27th
day of March 1997 by and between Intelligent Medical Imaging, Inc. ("IMI") and
Coulter Corporation ("Coulter").
WITNESSETH
WHEREAS, IMI and Coulter entered into a Distribution Agreement, effective
as of August 25, 1995 and amended January 5, 1996 (the "Distribution
Agreement");
WHEREAS, disagreements arose between IMI and Coulter concerning various
provisions of the Distribution Agreement, the continued enforceability of the
Distribution Agreement and the parties' respective right to relief, if any;
WHEREAS, the parties to the Distribution Agreement submitted their disputes
to arbitration in an action styled Intelligent Medical Imaging, Inc. vs. Coulter
Corporation before the American Arbitration Association, Case No.: 32-181-00400
96 KMG (the "Action");
WHEREAS, each party has contested, and continues to contest, the
allegations and assertions made by the other, and neither party has admitted any
liability or wrongdoing with respect to any allegations asserted in the Action;
WHEREAS, sharply contested issues of both law and fact exist and, absent
this Agreement, the parties would have vigorously litigated all such issues in
the Action;
WHEREAS, the costs associated with litigating these contested issues will
be substantial, time-consuming and disruptive of the parties' ongoing respective
activities and businesses;
WHEREAS, the parties hereto agree that, in order to avoid the costs,
disruption and uncertainty associated with such additional litigation and/or
appeals, it would be advantageous to settle the Action on the terms and
conditions set forth herein;
NOW, THEREFORE, for and in consideration of the mutual covenants set forth
herein and other good and valuable consideration the receipt and sufficiency of
which are hereby
- -----------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
acknowledged, the parties hereto agree as follows:
1. RECITALS. The above recitals are true and correct and are incorporated
herein by this reference.
2. TERMINATION OF THE DISTRIBUTION AGREEMENT. The parties acknowledge that
there is a dispute as to the effective date of termination of the Distribution
Agreement. For purposes of this Agreement, the Distribution Agreement shall be
deemed terminated as of the close of business on March 27, 1997. In connection
with said termination, the parties agree to the following:
A.) STIPULATION OF DISMISSAL AND RELEASES. Upon the execution of this
Agreement, the parties shall execute and exchange a joint stipulation of
dismissal with prejudice of the Action in the form attached hereto as Exhibit A,
and releases in the forms annexed hereto as Exhibits B and C.
B.) COVENANTS. The mutual covenants relating to intellectual property,
warranty, indemnity and liability set forth on Schedule I attached hereto are
incorporated herein by eference and shall apply to activities and
relations of the parties prior to the date of this Settlement Agreement and
thereafter.
C.) SETTLEMENT COSTS.
(i)IMI will pay [ * ] as reimbursement for certain of Coulter's
costs and expenses incurred in the sale and marketing the Micro21 system and in
exchange for the return of 26 of Coulter's used inventory of MICRO21 systems and
parts, all of which shall be in good condition, reasonable wear and tear
excepted, and shipped at Coulter's expense FOB to IMI's warehouse facility in
Palm Beach Gardens, Florida. In addition, IMI will pay Coulter [ * ] for
assignment of four (4) certain customer contracts to IMI. Coulter will deliver
substantially all of its inventory of Micro21 systems and parts or transfer
title of any of such systems placed with customers for evaluation (and assign
any evaluation contracts or purchase orders), within 30 days of this Agreement,
and the balance of such systems will be delivered promptly thereafter. In
addition, spare parts and equipment previously purchased by Coulter from IMI
will be returned to IMI and Coulter will be reimbursed for such parts and
equipment at original price paid for by Coulter. Payments by IMI of amounts due
Coulter hereunder shall be due as follows: thirty days from the date of this
Agreement - 50%; and sixty days from the date of this Agreement - 50%.
(ii) Coulter will promptly purchase from IMI [ * ] current
model MICRO21 systems to replace such systems in Japan at a purchase price of
[ * ] and Coulter will arrange for pick up from IMI and payment of all shipping
costs (i.e. FOB at IMI).
(iii) IMI's obligation to pay Coulter for the four (4) systems
sold by Coulter to four customers in the U.S. is subject to the approval by each
customer to the assignment from Coulter to IMI of all applicable customer
contracts, leases, and finance agreements. The customer must approve assignment
to IMI of the customers' remaining obligations to Coulter, with a novation in
favor of Coulter, and assumption by IMI of Coulter's remaining obligations to
- ---------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
the customers. For each customer contract transferred pursuant to this section,
Coulter will be entitled to pro-rata proceeds through March 31, 1997 and IMI
will be entitled to pro-rata proceeds after March 31, 1997, as set forth on
Schedule II attached hereto. In the event any of such customers will not approve
of such assignment, then Coulter will retain the relationship with the customers
and IMI will not purchase such customer contracts from Coulter.
(iv) With respect to the MICRO21 system installed for
evaluation at Beth Israel Hospital in New York, Coulter and IMI representatives
will approach the customer, explain that the Action has been resolved and
determine whether the customer would prefer to purchase a MICRO21 system from
IMI or from Coulter. In the event the customer wants to purchase the MICRO21
system from IMI, IMI will be free to sell the system at a price to be determined
by IMI and the customer and to pursue the relationship without Coulter's
involvement. In the event the customer wants to purchase the MICRO21 system from
Coulter, IMI agrees to sell a MICRO21 system to Coulter at a one time special
discounted transfer price of [ * ]. If Coulter is required to provide a Mircro21
system to Beth Israel under a previously negotiated agreement between Coulter
and Beth Israel, the transfer price from IMI to Coulter shall be [ * ].
(v) It is understood that the [ * ] MICRO21 systems sold in the
first quarter of 1997 by IMI to Coulter KK Japan for placement in Japan, outside
of the terms of the Distribution Agreement, will not be repurchased by IMI and
the customers purchasing such systems in Japan will be serviced by Coulter KK
Japan.
(vi) IMI and Coulter shall immediately reconcile all accounts
receivable and other payments due from Coulter to IMI or from IMI to Coulter
(including amounts under section 2(B)(iii) as promptly as possible) for
expenses, reimbursements, inventory or equipment and such adjustments shall be
made to the amount of any payments due from IMI to Coulter under this Section
2(C).
D.) CUSTOMER SERVICE OBLIGATIONS
(i) Subject to customer approval, IMI will assume responsibility for
customer service and support for MICRO21 systems sold and placed in the U.S. and
for MICRO21 systems sold by IMI directly or through distributors other than
Coulter or Coulter KK Japan, or any other Coulter affiliate, in any foreign
country. Coulter shall retain responsibility for customer service and support
for MICRO21 systems purchased by Coulter and sold by Coulter or its affiliates
to foreign customers, such as the customers of Coulter KK Japan in Japan.
(ii) Subject to IMI's consent and approval which shall not be
unreasonably withheld, with respect to foreign customer accounts of Coulter, IMI
will provide spare parts on consignment to Coulter in accordance with IMI's
normal and customary commercial practices and
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* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
IMI will provide technical support, including software and applications support
for the installed MICRO21 systems and for new procedures subsequently purchased
from IMI. This arrangement shall continue until Coulter and IMI agree to other
arrangements. Spare parts will be sold by IMI to Coulter at [ * ]. Initial in
field (at a customer's location) technical support will be provided by IMI to
Coulter at IMI's cost which shall include non-burdened labor, travel, room,
board and miscellaneous out-of-pocket expenses. Initial training at IMI's
facilities shall be at no cost. It is understood that IMI does not have an
international network of technical support personnel and that most of such
support is anticipated to be provided via telephone at a reasonable level at no
charge.
(iii) IMI will sell new procedures for the Micro21 system to
Coulter at IMI's average end-user prices less discounts ranging from [ * ]% to
[ * ]% based on volume.
(iv) Subject to Coulter's consent and approval which shall not
be unreasonably withheld, in the event IMI or any customer of IMI or any
customer of Coulter desires to engage Coulter for service and support in
connection with the MICRO21 system, then IMI will subcontract with Coulter for
the provision of hardware and installation support services at a price
equivalent to [ * ]% off of Coulter's published service price for such support.
IMI will provide Coulter with necessary spare parts on consignment in amounts in
accordance with IMI's normal and customary commercial practices. Spare parts
will be sold by IMI to Coulter at [ * ].
(v) IMI will provide customer training and neural net training for
nonstandard customer stains at Coulter's request at IMI's facility at IMI's
normal and customary prices.
(vi) Any of the foregoing service arrangements will be documented
in separate agreements acceptable to IMI, Coulter and the customers, including
customary and commercially reasonable provisions and such arrangements will
continue until otherwise agreed by the parties.
E.) NONEXCLUSIVE DISTRIBUTION RIGHTS AND "MOST FAVORED DISTRIBUTOR"
RELATIONSHIP.
It is agreed that Coulter may purchase MICRO21 systems from IMI at prices
and volumes to be set and agreed to by IMI, in its sole discretion, (other than
those volumes and prices specifically agreed to in this Agreement) for placement
with customers worldwide. In addition, to the extent and for so long as IMI
sells the MICRO21 system through distributors other than Coulter for resale or
lease to end users, then Coulter shall have the following rights as a "most
favored distributor," as described in paragraph 2(E)(i) below:
- --------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
(i) Coulter shall have the right to purchase MICRO21 systems from
IMI on the same terms such systems are sold by IMI to other distributors on a
country by country basis, including and subject to all of the conditions of such
sale transactions such as price, discounts, and quantity. For example, if IMI
sells [ * ] MICRO21 systems under terms requiring the purchase of a minimum of
[ * ] MICRO21 systems within one year to a distributor for placement in Spain
at a transfer price of [ * ] per system, then Coulter will have an opportunity
to purchase the same minimum number of systems (and no less) within one year at
the transfer price of [ * ] per system for placement in Spain. As another
example, if IMI sells a limited number of MICRO21 systems to a distributor at a
special discount price for the purpose of "seeding" a market, e.g. [ * ] systems
for [ * ] each to a distributor for placement in Germany, then Coulter may also
purchase [ * ] systems for [ * ] each for placement in Germany. At Coulter's
request, IMI will provide to Coulter reasonable verification of their
arrangements with third party distributors on a territory by territory basis. An
example of an acceptable method of verification may include use of IMI's outside
independent auditors to provide such verification.
(ii) The foregoing "most favored distributor" right shall
terminate in the event IMI terminates the sale and marketing of MICRO21 systems
through distributors other than Coulter, but shall be reinstated in the event
IMI recommences sales and marketing of the MICRO21 system through other
distributors. Notwithstanding the foregoing, the "most favored distributor"
right shall terminate and shall not be subject to reinstatement in the event of
a sale of all or substantially all of the stock or assets of IMI, or a merger,
consolidation, or reorganization of IMI involving a change in control of IMI
(collectively a "Change in Control Transaction"). However, at this time no such
change of control transaction is under negotiation.
(iii) If a Change in Control Transaction closes within three
years of the date of this Agreement, then (in addition to Coulter's rights under
section 2(F) below) Coulter may purchase the following number of then current
base MICRO21 systems configured for WBC Diff procedure only for a discount
transfer price of [ * ] per system:
CLOSING DATE OF CHANGE IN CONTROL TRANSACTION NUMBER OF SYSTEMS PURCHASABLE
- ---------------------------------------------- -----------------------------
within year 1 [ * ] systems
within year 2 [ * ] systems
within year 3 [ * ] systems
F.) LIMITED DISCOUNT TRANSFER PRICE TO COULTER FOR UP TO TWENTY ONE
SYSTEMS.
IMI agrees to sell to Coulter up to (but no more than) twenty-one (21)
MICRO21
- ----------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
systems, (IMI's then current base Micro21 system at the time of purchase
configured for WBC Diff procedure only), for a discount transfer price of [ * ]
per system, for placement by Coulter only with end user customers located in
foreign countries outside the U.S. This limited discount transfer price shall
apply only to MICRO21 systems, if purchased, for sale and installation outside
the U.S., and shall in any event expire three years from the date of this
Settlement Agreement. However, Coulter shall be under no obligation to purchase
and/or sell any of the twenty-one (21) MICRO21 systems referred to herein.
G.) USE OF NAMES OF COULTER AND IMI. IMI agrees that it will not use
Coulter's name or the fact of Coulter's prior association with IMI as its
exclusive distributor of the MICRO21 system in any of its present or future
marketing. Any sales by Coulter of the MICRO21 systems shall be under the IMI
trademark and trade name.
H.)PUBLIC ANNOUNCEMENTS AND DISCLOSURES. IMI and Coulter shall mutually
agree upon the wording of any public announcement, press release or public
statement relating to this Settlement Agreement, it being understood that
neither party desires disclosure of any of the special limited discount transfer
prices granted by IMI to Coulter as part of this Settlement Agreement, and
provided that IMI must comply with public disclosure obligations required under
securities laws and regulations.
I.) SOFTWARE LICENSE AGREEMENT. IMI and Coulter will promptly finalize and
execute a Software License Agreement, on terms mutually acceptable, providing
for acknowledgment of IMI's sole proprietary interest and right and title to the
software developed and utilized by IMI in connection with the MICRO21 system and
the licensing of such software (at no additional compensation) by IMI to
Coulter solely for purposes of Coulter's resales or lease of MICRO21 systems.
The Software License Agreement will provide for the terms of shrink-wrap
software licenses from IMI, or Coulter pursuant to a sublicense, to the
customers who purchase or lease a MICRO21 system.
3. NON-DISPARAGEMENT. The parties shall refrain from making any written or
oral statement or taking any action, directly or indirectly, which they know or
reasonably should know to be disparaging or negative concerning the other. The
parties also shall refrain from suggesting to anyone that any written or oral
statements be made which they know or reasonably should know to be disparaging
or negative concerning the other, or from urging or influencing any person to
make any such statements. However, this section shall not apply to any judicial,
self regulatory organization, arbitral or administrative proceeding in which IMI
or Coulter is a party or has been subpoenaed to testify under oath.
4. CORPORATE AUTHORIZATION. It is a material and essential condition of
this Agreement that each party represents that their respective undersigned
officer has the requisite corporate
- --------------
* Denotes confidential material omitted and filed separately with
Securities and Exchange Commission.
<PAGE>
authority to enter into this Agreement.
5. LIMITATIONS ON USE AND SCOPE OF SETTLEMENT AGREEMENT. If for any reason
this Agreement does not become final, this entire document and anything said or
done as part of the negotiations leading thereto, shall be null and void and
shall not be used or admitted in any action or proceeding for any purpose
whatsoever. However, it is an express condition of this Agreement that the
provisions of paragraph 6 shall survive the withdrawal, expiration or
termination of this Agreement and shall remain binding.
6. INADMISSIBILITY AND NO COLLATERAL ESTOPPEL EFFECT OF THIS SETTLEMENT
AGREEMENT. Neither this Agreement, whether or not approved by the parties, nor
any document referred to herein nor any action taken to carry out this
Agreement: (a) shall be construed as or deemed to be evidence of any
presumption, inference, concession or admission by either party (or any past or
present officer, director, employee or agent thereof) on any point of fact or
law, or of any liability, fault, omission or other wrongful act whatsoever; (b)
shall be offered or received as evidence in any litigation or proceeding
whatsoever of any presumption, inference, concession or admission of any
liability, fault, omission or wrongdoing by either party (or any past and
present officer, director, employee or agent thereof); or (c) shall be offered
or received as evidence in any action or proceeding whatsoever other than such
proceedings by the parties hereto as may be necessary to enforce the provisions
of this Agreement.
7. ENTIRE AGREEMENT. This Agreement represents the entire understanding as
of the date of execution hereof between the parties with respect to the subject
matter hereof, and no rights, duties or obligations shall be implied except as
provided herein. No modification, alteration, waiver or change in any of the
terms of this Agreement shall be valid or binding upon the parties hereto unless
made in writing and duly executed by each of the parties hereto. The parties
also acknowledge and stipulate that the compromise and settlement which forms
the basis of this Agreement has been arrived at after thorough bargaining and
negotiation, consultation with legal counsel of their own choice, and that this
Agreement represents a fair, final and mutually agreeable compromise of the
matters provided herein. Each party further acknowledges that if it may
hereafter discover facts in addition to or different from those which it now
knows or believes to be true with respect to the matters encompassed by this
Agreement, it is the intention of each party to, and each party does hereby,
fully, finally and forever settle the matters provided by this Agreement,
notwithstanding the discovery or existence of any such additional facts.
8. FURTHER ASSURANCES. In the event other acts or documents are required to
fully effectuate the terms, conditions and obligations described herein, then in
that event, the parties shall perform any lawful additional acts and make,
execute and deliver or cause to be made, executed and delivered (and, where
appropriate, shall cause to be recorded or filed) any and all such further
documents or instruments necessary or desirable to complete or perfect the
terms,
- ---------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
conditions or obligations herein.
9. GOVERNING LAW. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Florida without regard to
conflicts of laws provisions.
10. CONSTRUCTION. Any controversy regarding the construction of this
Agreement shall be decided neutrally, in light of its conciliatory purpose, and
without regard to the events of authorship or negotiation. The determination of
the terms of, and the drafting of, this Agreement has been by mutual agreement
after negotiation, with consideration by, and participation of all parties
hereto and consultation with their counsel.
11. AGREEMENT TO ARBITRATE. The parties hereby knowingly, voluntarily and
intentionally waive any right which they may have to trial by jury in respect to
any litigation based hereon (including, but not limited to, any claims,
counterclaims, crossclaims and third-party claims), or arising out of, under, or
in connection with this Agreement or the parties' performance hereunder
(including, without limitation, any action to rescind or cancel this Agreement
and any claims or defenses asserting that this Agreement was fraudulently
induced or is otherwise void or voidable). In the event of any dispute relating
to or arising out of, under or in connection with this Agreement, Coulter and
IMI shall meet promptly to discuss the matter in good faith. Any dispute that
cannot be resolved in the above fashion within thirty (30) days after the
dispute was raised, shall be submitted to binding arbitration before a panel of
three (3) arbitrators, one of whom shall be chosen by Coulter, another of whom
shall be selected by IMI, and the third of whom shall be chosen by the two
arbitrators already selected. The panel shall convene in Miami, Florida and
shall otherwise observe the Commercial Arbitration Rules of the American
Arbitration Association then in effect. The parties shall take all reasonable
measures to expedite this arbitration process. The decision of the panel shall
be binding and may be enforced by any court having competent jurisdiction
thereof. The parties hereby agree that jurisdiction for enforcement of any
decision of the arbitration panel shall lie in the Circuit Court for Dade County
or in the U.S. District Court for the Southern District in the event the dispute
qualifies for federal jurisdiction.
12. ATTORNEY'S FEES. In the event that arbitration is commenced regarding
this Agreement, the prevailing party shall be entitled to recover attorneys'
fees and costs from the other party, including attorneys' fees and costs
incurred in connection with the enforcement or challenge to any arbitral award.
13. NO DURESS. The parties to this Agreement acknowledge, represent and
warrant that they signed this Agreement only after due consideration and with
the opportunity to consult with counsel of their own choice; that they were not
fraudulently induced, coerced or intimidated to sign this Agreement; and that in
signing this Agreement they have not relied upon any oral or
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* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
written statement or acts made by any person other than those expressly set
forth in this Agreement.
14. SEVERABILITY. Should any part of this Agreement be held unenforceable
or in conflict with the applicable laws or regulations of any jurisdiction, the
invalid or unenforceable part or provision shall be replaced with a provision
which accomplishes, to the extent possible, the original business purpose of
such part or provision in a valid and enforceable manner, and the remainder of
this Agreement shall remain binding upon the parties.
15. NOTICES. Any notices required or permitted by the Agreement or given in
connection herewith, shall be in writing and shall be made by certified mail
return receipt requested or by overnight carrier, addressed to the party to be
notified, at the address listed below. Notices sent in such manner shall be
deemed as received on the next business day after timely mailing (by overnight
carrier) or five (5) business days after date of posting (by certified mail
return receipt requested) to the following addresses:
Coulter Corporation
Attn: Senior Vice President
11800 S.W. 147th Avenue
Miami, Florida 33196-2500
cc: Corporate Counsel (same address which shall not constitute notice)
Intelligent Medical Imaging, Inc.
Attn: Tyce Fitzmorris
4360 North Lake Boulevard, Suite 214
Palm Beach Gardens, Florida 33410
cc: Corporate Counsel (which shall not constitute notice)
Attn: John Igoe, Esq. Peter W. Homer, Esq.
Edwards & Angel Homer & Bonner, P.A.
250 Royal Palm Way 3400 International Place
Palm Beach, Florida 33480-4309 100 S.E. 2nd Street
Miami, Florida 33313
16. COUNTERPARTS. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF this Agreement is made and entered into as of March 27,
1997.
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* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
Coulter Corporation
By: /s/Chris Horwood
----------------
Chris Horwood
Title: Senior Vice President
Intelligent Medical Imaging, Inc.
By: /s/Tyce Fitzmorris
--------------------
Tyce Fitzmorris
Title: President
- -------------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
SCHEDULE I
TO
SETTLEMENT AGREEMENT
INTELLECTUAL PROPERTY
1.0 OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS. IMI represents and warrants
to Coulter that IMI owns all rights relating to the Micro21 system, including,
without limitation the hardware design, including electrical and mechanical,
software, ideas, drawings, source code, data, patents pending, patentable rights
or inventions. All modifications, enhancements, improvements, new
applications or procedures, and ideas, techniques, concepts, or designs for the
Micro21 system and such modifications, enhancements, improvements,
new applications or procedures, including any new products and any new micro21
procedures, shall remain the property of IMI. Coulter will not acquire any
rights to any of the foregoing, by evidence of development efforts or funding or
otherwise, without the prior written agreement of IMI which shall not
unreasonably withheld with respect to proposed development efforts.
1.1 LICENSE OF SOFTWARE AND TECHNOLOGY. IMI will grant Coulter a limited
license to use of the Micro21 system's software and technology and the right to
sub-license such software and technology to end-user's for use with the Micro21
system . This license will be documented in a separate Software License
Agreement acceptable to IMI and Coulter.
1.2 PROTECTION OF INTELLECTUAL PROPERTY RIGHTS. If a third party violates
IMI's intellectual property rights, IMI must resolve the problem at its own cos
and expense.
1.3 INFRINGEMENT CLAIM BY A THIRD PARTY. IMI shall protect, defend and
indemnify Coulter from and against any claim, suit or other action by a third
party alleging that IMI products sold to Coulter infringed such third party's
intellectual property right(s) at IMI's sole cost and expense; except that
Coulter shall bear proportionate responsibility for any infringement caused by
actions or omissions of Coulter.
If Coulter is prevented from selling the Micro21 system because of such
alleged infringement, Coulter shall not have recourse against IMI for
indemnificaton or reimbursement as a result of Coulter no longer selling the
Micro21 system.
1.4 TRADEMARK LICENSE. IMI hereby grants to Coulter the right to use IMI's
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* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
trade name and trademark in connection with the sale of the Micro21 system.
1.5 PROTECTION OF PROPRIETARY INFORMATION. Both Coulter and IMI will
protect the confidentiality of product information, technical know-how and other
information concerning corporate business management which was obtained through
the Distribution Agreement or which is obtained through any continuation of the
non-exclusive relationship between IMI and Coulter after the date of this
Settlement Agreement. Neither party will share any such proprietary information
with any third party.
WARRANTY; INDEMNITY; LIABILITY
2.0 PRODUCT WARRANTY. IMI warrants that all Micro21 systems sold to Coulter
will be free from defects in materials and workmanship at the time of the
installation and for one (1) year thereafter, subject to normal installation and
operation.
2.1 WARRANTY ACTION. If a defect in material or workmanship is found and
IMI receives prompt notice, IMI shall at its cost, settle the defect either by
repairing the defective part at IMI's facility or, at its option, by sending a
replacement part. To the extent permitted by law, IMI assigns any warrants and
indemnities from IMI's component vendors to Coulter. Coulter may convey the
foregoing IMI warranty to the Micro21 system end users. Coulter shall in any
event convey the warranty disclaimers set forth in Section 2.2 and 2.3 to the
Micro21 system end users and to any Coulter third party distributor or
sub-dealer.
2.2 NO OTHER WARRANTIES. The Warranty and the remedy provided for in
section 2.1 above supersede and are in lieu of all other warranties or
conditions, expressed or implied, and all other obligations or liabilities of
IMI, including any warranty of merchantability and fitness for a particular
purpose. Coulter is not authorized to make any warranties on behalf of or in the
name of IMI or to assume for IMI any other liability in connection with the
Micro21 system or procedures. IMI makes no representations or warranties as to
performance of products or as to service to Coulter or to any other person,
except as set forth above.
2.3 LIMITATION ON LIABILITY. With regard to sale or use of the Micro21
system, in no event shall IMI be liable for any indirect, incidental,
consequential, or special damages, including lost profits, sustained or incurred
in connection with the Micro21 system, or caused by defects in the Micro21
system, regardless
- --------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
of the form of action, whether in contract, tort (including, without limitation,
negligence and strict liability), or otherwise, and whether or not such damages
were unforeseen.
2.4 RECIPROCAL LIMITATION ON LIABILITY. Coulter and IMI may be liable to
each other for damages resulting from a breach of the obligations of such party
under Sections 2.0 and 2.1, including reasonable attorney fees and costs;
provided that in no event will Coulter or IMI be liable to the other for any
indirect, incidental, consequential or special damages, including lost profits,
as a result of a breach of such obligations.
2.5 LIABILITY TO THIRD PARTY. If a Micro21 system causes injury to person
or property and such injury results from design or manufacture of the Micro21
system, IMI shall assume the responsibility for such injury. IMI will purchase
and maintain product liability insurance sufficient to cover potential
compensation for injuries to life, health or damage to the property of a third
party in the minimum amount of $5,000,000. IMI will provide Coulter with a
certificate of insurance evidencing such coverage and naming Coulter as
additional insured party as its interest may appear. If injury to person or
property results from the intentional or negligent acts or omissions of Coulter
or its employees, contractors, agents or representatives, Coulter shall assume
the responsibility for such injury. Coulter will purchase and maintain
appropriate liability insurance relating to its activities in product support,
servicing, training, installation, maintenance, sales and other services,
sufficient to cover potential compensation for injuries for life, health or
damage to the property of a third party. Coulter will provide IMI with a
certificate of insurance evidencing such coverage and naming IMI as additional
insured party as its interest may appear.
PRODUCT QUALITY ASSURANCE
3.0 FDA COMPLIANCE REPRESENTATION. The Micro21 system and/or procedures is
hereby guaranteed as of the date of shipment or delivery, to be, on such date,
not adulterated or misbranded within the meaning of the Federal Food Drug and
Cosmetic Act, and not an article which may not, under the provisions of Section
5.10(k) or 515 of the act be introduced into interstate commerce.
3.1 PRODUCT QUALITY CONTROL AND MANAGEMENT. IMI will manufacture, manage
quality, and ship Micro21 systems according to GMPs for medical devices in
effect at the time the Micro21 system was manufactured. In addition, IMI's
manufacturing facility shall be equipped with a quality assurance system,
product
- --------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
standard documentation, product quality standard documentation, documented work
procedure instruction, work operations record file, and other procedures
required under GMP and other applicable regulations. Responsibility for FDA
compliance, if applicable, is with IMI.
3.2 PRODUCT RECALL AND ITS COSTS. If there is a concern for possible loss
or injury to the life, health, and property of a third party due to a cause
attributable to the Micro21 system, users will be informed of the situation
promptly and necessary action will be taken after consultation with IMI. Coulter
shall effect any recall using the same procedures it employs for its own
products. IMI will be responsible for the expense of such action unless the
recall is necessary because of actions or omissions of Coulter, its sub-dealers,
or third party distributors.
- -------------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
SCHEDULE II
COULTER LEASING CORPORATION
MICRO 21 ACTIVE CUSTOMER CONTRACTS
March 27, 1997
Customer & Months & Amount Credit to
START DATE PAYMENTS PAID/THRU IMI (COULTER)
- ---------- ---------- ------------ --------------
Baystate [ * ] [ * ] [ * ]
July 1996 [ * ] Feb 1997
[ * ]
[ * ]
Emory [ * ] [ * ] [ * ]
Oct 1996 [ * ] Mar 1997
[ * ]
[ * ]
Tulane [ * ] [ * ] [ * ]
June 1996 [ * ] Mar 1997
UTMB [ * ] [ * ] [ * ]
June 1996 [ * ] Mar 1997
-------- ------
TOTAL [ * ] [ * ]
Net [ * ] (Amount Paid less Net Credit
to IMI of [ * ])
- ---------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
Exhibit A
JOINT STIPULATION OF DISMISSAL WITH PREJUDICE
AMERICAN ARBITRATION ASSOCIATION
AAA CASE NO. 32 181 00400 96 KMG
IN RE: THE MATTER OF:
Intelligent Medical
Imaging, Inc.,
Claimant,
and
Coulter Corporation,
Respondent.
- --------------------------/
STIPULATION FOR VOLUNTARY DISMISSAL WITH PREJUDICE
Claimant Intelligent Medical Imaging, Inc. ("IMI") and respondent Coulter
Corporation ("Coulter"), by and through their undersigned counsel, hereby
stipulate to the dismissal with prejudice of all claims asserted, or that could
be asserted, by claimant against respondent, and all claims asserted, or that
could be asserted, by respondent against claimant in this proceeding, with
claimant and respondent to pay their respective costs and attorneys fees
incurred herein.
SO STIPULATED:
Attorneys for Claimant Intelligent Medical Imaging, Inc.
- -----------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
HOMER & BONNER, P.A.
Dated: March ____, 1997 By:
PETER W. HOMER
3400 International Place
100 S.E. Second Street
Miami, Florida 33131
(305) 350-5100
EDWARDS & ANGELL
By:
JOHN G. IGOE
GARY A. WOODFIELD
250 Royal Palm Way
Palm Beach, Florida 33480
(561) 833-7700
ATTORNEYS FOR RESPONDENT COULTER CORPORATION
RICHMAN GREER WEIL BRUMBAUGH MIRABITO
& CHRISTENSEN, P.A.
Dated: March ____, 1997 By:
ALAN G. GREER
Miami Center - 10th Floor
201 South Biscayne Boulevard
Miami, Florida 33131
(305)373-4000
- --------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
Exhibit B
RELEASE BY COULTER CORPORATION
RELEASE
KNOW ALL PERSONS BY THESE PRESENTS:
That Coulter Corporation ("first party"), for and in consideration of the
sum of TEN AND/NO DOLLARS ($10.00), or other valuable considerations, including
but not limited to the execution of a general release of and from all liability,
received from or on behalf of Intelligent Medical Imaging, Inc. ("second
party"), the receipt whereof is hereby acknowledged, do
HEREBY remise, release, acquit, satisfy, and forever discharge the said
second party and its agents and attorneys, and past and present officers,
directors and employees, of and from all, and all manner of action and actions,
cause and causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, specialties, covenants, contracts, controversies,
agreements, promises, variances, trespasses, damages, judgments, executions,
claims and demands whatsoever, whether known or unknown, liquidated or
unliquidated, fixed or contingent, both in law or in equity, which said first
party ever had, now have, or which any successor, assign, parent or subsidiary
of said first party, hereafter can, shall or may have, against said second party
or their agents or attorneys, and past and present officers, directors and
employees for, upon or by reason of any matter, cause or thing whatsoever
whether known or unknown, from the beginning of the world to the day of these
presents; provided, however, that such release excludes any and all rights and
obligations of the first party pursuant to that Settlement Agreement between
Intelligent Medical Imaging, Inc. and Coulter Corporation dated as of March 27,
1997. (Wherever used above the terms "first party" and "second party" shall
include singular and plural, heirs, legal representatives, and assigns of
individuals, and the successors, assigns, parents and subsidiaries of
corporations, wherever the context so admits or requires.)
Without limitation to the foregoing this Release specifically operates
to release Intelligent Medical Imaging, Inc. of any and all claims
which Coulter Corporation brought or could have brought in the action
entitled Intelligent Medical Imaging, Inc. vs. Coulter Corporation
before the American Arbitration Association, Case No.:
32-181-00400 96 KMG.
The first party hereby expressly acknowledges, warrants and represents that (i)
this Release was
- ---------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
signed only after due consideration and consultation with its attorney; (ii)
said first party was not fraudulently induced, coerced or intimidated to sign
this release: (iii) no promise, representation, inducement, agreement or
warranty other than those specifically set forth in the contemporaneously
executed Settlement Agreement has been made or relied upon by the parties in
executing this release; and (iv) this Release is the result of a compromise of
disputed claims and shall never at any time for any purpose be considered as an
admission of liability or responsibility of the parties hereby released, who
continue to deny such liability and to disclaim such responsibility. In signing
this Release the first party has not relied upon any oral statements or acts
made by the second party, or their attorneys or agents.
- -------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and seal this ________ day
of __________ , A.D., 1997.
Signed, sealed and delivered
in presence of:
COULTER CORPORATION
_________________ BY: Wayne Barlin
_________________ AS: _________________
STATE OF FLORIDA)
COUNTY OF DADE)
I HEREBY CERTIFY that on this day, before me, an officer duly authorized in
the County aforesaid and in the State aforesaid to take acknowledgments,
personally appeared Wayne Barlin as ___________ of Coulter Corporation, to me
known to be the person described in and who executed the foregoing instrument
and he acknowledged before me that he executed the same.
WITNESS my hand and official seal in the County and State last aforesaid
this ___________ day of___________ , A.D., 1997.
NOTARY PUBLIC
State of Florida
My Commission Expires:
- --------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
Exhibit C
RELEASE BY INTELLIGENT MEDICAL IMAGING, INC.
RELEASE
KNOW ALL PERSONS BY THESE PRESENTS:
That Intelligent Medical Imaging, Inc. ("first party"), for and in
consideration of the sum of TEN AND/NO DOLLARS ($10.00), or other valuable
considerations, including but not limited to the execution of a general release
of and from all liability, received from or on behalf of Coulter Corporation,
("second party"), the receipt whereof is hereby acknowledged, do
HEREBY remise, release, acquit, satisfy, and forever discharge the said
second party and its agents and attorneys, and past and present officers,
directors and employees, of and from all, and all manner of action and actions,
cause and causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, specialties, covenants, contracts, controversies,
agreements, promises, variances, trespasses, damages, judgments, executions,
claims and demands whatsoever, whether known or unknown, liquidated or
unliquidated, fixed or contingent, both in law or in equity, which said first
party ever had, now have, or which any successor, assign, parent or subsidiary
of said first party, hereafter can, shall or may have, against said second party
or their agents or attorneys, and past and present officers, directors and
employees for, upon or by reason of any matter, cause or thing whatsoever
whether known or unknown, from the beginning of the world to the day of these
presents; provided, however, that such release excludes any and all rights and
obligations of the first party pursuant to that Settlement Agreement between
Intelligent Medical Imaging, Inc. and Coulter Corporation dated as of March 27,
1997. (Wherever used above the terms "first party" and "second party" shall
include singular and plural, heirs, legal representatives, and assigns of
individuals, and the successors, assigns, parents and subsidiaries of
corporations, wherever the context so admits or requires.)
Without limitation to the foregoing this Release specifically operates
to release Coulter Corporation of any and all claims which
Intelligent Medical Imaging, Inc. brought or could have brought
in the action entitled Intelligent Medical Imaging, Inc. vs.
Coulter Corporation before the American Arbitration Association,
Case No.: 32-181-00400 96 KMG.
The first party hereby expressly acknowledges, warrants and represents that (i)
this Release was
- --------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
signed only after due consideration and consultation with its attorney; (ii)
said first party was not fraudulently induced, coerced or intimidated to sign
this release: (iii) no promise, representation, inducement, agreement or
warranty other than those specifically set forth in the contemporaneously
executed Settlement Agreement has been made or relied upon by the party in
executing this release; and (iv) this Release is the result of a compromise of
disputed claims and shall never at any time for any purpose be considered as an
admission of liability or responsibility of the parties hereby released, who
continue to deny such liability and to disclaim such responsibility. In signing
this Release the first party have not relied upon any oral statements or acts
made by the second party, or their attorneys or agents.
- ------------
* Denotes confidential material omitted and filed separately with Securities
and Exchange Commission.
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand and seal this ________ day
of __________ , A.D., 1997.
Signed, sealed and delivered
in presence of:
INTELLIGENT MEDICAL IMAGING, INC.
____________________ BY: Tyce Fitzmorris
____________________ AS: President
STATE OF FLORIDA)
COUNTY OF DADE)
I HEREBY CERTIFY that on this day, before me, an officer duly authorized in
the County aforesaid and in the State aforesaid to take acknowledgments,
personally appeared Tyce Fitzmorris as President of Intelligent Medical Imaging,
Inc. to me known to be the person described in and who executed the foregoing
instrument and he acknowledged before me that he executed the same.
WITNESS my hand and official seal in the County and State last aforesaid
this__________ day of __________, A.D., 1997.
NOTARY PUBLIC
State of Florida
My Commission Expires:
EXHIBIT 11.1
INTELLIGENT MEDICAL IMAGING, INC.
COMPUTATION OF PER SHARE LOSSES
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
1996 1995 1994
-------------------------
Net loss before extraordinary
item $(6,932) $(4,161) $(2,416)
Extraordinary gain on
extinguishment of debt 76 174 -
======= ======= =======
Net loss $(6,856) $(3,987) $(2,416)
======= ======= =======
Shares used in calculation of
net loss per share (1):
Weighted average shares of
common stock outstanding 9,937 3,960 3,214
Shares related to Staff
Accounting Bulletin 83:
Stock options and warrants
granted - 468 468
Issuances of common stock - 2,040 2,040
======= ======= =======
Weighted average number of
common shares outstanding 9,937 6,468 5,722
======= ======= =======
Loss per common share:
Before extraordinary item $ (.70) $ (0.64) $ (0.42)
Extraordinary item-gain
on early extinguishment
of debt .01 0.02 -
======= ======= =======
Net loss per common share $ (.69) $ (0.62) $ (0.42)
======= ======= =======
(1) Common stock equivalents (stock options and warrants) are excluded
from the computation as their effect is antidilutive, except that, in
1995 and 1994 pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, common stock options and warrants issued
and common stock sold in the 12 months preceding the initial public
offering have been included in the calculation as if outstanding for
all periods presented using the treasury stock method and the initial
public offering price of $11 per share.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 288,001
<SECURITIES> 24,793,872
<RECEIVABLES> 217,096
<ALLOWANCES> 40,000
<INVENTORY> 3,541,993
<CURRENT-ASSETS> 29,012,814
<PP&E> 2,297,229
<DEPRECIATION> 630,272
<TOTAL-ASSETS> 30,732,023
<CURRENT-LIABILITIES> 3,865,328
<BONDS> 0
0
0
<COMMON> 108,981
<OTHER-SE> 26,757,714
<TOTAL-LIABILITY-AND-EQUITY> 30,732,023
<SALES> 1,460,675
<TOTAL-REVENUES> 1,460,675
<CGS> 1,227,216
<TOTAL-COSTS> 1,227,216
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,669
<INCOME-PRETAX> (6,932,203)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,932,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 76,475
<CHANGES> 0
<NET-INCOME> (6,855,728)
<EPS-PRIMARY> (.69)
<EPS-DILUTED> 0
</TABLE>
