UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1997
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
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 __
AS OF MAY 12, 1997, THERE WERE OUTSTANDING 10,909,355 SHARES OF COMMON STOCK,
PAR VALUE $.01, OF THE REGISTRANT.
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
QUARTER ENDED MARCH 31, 1997
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS 3
BALANCE SHEETS AS OF MARCH 31, 1997 AND 3
DECEMBER 31, 1996
STATEMENTS OF OPERATIONS FOR THE THREE 4
MONTHS ENDED MARCH 31, 1997 AND 1996
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS 5
ENDED MARCH 31, 1997 AND 1996
NOTES TO FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 11
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 13
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
BALANCE SHEETS
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,533,042 $ 288,001
Investments available for sale 19,795,176 24,793,872
Accounts receivable 1,012,886 177,096
Accrued interest receivable 224,267 159,427
Inventory 3,626,806 3,541,993
Prepaid expenses 73,271 52,425
------------ ------------
Total current assets 26,265,448 29,012,814
Property and equipment, net 2,086,809 1,666,957
Other assets 196,387 52,252
------------ ------------
$ 28,548,644 $ 30,732,023
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable 698,942 1,062,979
Accrued salaries and benefits 302,320 319,217
Other accrued liabilities 57,702 421,132
Contingent settlement liability 2,062,000 2,062,000
Total current liabilities 3,120,964 3,865,328
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Preferred stock, $.01 par value-authorized 2,000,000 shares;
no shares issued or outstanding 0 0
Common stock, $.01 par value-authorized 30,000,000 shares;
issued and outstanding, 10,908,054 shares at March 31,
1997 and 10,898,054 at December 31, 1996 109,081 108,981
Additional paid-in capital 42,441,306 42,425,306
Deferred compensation (298,191) (321,504)
Net unrealized investment gains 48,102 58,027
Accumulated deficit (16,872,618) (15,404,115)
------------ ------------
Total stockholders' equity 25,427,680 26,866,695
------------ ------------
$ 28,548,644 $ 30,732,023
</TABLE>
See accompanying notes
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31, MARCH 31,
1997 1996
--------------------------------
Sales $841,705 $2,176,203
Cost of sales 406,243 1,224,206
--------------------------------
435,462 951,997
Operating expenses:
Selling, general and 1,494,638 544,339
administrative
Research and development 761,184 252,677
--------------------------------
Total operating expenses 2,210,822 797,016
--------------------------------
Income (loss) from operations (1,775,360) 154,981
Other income (expense):
Other 0 76,475
Investment and interest income 306,857 17,032
Interest expense 0 (104,371)
--------------------------------
Other income (expense) 306,857 (10,864)
--------------------------------
Net income (loss) ($1,468,503) $144,117
Income (loss) per common share ($0.13) $0.02
Weighted average common
shares outstanding 10,902,766 9,231,906
--------------------------------
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) (1,468,503) $ 144,117
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 124,266 51,649
Services exchanged for common stock 23,313 9,914
Changes in operating assets and liabilities
Accounts receivable (835,790) (1,102,419)
Inventory (377,204) 87,565
Prepaid expenses and accrued interest
receivable (85,686) (16,191)
Other assets (144,135) 72,846
Accounts payable (364,037) (497,274)
Accrued salaries and benefits (16,897) (40,646)
Accrued interest payable 0 5,757
Other accrued liabilities (363,430) 334,613
Due to related party 0 8,984
Customer advance 0 (150,000)
------------ ------------
Net cash used in operating activities (3,508,104) (1,091,085)
INVESTING ACTIVITIES
Purchases of property and equipment (251,726) (74,016)
Purchase of investments available for sale 4,998,771 0
------------ ------------
Net cash used in investing activities 4,737,045 (74,016)
FINANCING ACTIVITIES
Proceeds from long-term notes payable 0 60,000
Repayment of long-term notes payable and
capitalized lease obligations 0 (159,395)
Advance from factor 0 1,571,035
Repayments to factor 0 (1,571,035)
Proceeds from issuance of common stock 16,099 34,424,043
------------ ------------
Net cash provided by financing activities 16,099 34,324,648
Net increase (decrease) in cash and cash
equivalents 1,245,041 33,159,547
Cash and cash equivalents at beginning of period 288,001 75,821
------------ ------------
Cash and cash equivalents at end of period 1,533,042 $ 33,235,368
SUPPLEMENTAL INFORMATION
Interest paid 0 $ 128,456
Notes payable and notes payable to related
parties converted to common stock 0 $ 300,000
Inventory transferred to property and equipment 292,391 $ 86,000
</TABLE>
See accompanying notes
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. These
financial statements, footnotes and discussions should be read in conjunction
with audited financial statements and related footnotes included in Intelligent
Medical Imaging, Inc.'s ("IMI") annual report on Form 10-K for the year ended
December 31, 1996. Operating results for the three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997.
2. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale consist of asset backed securities, corporate
bonds and U.S. Government agency bonds. Management determines the proper
classifications of investments in obligations with fixed maturities and
marketable equity securities at the time of purchase and reevaluates such
designations as of each balance sheet date. At March 31, 1997, all securities
were designated as available for sale. Accordingly, these securities are stated
at fair market value, with unrealized gains and losses reported as a separate
component of stockholders' equity. Realized gains and losses on sales of
investments, as determined on a specific identification basis, are included in
the statements of operations.
Investment securities available for sale at March 31, 1997, are summarized as
follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1997
Unrealized Market Unrealized Market
Cost Gains (Losses) Value Cost Gains Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,526,832 $ 0 $1,526,832 $5,389,564 $ 2,950 $5,392,514
U.S. Government agency
bonds and mortgages $ 7,999,026 $28,025 $8,027,051 $1,525,683 $18,169 $7,543,852
U.S. Corporate bonds and
asset backed securities $11,748,048 $20,077 $11,768,124 $11,820,598 $36,908 $11,857,506
----------- ------- ----------- ----------- ------- -----------
Total investments available
for sale $21,273,906 $48,101 $21,322,007 $24,735,845 $58,027 $24,793,872
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
MARCH 31, DECEMBER 31,
1997 1996
---------------- -----------------
Furniture, fixtures and office
equipment $548,283 $461,690
Computer and development
equipment 2,293,064 1,835,539
---------------- -----------------
2,841,347 2,297,229
Accumulated depreciation (754,538) (630,272)
---------------- -----------------
$2,086,809 $1,666,957
<PAGE>
4. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE, which is required to be adopted in December 1997. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. Statement 128 would not have an impact on the
quarters ended March 31, 1997 and 1996.
5. COMMITMENTS AND CONTINGENCIES
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
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 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.
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 18, and service personnel have increased from 3 to 10 from October 1, 1996 to
March 31, 1997.
The Company settled its litigation with International Remote Imaging Systems,
Inc. ("IRIS") as of March 1, 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.
As of March 1, 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 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
<PAGE>
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.
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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company has developed and is marketing the MICRO21/Trademark/ 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 Coulter Agreement remained in effect. The parties
submitted the dispute to arbitration, but settled the 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 incurred 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.
RESULTS OF OPERATIONS
Product sales were $841,705 for the first quarter of 1997 compared with
$2,176,203 for the first quarter of 1996, a decrease of $1,334,498. The decrease
in product sales for the quarter was primarily due to the dispute with Coulter,
termination of the Coulter Agreement and the time expended in building the
Company's sales and marketing teams for transition of sales and marketing
responsibilities from Coulter to the Company. The MICRO21 is now sold directly
to the customer by the Company's sales force and is no longer sold exclusively
through Coulter.
Cost of sales was $406,243 for the first quarter of 1997 compared with
$1,224,206 for the first quarter of 1996, a decrease of $817,963. The decrease
in cost of sales for the quarter was primarily due a reduction in sales because
of the termination of the Coulter Agreement.
Selling, general and administrative expenses were $1,494,638 for the first
quarter of 1997 compared with $544,339 for the first quarter of 1996, an
increase of $950,299. Selling, general and administrative expenses have
continued to increase due to the continued growth of the Company. The need for
additional personnel, following the Company's termination of the Coulter
Agreement, will continue to increase.
Research and development expenses were $716,185 for the first quarter of 1997
compared with $252,677 for the first quarter of 1996, an increase of $463,507.
The increase was primarily due to the Company's development of new procedures,
upgrades and new products for the MICRO21 system. Research and development
expenses are expected to increase as new procedures, technologies and products
are developed.
Other income was $0 for the first quarter of 1997 compared with $76,475 for the
first quarter of 1996.
The decrease was due to a gain recognized in connection with a discount
negotiated on a note payable to a third party.
<PAGE>
Interest income was $306,857 for the first quarter of 1997 compared with $17,032
for the first quarter of 1996, an increase of $289,825. The increase was
primarily due to interest income earned on the proceeds from the Company's
initial public offering which closed on March 27, 1996.
Interest expense was $0 for the first quarter of 1997 compared with $104,371 for
the first quarter of 1996, a decrease of $104,371. The Company had no notes
payable outstanding during the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Settlement Agreement provides that the Company will pay to Coulter
approximately $4,600,000. $1,800,000 was paid on April 28, 1997 and the
balance owed to Coulter is expected to be paid within 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 and of maturities no longer than two years. These
investments are classified as available for sale.
Cash and cash equivalents consist of cash and liquid investments with a maturity
of 90 days or less. Investments available for sale consist of 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 a separate component of shareholders' equity.
For the three months ended March 31, 1997, net cash used in operating activities
of $3,508,103 was primarily due to the Company's operating loss due to an
increase in overall expenses because of the increase in personnel.
For three months ended March 31, 1997, net cash provided by investing activities
of $4,737,044 was primarily the result of sales of investments available for
sale, partially offset by purchases of development equipment and leasehold
improvements to the manufacturing facility.
For the three months ended March 31, 1997, net cash provided by financing
activities of $16,100 was primarily the result of proceeds from the exercise of
common stock options.
At March 31, 1997 the Company had a net operating loss ("NOL") carryforward of
approximately $11,000,000 available for income tax purposes that expire 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 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.
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company cautions
that a number of important factors could cause the Company's actual results for
1997 and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
<PAGE>
Forward-looking statements involve a number of risks and uncertainties
including, but not limited to, the Company's history of operating losses;
uncertainty of profitability and uncertainty of widespread market acceptance for
the MICRO21 system; uncertainty, risks and costs associated with the Company's
need to expand and enhance its own sales and marketing organization to replace
Coulter; the anticipated loss of revenue and earnings during the period of
transition of sales, marketing and service responsibilities from Coulter to the
Company; the delays and impediments to customer acceptance associated with
industry and market perception of the historical dispute between the Company and
Coulter; 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; the inability of the Company to enter into an
alternative exclusive distribution arrangement due to certain rights granted to
Coulter under the Coulter Settlement Agreement; potential delays and technical
problems in the development and commercial release of new products and
procedures such as the proposed MICRO21 Microscopic Workstation System; the
expense of product development and the related delay and uncertainty as to
receipt of any requisite FDA clearance or other governmental clearance or
approval for new products and new procedures for use on the MICRO21 system; the
uncertainty of profitability and sustainability of revenues and profitability;
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; 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; the Company's limited manufacturing experience; fluctuations in
operating results; the Company's ability to its protect trade secrets and
proprietary technology; competition and technical change in the industry in
which the Company is engaged; product liability and the ability of the Company
to obtain adequate insurance for product liability; uncertainty of third party
reimbursement and health care reform policies; and government regulation. The
Company cannot assure that it will be able to anticipate or respond timely to
any of the factors, or changes in any of the factors, listed above, which could
adversely affect the operating results in one or more fiscal quarters. Results
of operations in any past period should not be considered indicative of the
results to be expected for future periods. Fluctuations in operating results may
also result in fluctuations in the price of the Company's common stock.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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 "Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SETTLEMENT WITH INTERNATIONAL REMOTE IMAGING SYSTEMS, INC. The Company settled
its litigation with International Remote Imaging Systems, Inc. ("IRIS") as of
March 1, 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.
As of March 1, 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 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
<PAGE>
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
LIST OF EXHIBITS DESCRIPTION
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTELLIGENT MEDICAL IMAGING, INC.
Date: MAY 15, 1997 BY: /s/ TYCE M. FITZMORRIS
----------------------
Tyce M. Fitzmorris, President and Chief
Executive Officer
Date: MAY 15, 1997 BY: /s/ GENE M. COCHRAN
-------------------
Gene M. Cochran, Chief Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBITS DESCRIPTION
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
EXHIBIT 11
INTELLIGENT MEDICAL IMAGING, INC.
COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 1996
-------------------------------
Net income (loss) ($1,478,503) $144,117
Weighted average common shares outstanding 10,902,766 7,313,380
Shares related to Staff Accounting Bulletin 83:
Stock options and warrants granted
Issuance of common stock 1,918,526
-------------------------------
Average common shares, outstanding 10,902,766 9,231,906
===============================
Net income (loss) per common share ($0.13) $0.02
===============================
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,533,042
<SECURITIES> 19,795,176
<RECEIVABLES> 1,012,885
<ALLOWANCES> 0
<INVENTORY> 3,626,806
<CURRENT-ASSETS> 26,265,448
<PP&E> 2,841,347
<DEPRECIATION> (754,538)
<TOTAL-ASSETS> 28,548,644
<CURRENT-LIABILITIES> 3,120,964
<BONDS> 0
0
0
<COMMON> 109,081
<OTHER-SE> 25,318,599
<TOTAL-LIABILITY-AND-EQUITY> 28,548,644
<SALES> 841,705
<TOTAL-REVENUES> 841,705
<CGS> 406,243
<TOTAL-COSTS> 406,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,468,503)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,468,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,468,503)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> 0
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