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, 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
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 FILERS 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. [ ]
<PAGE>
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT, BASED UPON THE CLOSING PRICE OF SUCH STOCK ON MARCH 23, 1998, AS
REPORTED BY NASDAQ, WAS APPROXIMATELY $23,776,753. 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 23,
1998, WAS 11,031,562.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE REGISTRANT'S 1998 ANNUAL MEETING OF
SHAREHOLDERS (TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OR
BEFORE APRIL 30, 1998) ARE INCORPORATED BY REFERENCE INTO PART III HEREOF.
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1997
Part I
Item 1. Business...............................................................1
A. General......................................................1
B. Financial Information about Industry Segments................2
C. Description of Business......................................2
Item 2. Properties.............................................................6
Item 3. Legal Proceedings......................................................6
Item 4. Submission of Matters to a Vote of Security Holders....................7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................9
Item 6. Selected Financial Data...............................................10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................12
A. Overview....................................................12
B. Results of Operations.......................................13
C. Liquidity and Capital Resources.............................13
D. Outlook.....................................................14
E. Other Factors Relating to Forward-Looking Statements........16
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-7
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................ 17
Part III
Item 10. Directors and Executive Officers of the Registrant...................17
Item 11. Executive Compensation.............................................. 17
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 17
Item 13. Certain Relationships and Related Transactions.......................17
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K...... 18
<PAGE>
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.(TM) ("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, 1997, December 31, 1996, or December 31, 1995, unless otherwise indicated.
A. GENERAL
IMI has developed and is marketing the MICRO21(R) 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.(TM) ("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
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.
The 26 Coulter units and the four customer contract receivables were returned to
the Company in exchange for total payments to Coulter of approximately
$3,800,000 in 1997, after giving effect to offsets for damage to the returned
units and Coulter's costs incurred in connection with the sale and marketing of
the MICRO21 system. As of December 31, 1997, Coulter had purchased 12 MICRO21s
at discounted prices and the four (4) MICRO21s for placement in Japan. See
"Description of Business - Settlement of Dispute with Coulter Corporation; Sales
and Distribution;" "Item 3. Legal Proceedings," and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company began to build up internal sales and service organizations following
termination of the Coulter Agreement. Since October 1, 1996, the Company's
sales, marketing and service personnel have increased from 8 to 49 through March
31, 1998. IMI's marketing group has developed a comprehensive plan that includes
lead fulfillment, targeted advertising and an aggressive trade show schedule for
both domestic and international markets. In the US, the Company has established
three regions comprising nine territories and employs a national accounts
manager. Each US territory is assigned a team consisting of a sales
representative, a technical application specialist and a regional manager. The
Company's domestic service organization consists of four regional field service
offices and centralized customer support personnel providing 24-hour coverage.
In July 1997, the Company opened an office in the Netherlands to coordinate
sales and service efforts in European markets. In January 1998, the Company
hired a consultant to coordinate distributors in other international market
areas. IMI has field personnel located in Europe, and certified distributors are
service representatives in international markets other than Europe.
During the fourth quarter of 1997, the Company began to offer a short-term
rental program which provides for monthly or annual rentals of the MICRO21
system. The Company believes that this program will augment its sales and
long-term lease programs by giving potential customers the ability to fund a
MICRO21 with operating funds, thereby overcoming potential cost barriers
associated with limited or non-existent capital expenditure funds. Expansion of
the short-term rental program may require that the Company secure additional
financing.
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(R) 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.
While the Company intends to apply the MICRO21 system to a variety of diagnostic
tests, the Company implemented the white blood cell ("WBC") differential,
including the WBC morphology, the red blood cell ("RBC") morphology and the
platelet estimate as the first procedure. The WBC differential 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
differential. 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 differentials 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. IMI received FDA 510(k)
clearance in December 1997 to market the WBC estimate procedure and has added it
to the WBC differential package. The WBC estimate is provided as a back-up to
WBC counts provided by hematology analyzers.
In May 1996, the Company received FDA 510(k) clearances for two additional
commonly performed microscope procedures: reticulocyte count and anti-nuclear
antibodies ("ANAs"). The reticulocyte 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.
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.
In October 1997, IMI received FDA 510(k) clearance for the cerebrospinal fluid
white blood cell differential, which is the examination of white blood cells in
spinal fluid and is used to diagnose inflammation and infection of the central
nervous system, including meningitis. It is currently in final testing for
anticipated sales launch in 1998.
Currently under development is a procedure for urine sediment analysis, which is
broadly used to screen urinary tract and renal functions and to establish
diagnosis of multiple kidney and urinary tract diseases. FDA 510(k) submission
for this procedure is anticipated by year-end 1998.
IMI has also entered into an agreement with Johns Hopkins University (November
1996), pursuant to which IMI and Johns Hopkins University are collaborating 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 MICRO21 now also supports animal applications for use in veterinary,
pharmaceutical and other medical research.
The Company believes that, similar to the automation of the WBC differential,
the automation of 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 additional procedures or
ultimately obtain FDA clearance for the MICRO21 system for such new procedures.
PRODUCT DEVELOPMENT
NeuralVision is the Company's internally-developed, proprietary software
platform, incorporating neural network, image processing and hardware operation
programs. 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.
The goal of IMI's product development is to allow the MICRO21 to be used in
conjunction with other laboratory equipment automatically and eliminate the need
for much of the time-consuming and potentially dangerous handling of samples.
New products under development include:
Hematology Slide Master, an automated slide maker/stainer which will
prepare patient samples for several hematological microscopy procedures for
either MICRO21 or manual examination;
UriSlide Master, an automated slide maker which will prepare urine samples
for examination by a technologist or by the MICRO21; and
CoreLab, IMI's total hematology solution. It will be designed to be
integrated with many hematology analyzers on the market today and will
automatically respond to flags for full sample examination, prepare slides
as required and perform the search and display functions using the MICRO21
system.
The Company spent approximately $5,022,670, $2,113,565 and $1,793,769 on
research and development in 1997, 1996 and 1995, respectively.
MANUFACTURING
The Company's manufacturing process consists of final assembly and testing of
major components and is performed at the Company's 20,800 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 differentials, reticulocyte counts, ANA and nDNA screens and other
procedures to determine whether the system's location, display,
pre-classification and other functions are performing to specification.
In September 1997, IMI obtained Quality Management Institute ("QMI")
registration to ISO 9001 for its quality management system. Such registration
means IMI's design, development, manufacturing, installation and servicing
processes have successfully completed a quality audit by QMI, a worldwide
accredited auditor. In November 1996, IMI obtained the necessary safety,
emissions and immunity certification for the MICRO21 to qualify for CE Mark
certification. Although the MICRO21 did not previously fall under a particular
CE directive, a new directive is expected to be adopted (the European In Vitro
Diagnostic Directive). Based on drafts of the new directive made available, IMI
believes the MICRO21 will comply with the new directive.
SETTLEMENT OF DISPUTE WITH COULTER CORPORATION; SALES AND DISTRIBUTION
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 transfer price and Coulter
agreed to purchase four (4) MICRO21 systems promptly for placement in Japan.
The 26 Coulter units and the four customer contract receivables were returned to
the Company in exchange for total payments to Coulter of approximately
$3,800,000 in 1997, after giving effect to offsets for damage to the returned
units and Coulter's costs incurred in connection with the sale and marketing of
the MICRO21 system. As of December 31, 1997, Coulter had purchased 12 MICRO21s
at discounted prices and the four (4) MICRO21s for placement in Japan. See
"Description of Business - Settlement of Dispute with Coulter Corporation; Sales
and Distribution; " "Item 3. Legal Proceedings," and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 established its internal
sales, marketing and service teams. 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 has positioned the Company to achieve better results than the Company
realized or could have achieved by continuing an exclusive distribution
relationship.
The Company began to build up internal sales and service organizations following
termination of the Coulter Agreement. Since October 1, 1996, the Company's
sales, marketing and service personnel have increased from 8 to 49 through March
31, 1998. IMI's marketing group has developed a comprehensive plan that includes
lead fulfillment, targeted advertising and an aggressive trade show schedule for
both domestic and international markets. In the US, the Company has established
three sales regions comprising nine sales territories and employs a national
accounts manager. Each US territory is assigned a team consisting of a sales
representative, a technical application specialist and a regional manager. The
Company's domestic service organization consists of four regional field service
offices and centralized customer support personnel providing 24-hour coverage.
In July 1997, the Company opened an office in the Netherlands to coordinate
sales and service efforts in European markets. In January 1998, the Company
hired a consultant to coordinate distributors in other international market
areas. IMI has field personnel located in Europe, and certified distributors are
service representatives in international markets other than Europe.
During the fourth quarter of 1997, the Company began to offer a short-term
rental program which provides for monthly or annual rentals of the MICRO21
system. The Company believes that this program will augment its sales and
long-term lease programs by giving potential customers the ability to fund a
MICRO21 with operating funds, thereby overcoming potential cost barriers
associated with limited or non-existent capital expenditure funds. Expansion of
the short-term rental program may require that the Company secure additional
financing.
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
differential, the MICRO21 system competes indirectly with flow cytometers
performing complete blood counts and partial WBC differentials, including flow
cytometers manufactured and sold by Coulter Corporation, Abbott Laboratories and
Sysmex as well as with older image-based systems.
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 differential 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 1996, IMI received FDA 510(k) clearance for two additional commonly
performed microscope procedures: reticulocyte count and anti-nuclear antibodies
(ANAs). The reticulocyte 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 systemic lupus erythematosus
(SLE), scleroderma and Sjogrens syndrome. 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 SLE and other
connective tissue disease. In October 1997, the Company received FDA 510(k)
clearance for cerebrospinal fluid (CSF) WBC differential procedure. The CSF
procedure automates cytological analysis of white blood cells in human
cerebrospinal fluid and is used to diagnose inflammation and infection of the
central nervous system, including meningitis. In December 1997, the Company
received FDA 510(k) clearance for the WBC estimate procedure which is integrated
into the WBC differential procedure. The WBC estimate provides confirmation of
white blood cell count figures provided by hematology analyzers.
EMPLOYEES
As of March 15, 1998, the Company had 120 full-time employees and seven
part-time employees. The Company also has consulting arrangements with three
additional persons. Of its total workforce (including the three consultants), 49
persons are engaged in research and development activities, 26 persons are
engaged in manufacturing and quality assurance, 31 are engaged in sales and
marketing, 18 are engaged in customer support and six 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.
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, 1999 and May 31, 1999, respectively. In January 1997, the
Company moved its manufacturing division from 1006 W. 15th Street, Riviera
Beach, Florida to 20,800 square feet of leased office and manufacturing space
located at 3960 RCA Boulevard, Palm Beach Gardens, Florida. The lease for the
manufacturing facility expires April 30, 1999.
ITEM 3. LEGAL PROCEEDINGS
SETTLEMENT WITH COULTER CORPORATION. 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. On
March 27, 1997, the parties entered into a settlement agreement (the "Settlement
Agreement"). 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 provided 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 26 Coulter units and the four customer contract receivables were returned to
the Company in exchange for total payments to Coulter of approximately
$3,800,000 in 1997, after giving effect to offsets for damage to the returned
units and Coulter's costs incurred in connection with the sale and marketing of
the MICRO21 system. As of December 31, 1997, Coulter had purchased 12 MICRO21s
at discounted prices and the four (4) MICRO21 systems for placement in Japan.
See "Description of Business - Relationship with Coulter Corporation; Sales and
Distribution," "Item 3. Legal Proceedings," and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DIASYS CORPORATION. In November 1996, IMI and DiaSys Corporation ("DiaSys")
entered into a Product Integration Agreement (the "DiaSys Agreement"). DiaSys is
a publicly-held corporation (Nasdaq, DIYS) based in Waterbury, Connecticut.
DiaSys designs, develops, manufactures and distributes workstation products
which prepare fluid samples. Under the DiaSys Agreement, IMI was 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. The DiaSys Agreement
was terminated in July 1997, when IMI rejected products delivered by DiaSys and
returned them. The DiaSys Agreement provides for mandatory and binding
arbitration of disputes between the parties. On January 12, 1998, DiaSys filed a
demand with the American Arbitration Association for arbitration of the dispute.
The arbitration (In re: The Matter of DiaSys Corporation v. Intelligent Medical
Imaging, Inc., AAA No. 32-117-0001798) is to be held in Miami, Florida. In its
demand for arbitration, DiaSys seeks damages in excess of $1,000,000 for IMI's
alleged breach of the DiaSys Agreement by failing to pay for products delivered
and failing to order and pay for additional products under the DiaSys Agreement.
DiaSys also seeks damages for IMI's alleged defamation of DiaSys and its
products. IMI filed its response on February 9, 1998. In its response, IMI
denies that it breached the DiaSys Agreement or defamed DiaSys, and states that
it properly rejected products supplied by DiaSys due to non-conformance. IMI
also seeks damages for libelous statements made by DiaSys in a July 2, 1997
press release issued by DiaSys, and for delays in IMI's product development
efforts caused by DiaSys's breach of the DiaSys Agreement. The Company believes
that DiaSys's claims are without merit, and that the Company will prevail in the
arbitration. However, there can be no assurance that the Company will prevail in
the arbitration or in its counterclaim asserted against DiaSys, or that any
resolution of the dispute, which is expected to occur within one year, will not
have a material adverse effect on the Company's liquidity, financial condition
and results of operations. The Company and DiaSys are presently in the process
of selecting the panel of arbitrators and no hearing date for the arbitration
has been scheduled.
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 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
expire 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.
<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 and 1997, as
reported by the Wall Street Journal.
1997 High Low
4th Quarter $5.25 $3.00
3rd Quarter $7.47 $4.13
2nd Quarter $6.38 $4.00
1st Quarter $8.25 $5.25
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 23, 1998, there were 171 registered shareholders of record of the
Company's common stock, excluding shareholders whose shares are held in nominee
or street name by brokers.
The Company has not paid in the past, and does not anticipate paying in the
foreseeable 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 is
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.
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
STATEMENTS OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
Product sales, net $106,000 $118,173 $1,392,883 $1,460,675 $3,770,489
Cost of sales -- -- 1,135,499 1,227,216 3,328,394
--- --- ---------- ---------- ---------
Gross margin 106,000 118,173 257,384 233,459 442,095
Operating expenses:
Selling, general and
administrative 238,468 1,215,686 2,462,553 3,960,625 8,183,800
Research and development 195,070 1,101,463 1,793,769 2,113,565 5,022,670
Provision for contract
settlement -- -- -- 2,062,000 --
--- --- --- ---------- --
Total operating expenses 433,538 2,317,149 4,256,322 8,136,190 13,206,470
-------- ---------- ---------- ---------- ----------
Loss from operations (327,538) (2,198,976) (3,998,938) (7,902,731) (12,764,375)
Other income (expense):
Interest income -- -- 13,046 1,112,227 1,035,210
Interest expense (151,332) (216,879) (175,074) (141,699) --
--------- --------- --------- --------- --
Other income (expense) (151,332) (216,879) (162,028) 970,528 1,035,210
--------- --------- --------- -------- ---------
Loss before extraordinary item (478,870) (2,415,855) (4,160,966) (6,932,203) (11,729,165)
Extraordinary item--gain on early
extinguishment of debt -- -- 173,575 76,475 --
--- --- -------- ------- --
Net loss ($478,870) ($2,415,855) ($3,987,391) ($6,855,728) ($11,729,165)
========== ============ ============ ============ =============
Loss per common share - basic and diluted (1):
Before extraordinary item ($0.17) ($0.75) ($0.73) ($0.70) ($1.07)
Extraordinary item--gain on early
extinguishment of debt -- -- -- -- --
--- --- --- --- --
Net loss per common share - basic and diluted ($0.17) ($0.75) ($0.70) ($0.69) ($1.07)
======= ======= ======= ======= =======
Weighted average number of common
shares outstanding (1)
2,823,804 3,213,678 5,720,640 9,937,440 10,952,330
========= ========= ========= ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA
Cash and investments available-
<S> <C> <C> <C> <C> <C>
for-sale $34,142 $1,494,481 $75,821 $25,081,873 $7,083,173
Total assets 139,746 2,406,769 2,705,330 30,732,023 17,406,409
Total debt and noncurrent
obligations 1,291,118 3,860,379 2,182,160 -- --
Accumulated deficit (2,145,141) (4,560,996) (8,548,387) (15,346,088) (27,102,275)
Total shareholders' equity
(net capital deficiency) (1,493,801) (2,480,816) (1,225,022) 26,866,695 15,317,345
(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.
</TABLE>
<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-practice 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.
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 transfer price and Coulter
agreed to purchase four (4) MICRO21 systems promptly for placement in Japan.
The 26 Coulter units and the four customer contract receivables were returned to
the Company in exchange for total payments to Coulter of approximately
$3,800,000 in 1997, after giving effect to offsets for damage to the returned
units and Coulter's costs incurred in connection with the sale and marketing of
the MICRO21 system. As of December 31, 1997, Coulter had purchased 12 MICRO21s
at discounted prices and the four (4) MICRO21 systems for placement in Japan.
See "Description of Business - Settlement of Dispute with Coulter Corporation;
Sales and Distribution," "Item 3. Legal Proceedings," and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company began to build up internal sales and service organizations following
termination of the Coulter Agreement. Since October 1, 1996, the Company's
sales, marketing and service personnel have increased from 8 to 49 through March
31, 1998. IMI's marketing group has developed a comprehensive plan that includes
lead fulfillment, targeted advertising and an aggressive trade show schedule for
both domestic and international markets. In the US, the Company has established
three regions comprising nine territories and employs a national accounts
manager. Each US territory is assigned a team consisting of a sales
representative, a technical application specialist and a regional manager. The
Company's domestic service organization consists of four regional field service
offices and centralized customer support personnel providing 24-hour coverage.
In July 1997, the Company opened an office in the Netherlands to coordinate
sales and service efforts in European markets. In January 1998, the Company
hired a consultant to coordinate distributors in other international market
areas. IMI has field personnel located in Europe, and certified distributors are
service representatives in international markets other than Europe.
During the fourth quarter of 1997, the Company began to offer a short-term
rental program which provides for monthly or annual rentals of the MICRO21
system. The Company believes that this program will augment its sales and
long-term lease programs by giving potential customers the ability to fund a
MICRO21 with operating funds, thereby, overcoming potential cost barriers
associated with limited or non-existent capital expenditure funds. Expansion of
the short-term rental program may require that the Company secure additional
financing.
<PAGE>
B. RESULTS OF OPERATIONS
Product sales for 1997 of $3,770,489 increased 158 percent over 1996, from
$1,460,675. This compares with revenue in 1995 of $1,392,883. The increase in
product sales for 1997 was primarily due to sales of MICRO21 systems to
hospitals and laboratories. 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 1995 consisted of sales to Coulter Corporation.
Cost of sales for 1997 of $3,328,394 increased 172 percent over 1996, from
$1,227,216. This compares with cost of sales in 1995 of $1,135,499. The increase
in costs of sales for 1997 is attributable to increased sales and the write down
on the MICRO21 systems that remain in inventory. The increase in cost of sales
for 1996 was primarily due to sales of MICRO21 systems and peripheral equipment
to Coulter.
Selling, general and administrative expenses were $8,183,800 in 1997, compared
with $3,960,625 in 1996, an increase of 107 percent. This compares with a 1996
increase of 61 percent over 1995 when selling, general and administrative
expenses were $2,462,553. Selling, general and administrative expenses increased
in 1997 primarily due to the continued growth of the Company and the need for
additional personnel following the Company's termination of the Coulter
Agreement. In 1997, selling, general and administrative expenses included
consulting fees of $196,728 and the amortization of deferred compensation of
$93,252 associated with common stock issued to a member of the Board of
Directors. Selling, general and administrative expenses should stabilize now
that the sales and service organizations are established.
Research and development expenses were $5,022,670 in 1997, a 138 percent
increase over $2,113,565 in 1996. This compares with a 1996 increase of 18
percent over 1995 when research and development expenses were $1,793,769.
Research and development expenses increased in 1997 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 1998 as new procedures, technologies and products are developed.
In 1996, the Company recorded a provision for contract settlement of $2,062,000.
In 1997, under the Settlement Agreement, the Company paid Coulter approximately
$1,800,000 fulfilling this obligation, which represented the return of 26 of
Coulter's used inventory of MICRO21 systems and certain equipment; the
assignment to the Company of four (4) of Coulter's customer contracts;
reimbursement to Coulter for certain costs and expenses incurred in its sale and
marketing of the MICRO21 systems; and an offset in the Company's favor for
damage to units returned by Coulter. See "Item 1. Business - Description of
Business - Settlement of Dispute with Coulter Corporation; Sales and
Distribution" and "Item 3. Legal Proceedings."
Interest income was $1,035,210 in 1997, a seven percent decrease from $1,112,227
in 1996. The decrease in 1997 was primarily due to a decrease in investment
funds. Investments decreased because the funds were used for operations.
Interest income in 1995 was $13,046.
Interest expense was $0 in 1997 and $141,699 in 1996, a decrease of $141,699.
Interest expense was $175,074 in 1995. In 1997, the decrease in interest expense
was due to the Company's lack of debt.
C. LIQUIDITY AND CAPITAL RESOURCES
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 a separate component of shareholders' equity.
During 1997, 1996 and 1995, the Company had cash flow used in operations of
$17,126,837, $6,966,570 and $4,410,327, respectively. The decrease in cash flow
was primarily due to the net loss from operations.
For the year ended December 31, 1997, net cash provided by investing activities
of $17,578,415 was primarily the result of sales of investments
available-for-sale for use in operations. In 1996 and 1995, the Company used
cash of $25,501,141 and $224,907, respectively, to purchase investments
available-for-sale and property and equipment.
For the year ended December 31, 1997, net cash provided by financing activities
of $113,585 was primarily the result of proceeds from the exercise of common
stock options. During 1996 and 1995, the Company had cash provided by financing
activity of $32,679,891 and $3,216,574, respectively, primarily due to proceeds
from the sale of common stock from the Company's initial public offering and
convertible notes in private placements.
At December 31, 1997, the Company had a net operating loss (NOL) carryforward of
approximately $22,707,000 available for income tax purposes that expires through
the year 2012. 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 $5,400,000 in 1998 in research and
development to develop new products, procedures and technology.
The Company's 1998 operating plan contemplates focusing activities on expanding
sales revenue through the efforts of its internal sales, marketing and service
force. In addition, during the third quarter of 1997 the Company established a
division in Europe to further expand its marketing efforts and during the fourth
quarter of 1997 the Company began to offer a short-term rental program. The
Company's plan also contemplates implementing cost controls, seeking alternative
sources of financing and exploring strategic alternatives. Although management
believes that its plan will be successful, there can be no assurance that the
Company will be successful in its attempt to expand revenue, secure additional
financing or consummate a strategic alternative.
The Company believes that cash, cash equivalents and investments available for
sale, together with projected cash flow from operations, will be sufficient to
meet the Company's liquidity and capital requirements for at least twelve
months. No assurance exists that the Company will not require additional capital
prior to the end of such period. Additional funds may be sought through equity
or debt financings. There can be no assurance that commitments for such
financings can be obtained on favorable terms, if at all.
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.
BUILD-UP OF THE COMPANY'S INTERNAL SALES FORCE; CHANGES IN SALES STRATEGY. Costs
and delays associated with the Company's efforts to build its internal sales and
service force in the wake of termination of the Coulter Agreement have adversely
affected the Company's business, results of operations and financial condition
in 1997 and may continue to do so through 1998. 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 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.
In addition to the foregoing considerations, during the fourth quarter of 1997
the Company began to offer a short-term rental program which provides for
monthly or annual rentals of the MICRO21 system. The Company believes that this
program will augment its sales and long-term lease programs by giving potential
customers the ability to fund a MICRO21 with operating funds, thereby overcoming
potential cost barriers associated with limited or non-existent capital
expenditure funds. Expansion of the short-term rental program may require that
the Company secure additional financing. Additional funds for this purpose may
be sought through equity or debt financings. There can be no assurance that
commitments for such financings can be obtained on favorable terms, if at all.
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 continue to seek to
develop, either internally or through licensing arrangements, 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. IMI entered into two group purchasing
agreements in 1997. The first was with Amerinet, a network of over 1900
hospitals and 43 independent laboratories. The second was with Magnet, a network
with over 900 hospitals. Market penetration could be more difficult if sales of
MICRO21 systems are not made through such large purchasing groups.
ARBITRATION WITH DIASYS CORPORATION. In its demand for arbitration, DiaSys seeks
damages in excess of $1,000,000 for IMI's alleged breach of the DiaSys Agreement
by failing to pay for products delivered and failing to order and pay for
additional products under the DiaSys Agreement. DiaSys also seeks damages for
IMI's alleged defamation of DiaSys and its products. IMI denies that it breached
the DiaSys Agreement or defamed DiaSys, and believes that it properly rejected
products supplied by DiaSys due to non-conformance. IMI also seeks damages for
libelous statements made by DiaSys in a July 2, 1997 press release issued by
DiaSys, and for delays in IMI's product development efforts caused by DiaSys's
breach of the DiaSys Agreement. The parties are presently in the process of
selecting the panel of arbitrators and no hearing date for the arbitration has
been scheduled. The Company believes that DiaSys's claims are without merit, and
that the Company will prevail in the arbitration. However, there can be no
assurance that the Company will prevail in the arbitration or in its
counterclaim asserted against DiaSys, or that any resolution of the dispute,
which is expected to occur within one year, would be on terms favorable to the
Company. An adverse decision in the arbitration could have a material adverse
effect on the Company's liquidity, financial condition and results of
operations.
YEAR 2000 COMPLIANCE. Until recently, many computer programs were written using
two digits rather than four digits to define the applicable year in the
twentieth century. Such software may recognize a date using "00" as the year
1900 rather than the year 2000. Utilizing both internal and external resources,
the Company is in the process of defining, assessing and converting or replacing
various programs, hardware and instrumentation systems to make them Year 2000
compatible. The Company's Year 2000 project is comprised of two
components--business applications and equipment. The business applications
component consists of the Company's business computer systems, as well as the
computer systems of third-party suppliers or customers, whose Year 2000 problems
could potentially impact the Company. Equipment exposures consist of personal
computers, system servers and telephone equipment whose Year 2000 problems could
also impact the Company. The cost of the Year 2000 initiatives is not expected
to be material to the Company's results of operations or financial position.
While management believes that its products, the MICRO21 and NeuralVision
software, are currently capable of storing four-digit year data, allowing
applications to differentiate between dates from the 1900s and the year 2000 and
beyond, such potential incompatibility with two-digit application programs may
limit the Company's sales of product in those situations. There can be no
assurance that the Company's products will not be integrated by the Company or
its customers with, or otherwise interact with, non-compliant software or other
products which may expose the Company to claims from it customers or other third
parties. The foregoing could result in a loss of or delay in market acceptance
of the Company's products, increased service costs to the Company or payment by
the Company of compensatory or other damages. Further, there can be no assurance
that the Company's software product that is designed to be Year 2000 compliant
contains all necessary technology to make it Year 2000 compliant.
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 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:
the delay in the Company's achievement of substantial market penetration
and widespread acceptance of the MICRO21 system, the Hematology Slide
Master or the UriSlide Master;
the delays and impediments to customer acceptance associated with industry
and market perception of the historical dispute, even though now settled,
between the Company and Coulter;
the inability of the Company to enter into alternative exclusive
distribution arrangements due to certain rights granted to Coulter under
the Settlement Agreement;
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 potential failure of the Company's sales force, and Coulter or other
distributors, to sell or rent MICRO21 systems in amounts sufficient to help
the Company achieve its sales goals;
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;
the uncertainty of profitability and sustainability of revenues and
profitability;
the possible need for capital because of changes in sales strategy to offer
the MICRO21 on a short-term rental basis; and
the uncertainty of obtaining capital for future capital needs, especially
in the event of further delays in anticipated widespread market acceptance
for the MICRO21 system.
<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, 1997 and 1996 F-3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Statements of Shareholders' Equity (Net Capital Deficiency)
for the years ended December 31, 1997, 1996 and 1995 F-5
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Financial Statements F-7
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, 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 9, 1998
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
BALANCE SHEETS
DECEMBER 31,
1997 1996
ASSETS
Current assets:
<S> <C> <C>
Cash $ 853,164 $ 288,001
Investments available-for-sale 6,230,009 24,793,872
Accounts receivable, net of allowance
for uncollectible accounts of
$40,000 at December 31, 1997 and 1996 671,905 177,096
Inventory 5,933,815 3,541,993
Prepaid expenses and other current assets 61,799 52,425
Current portion of investment in sales-type leases 222,213 --
Accrued interest receivable 13,151 159,427
--------------- -------------
Total current assets 13,986,056 29,012,814
Investment in sales-type leases, net 240,145 --
Revenue equipment, net 263,632 --
Property and equipment, net 2,789,693 1,666,957
Other assets 126,883 52,252
-------------- ---------------
$17,406,409 $30,732,023
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,298,811 $1,062,979
Accrued salaries and benefits 394,190 319,217
Other accrued liabilities 101,816 421,132
Current portion of deferred revenue 74,673 --
Accrued contract settlement costs -- 2,062,000
--------------- ---------
Total current liabilities 1,869,490 3,865,328
Deferred revenue 219,574 --
Commitments and contingencies
Shareholders' equity:
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, 11,023,938
shares in 1997 and 10,898,055
shares in 1996 110,239 108,981
Additional paid-in capital 42,537,633 42,425,306
Deferred compensation (228,252) (321,504)
Accumulated deficit (27,102,275) (15,346,088)
------------ ------------
Total shareholders' equity 15,317,345 26,866,695
---------- ----------
$17,406,409 $30,732,023
=========== ===========
SEE ACCOMPANYING NOTES
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Product sales, net (Note 9) $3,770,489 $1,460,675 $1,392,883
Cost of sales 3,328,394 1,227,216 1,135,499
--------- --------- ---------
Gross margin 442,095 233,459 257,384
Operating expenses:
Selling, general and administrative 8,183,800 3,960,625 2,462,553
Research and development 5,022,670 2,113,565 1,793,769
Provision for contract settlement -- 2,062,000 --
---------------- --------- --------
Total operating expenses 13,206,470 8,136,190 4,256,322
---------- --------- ---------
Loss from operations (12,764,375) (7,902,731) (3,998,938)
Other income (expense):
Interest income 1,035,210 1,112,227 13,046
Interest expense -- (141,699) (175,074)
-- --------- ---------
Other income (expense) 1,035,210 970,528 (162,028)
--------- ------- ---------
Loss before extraordinary item (11,729,165) (6,932,203) (4,160,966)
Extraordinary item--gain on early
extinguishment of debt -- 76,475 173,575
-- ------- -------
Net loss $(11,729,165) $(6,855,728) $(3,987,391)
============= ============ ============
Loss per common share-basic and diluted:
Before extraordinary item $(1.07) $(.70) $(.73)
Extraordinary item--gain on early
extinguishment of debt -- .01 .03
== === ===
Net loss per common share-basic and diluted $(1.07) $(.69) $(.70)
======= ====== ======
Weighted average number of common shares
outstanding 10,952,330 9,937,440 5,720,640
========== ========= =========
SEE ACCOMPANYING NOTES
</TABLE>
<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 CAPTIAL
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIENCY)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 3,959,970 $39,599 $2,040,581 $-- $(4,560,996) $(2,480,816)
Issuance of $.01 par value common
stock from conversion of notes payable 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
Exercise of stock options 104,190 1,041 2,432 -- -- 3,473
Issuance of $.01 par value common
stock for services rendered 49,500 495 164,505 165,000
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
Exercise of stock options 102,811 1,028 92,005 -- -- 93,033
Exercise of stock purchase warrants 23,072 230 20,322 -- -- 20,552
Amortization of deferred compensation -- -- -- 93,252 -- 93,252
Adjustments for change in unrealized
gains on securities available-for-sale -- -- -- -- (27,022) (27,022)
Net loss -- -- -- -- (11,729,165) (11,729,165)
----------- ---------- ----------- ---------- ------------ ------------
Balance at December 31, 1997 11,023,938 $110,239 $42,537,633 $(228,252) $(27,102,275) $15,317,345
=========== ========== =========== ========== ============ ===========
SEE ACCOMPANYING NOTES
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(11,729,165) $(6,855,728) $(3,987,391)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,025,419 299,338 169,687
Gain on early extinguishment of debt -- (76,475) (173,575)
Services received in exchange for common stock and stock
options 93,252 93,833 295,492
Provision for contract settlement -- 2,062,000 --
Officers' bonus accrual -- -- 450,000
Changes in operating assets and liabilities:
Inventory (3,581,551) (2,401,545) (1,504,833)
Accounts receivable (494,809) 4,904 (182,000)
Prepaid expenses and other current assets (9,374) (48,819) (3,606)
Investment in sales-type leases (462,358) -- --
Accrued interest receivable 146,276 (159,427) --
Other assets (74,631) 50,204 (98,899)
Revenue equipment (263,632) -- --
Accounts payable 235,832 28,512 423,367
Accrued salaries and benefits 74,973 114,979 (40,935)
Other accrued liabilities (319,316) 316,132 105,000
Deferred revenue 294,247 -- --
Accrued settlement liability (2,062,000) -- --
Accrued interest payable -- (139,478) (117,634)
Due to related party -- (105,000) 105,000
Customer advance -- (150,000) 150,000
---------- -------- -------
Net cash used in operating activities (17,126,837) (6,966,570) (4,410,327)
INVESTING ACTIVITIES
Purchases of property and equipment (958,426) (765,296) (224,907)
Purchases of investments available-for-sale (3,683,412) (33,226,690) --
Sales of investments available-for-sale 22,220,253 8,490,845 --
---------- --------- ---------
Net cash provided by (used in) investing activities 17,578,415 (25,501,141) (224,907)
CONTINUED ON NEXT PAGE.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
FINANCING ACTIVITIES
<S> <C> <C> <C>
Proceeds from sale of common stock $113,585 $34,495,585 $4,145,030
Proceeds from long-term notes payable
and capitalized lease obligations -- 60,000 160,000
Repayment of long-term notes payable
and capitalized lease obligations -- (773,839) (919,414)
Advances from factor -- 2,216,614 --
Repayments to factor -- (2,216,614) --
Proceeds from notes payable to related parties -- 74,784 --
Repayment of notes payable to related parties -- (1,176,639) (169,042)
-- ----------- ---------
Net cash provided by financing activities 113,585 32,679,891 3,216,574
------- ---------- ---------
Net increase (decrease) in cash 565,163 212,180 (1,418,660)
Cash at beginning of year 288,001 75,821 1,494,481
------- ------ ---------
Cash at end of year $853,164 $288,001 $75,821
======== ======== =======
SUPPLEMENTAL INFORMATION
Inventory transferred to property and equipment $1,109,729 $514,733 $104,876
========== ======== ========
Interest paid $-- $319,073 $159,133
=== ======== ========
Notes payable and notes payable to related
parties converted to common stock $-- $300,000 $930,000
=== ======== ========
Common stock issued in exchange for services $-- $-- $165,000
=== === ========
SEE ACCOMPANYING NOTES.
</TABLE>
<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 1995 financial statements were previously restated to reflect the newly
authorized shares and to give retroactive recognition to the stock split
described above.
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 or 1997.
During October 1997, the Accounting Standards Executive Committee (AcSEC) of the
American Institute of Certified Public Accounts issued Statement of Position
97-2 (SOP 97-2), SOFTWARE REVENUE RECOGNITION. SOP 97-2 replaces the SOP 91-1
method of distinguishing between significant and insignificant vendor
obligations as a basis for recording revenue with a requirement that each
element of a software licensing arrangement (e.g., post contract customer
support (PCS), specified upgrades and enhancements--even on a when-and-if
available basis, additional software products and services) be separately
identified and accounted for based on relative fair values of each element.
Further, in order to recognize revenue for each element as delivered, stringent
requirements for "vendor-specific objective evidence" must be met for each
element's fair value, and no remaining undelivered elements can be essential to
the functionality of the delivered elements. The SOP is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
Different informal and unauthoritative interpretations of certain provisions of
SOP 97-2 have arisen. AcSEC is already deliberating amendments to SOP 97-2,
including deferral of the effective date of certain provisions of the SOP so
AcSEC can develop and issue an interpretation regarding the applicability and
the method of application of those provisions. Because of the uncertainties
relating to the outcome of these amendments, the impact on the future results of
the Company is not currently determinable.
Sales to one customer, Coulter Corporation (Coulter), the Company's exclusive
worldwide distributor through October 1996, accounted for 50% of the Company's
sales in 1997 and 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. Sales outside of the United
States accounted for 24% of total sales in 1997; sales to one customer in Japan
(Coulter K.K., an affiliate of Coulter) accounted for 15% of 1997 sales. There
were no sales outside of the United States in 1996 or 1995.
CASH
Deposits in banks may exceed the amount of Federal Deposit Insurance Corporation
("FDIC") insurance limits provided on such deposits. The Company periodically
performs reviews of the credit worthiness of its depository banks. As of
December 31, 1997, the company had approximately $578,000 of cash in excess of
FDIC insurance limits.
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.
EQUIPMENT LEASING
The Company leases equipment to customers under operating leases generally for
periods of one year. The cost of revenue equipment is depreciated on a
straight-line basis over three to five years. Accumulated depreciation on
revenue equipment was $80,000 at December 31, 1997. The Company also leases
equipment to customers under sales-type leases as defined in Statement of
Financial Accounting Standards (SFAS) No. 13, ACCOUNTING FOR LEASES. The Company
had no equipment leasing transactions during the year ended December 31, 1996.
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 for furniture, fixtures and office equipment and three to five
years for computer equipment. Property held under capitalized leases is
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.
SOFTWARE DEVELOPMENT COSTS
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.
DEFERRED REVENUE
Income under service agreements is deferred and recognized over the term
(primarily four to five years) of the agreement on a straight-line basis.
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 $64,000 at
December 31, 1997 and $54,000 at December 31, 1996, is included in the caption
"other accrued liabilities" in the accompanying balance sheets.
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
EARNINGS PER SHARE, which established new standards for computing and presenting
earnings per share. SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share.
All loss per share amounts have been presented to conform to the SFAS No. 128
presentation. On February 3,1998, due to the issuance of SFAS No. 128, the SEC
revised its Staff Accounting Bulletin No. 83 relative to cheap stock.
Consequently, net loss per share for the year ended December 31, 1994 has been
restated. Stock options and warrants have not been included in the computation
of diluted loss per share as the computation would not be dilutive.
For additional disclosures regarding stock options and warrants see Note 9.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements. The Company will adopt SFAS No. 131 in December
1998 and has not yet assessed what the impact will be on its 1998 financial
statement disclosures.
<PAGE>
2. NET INVESTMENT IN SALES-TYPE LEASES
The company has entered into sales-type leases of its product. Annual future
lease payments under sales-type leases consist of the following:
YEAR AMOUNT
1998 $240,747
1999 96,708
2000 96.708
2001 60,945
2002 10,098
--------
505,206
Less unearned income 42,848
--------
Net investment in sales type lease 462,358
Less current portion 222,213
========
$240,145
========
3. INVENTORY
The components of inventory are summarized as follows:
DECEMBER 31
1997 1996
Finished goods $3,773,526 $1,361,038
Work in process 407,821 819,161
Raw materials 1,752,468 1,361,794
---------- ----------
$5,933,815 $3,541,993
========== ==========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31
1997 1996
----------- -----------
Furniture, fixtures and office equipment $ 1,403,234 $ 767,227
Computer equipment 2,962,150 1,530,002
----------- -----------
4,365,384 2,297,229
Accumulated depreciation (1,575,691) (630,272)
----------- -----------
$ 2,789,693 $ 1,666,957
=========== ===========
<PAGE>
5. INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------- -------------------------------------
GROSS ESTIMATED GROSS ESTIMATED
UNREALIZED FAIR UNREALIZED FAIR
COST GAIN VALUE COST GAIN VALUE
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 164,708 $ 0 $ 164,708 $ 5,389,564 $ 2,950 $ 5,392,514
U.S. Corporate bonds 0 0 0 2,185,820 13,221 2,172,599
U.S. Government agency
bonds and mortgages 3,677,946 5,466 3,683,412 7,525,683 18,169 7,543,852
Mortgages and asset
backed securities 2,356,350 25,539 2,381,889 9,634,778 50,129 9,684,907
----------- ----------- ----------- ----------- ----------- -----------
$ 6,199,004 $ 31,005 $ 6,230,009 $24,735,845 $ 84,469 $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
$31,005 and $58,027 at December 31, 1997 and 1996, respectively, are included as
a separate component of shareholders' equity.
The contractual maturities of debt securities available for sale at December 31,
1997, regardless of their balance sheet classification, follow:
AMORTIZED COST FAIR
VALUE
Due within one year $3,677,946 $3,683,412
Not due at a single maturity date 2,356,350 2,381,889
--------- ---------
$6,034,296 $6,065,301
========== ==========
Gross realized gains and gross realized losses from the sale of securities
classified as available-for-sale were approximately $137,000 and $450,000,
respectively, for the year ended December 31, 1997. 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.
6. NOTES PAYABLE TO RELATED PARTIES
On May 22, 1997, the Board of Directors authorized the Company to loan the
Company's President and Chief Executive Officer up to $500,000 on a secured
recourse basis. During 1997, advances of approximately $367,000 were made. All
amounts advanced, including interest accrued at the rate of 8.5% per annum, were
repaid as of December 31, 1997.
In January 1998, $196,000 was advanced to the Company's President and $424,000
was advanced to a member of the Board of Directors. These advances, which are
secured by shares of the Company's common stock and bear interest at the rate of
prime plus 1% per annum, are due 90 days from the date of the first advance.
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.
The Company repaid approximately $339,000 of debt in 1996 with the proceeds of
its initial public offering of common stock in connection with: (i) a 12%
unsecured note payable to a shareholder, principal and interest due in monthly
installments of $10,000 through October 1997; (ii) an 11% unsecured note payable
to a shareholder, payable in full on demand; and (iii) 11% unsecured notes
payable to shareholders, principal and interest due December 31, 1996. In
addition, a $300,000, 10% promissory note payable to a shareholder, due July 1,
1996, secured by a security interest in the Company's technology and computer
equipment was converted in 1996 to common stock at a conversion price of $1.09
per share.
Interest expense on notes payable to related parties and amounts due to related
party, discussed in Note 7, amounted to approximately $15,000 and $75,000 for
the years ended December 31, 1996 and 1995, respectively. No interest was
incurred for the year ended December 31, 1997.
7. 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 and 1994, XL Vision advanced $925,000 to the Company
representing debt and an equity investment. 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. 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.
8. 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 and $24,000 for the years ended December 31, 1996 and 1995, respectively.
No interest was incurred for the year ended December 31, 1997.
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
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 $129,676, $150,000, and $102,000, for the years
ended December 31, 1997, 1996, and 1995, respectively, under this agreement.
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 $127,337 was recognized in 1995, under this
agreement which was terminated effective November 30, 1995.
9. 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 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 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 would 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 promptly 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 were 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.
In 1997, the Company paid Coulter Corporation ("Coulter") $3,600,000 in exchange
for the return of 26 of Coulter's used inventory of MICRO21 Systems and
reimbursement to Coulter for certain costs incurred in connection with the sale
and marketing of MICRO21 Systems in accordance with the terms of the Settlement
Agreement. In the Settlement Agreement, the Company also agreed to pay Coulter
approximately $1,000,000, subject to certain offsets, in exchange for: (1) the
return of certain spare parts and equipment and (ii) the assignment of four of
Coulter's customer contract accounts receivable. In November 1997, the Company
paid Coulter $1.2 million in final settlement, in exchange for the assignment of
four customer contract accounts receivable with a net present value of $900,000.
The return of six additional MICRO21 units purchased by Coulter in 1997, prior
to the Settlement Agreement offset by amounts due to the Company from Coulter.
On November 1, 1996, the Company entered into a Product Integration Agreement,
an agreement whereby the Company committed to purchase approximately $829,000 of
equipment from DiaSys (DiaSys) Corporation to be integrated into the MICRO21
system workstation. As of December 31, 1996, the Company had purchased $21,000
of product and was committed to purchase approximately $808,000 of equipment
under the agreement. On June 17, 1997, the Company notified DiaSys that it was
terminating the DiaSys Agreement due to DiaSys' material breaches of the DiaSys
Agreement. The Company also rejected all goods delivered by DiaSys to the
Company as non-conforming. DiaSys expressed its disagreement with the Company's
position regarding the conformity of DiaSys' products and the Company's
termination of the DiaSys Agreement.
On January 12, 1998, DiaSys filed for arbitration against the Company. In its
demand, DiaSys alleges that the Company breached the DiaSys Agreement and that
it defamed DiaSys. DiaSys seeks damages in excess of $1 million. As of December
31, 1997, the Company has not accrued any loss contingencies or related expenses
in connection with this lawsuit. Management is unable to make a meaningful
estimate of the likelihood or amount or range of loss that could result from an
unfavorable outcome of the pending litigation. Although the Company believes
that it has meritorious defenses which it will pursue vigorously and that the
Company has valid counterclaims against DiaSys, there can be no assurance that
the ultimate resolution of such dispute, which is expected to occur within one
year, will not have a material adverse effect on the Company's liquidity,
financial condition and results of operations. The Company and DiaSys are
presently in the process of selecting the arbitration panel and a hearing date
for the arbitration has not been scheduled.
During 1996, the Company entered into an agreement with MonoGen, Inc. (MonoGen)
for the worldwide license rights for a microscope slide preparing technique.
During 1997, the Company paid $150,000, 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, could
elect to terminate or proceed with the license and product development
agreement. During 1997, the Company elected to terminate the agreement resulting
in the forfeiture of the $150,000 nonrefundable payment.
This amount is recorded as research and development expense in the statement of
operations for 1997.
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 accounts receivable, with
recourse, over the six-month term of the agreement for 80% of the net amount of
the Coulter accounts receivable. 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
renewable operating leases through May 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, 1997, 1996, and 1995 was approximately
$379,000, $196,000 and $118,000, respectively.
Future minimum lease payments under operating leases as of December 31, 1997,
are as follows: 1998--$352,000; and 1999--$140,000.
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 with
International Remote Imaging Systems, Inc. ("IRIS") 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.
10. 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 (the 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 has reserved 2,686,500 shares of the Company's common
stock for the purpose of issuing stock options under this plan. 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. In addition, the
exercise price of nonqualified stock options granted through 1995 must be at
least 10% of the fair market value of the common stock on the date of grant;
upon the consumption of the Company's initial public offering the exercise
price, increased to at least 50% of the fair market value of the common stock.
Options granted under the Plan vest 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. Compensation expense for the years ended December
31, 1997, 1996 and 1995, totaled $93,252, $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. During 1997, options
to purchase 19,800 shares of common stock were issued under the Director Plan.
No options were granted under the Director Plan in 1996.
Pro forma information regarding net loss and loss per share has been determined
as if the Company had accounted for its employee stock options under the fair
value method of SFAS No. 123, ACCOUNTING FOR STOCK-BASED 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 1997
and 1996: risk-free interest rates of 5.75% and 6.11%; dividend yields of 0%;
volatility factors of the expected market price of the Company's common stock of
.854 and .398; 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. Information regarding
these option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF OPTION EXERCISE
SHARES PRICE PRICE
<S> <C> <C> <C>
Options outstanding at January 1, 1995 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
Granted 476,050 $5.88
Canceled (182,786) $2.73
Exercised (102,811) $0.96
--------
Options outstanding at December 31, 1997 1,798,075
=========
Exercisable at December 31, 1997 1,076,642
Exercisable at December 31,1996 810,459
Reserved for future option grants at
December 31, 1997 2,619,317
Weighted average fair value of options
granted in 1997 $3.83
=====
Weighted average fair value of options
granted during 1996 $3.90
=====
</TABLE>
SFAS 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, 1997, ranged from
$.03 to $20.06. The weighted average remaining contractual life of those options
is 7.3 years.
<PAGE>
The following table sets forth information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE NUMBER
RANGE OF EXERCISE OUTSTANDING AS OF CONTRACTUAL EXERCISE EXERCISABLE AS OF
PRICES DECEMBER 31, 1997 LIFE PRICE DECEMBER 31, 1997
<S> <C> <C> <C> <C> <C>
$ 0.03 - $ 5.25 1,124,040 6.2 years $ 1.02 925,977
$ 5.38 - $10.75 595,735 9.0 years $ 6.22 125,527
$ 11.00 - $14.75 14,000 7.5 years $14.33 4,813
$ 15.00 - $20.06 44,500 7.5 years $17.11 15,375
------ ------ ------
1,778,275 $ 3.27 1,071,692
========= ====== =========
</TABLE>
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 loss reflects
only the vesting of 1995 through 1997 awards in 1997 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 loss. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
------------ ----------- -------------
<S> <C> <C> <C>
Pro forma net loss $ 12,547,611 $(7,000,652) $ (4,017,561)
============ =========== =============
Pro forma net loss per share $ (1.15) $ (.70) $ (.70)
============ =========== =============
</TABLE>
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.
The following table summarizes information relative to the Company's warrants:
SHARES PRICE RANGE
Outstanding at January 1, 1995 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
Exercised (23,072) $2.00
---------
Outstanding at December 31, 1997 646,504 $0.35--$2.50
======= ============
Shares of common stock reserved for future issuance at December 31, 1997 are as
follows:
Options 2,561,507
Warrants 646,504
3,208,011
11. INCOME TAXES
At December 31, 1997, the Company had tax net operating loss (NOL) carryforwards
of approximately $22,707,000 available for income tax purposes that expires
through 2012. 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 $9,582,000 and $4,856,000 at December
31, 1997 and 1996, respectively. However, realization of these deferred assets
is not reasonably assured; therefore, they were fully reserved by a valuation
allowance of $9,582,000 and $4,856,000 at December 31, 1997 and 1996,
respectively.
Significant components of the Company's deferred income taxes are as follows:
DECEMBER 31
1997 1996
---- ----
NOL carryforwards $8,544,000 $3,810,000
Contract settlement --- 779,000
Depreciation 141,000 57,000
Amortization --- (29,000)
Accrued liability 172,000 66,000
Unamortized stock option cost 71,000 36,000
Inventory 543,000 137,000
Deferred revenue 111,000 ----
------- ------------
9,582,000 4,856,000
Less valuation allowances for
deferred tax assets (9,582,000) (4,856,000)
----------- ----------
$ - $ -
============ ===========
The net change in the valuation allowance for the years ended December 31, 1997
and 1996, was an increase of approximately $4,726,000 and $2,694,000,
respectively, resulting primarily from net operating losses generated during the
respective years.
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 1997 and
1996, resulting in no tax benefit reported in any of these years.
YEAR ENDED DECEMBER 31
1997 1996
-------------------- ---------------------
Tax at U.S. statutory rate (34.00)% (34.00)%
State taxes, net of federal benefit (3.61) (3.63)
Nondeductible items .19 .25
Change in valuation allowance 40.29 40.68
Other (2.87) (3.30)
==================== =====================
-- --
==================== =====================
12. 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 1997 and 1996 was
approximately $21,000 and $50,000, respectively. In addition, the Company
purchased inventory of approximately $241,000 and $250,000 in 1997 and 1996,
respectively from a company owned by this individual.
13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, and investments
available-for-sale are reflected in the financial statements at fair value
because of the short-term maturity of these instruments. The carrying value of
the Company's investment in sales-type leases is reflected in the financial
statements at fair value calculated based on discounted cash flow using a
discount rate of 6%.
14. MANAGEMENT'S PLANS
The Company reported a net loss of approximately $11,729,000 for the year ended
December 31, 1997, incurred cumulative losses from inception to December 31,
1997, aggregating approximately $27,102,000, and reported negative cash flows
from operations for the year ended December 31, 1997, of approximately
$17,127,000. At December 31, 1997, the Company had working capital of
approximately $12,117,000 and shareholders' equity of approximately $15,317,000.
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
(see Note 9) adversely affected the Company's business, results of operations
and financial condition in 1997. The Company's 1998 operating plan contemplates
focusing activities on expanding sales revenue through the efforts of its
internal sales, marketing and service force. In addition, during the third
quarter of 1997 the Company established a division in Europe to further expand
its marketing efforts and during the fourth quarter of 1997 the Company began to
offer a short-term rental program. The Company's plan also contemplates
implementing cost controls, seeking alternative sources of financing and
exploring strategic alternatives. Although management believes that its plan
will be successful, there can be no assurance that the Company will be
successful in its attempt to expand revenue, secure additional financing or
consummate a strategic alternative.
15. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
Certain adjustments were recorded in the fourth quarter of 1997 which included
an adjustment to provide an additional allowance for obsolete inventory of
approximately $740,000.
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
YEAR EXPENSES OF YEAR
Year ended December 31, 1997:
Deducted from asset accounts:
<S> <C> <C> <C>
Valuation allowance for deferred tax assets $4,856,000 $4,726,000 $9,582,000
Allowance for uncollectible accounts 40,000 0 40,000
Allowance for obsolete inventory 200,000 839,000 1,039,000
------- --------- ---------
Total $5,096,000 $5,565,000 10,661,000
========== ========== ==========
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
========== ========== ==========
</TABLE>
<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 1998 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 1998 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 1998 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 1998 Annual Meeting of Stockholders.
<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 Palm Beach
Gardens Limited Partnership 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.
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.
10.28 Assignment and Assumption of Lease Agreement dated December 30, 1996
between the Company and Lenzar Electrooptics, Inc., with respect to
Lease Agreement dated March 9, 1994 between CTB Realty Ventures XVI,
Inc. and Lenzar Electrooptics, Inc. (2)
23.1 Consent of Ernst & Young LLP, Independent Certified Public
Accountants. (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, 1997.
<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 31st day of March, 1998.
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 31, 1998.
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)
<PAGE>
EXHIBIT 10.28
Assignment and Assumption of Lease
THIS ASSIGNMENT AND ASSUMPTION OF LEASE ("Assignment:) is made and entered
into this 30 day of December, 1996 by and between Lenzar Electrooptics, Inc.
("Assignor") and Intelligent Medical Imaging, Inc. ("Assignee").
WITNESSETH:
1. Pursuant to a Lease Agreement ("Lease") dated March 9, 1997, Assignor,
as tenant, agreed to lease from CTB Realty Ventures XVI, Inc. as landlord,
certain space, known as Suite 6001, 3960 RCA Boulevard, Palm Beach Gardens,
Florida, consisting of 19,200 square feet, all as more particularly described in
the Lease and Exhibit A thereto (the "Leased Premises").
2. Assignor desires to assign and Assignee desires to assume the Lease and
take possession of the Leased Premises as of January 1, 1997, upon and subject
to all terms and conditions thereof for the remainder of the term of the Lease.
3. Landlord, as evidenced by its execution of this Assignment, has
consented to the terms of this Assignment and has agreed to release Assignor
from all liability accruing after the effective date of this Assignment.
NOW, THEREFORE, for an in consideration of the sum of Ten Dollars ($10,00)
and other good and valuable consideration, the receipt and sufficiency of which
are acknowledge by the parties hereto, the parties agree as follows:
1. RECITALS. The recitals set forth above are incorporated herein by
reference.
2. ASSIGNMENT AND ASSUMPTION. Assignor does hereby assign, transfer, set
over and deliver to Assignee all of Assignor's rights and interests in and to,
and existing under and by virtue of, the Lease. Assignee does hereby assume and
agree to be bound by the Lease and all the terms and provisions thereof.
3. INDEMNIFICATION. A. It is specifically agreed that Assignor shall not be
responsible for the discharge and performance of any duties or obligations to be
performed and/or discharged by the tenant under the Lease from and after the
effective date hereof. By acceptance of this Assignment, Assignee agrees to
indemnify, save and hold harmless Assignor from and against any and all loss,
liability, claims or causes of action existing in favor of or asserted by any
party arising out of or relating to Assignee's failure to perform any duties or
obligations required by the tenant under the Lease from and after the effective
date hereof.
B. It is further agreed that Assignee shall not be responsible for the
discharge and performance of any duties or obligations required to be performed
and/or discharged by the tenant under the Lease prior to the effective date
hereof. By acceptance of the Assignment, Assignor agrees to indemnify, save and
hold harmless Assignee from and against any and all loss, liability, claims or
causes of action existing in favor of or asserted by any party arising out of or
relating to Assignor's failure to perform any duties or obligation required by
the tenant under the Lease prior to the effective date hereof.
4. RELEASE OF LIABILITY. Landlord hereby consents to the terms of this
Assignment and hereby releases Assignor from all duties, obligations and
liabilities required to be performed and/or discharged by the tenant under the
Lease from and after the effective date hereof.
5. FURTHER ASSURANCES. Assignor and Assignee hereby agree to perform,
execute and/or deliver or cause to be performed, executed and/or delivered any
and all such further acts and assurances as may be reasonably be required to
consummate the terms of this Assignment.
6. COUNTERPARTS. This Assignment may be executed in two or more
counterparts, all of which taken together shall constitute one and the same
instrument.
IN WITNESS THEREOF, Assignor and Assignee have caused this Assignment to be
effective as of the 1st day of January, 1997.
Assignor:
Lenzar Electrooptics, Inc.
By: /s/ James N. Cheavetta [SEAL]
-----------------------------
James N. Cheavetta
Its: President
Assignee:
By: /s/ Gene Cochran [SEAL]
-----------------------------
Gene Cochran
Its: CFO
SEEN AND AGREED TO:
CTB Realty Ventures XVI, Inc.
By: _________________________________[SEAL]
Its: __________________________________
<PAGE>
IMI
Intelligent Medical Imaging, Inc.
Date: January 7, 1997
To: John Bills Enterprises
From: Gene Cochran
This is a letter of understanding between Intelligent Medical Imaging, Inc.
(IMI) and John Bills Enterprise (JBE).
JBE agrees to assignment and assumption of lease between IMI and Lenzar
Electrooptics, Inc. The lease dated March 9, 1994 known as Suite 6001, 3960 RCA
Boulevard, Palm Beach Gardens, Florida, consisting of 19,200 square feet.
JBE negotiation with Lenzar will not effect this assumption, merely from whom
IMI leases or subleases Suite 6001.
The effective day of rent is January 1, 1997 by IMI.
/s/ John Bills 1/9/97
- -------------------------------
John Bills Date
/s/ Gene Cochran 1/7/97
- -------------------------------
Gene Cochran Date
<PAGE>
NORTHCORP CENTER
STANDARD OFFICE BUILDING LEASE
LENZAR ELECTROOPTICS, INC.
THIS LEASE AGREEMENT (sometimes hereinafter referred to as the "Lease")
dated this 9TH day of MARCH, 1994 , by and between CTB REALTY VENTURES XVI,
INC., (hereinafter called "LESSOR"), %JCB Enterprises III, Inc., whose address
for purposes hereof is 3910 RCA Boulevard, Suite 1011, Palm Beach Gardens,
Florida 33410 and LENZAR ELECTROOPTICS INC. (herein after called "LESSEE"),
whose address for purposes hereof until commencement of the terms of this Lease
is 1006 W. 15TH STREET, RIVIERA BEACH, FL 33408. WITNESSETH
1. LEASED PREMISES: Subject to and upon the terms, provisions, covenants
and conditions hereinafter set forth, and each in consideration of the duties,
covenants and obligations of the other hereunder, LESSOR does hereby lease,
demise and let to LESSEE and LESSEE does hereby lease, demise and let from
LESSOR those certain premises (hereinafter sometimes called the "Premises" or
"Leased Premises") in that certain building known as BUILDING 60 which is part
of NORTHCORP CENTER, located at 3960 RCA Boulevard, Palm Beach Gardens, Florida.
Leased Premises are more specifically defined as 19,200 square feet of space
known as SUITE #6001 as depicted on floor plan which is attached and made a part
hereto as Exhibit A.
2. TERM: This Lease shall be for a term of FIVE (5) years, commencing on
the 1ST day of MAY, 1994 and ending on the 30 day of APRIL, 1999, hereinafter
referred to as the "Lease Term" or "Term".
3. RENTAL: LESSEE agrees to pay LESSOR an Annual Rental ("Rental") of:
TERM ANNUAL RENTAL MONTHLY RENTAL
Year 1 5/1/94-4/30/95 $134,400.00 $11,200.00 plus state sales tax
Year 2 96 $144,000.00 $12,000.00 plus state sales tax
Year 3 97 $144,000.00 $12,000.00 plus state sales tax
Year 4 98 $153,600.00 $12,800.00 plus state sales tax
Year 5 99 $163,200.00 $13,600.00 plus state sales tax
Said balance shall be due and payable on the first day of each and every
calendar month of the term of this Lease, without any demand, notice, offset or
deduction whatsoever, in lawful (legal tender for public or private debts) money
of the United States of America, at the Management Office of LESSOR or elsewhere
as designated from time to time by LESSOR'S written notice to LESSEE.
4. SECURITY DEPOSIT: LESSEE, concurrently with the execution of this Lease,
will deposit with LESSOR the sum of ELEVEN THOUSAND DOLLARS AND NO/100
$11.000.00), which sum shall be retained by LESSOR as security for the payment
by LESSEE of the rents and all other payments herein agreed to be paid by LESSEE
and for the faithful performance by LESSEE of the terms, provisions, and
conditions of this Lease. It is agreed that LESSOR, at LESSOR'S option, may at
the time of any default by LESSEE under any of the terms, provisions, covenants
or conditions of this Lease apply said sum or any part thereof towards the
payment of the rents and all other sums payable by LESSEE under this Lease shall
thereby be discharged only pro tanto; that LESSEE shall remain liable for any
amounts that such sum shall be insufficient to pay; that LESSOR may exhaust any
or all rights and remedies against LESSEE before resorting to said sum, but
nothing herein contained shall required or be deemed to require LESSOR to do so;
that in the event this deposit shall not be utilized by any such purpose, then
such deposit shall be returned by LESSOR to LESSEE within ten (10) days next
after the expiration of the term of this Lease or the determination and payment
of the amount due under Section 5 of this Lease, if any, whichever later occurs.
LESSOR shall not be required to pay LESSEE any interest on said security deposit
unless required to so do by law.
5. COST OF LIVING INCREASE: n/a
6. REPAIRS, MAINTENANCE AND OPERATING COSTS: LESSEE shall, at all times
during the term, and at its own cost and expense, put, keep, replace and
maintain in thorough repair and in good, safe and substantial order and
condition, all nonstructural improvements of the Leased Premises at the
commencement of the term and thereafter erected in the Leased Premises, forming
a part thereof, and their full equipment and appurtenances, whether or not
necessitated by wear, tear or defects, latent or otherwise; and shall use all
reasonable precautions to prevent waste, damage or injury. LESSEE will replace
at its own expense any and all broken glass caused by LESSEE in and about said
Leased Premises. LESSEE shall not be responsible for any damaged caused by any
negligent or intentional act or omission of LESSOR, its agents, employees or
invitees.
LESSOR shall be responsible for the maintenance and upkeep of the
foundations, exterior walls, downspouts, gutters and roof, to include roof
supports. LESSOR shall not be responsible for any damage caused by any negligent
or intentional act or omission of Tenant, its agents, employees or invitees.
LESSOR shall be responsible for maintenance and operation of common areas
of the development, of which the Leased Premises is a part. For the purposes of
this Section 6, maintenance and operating costs shall mean the costs incurred by
LESSOR in maintaining and operating common areas of the development, of which
the Leased Premises is a part, and shall include common area utilities, a
management, common area air conditioning maintenance, parking lot maintenance,
pest control, security services salaries, wages and costs of engineers,
superintendents, watchmen and other employees, grounds maintenance, common area
maintenance and repair expense, supplies, water/sewer service to the Leased
Premises, sanitation pick-up, real estate taxes and property insurance and, in
general, all common area costs and expenses.
7. UTILITIES AND SERVICE: LESSOR shall pay all the charges and expenses for
water and sewer service to the Leased Premises. LESSEE shall pay all other
charges and expenses for utilities and services used upon and in connection with
the Leased Premises, including but not limited to telephone service, pest
control and janitorial services and shall pay same not more than ten (10) days
after each bill shall become due and payable. LESSOR, at LESSOR'S cost, shall
supply trash disposal bins in a location of LESSOR'S choice, which LESSEE shall
utilize for the disposal of its office debris. LESSEE shall pay LESSOR a flat
fee of $1.50 per square foot per annum plus state sales tax. Such fee shall be
paid in monthly installments and added to rental payment for electricity.
8. USE: The LESSEE will use and occupy the Leased Premises for the
following use or purpose and for no other use or purpose: GENERAL OFFICE, LIGHT
ASSEMBLY AND ENGINEERING LAB.
9. IMPROVEMENTS: All interior improvements to the Leased Premises shall be
constructed in accordance with plans and specifications to be prepared by
LESSOR'S Space Planner and Architect and shall be constructed by a Contractor of
LESSOR'S choice subject to LESSEE'S reasonable approval.
All permanent tenant improvements made to the Leased Premises by LESSEE
shall be the property of the LESSOR during the Term of this Lease and shall
remain the property of the LESSOR Upon termination of this Lease.
10. LEASEHOLD IMPROVEMENTS: LESSOR will through its contractor, complete
the improvements contained in the schedule marked as Exhibit "B:, if no further
modifications are made, prior to the commencement of the Lease, Mary 1, 1994 If
the improvement schedule is not met, there will be an abatement of rent, for a
reasonable portion of the unfinished area, until the work is completed. With
regard to the payment of construction costs associated with the improvements
listed on Exhibit "B", LESSOR is responsible for $50,000.00 and LESSEE is
responsible for $11,335.00. Should LESSEE request other work to be completed or
request modifications to the scheduled list of improvements, LESSOR will provide
LESSEE with the cost associated with any of the changes, and LESSEE will have to
authorize any changes to the schedule or list of improvements in writing. Should
those changes be approved by LESSEE, then LESSEE assumes responsibility for the
approved increased costs. LESSEE shall pay its share of the tenant improvement
costs, $11,335.00, or more if approved in advance, on the day of occupancy.
11. POSSESSION AND COMMENCEMENT OF RENT Anything to the contrary in this
Lease notwithstanding, it is understood and agreed between the LESSOR and the
LESSEE that the first year Lease Term herein granted in Section 2 shall commence
on MAY 1, 1994.
12. LESSEE'S RIGHTS AND RESTRICTIONS AS TO BUSINESS SIGNS: LESSEE may, at
its own expense, erect or place, of a quality and in a manner approved in
writing by LESSOR, and based on LESSOR'S building standard, signs concerning its
business on the entrance door of its office suite or as designed by LESSOR, it
being understood between the Parties hereto that the maintenance of such signs
shall be kept in a good state of repair and LESSEE shall repair any damage that
may have been done to the premises by the erection, existence or removal of such
signs. At the end of the Lease term, LESSEE shall remove the signs at its
expense. It is the intent of LESSOR to have uniform tenant signs.
Except as provided above, no sign, notice or other advertisement shall be
inscribed, painted, affixed or displayed on any of the windows or on the
exterior of any of the doors of the subject premises, nor anywhere outside the
Leased Premises without prior written consent of LESSOR or its agents. LESSOR'S
consent to grant is absolute and need not be given.
13. CONDITIONS OF PREMISES: Taking possession of the Leased Premises by
LESSEE shall be conclusive evidence as against LESSEE that the Leased Premises
were in good and satisfactory condition when possession was so taken.
14. QUIET POSSESSION: Upon payment by LESSEE of the rental herein provided
and upon the observance and performance of all terms, provisions, covenants and
conditions on LESSEE'S part to be observed and performed, LESSEE shall, subject
to all of the terms, provisions, covenants and conditions of this Lease
Agreement, peaceably and quietly hold and enjoy the Leased Premises for the term
hereby leased. In the event space contiguous to the Leased Premises is occupied
by a user other than office, then and in that event LESSOR will be responsible
for providing adequate insulation to ensure that said use does not prevent the
quiet enjoyment of LESSEE'S Leased Premises. LESSOR is responsible at its sole
expense to ensure that other tenants and nature of other tenants' business does
not interfere with LESSEE'S conduct of business and quiet enjoyment of the
Leased Premises.
15. TENANT ELECTRICAL: LESSEE shall use only office machines and equipment
that operate on the Building's standard electric circuits designated for sole
use of the LESSEE, but which in no event shall overload the Building's standard
electric circuits from which the LESSEE obtains electric current or which will,
in the opinion of LESSOR, interfere with the reasonable use of the Building by
LESSOR or other tenants or which shall create a hazard within the Leased
Premises. LESSEE shall comply with all governmental mandates regarding
temperature control.
LESSEE may add additional electrical switch gear and electric circuits as
necessary to support its business. LESSEE shall install any additional equipment
at its sole expense.
16. CHARGES FOR SERVICE: It is understood and agreed upon between the
Parties hereto that any charges against LESSEE by LESSOR for services or for
work done on the Leased Premises by order of LESSEE, or otherwise accruing under
this Lease, shall be considered as rent due and shall be included in any lien
for rent.
17. NON-PAYMENT: LESSEE agrees that LESSEE will promptly pay said rent at
the times and place stated herein; that LESSEE will pay charges for work
performed on order of LESSEE, and will pay any other charges that accrue under
this Lease. LESSEE shall be required to pay LESSOR a late charge equal to ten
percent (10%) on any rental due that remains unpaid fifteen (15) days after said
rental is due.
Faithful payment by LESSEE of the rent at the time stated shall be of
essence in the performance of this Lease and should said rent herein provided at
any time remain due and unpaid for a period of thirty (30) days after same shall
become due, the LESSOR may consider the LESSEE a tenant at sufferance and LESSOR
may immediately re-enter upon said premises.
18. ALTERATIONS AND REPAIRS: LESSEE will, at LESSEE'S own expense, keep the
Leased Premises in good repair and tenantable condition during the Lease Term
and will replace at its own expense any and all broken glass caused by LESSEE in
and about said Leased Premises.
LESSEE will make no alteration, additions or improvements in or to the
Leased Premises without the written consent of LESSOR, which shall not be
unreasonably withheld, and all additions, fixtures, carpet or improvements,
except office furniture, LESSEE'S machinery and fixtures which shall be readily
removable without injury to the Leased Premises, shall be and remain a part of
the Leased Premises at the expiration of this Lease.
19. LIENS: LESSEE further agrees that LESSEE will pay all liens of LESSEE'S
contractors, subcontractors, mechanics, laborers, materialmen, and other items
of like character, and will indemnify LESSOR against all expenses, costs and
charges, including bond premiums for release of liens and attorney's fees
reasonably incurred in and about the defense of any suit in discharging the said
premises or any part thereof from any liens, judgments or encumbrances caused by
LESSEE. In the event any such lien shall be made or filed, LESSEE shall bond
against or discharge same within ten (10) days after the same has been made or
filed. It is understood and agreed between the Parties hereto that the expenses,
costs and charges above referred to shall be considered as rent due and shall be
included in any lien for rent.
The LESSEE herein shall not have any authority to create any liens for
labor or materials on the LESSOR'S interest in the Leased Premises and all
persons contracting with the LESSEE for the destruction or removal of any
facilities or other improvements or for the erection, installation, alteration
or repair of any facilities or other improvements on or about the Leased
Premises, and all materialmen, contractors, mechanics and laborers, are hereby
charged with notice that they must look only to the LESSEE'S interest in the
Leased Premises to secure the payment of any bill for work done or material
furnished at the request or instruction of LESSEE.
20. PARKING: LESSOR grants to LESSEE the right to use in common with other
LESSEES entitled to similar use thereof the parking areas for parking
automobiles of LESSEE's customers, clients and invitees in an area designated by
LESSOR. LESSEE shall be assigned ten (10) designated parking spaces along the
north side of Building 30 as shown on Exhibit "C".
21. ESTOPPEL CERTIFICATE: LESSEE agrees that from time to time, upon not
less than ten (10) days prior request by LESSOR, LESSEE will deliver to LESSOR a
statement in writing certifying: (a) that this Lease is unmodified and in full
force and effect (or, if there have been modifications that the Lease, as
modified, is in full force and effect and stating the modifications); (b) the
dates to which the rent and other charges have been paid; and (c) that LESSOR is
not in default under any provisions of this Lease, or if in default, the nature
thereof in detail.
22. ASSIGNMENT BY LESSOR: If the interests of LESSOR under this Lease shall
be transferred voluntarily or by reason of foreclosure or other proceedings for
enforcement of any first mortgage on the Leased Premises, LESSEE shall be bound
to such transferee (herein sometimes called the "Purchaser"), for the balance of
the term hereof remaining and any extensions or renewals thereof which may be
effected in accordance with the terms and provisions hereof, with the same force
and effect as if the Purchaser were the LESSOR under this Lease, and LESSEE does
hereby agree to attorn to the Purchaser, including the Mortgagee under any such
mortgage if it be the Purchaser, as its LESSOR, said attornment to be effective
and self-operative without the execution of any further instruments upon the
Purchaser succeeding to the interest of the LESSOR under this Lease. The
respective rights and obligations of LESSEE and the Purchaser upon such
attornment to the extent of the then remaining balance of the term of this Lease
and any such extensions and renewals, shall be and are the same as those set
forth herein. In the event of such transfer of LESSOR'S interest, LESSOR shall
be released and relieved from all liability and responsibility thereafter
accruing to LESSEE under this Lease or otherwise and LESSOR'S successor by
acceptance of rent from LESSEE hereunder shall become liable and responsible to
LESSEE in respect to all obligations of the LESSOR under this Lease.
23. ASSIGNMENT BY LESSEE: Without the written consent of LESSOR first
obtained in each case, which cannot be unreasonably withheld, LESSEE shall not
assign, transfer, mortgage, pledge, or otherwise encumber or dispose of this
Lease for the Term hereof, or underlet the Leased Premises or any part thereof
or permit the Leased Premises to be occupied by other persons. If this Lease is
assigned, or if the Leased Premises or any part thereof are underlet or occupied
by anybody other than the LESSEE, the LESSOR may after default by the LESSEE
collect or accept rent and pro rata expense payments from the assignee,
undertenant, or occupant and apply the net amount collected or accepted to the
rent herein reserved, but no such collection or acceptance shall be deemed a
waiver of this covenant or the acceptance of the assignee, undertenant or
occupant as LESSEE, nor shall it be construed as, or implied to be, a release of
the LESSEE from the further observance and performance by the LESSEE of the
term, provisions, covenants and conditions herein contained.
Notwithstanding the foregoing, LESSEE shall have the right to sublet, and
or assign Leased Premises to any parent, subsidiary or other affiliated company
in which it has ownership.
24. SUCCESSORS AND ASSIGNS: All terms, provisions, covenants and conditions
to be observed and performed by LESSEE shall be applicable to and binding upon
LESSEE'S respective heirs, administrators, executors, successors and assigns,
subject, however, to the restrictions as to assignment or subletting by LESSEE
as provided herein. All expressed covenants of this Lease shall be deemed to be
covenants running with the land.
25. INSURANCE: A. LESSEE shall, during the entire term hereof, at its sole
cost and expense, provide and keep in full force and effect a policy of
Commercial General Liability insurance covering the Leased Premises, and the
business operation by LESSEE in an amount of not less than $1,000,000.00
combined single limit liability for bodily injury and property damage. The
policy shall name LESSOR, any person, firms or corporations designated by LESSOR
with respect to LESSEE'S negligence, as an additional insured, and LESSEE as
insured, and shall contain a clause that the insurance will not be cancelled or
reduced below the limits stated herein without first giving the LESSOR ten (10)
days prior written notice. The insurance shall be in an insurance company
approved by LESSOR and provide LESSOR a true and certified copy of said policy
or certificate of insurance.
B. LESSEE agrees to pay any increase in premiums for fire and extended
coverage insurance that may be charged during the term of this Lease resulting
from the type of activity or merchandise stored, distributed or sold by LESSEE
in the Leased Premises, whether or not LESSOR has consented to the same. The
LESSEE also shall pay any additional premium on the rent insurance policy that
may be carried by the LESSOR for its protection against rent loss assuming such
premium increase is due to no fault or action of LESSOR. Bills for such
additional premiums shall be rendered by LESSOR to LESSEE at such times as
LESSOR may elect, and shall be due from, and payable by, LESSEE when rendered,
and the amount thereof shall be deemed to be, and be paid, as additional rent.
C. Except as provided in Paragraph D of this Section 25, LESSEE will
indemnify the LESSOR and save it harmless from and against any and all claims,
actions, damages, liability and expense in connection with loss from fire,
personal injury and/or damage to property arising from or out of any occurrence
in the Leased Premises or any part thereof, occasioned wholly or in part by any
negligent act or omission of Tenant, its agents, contractors, employees,
servants, LESSEES or concessionaires. In case LESSOR shall, without fault on its
part, be made a party to any litigation commenced by or against LESSEE, then
LESSEE shall protect and hold LESSOR harmless and shall pay all costs, expenses
and reasonable attorneys' fees incurred or paid by LESSOR in connection with
such litigation. LESSEE shall also pay all costs, expenses and reasonable
attorneys' fees (including appeals) that may be incurred or paid by LESSOR in
enforcing the covenants and agreements in this Lease.
D. It is understood that the LESSOR hereby waives any and all rights of
recovery against the LESSEE, its officers, employees and agents, for loss
occurring to the described premises, and that it will cause to be inserted in
all fire and extended coverage insurance policies which are carried on the
described premises, a provision substantially as follows: "it is hereby
stipulated that this insurance shall not be invalidated should the insured waive
in writing prior to loss, any and all rights of recovery against any party for
loss occurring to the property covered by this policy." It is also understood
that the LESSEE hereby waives any and all rights of recovery against the LESSOR,
its officers, employees and agents, for loss occurring to the described
premises, and that it will cause to be inserted in all fire and extended
coverage insurance policies which are carried on its property at the described
premises, a provision substantially as follows: "It is hereby stipulated that
this insurance shall not be invalidated should the insured waive in writing
prior to loss, any and all rights of recovery against any party for loss
occurring to the property covered by this policy."
26. INDEMNIFY LESSOR: Except as provided in Paragraph D of Section 25, in
consideration of said Premises being leased to LESSEE for the above rental,
LESSEE agrees: that LESSEE, at all times, will indemnify and keep harmless
LESSOR from all losses, damages, liabilities and expenses, which may arise or be
claimed against LESSOR and be in favor of any persons, firms or corporations,
for any injuries or damages to the person or property of any persons, firms or
corporations, consequent upon or arising from the negligent use or occupancy of
said Premises by LESSEE, or consequent upon or arising from any negligent acts,
omissions, neglect or fault of LESSEE, his agents, servants, employees,
licensees, visitors, customers, patrons or invitees, or consequent upon or
arising from LESSEE'S failure to comply with any laws, statutes, ordinances,
codes or regulations as herein provided; that LESSOR shall not be liable to
LESSEE for any damages, losses or injuries to the persons or property of LESSEE
which may be caused by the acts, neglect, omissions or faults of any persons,
forms or corporations, except when such injury, loss or damage results from
negligence of LESSOR, his agents or employees or contractors and the LESSEE will
indemnify and keep harmless LESSOR from all damages, liabilities, losses,
injuries or damages to the person or property of any persons, firms or
corporations, where said injuries or damages arose about or upon said Premises,
as a result of the negligence of LESSEE, his agents, employees, servants,
licensees, visitors, customers, patrons and invitees. The LESSOR shall also
indemnify and hold harmless the LESSEE if any of the losses, damages,
liabilities and expenses are due to the acts, omissions, neglect or fault of the
LESSOR, et. al.
In case LESSOR shall be made a part to any litigation commenced by or
against LESSEE, then LESSEE shall protect and hold LESSOR harmless and shall pay
all costs, expenses and reasonable attorney's fees incurred or paid by LESSOR in
connection with such litigation unless litigation is caused by the negligence of
the LESSOR.
27. GOVERNMENTAL REGULATIONS: LESSEE shall faithfully observe in the use of
the Leased Premises all municipal and county ordinances and codes and state,
local and federal statutes or laws, rules, regulations or other governmental
requirements now in force or which may hereafter be in force.
28. FIRE OR CASUALTY: In the event the Building shall be destroyed, or so
damaged, or injured by fire or other casualty during the term of this Lease
whereby the same shall be rendered untenantable, the LESSOR shall have the right
to render such Building tenantable by repairs within one hundred eighty (180)
days therefrom. The LESSEE shall be notified in thirty (30) days if the Leased
Premises cannot be made tenantable within this time frame. If said Premises are
not rendered tenantable within same time, it shall be optional with either party
hereto to cancel this Lease, and in the event of such cancellation, the rent and
pro rata expenses shall be paid only to the date of such fire or casualty. The
cancellation herein mentioned shall be evidenced in writing. During any time
that the Leased Premises are untenantable due to causes set forth in this
Section, the rent and pro rata expenses or a just and fair proportion thereof
shall be abated.
29. EMINENT DOMAIN: If any part of the Leased Premises is taken by
condemnation or Eminent Domain, the LESSEE may elect to terminate this Lease or
continue same in effect and if the LESSEE elects to continue this Lease, the
rental and pro rata assessment shall be reduced in proportion to the area of the
Leased Premises so taken and LESSOR shall repair any damage to the Leased
Premises resulting from such taking. All sums awarded or agreed upon between
LESSOR and the condemning authority for the taking of the interest of LESSOR
and/or LESSEE, whether as damages or as compensation, and whether for partial or
total condemnation, will be the property of LESSOR. If this Lease should be
terminated under any provision of this Section, rental shall be payable up to
the date that possession is taken by the taking authority, and LESSOR will
refund to LESSEE any prepaid unaccrued rent and prepaid pro rata expenses less
any sum or amount then owing by LESSEE to LESSOR.
30. ABANDONMENT: If, during the term of this Lease, LESSEE shall abandon,
vacate or remove from the Leased Premises the major portion of the goods, wares,
equipment or furnishings usually kept on said Leased Premises, or shall cease
doing business in said Leased Premises, or shall suffer the rent to be in
arrears, LESSOR may, at its option, cancel this Lease by written notice to
LESSEE at LESSEE'S address as provided in Section 34, or LESSOR may enter said
Leased Premises as the agent of LESSEE by force or otherwise, without being
liable in any way therefore, and relet the Leased Premises with or without any
furniture that may be therein as the agent of LESSEE, at such price and upon
such terms and for such duration of time as LESSOR may determine and receive the
rent and pro rata expenses therefore, applying the same to the payment of the
sums due by LESSEE, and if the full rental and pro rata expenses herein provided
shall not be realized by LESSOR over and above the expense to LESSOR of such
reletting, LESSEE shall pay any deficiency.
31. BANKRUPTCY: It is agreed between the Parties hereto that: if LESSEE
shall be adjudicated bankrupt or insolvent or take the benefit of any federal
reorganization or composition proceeding or make a general assignment or take
the benefit of any insolvency law; or, if LESSEE'S leasehold interest under this
Lease shall be sold under any execution or process of law; or if a trustee in
bankruptcy or a receiver be appointed or elected or had for LESSEE (whether
under Federal or State Laws); or if said Premises shall be abandoned or
deserted; or if LESSEE shall fail to perform any of the terms, provisions,
covenants or conditions of this Lease on LESSEE'S part to be performed; or if
this Lease or the term thereof be transferred or pass to or devolve upon any
persons, firms, officers or corporations other than LESSEE by death of the
LESSEE, operation of law or otherwise, then and in any such event this Lease and
the Term of this Lease, at LESSOR'S option, shall expire and end five (5) days
after LESSOR has given LESSEE written notice of such act, condition or default
and LESSEE hereby agrees immediately then to quit and surrender said Leased
Premises to LESSOR; but this shall not impair or affect LESSOR'S right to
maintain summary proceeding for the recovery of the possession of the Leased
Premises in all cases as provided for by law. If the Term of this Lease shall be
so terminated, LESSOR may immediately, or at any time thereafter, re-enter or
repossess the Leased Premises and remove all persons and property therefrom
without being liable for trespass or damages.
32. ASSIGNMENT OF CHATTELS: N/A
33. RIGHT OF ENTRY: LESSOR, or any of his agents, shall have the right to
enter the Leased Premises during all reasonable hours, to examine the same or to
make such repairs, additions or alterations as may be deemed necessary for the
safety, comfort or preservation thereof, or of said building, or to exhibit said
Leased Premises at any time within one hundred eighty (180) days before the
expiration of this Lease. Said tight of entry shall likewise exist for the
purpose of removing placards, signs, fixtures, alterations or additions which do
not conform to this Lease.
34. NOTICES: Any notice given LESSOR as provided for in this Lease shall be
sent to LESSOR by certified mail addressed to LESSOR at LESSOR'S Management
Office. Any notice to be given LESSEE under the terms of this Lease shall be in
writing and shall be sent by certified mail to the office of LESSEE in the
Leased Premises and to the General Council; Ogden Corporation, 2 Pennsylvania
Plaza, New York, NY 10121. Either party, from time to time, by such notice, may
specify another address to which subsequent notice shall be sent.
35. RULES AND REGULATIONS: LESSEE agrees to comply with all reasonable
rules and regulations LESSOR may adopt from time to time for operation of the
Building and parking facilities and protection and welfare of the Building and
parking facilities, its tenants, visitors and occupants. The present rules and
regulations, with which LESSEE hereby agrees to comply, entitled, "Rules and
Regulations" are attached hereto and are by this reference incorporated herein.
Any future rules and regulations shall become a part of this Lease and LESSEE
hereby agrees to comply with the same upon delivery of a copy thereof to LESSEE,
providing the same are reasonable and do not deprive LESSEE of its rights
established under this Lease.
36. HAZARDOUS AND/OR INDUSTRIAL MATERIALS: LESSEE agrees that it will not
discharge any hazardous material, hazardous waste or any other material
regulated by local, state or federal authorities, into or upon the land, water
or air of the property of which the Leased Premises is a part. Any and all such
hazardous materials, hazardous waste or any other such regulated materials shall
be stored and managed in a manner that will prevent their release to the
environment during use, fire spillage or other accidental occurrence. Hazardous
materials and hazardous waste shall be transported to and from the site in a
manner consistent with the directives of local, state and federal regulatory
authorities. LESSEE further agrees that it will not discharge any industrial
waste water, hazardous material, hazardous waste or any other material regulated
by local, state or federal authorities into any sewer system serving the Leased
Premises (or the property of which the Leased Premises is a part), that are in
excess of the published pretreatment standards of Seacoast Utilities, Inc. or
any other utility serving the Leased Premises without first obtaining written
authorization from the responsible utility and any regulatory authorities having
jurisdiction.
37. RADON GAS: Radon is a naturally occurring gas that, when it has
accumulated in a building in sufficient quantities, may present health risks to
persons who are exposed to it over time. Levels of Radon that exceed Federal and
State guidelines have been found in buildings in Florida. Additional information
regarding Radon and Radon testing may be obtained from your County Public Health
Unit. LESSOR warrants that Radon Gas levels, if any, in the Leased Premises are
maintained within Federal and State guidelines.
38. SURRENDER OF PREMISES: LESSEE agrees to surrender to LESSOR, at the end
of the term of this Lease and/or upon any cancellation of this Lease, said
Leased Premises in as good condition as said Leased Premises were at the
beginning of the Term of this Lease, ordinary wear and tear and damage by fire
or other casualty not caused by LESSEE'S negligence, excepted. LESSEE agrees
that if LESSEE does not surrender said Leased Premises to LESSOR at the end of
the term of this Lease, then LESSEE will pay to LESSOR two (2) times the monthly
rent paid in the final month of LESSEE'S term hereunder for each month that
LESSEE holds over; in addition, LESSEE shall pay all damages that LESSOR may
suffer on account of LESSEE'S failure to so surrender to LESSOR possession of
said Leased Premises, and will indemnify and save LESSOR harmless from and
against all claims made by any succeeding tenant of said Leased Premises against
LESSOR on account of delay of LESSOR in delivering possession of said Leased
Premises to said succeeding tenants so far as such delay is occasioned by
failure of LESSEE to so surrender said Leased Premises in accordance herewith or
otherwise.
39. PRIOR OCCUPANCY: If LESSEE, with LESSOR'S consent, shall occupy the
Leased Premises prior to the beginning of the Lease Term specified in Section 2
hereof, all provisions of this Lease shall be in full force and effect
commencing upon such occupancy, and rent for such period shall be paid by LESSEE
at the same rate herein specified.
40. WAIVER OF TRIAL BY JURY: It is mutually agreed by and between LESSOR
and LESSEE that the respective Parties hereto shall and they hereby do waive
trial by jury in any action, proceeding or counterclaim brought by either of the
Parties hereto against the other on any matter arising about, of or in any way
connected with this Lease, the relationship of LESSOR and LESSEE and LESSEE'S
use of or occupancy of the Premises.
41. ATTORNEY'S FEE: In the event it should become necessary for either
party hereto to enforce any of its rights hereunder, the prevailing party shall
be entitled to recover reasonable attorney's fee together with all costs
incurred, including through Appellate Court.
42. PRO RATA SHARE OF INCREASES IN MAINTENANCE AND OPERATING COSTS, REAL
ESTATE TAXES AND INSURANCE: N/A
43. TAXES AND INSURANCE: For the purposes of this Lease only, the following
words and terms shall have the following meaning:
(A) "Real Estate Taxes" shall mean all the real estate taxes and
assessments, special or otherwise, levied, assessed or imposed by federal, state
or local governments against or upon the building of which the Leased Premises
form a part and the land upon which it is erected. If due to a future change in
the method of taxation, any franchise, income, profit or other tax shall be
levied against LESSOR in substitution for or in lieu of any tax which would
otherwise constitute a real estate tax, such franchise, income, profit or other
tax shall be deemed to be a real estate tax for the purposes hereof.
(B) "Insurance" shall mean all insurance policies of every nature
maintained by LESSOR on the building and land of which the Leased Premises is a
part.
44. BROKERS: It is mutually agreed that neither party has dealt with any
real estate agent or broker other than JCB Enterprises III, Inc. LESSOR and
LESSEE agree and shall hold harmless that all expenses, judgments and attorneys
fees incurred in defending the claim of any other broker who alleges that LESSOR
or LESSEE dealt with him in connection with this Lease. Further, LESSOR shall be
responsible for any real estate commissions due JCB Enterprises III, Inc. in
connection with this Lease.
45. TIME: It is understood and agreed between the Parties hereto that time
is of the essence of all the terms, provisions, covenants and conditions of this
Lease.
46. CONSTRUCTION: This Lease shall be construed in accordance with the laws
of the State of Florida, with venue laid in Palm Beach County, Florida.
47. DRUG FREE ENVIRONMENT: LESSEE acknowledges that it understands that
LESSOR wishes to promote a Drug Free working environment and LESSEE will do all
that it can to keep illegal drugs, chemical substances and paraphernalia from
NorthCorp property. LESSEE will not knowingly allow any person to use or possess
any illegal substance on the NorthCorp property. Knowledgeable violation of this
policy may, at the discretion of the LESSOR, be considered grounds for the
termination of this Lease.
48. LEASE VALIDITY: The submission of this Lease for examination and/or
execution by LESSEE does not constitute a reservation of or option for the
Leased Premises for the benefit of LESSEE and this Lease shall have no force or
validity unless and until duly executed by LESSOR and delivered by LESSOR to
LESSEE.
49.PARTIAL INVALIDITY: If any provision of this Lease is held by a court of
competent jurisdiction to be invalid, void, or unenforceable, the remainder of
the provisions hereof shall nonetheless continue in full force and effect and
shall in no way be affected, impaired or invalidated thereby.
50. EQUIPMENT 6i UTILITY INTERRUPTIONS: Upon reasonable notification,
LESSOR may turn off equipment and interrupt utilities as reasonably needed to
avoid property damage or to perform work requiring such interruptions. LESSOR
shall act with customary diligence in making repairs and reconnections, and rent
shall not abate.
51. ASBESTOS AND HAZARDOUS MATERIAL DISCLAIMER: LESSOR warrants that the
Leased Premises contains no asbestos and or hazardous material either in present
or latent form.
52. CANCELLATION: LESSEE shall have the right to cancel the term of this
Lease beyond the eighteenth (18th) month by giving written notice of its'
intention to do so no later then the end of the twelfth (12) month at no penalty
or additional costs.
IN WITNESS WHEREOF, the Parties hereto have signed, and delivered this
Lease in duplicate at Palm Beach County, Florida on the day and year first above
written.
WITNESSES: FOR: LENZAR ELECTROOPTICS, INC.
A Corporation
HARVEY J. FORD 4/5/94 By: /s/ JAMES N. CHEAVETTA 4/5/94
- --------------------------------- ------------------------------
Date James N. Cheavetta
President
/s/Jane M. McBride 4/5/94
- ---------------------------------
Jane M. McBride
/s/ Harvey J. Ford
- ---------------------------------
Harvey J. Ford FOR CTB REALTY VENTURE XVI, INC.
A Connecticut Corporation
/s/ Allyson Almeida 4/6/94 BY: /s/ James R. Griffin
- --------------------------------- ------------------------------
Allyson Almeida Date James E. Griffin,
Vice President
/s/ Daniel Soars 4/6/94
- ---------------------------------
Daniel Soars
<PAGE>
NORTHCORP CENTER
RULES AND REGULATIONS
The following Rules and Regulations are considered to be a material portion of
the Lease and should be attached:
1) No sign, fixtures, advertisements or notice shall be displayed, inscribed,
painted or affixed by any Lessee on any part of the outside or inside of the
Building or on or about the Premises of any Lessee without written consent of
the Lessor, and then only of such color, size, style, and material as shall be
first specified by Lessor. No showcase shall be placed in front or in the
lobbies or corridors of said Building, and Lessor reserves the right to remove
all showcases so placed and all signs other than those above provided for,
without notice, and at the expense of the Lessee responsible for the same.
2) The sidewalks, entrance, passages, elevators and staircases shall not be
obstructed or used for any other purpose than ingress and egress.
3) Lessee identification on entrance doors will be by a standard signage
specified by Lessor and paid for by Lessee. No Lessee shall install or cause to
be installed without Lessor's consent any shades or blinds or drapes and their
color, materials, shape, style and size shall be designated by Lessor. No awning
or screen shall be installed by Lessee. All draperies hung or installed by
Lessee shall be installed with a back lining, the windowside face of which shall
be a color approved by Lessor in order to provide a uniform window exposure from
the street side of the Building.
4) No additions to nor alterations of any part of the Building shall be made by
any Lessee, without the written approval of the Lessor, and any such additions
or alterations shall be performed by the Lessor at the cost of the Lessee, if so
approved. Lessee shall not permit nor cause to be permitted any defacing of any
walls or other surfaces by nails, screws, hangers, drilled holes or otherwise.
5) Lessee shall keep all glass, locks, trim and other property of the Lessor in
good working order and in good repair and if any of same are broken by the
Lessee, such breaks shall be repaired at the Lessee's expense.
6) No additional locks shall be placed on any door of the leased premises and
Lessee will not permit any duplicate keys to be made, but if more than two (2)
keys for any door are desired, the additional number must be procured from the
Lessor and paid for by the Lessee. Upon the termination of the tenancy herein
provided, Lessee shall surrender all keys received by the Lessee to the Lessor.
No electric lamps of a higher wattage than 200 shall be placed in any electric
fixture in the Leased Premises without the consent of the Lessor.
7) If a Lessee desires telegraphic or telephonic connections, the Lessor will
direct the electricians as to where the wires are to be introduced, and without
such direction, no wiring or cutting for wires will be permitted.
8) The Lessor retains the power to prescribe the weight and proper position of
safes or any heavy equipment to be brought into the Lease Premises. Lessee shall
be responsible for any and all damage to the walls, floors or other parts of the
Building or common areas caused by or connected with any moving or caused by any
safe, furniture, boxes or bulky/heavy articles of Lessee in the Building.
9) Lessee shall instruct its agents, employees or co-Lessees not to use the
hallways, corridors or stairwells for loitering, lounging or public gathering.
Common area restrooms are for the convenience and use of the Lessees of the
building and for no other use.
10) The doors, windows and transoms that reflect or admit light into passageways
or into any place in said building shall not be covered or obstructed by Lessee.
The water-closets and other apparatus shall not be used for any purpose other
than for which they are constructed, and no sweeping, rubbish, rages or other
substances shall be thrown therein. Any damage resulting to them from such use
shall be borne by the Lessee who shall cause it.
11) Nothing shall be thrown by the Lessee its employees or guests out of the
windows or doors or down passages of the Building.
12) Lessee and its employees and guests are not to injure or deface the Building
nor the woodwork, nor the walls of the premises or common areas, nor to carry
upon the premises obnoxious, noisy or offensive business or a nuisance, nor
conduct any auction therein.
13) No room or rooms shall be occupied or used as sleeping or lodging apartments
upon the Leased Premises.
14) Water shall not be wasted by tying or wedging back faucets or otherwise.
15) Lessees must not leave their windows and doors open when leaving premises at
close of business or unoccupied at any time, and shall close windows and lock
doors and for any default or carelessness in these respects, or any of them,
shall make good all injury sustained by other Lessees and by the Lessor, or by
either of them, for damages resulting from such default or carelessness.
16) No bicycles or other vehicle and no animal shall be allowed in any part of
the Building without the consent of the Lessor.
17) No Lessee shall accumulate or store in the premises covered by this Lease
any waste paper, discarded records, books, paper files, sweepings, rags, rubbish
or other combustible material, protected from any external combustion.
18) Lessor retains the right to modify these Rules and Regulations upon mutual
agreement with LESSEE.
<PAGE>
LEASE BRIEF
Source of Information: JCB Enterprises III, Inc.
Lessor: CTB Realty Ventures XVI, Inc.
Lessee: Lenzar ElectroOptics, Inc.
Contact Name and Phone Number:
Legal Description: Building: 60 Suite: 6001
Date of Lease: March 9, 1994
Signed
Commenced May 1, 1994
Term of Lease: Five Years
Option Periods: None
TERM ANNUAL RENTAL MONTHLY RENTAL
Year 1 $134,400.00 $11,200.00 plus state sales tax 7.00 psf
Year 2 $144,000.00 $12,000.00 plus state sales tax 7.50
Year 3 $144,000.00 $12,000.00 plus state sales tax 7.50
Year 4 $153,600.00 $12,800.00 plus state sales tax 8.00
Year 5 $163,200.00 $13,600.00 plus state sales tax 8.50 7.70 avg.
Security Payment: $11,000.00
Free Rent: None
Size: 19,200 Use:
Parking Requirements: 10 north side of Building 30
Utilities Paid By: Landlord - water and sewer
Tenant -electric and janitorial
Maintenance Paid By: Exterior - Landlord
Interior-Tenant
Copy of Lessee's Insurance Policy: YES NO
Insurance Paid By: Real Property - Landlord
Personal Property- Tenant
Taxes Paid By: Real Property - Landlord
Personal Property- Tenant
Right of Assignment Yes with consent
Other Terms: Escalations: CPI 5% - 10% annual
Grosso 1st yr. 7.00
Landlord Expenses: $3.00 per square foot
Net Rent: $ 4.00 per square foot
Landlord Tenant Improvements: $2.60 per square foot
Cancellation: Yes - See P 52
Signage:
Mailbox Key: #:_______ Ordered:_____ Given to Lessee:_____
------
Initials
<PAGE>
NORTHCORP CENTER
ADDENDUM NO. 1
to a Lease dated 9TH day of MARCH, 1994, by and between CTB REALTY VENTURES
XVI, INC., (hereinafter called "LESSOR"), %JCB Enterprises III, Inc., whose
address for purposes hereof is 3910 RCA Boulevard, Suite 1011, Palm Beach
Gardens, Florida 33410 and INTELLIGENT MEDICAL IMAGING, INC. (hereinafter called
"LESSEE").
It is agreed between the Parties hereto that the Lease shall be amended as
follows:
1. LEASED PREMISES: Leased Premises are hereby expanded to include an
additional area of approximately 1,579 SQUARE FEET immediately contiguous to
Leased Premises and within Building 60 for a total of 20,779 SQUARE FEET.
2. RENTAL: Monthly Rental Rate is hereby increased by $500.00 ($6,000 per
annum), as follows:
Balance of Year 3 (Jan. - April) $12,500.00 per month plus state sales tax
Year 4 (5/97 - 4/98 ) $13,300.00 per month plus state sales tax
Year 5 (5/98 - 4/99 ) $14,100.00 per month plus state sales tax
All other terms and conditions of the Lease shall remain in full force and
effect.
IN WITNESS WHEREOF, the Parties hereto have signed, and delivered this
Lease in duplicate at Palm Beach County, Florida on the day and year first
written below.
WITNESSES: FOR: INTELLIGENT MEDICAL IMAGING, INC.
a Florida Corporation
By: /s/ Gene Cochran
- ----------------------------------- -----------------------------------
Date Gene Cochran
FOR: CTB REALTY VENTURES XVI, INC.
a Connecticut corporation
/s/ 1/27/97 By: /s/ John C. Bills
- ---------------------------------- ----------------------------------
Date John C. Bills
/s/
- ----------------------------------
[MAP OF PREMISES DELETED]
<PAGE>
Exhibit 23.1
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-29509) pertaining to the Amended and Restated 1990 Stock Option Plan
of Intelligent Medical Imaging, Inc. of our report dated February 9, 1998, with
respect to the financial statements and schedule of Intelligent Medical Imaging,
Inc. included in the Annual Report (Form 10-K) for the year ended December 31,
1997.
ERNST & YOUNG LLP
West Palm Beach, Florida
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1 Financial Data Schedule
</LEGEND>
<CIK> 0000930090
<NAME> INTELLIGENT MEDICAL IMAGING, INC.
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-30-1997
<EXCHANGE-RATE> 1
<CASH> 853,164
<SECURITIES> 6,230,009
<RECEIVABLES> 711,905
<ALLOWANCES> 40,000
<INVENTORY> 5,933,815
<CURRENT-ASSETS> 13,986,056
<PP&E> 4,365,384
<DEPRECIATION> 1,575,691
<TOTAL-ASSETS> 17,406,409
<CURRENT-LIABILITIES> 1,869,490
<BONDS> 0
0
0
<COMMON> 110,239
<OTHER-SE> 15,207,106
<TOTAL-LIABILITY-AND-EQUITY> 17,406,409
<SALES> 3,770,489
<TOTAL-REVENUES> 3,770,489
<CGS> 3,328,394
<TOTAL-COSTS> 3,328,394
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,729,165)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,729,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,729,165)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> 0.00
</TABLE>
