SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 16, 1998
Intelligent Medical Imaging, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
1-14190 65-0136178
(Commission File Number) (IRS Employer Identification No.)
4360 Northlake Boulevard, Suite 214, Palm Beach Gardens, FL 33410
(Address of Principal Executive
Offices) (Zip Code)
(561) 627-0344
(Registrant's Telephone Number, Including Area Code)
<PAGE>
Item 5. Other Events.
Throughout 1998, the Company has experienced a reduction in revenue and
increased costs that have adversely affected the Company's current results of
operations and liquidity. In addition, the closing price of the Company's common
stock has recently been below the Nasdaq National Market minimum requirement on
a consistent basis. In the event the price of the Company's common stock
continues to close below the Nasdaq National Market minimum price for a
sufficient length of time so as to cause the Company to not meet the Nasdaq
National Market continued inclusion requirements for minimum bid price and the
Company is not able to rectify such non-compliance in accordance with Nasdaq
rules and regulations, Nasdaq can delist the Company's common stock. Failure of
the Company's common stock to be listed for trading on Nasdaq constitutes an
event of default under the Company's convertible debenture agreement under which
$3 million of convertible debentures are outstanding at October 9, 1998. In the
event of default under the convertible debenture agreement, the full principal
amount of the debentures, together with all accrued interest thereon, would
become immediately due and payable in cash. These developments and the terms of
the lending arrangement could limit the ability of the Company to make further
borrowings under this agreement, further adversely impacting the Company's
liquidity. As a result of these issues, the Company's financial statements for
the year ended December 31, 1997 and an updated accountants' report and an
updated Management's Discussion and Analysis thereon are filed herewith as
exhibits to this Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Not applicable
(b) Not applicable
(c) Exhibits:
Exhibit Number
Exhibit Title
99.1 Financial Statements of Intelligent Medical Imaging, Inc. for the year
ended December 31, 1997
99.2 Management's Discussion and Analysis for the year ended
December 31,1997
<PAGE>
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Intelligent Medical Imaging, Inc.
Registrant
By: /s/ Tyce M. Fitzmorris
--------------------------
Tyce M. Fitzmorris,
President and Chief Executive Officer
Dated:October 16, 1998
<PAGE>
EXHIBIT 99.1
ITEM 7. FINANCIAL STATEMENTS
Financial statements required by this item can be found at the pages listed in
the following index:
PAGE
Report of Independent Certified Public Accountants 2
Balance Sheets at December 31, 1997 and 1996 3
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 4
Statements of Shareholders' Equity (Net Capital Deficiency)
for the years ended December 31, 1997, 1996 and 1995 5
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995 6
Notes to Financial Statements 8
<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. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 9, 1998,
the Company, as discussed in Note 16, has experienced a reduction in revenue and
increased costs that have adversely affected the Company's current results of
operations and liquidity. In addition, the price of the Company's common stock
has recently closed below the Nasdaq National Market minimum requirement on a
consistent basis. In the event the price of the Company's common stock continues
to close below the Nasdaq National Market minimum price for a sufficient length
of time so as to cause the Company to not meet the Nasdaq National Market
continued inclusion requirements for minimum bid price and the Company is not
able to rectify such non-compliance in accordance with Nasdaq rules and
regulations, Nasdaq can delist the Company's common stock. Failure of the
Company's common stock to be listed for trading on Nasdaq constitutes an event
of default under the Company's convertible debenture agreement under which $3
million of convertible debentures were outstanding at October 9, 1998. In the
event of default under the convertible debenture agreement, the full principal
amount of the debentures, together with all accrued interest thereon, would
become immediately due and payable in cash. These developments and the terms of
the lending arrangement could limit the ability of the Company to make further
borrowings under this agreement. Note 16 describes management's plans to address
these issues.
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.
/s/ ERNST & YOUNG LLP
---------------------
Ernst & Young LLP
West Palm Beach, Florida
February 9, 1998, except for Note 16,
as to which the date is October 9, 1998.
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
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
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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
========== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
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
=========== ========== =========== ========== ============ ===========
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
7
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
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)
</TABLE>
CONTINUED ON NEXT PAGE.
<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
=== === ========
</TABLE>
SEE ACCOMPANYING NOTES.
<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:
FAIR
AMORTIZED COST 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:
DECEMBER 31
1997 1996 1995
---- ---- ----
Pro forma net loss $12,547,611 $(7,000,652) $(4,017,561)
=========== ============ ============
Pro forma net loss per share $(1.15) $(.70) $(.70)
======= ====== ======
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.
<PAGE>
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.
16. RECENT DEVELOPMENTS
During 1998 the Company has experienced a reduction in revenue and increased
costs that have adversely affected the Company's current results of operations
and its liquidity. However, during 1998, the Company introduced two new products
and two additional procedures which management believes offer significant
opportunities for expanding the Company's potential customer base in the future.
In addition, the Company is currently negotiating with two parties for
distribution and licensing agreements associated with sales of the Company's
products. Also, during the third quarter of 1998, the Company implemented cost
controls and personnel reductions.
In June 1998, the Company issued $3 million of convertible debentures. An
additional $7 million of financing is available to the Company, but the
availability of such financing is at the discretion of the lender after
consideration of the trading characteristics of the common stock, the lender's
exposure to the Company at that time, the absence of any material adverse change
in the Company's financial condition or operations and the Company's continued
compliance with the terms of the financing. The debentures include a requirement
that the Company's common stock be listed for trading by Nasdaq. The closing
price of the Company's common stock has closed below the Nasdaq National Market
minimum requirement on a consistent basis, resulting in the potential for the
stock to be delisted from Nasdaq which would constitute an event of default
under the convertible debenture agreement, in which event the full principal
amount of the debentures, together with all accrued interest thereon, would
become immediately due and payable in cash and the availability of the remaining
borrowing capacity under the convertible debenture agreement could be further
limited. The Company is considering a reverse stock split to rectify this
situation, however, there can be no assurance that such action will achieve the
intended result or that it will satisfy the event of default under the
convertible debenture agreement.
Although management believes that its plans 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 the distribution and licensing
agreements.
<PAGE>
EXHIBIT 99.2
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.
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.
RECENT DEVELOPMENTS
During 1998 the Company has experienced a reduction in revenue and increased
costs that have adversely affected the Company's current results of operations
and its liquidity. However, during 1998, the Company introduced two new products
and two additional procedures which management believes offer significant
opportunities for expanding the Company's potential customer base in the future.
In addition, the Company is currently negotiating with two parties for
distribution and licensing agreements associated with sales of the Company's
products. Also, during the third quarter of 1998, the Company implemented cost
controls and personnel reductions.
In June 1998, the Company issued $3 million of convertible debentures. An
additional $7 million of financing is available to the Company, but the
availability of such financing is at the discretion of the lender after
consideration of the trading characteristics of the common stock, the lender's
exposure to the Company at that time, the absence of any material adverse change
in the Company's financial condition or operations and the Company's continued
compliance with the terms of the financing. The debentures include a requirement
that the Company's common stock be listed for trading by Nasdaq. The closing
price of the Company's common stock has closed below the Nasdaq National Market
minimum requirement on a consistent basis, resulting in the potential for the
stock to be delisted from Nasdaq which would constitute an event of default
under the convertible debenture agreement, in which event the full principal
amount of the debentures, together with all accrued interest thereon, would
become immediately due and payable in cash and the availability of the remaining
borrowing capacity under the convertible debenture agreement could be further
limited. The Company is considering a reverse stock split to rectify this
situation, however, there can be no assurance that such action will achieve the
intended result or that it will satisfy the event of default under the
convertible debenture agreement.
Although management believes that its plans 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 the distribution and licensing
agreements.
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 arbitration hearing was completed on October
7, 1998 and the parties are required to submit past trial memoranda on or before
November 6, 1998. 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 ISSUE
The Company has implemented a process for identifying, prioritizing and
modifying or replacing certain computer and other systems and programs that may
be affected by the Year 2000 issue. The Company is also monitoring the adequacy
of the manner in which certain third parties and third party vendors of systems
are attempting to address the Year 2000 issue. The Company has substantially
completed an assessment of its computer and embedded systems and determined that
it needed to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. While the Company believes its process is designed to be successful,
because of the complexity of the Year 2000 issue, and the interdependence of
organizations using computer systems, it is possible that the Company's efforts,
or those of third parties with whom the Company interacts, will not be
successful or satisfactorily completed in a timely fashion.
The Company estimates that the total cost that it will incur in connection with
attempting to address the Year 2000 issue, including assessment development of a
modification or replacement plan, purchase of new hardware and software and
implementation of the modification or replacement plan or software, will be
approximately $50,000. To date, the Company has incurred approximately $35,000
(all of which has been expensed). The Company funded the costs incurred to date
through cash flow from operations and expects to fund future costs through cash
flow from operations.
The project is estimated to be completed by September 1999, which is prior to
any anticipated impact on the Company's operating systems. The Company believes
that with modifications to existing software, conversions to new software and
replacement or modification of certain embedded systems, the Year 2000 issue
will not pose significant operational problems. However, if such modifications
and conversions are not made, or are not completed on a timely basis, the Year
2000 issue would have a material adverse impact on the Company's business,
financial condition and results of operations.
The estimated costs of the project and the date on which the Company believes
necessary modifications and replacements to address the Year 2000 issue will be
completed are based on management's estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources and other factors. As the Company progresses in addressing the
Year 2000 issue, estimates of costs could change, and there can be no assurance
that the Company will not experience cost overruns or delays in connection with
its plan for modifying or replacing systems and programs. In addition, it may
not be possible to adequately assess the impact of the failure of third parties
to adequately address the Year 2000 issue. As a result, actual operating results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained to address the Year 2000 issue, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Due to the fact that the Company believes it has secured sufficient resources to
address the Year 2000 issue as it relates to its computer systems, the
assessment of embedded systems is complete and the Company does not believe that
the contingency planning is warranted at this time. The assessment of third
parties external to the Company is underway, and the results of this assessment,
when completed, may reveal the need for contingency planning at a later date.
The Company will regularly evaluate the need for contingency planning based on
the progress and findings of the Year 2000 project.
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.
