SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 1-14190
INTELLIGENT MEDICAL IMAGING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0136178
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
4360 NORTHLAKE BOULEVARD, SUITE 214, PALM BEACH GARDENS, FLORIDA 33410
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 627-0344
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH
REGISTERED:
COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ (NATIONAL MARKET SYSTEM)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY A CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED TO THE BEST
OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THE
FORM 10-K. [ ]
<PAGE>
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE
REGISTRANT, BASED UPON THE CLOSING PRICE OF SUCH STOCK ON APRIL 9, 1999, AS
REPORTED BY NASDAQ, WAS APPROXIMATELY $12,779,888. SHARES OF COMMON STOCK HELD
BY EACH OFFICER AND DIRECTOR AND BY EACH PERSON WHO OWNS 5 PERCENT OR MORE OF
THE OUTSTANDING COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE
DEEMED TO BE AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS IS NOT
NECESSARILY A CONCLUSIVE DETERMINATION FOR OTHER PURPOSES.
THE NUMBER OF OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK ON APRIL 9,
1999, WAS 12,280,021.
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1998
Part I
Item 1. Business...............................................................1
A. General..........................................................1
B. Financial Information about Industry Segments....................4
C. Description of Business..........................................4
Item 2. Properties.............................................................8
Item 3. Legal Proceedings......................................................8
Item 4. Submission of Matters to a Vote of Security Holders....................8
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..8
Item 6. Selected Financial Data...............................................10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................12
A. Overview........................................................12
B. Results of Operations...........................................14
C. Liquidity and Capital Resources.................................14
D. Outlook.........................................................15
E. Other Factors Relating to Forward-Looking Statements............17
Item 8. Financial Statements and Supplementary Data..........................F-1
Report of Independent Certified Public Accountants...........F-2
Balance Sheets...............................................F-3
Statements of Operations.....................................F-4
Statements of Shareholders' Equity...........................F-5
Statements of Cash Flows.....................................F-6
Notes to Financial Statements................................F-8
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................18
Part III
Item 10. Directors and Executive Officers of the Registrant...................18
Item 11. Executive Compensation...............................................20
Item 12. Security Ownership of Certain Beneficial Owners and Management.......27
Item 13. Certain Relationships and Related Transactions.......................28
Part IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.......30
<PAGE>
Part I.
Item 1. BUSINESS
The following discussion contains trend information and other forward-looking
statements that involve a number of risks and uncertainties. The actual results
of Intelligent Medical Imaging, Inc.(TM) ("IMI") could differ materially from
IMI's historical results of operations and those discussed in the
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those identified in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." All period references are to IMI's fiscal periods ended December
31, 1998, December 31, 1997, December 31, 1996, or December 31, 1995, unless
otherwise indicated.
A. GENERAL
IMI has developed and is marketing the MICRO21(R) system, an intelligent,
automated microscope system, for diagnostic use in hospital, commercial
reference and physician group-practice laboratories. The MICRO21 system is
designed to automate a broad range of manual microscopic procedures, potentially
enabling the laboratory to reduce costs and exposure to liabilities, enhance
analytical accuracy and consistency, increase the productivity of medical
technologists and improve patient care. According to industry sources, over 2
billion clinical laboratory microscopic procedures are performed manually by
trained medical technologists each year. When performed manually, these
procedures are costly, time-consuming and subject to varying degrees of accuracy
and consistency. These procedures, which are performed to assist in the
diagnosis of various diseases, including most cancers, AIDS and other sexually
transmitted diseases, anemia, infections and genetic disorders, remain the last
major segment of the clinical laboratory to be automated.
The Company estimates that manual microscopic procedures are conducted in
approximately 31,000 clinical laboratories worldwide, including approximately
10,800 in the United States, which comprised an estimated 5,500 hospital
laboratories, 2,700 commercial reference laboratories and 2,600 large physician
group-practice laboratories. Currently, there are over 50 manual microscopic
procedures used to assist in the diagnosis of various diseases and disorders.
Most of these procedures are performed by trained medical technologists who scan
prepared slides under a microscope to classify, count and examine cells and
other structures. The Company believes the MICRO21 system can replace many
manual microscopic procedures.
In December 1998 the Company's new blood slide maker, the Hematology Slide Maker
(TM) ("HSM") was commercially released. The HSM fully automates the process of
blood slide making/staining. The HSM was designed so that results from the
hematology analyzers manufactured by Bayer and Beckman-Coulter can trigger the
automatic preparation of a slide, providing the lab significant labor savings
and improved operational efficiency. Once prepared, the slides can be
automatically reviewed by the MICRO21, providing even greater labor savings and
improved operational efficiency.
IMI was incorporated in Florida in 1989. On January 16, 1996, Intelligent
Medical Imaging, Inc.(TM) ("IMI Delaware") was formed as a Delaware corporation
for the purpose of changing the Company's state of incorporation from Florida to
Delaware. Also on January 16, 1996, the Board of Directors declared a
three-for-one stock split, effective upon the merger described below, on IMI
Delaware's common stock in the form of a 200 percent stock dividend, payable
January 18, 1996, to shareholders of record on January 18, 1996. Effective
January 17, 1996, IMI Florida was merged into IMI Delaware. IMI Delaware has
30,000,000 shares of $.01 par value common stock and 2,000,000 shares of $.01
par value preferred stock authorized for issuance. IMI Delaware and its
predecessor, IMI Florida, are referred to herein as the "Company" or "IMI."
On March 27, 1996, the Company completed an initial public offering of 3,450,000
shares of common stock at a price of $11.00 per share. The net proceeds to the
Company from the sale of such common stock were approximately $34,000,000 after
deducting underwriting commissions of approximately $2,700,000 and offering
expenses of approximately $900,000.
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.
On April 20, 1998, the Company signed a customer financing agreement with Prime
Capital Corp. ("Prime") to provide up to $36 million of financing for customers
acquiring the MICRO21 System Workstation. Under the terms of the agreement, the
Company and Prime agreed to establish a wholesale customer finance relationship
under which Prime agreed to provide a "Private Label Fee Per Slide" financing
facility to customers of the Company for an ongoing vendor leasing program.
Prime agreed to provide up to $12 million of customer financing per year over
three years. Notwithstanding the execution of this agreement, as of April 9,
1999 the Company and Prime have not established a customer finance relationship
and none of the Company's customers have obtained financing under this agreement
with Prime. If and when it is ever implemented this agreement will provide a
financing alternative for IMI's customers.
On June 30, 1998 the Company completed the sale of $3,000,000 of 6% convertible
debentures, due June 30, 2001 (the "Debentures"). See Footnote 8 of Notes to
Financial Statements in Part II, Item 8 of this Form 10-K. As of April 9, 1999,
the holder of the Debentures had converted $345,000 of the original $3,000,000
principal amount of the Debentures into shares of the Company's common stock,
leaving Debentures in the principal amount of $2,655,000 outstanding as of April
9, 1999. If the Company's common stock is delisted from the Nasdaq National
Market and not allowed to be listed on the Nasdaq SmallCap Market as discussed
below, the Debentures will be in default. The Company does not have capital
available to pay the outstanding principal amount of the Debentures in the event
of such a default.
On August 14, 1998 the Company received full repayment of all amounts due with
respect to an advance which the Company made to the Company's President in
January 1998 in the amount of $196,000. With respect to repayment of the
Company's advance to a former director, R. Wayne Fritzsche, as of December 31,
1998 payments in the amount of $290,000, plus a $75,000 credit offset for
consulting fees past due or payable to Mr. Fritzsche by the Company, had been
applied against the amount due, leaving a balance due of $86,684.
Repayment of the balance of $86,684 has been extended to August 28, 1999.
On October 30, 1998 the Company was notified by Nasdaq of a potential delisting
of the Company's common stock from the Nasdaq National Market, effective
February 1, 1999, due to the Company's failure to comply with Nasdaq's $1.00
minimum bid price requirement for continued listing on the Nasdaq National
Market. On January 28, 1999 the Company requested a hearing before a Nasdaq
hearing panel to appeal the proposed delisting, which effectively staying the
delisting of the Company's common stock. On March 25, 1999 the Company was
further notified by Nasdaq that the Company did not meet the $4,000,000 net
tangible assets requirement for continued listing on the Nasdaq National Market.
The Company's request for a hearing was granted by Nasdaq and the hearing was
held on April 8, 1999. The Company expects Nasdaq to render a decision on the
Company's appeal of the proposed delisting within three weeks of the date of the
hearing. In the event that the Company's appeal is denied and the Company's
common stock is delisted from the Nasdaq National Market, the Company has
requested that Nasdaq permit the Company's common stock to be listed on the
Nasdaq Smallcap Market. There can be no assurance that the Company's appeal of
Nasdaq's proposed delisting of the Company's common stock will be successful and
it appears likely that the Company's common stock will eventually be delisted
from the Nasdaq National Market. There also can be no assurance that Nasdaq will
permit the Company's common stock to be listed on the Nasdaq Smallcap Market
since such listing will require that the Company convince Nasdaq that it can
sustain long term compliance with all applicable continued listing requirements.
In the event that the Company's common stock is delisted from the Nasdaq
National Market and the Company is not successful in its request that its common
stock be listed on the Nasdaq Smallcap Market, the Company's common stock will
commence trading on the OTC Bulletin Board, in which case a shareholder may find
it more difficult to sell, or to obtain quotations as to the price of, the
Company's common stock. In addition, the failure of the Company's common stock
to be listed for trading on the Nasdaq National Market or the Nasdaq Smallcap
Market would constitute an event of default under the Debentures, 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 any remaining borrowing capacity under the related convertible debenture
agreement could be further limited. Pending the Nasdaq hearing panel's decision,
the Company's common stock will remain listed on Nasdaq's National Market
System.
On November 16, 1998 the Company entered into three related agreements with
Bayer Corporation ("Bayer") involving the Company's blood slide maker, the HSM.
The three agreements, a Licensing Agreement, Instrument Supply Agreement and an
After Market Supply Agreement, provide Bayer with certain non-exclusive rights
to manufacture and sell products based on the HSM. Pursuant to the Licensing
Agreement Bayer paid the Company a one-time licensing fee of $1,100,000. The
Licensing Agreement further provides for Bayer to pay the Company a royalty
payment of $2,000 on each of the first 400 HSM-based units it manufactures and
sells in exchange for the non-exclusive right to manufacture and sell HSM-based
products and the right to negotiate for the manufacture and distribution of the
Company's MICRO21 System, Urine Slide Maker ("USM") and any other new Company
products. The Instrument Supply Agreement provides that Bayer will manufacture
the HSM for the Company for at least two years in the event the Company chooses
not to manufacture the HSM or chooses to have Bayer manufacture the HSM to
supplement the Company's manufacture of this product. Finally, pursuant to the
After Market Supply Agreement, with limited exceptions Bayer is required to
recommend the Company as a sole source of consumables used on all HSM-based
products manufactured and sold by Bayer until the earlier to occur of (a) three
years following Bayer's sale of 200 HSMs or (b) five years after Bayer's initial
sale of an HSM.
On November 23, 1998, the Company entered into an Invoice Purchase and Sale
Agreement with Finova Capital Corporation ("Finova") pursuant to which Finova
purchased certain invoices from the Company at an invoice purchase price of 95%
of the net amount of the invoice. Eighty percent (80%) of the purchase price is
payable to the Company at the time of the acceptance of the invoice by Finova
and the remainder of the purchase price is due to the Company upon payment of
the invoice by the account debtor. As of April 9, 1999, the Company had sold
invoices with an aggregate net amount of $1,057,000 to Finova.
On December 17, 1998, the Company entered into a distribution agreement with
Beckman-Coulter involving the Company's blood slide maker, the HSM. The
non-exclusive distribution agreement has a term of ten years and allows
Beckman-Coulter to obtain the HSM on a volume discount basis for re-sale to its
customers. Domestically IMI will have prime responsibility for customer support,
with Beckman-Coulter field support personnel providing installation and field
maintenance services on a fixed fee basis. In foreign markets, Beckman-Coulter
will have total responsibility for customer support. Beckman-Coulter will
recommend IMI as the sole source for consumables on all HSMs it sells,
domestically and overseas. As of April 9, 1999, Beckman-Coulter had purchased
two HSMs under the distribution agreement.
The Company has implemented strategic steps in an effort to remain viable until
sufficient market penetration for the Company's products is achieved. This plan,
which includes personnel reductions, has reduced monthly expenditures from
approximately $1,100,000 in July 1998 to $350,000 as of April 9, 1999, with the
reduction in extraordinary development expenditures coinciding with the
completion of the HSM instrument and across the board reductions in IMI's
operating costs. In connection with these cost reductions, the Company decided
to discontinue its operations in Europe and, instead, rely on qualified
distributors. The IMI Europe office was officially closed on July 31, 1998.
The Company has also reduced sales expenditures, while emphasizing a sales
process that better targets prospective customers who are closest to making a
purchase decision. The reduction of sales expenditures is in furtherance of the
strategy of focusing on specific customer groups and markets and the de-emphasis
on providing total market coverage to all types of prospects. The Company is
implementing a plan that will segment the market according to product fit and
geographic location.
Notwithstanding the reductions in personnel and corporate expenditures and the
strategic planning referenced above, the Company has depleted its cash reserves
and has been delinquent in its payroll obligations since March 31, 1999. As of
April 9, 1999 the Company is delinquent in its payroll obligations (including
wages, severance pay and accrued vacation pay) in the amount of $189,000. The
Company is also currently delinquent in the payment of its accounts payable. In
addition, the Company is currently in default in the amounts of $57,213 and
$175,280 with respect to the payment of two secured promissory notes to the
Company's legal counsel. These promissory notes were executed to provide for the
payment of past due legal fees owed to the Company's legal counsel, Edwards &
Angell, LLP. The Company's failure to pay its employees will adversely affect
the Company's efforts to maintain a competent and capable sales and marketing
staff. The Company will continue to lose employees unless it can raise capital
promptly. In addition, the Company's inability to timely pay its accounts
payable has had an adverse effect on the Company's relationship with its
vendors, resulting in some vendors refusing to ship products or to provide
services to the Company. The Company continues to explore a variety of
alternatives for increasing its sales and distribution capacity and raising
sufficient capital to fund its operations. Implementation of the Company's
business strategy requires significant expenditures of capital. The Company is
currently seeking additional funds through debt or equity. There can be no
assurance that such funds can be obtained on favorable terms, if at all. If the
Company's efforts to raise capital are unsuccessful, the Company will have to
cease operations.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
IMI does business in one industry segment.
C. DESCRIPTION OF BUSINESS
PRODUCTS
The MICRO21 system consists of the Company's NeuralVision(R) software platform
integrated with slide delivery, optics, video and monitor hardware subsystems.
The MICRO21 system automatically scans pre-loaded slides to locate, classify,
count, display and store full-color digital images of cells. Up to 100 cell
images, identified and grouped by cell type, can be displayed simultaneously on
a full-color screen. A pen-based, touch-sensitive screen allows a medical
technologist to review, regroup and reclassify cells, and an on-line reference
library can be accessed to assist in cellular analysis. By automating most of
the steps associated with microscopic procedures, the MICRO21 system allows
medical technologists to focus on diagnostic analysis. The Company believes that
the MICRO21 system can substantially reduce review time, thereby decreasing
labor costs and allowing for more efficient use of personnel.
While the Company intends to apply the MICRO21 system to a variety of diagnostic
tests, the Company implemented the white blood cell ("WBC") differential,
including the WBC morphology, the red blood cell ("RBC") morphology and the
platelet estimate as the first procedure. The WBC differential is the most
common clinical laboratory microscopic procedure, performed manually over 240
million times worldwide in 1995, according to Company estimates. A WBC
morphology, RBC morphology and platelet estimate are commonly performed in
conjunction with, and on the same blood smear used when performing, a WBC
differential. The Company has received U.S. Food and Drug Administration ("FDA")
510(k) clearance to market the MICRO21 system for the automated location and
display of nucleated blood cells to assist medical technologists in performing
WBC differentials and WBC morphological analysis and for the display of
full-screen wide-field images from a slide to assist a medical technologist in
assessing RBC morphologies and in estimating platelets. IMI received FDA 510(k)
clearance in December 1997 to market the WBC estimate procedure and has added it
to the WBC differential package. The WBC estimate is provided as a back-up to
WBC counts provided by hematology analyzers.
In May 1996, the Company received FDA 510(k) clearances for two additional
commonly performed microscope procedures: reticulocyte count and anti-nuclear
antibodies ("ANAs"). The reticulocyte procedure, which is now implemented,
measures the number of reticulocytes (immature red blood cells produced in the
bone marrow) and is performed to monitor bone marrow production during the
treatment of particular anemias in order to track the effectiveness of the
therapies being utilized. An ANA analysis is used to identify cells associated
with general connective tissue and autoimmune diseases such as arthritis, lupus
and Graves disease.
In January 1997, the Company received FDA 510(k) clearance for the nDNA
procedure. nDNA is an indirect enzyme antibody test which is used for the
semi-quantitative detection of nDNA antibody in human serum. This procedure is
used as an aid in the diagnosis of systemic lupus erythematosus and other
connective tissue disease.
In October 1997, IMI received FDA 510(k) clearance for the cerebrospinal fluid
white blood cell differential, which is the examination of white blood cells in
spinal fluid and is used to diagnose inflammation and infection of the central
nervous system, including meningitis.
Currently under development is a procedure for urine sediment analysis, which is
broadly used to screen urinary tract and renal functions and to establish
diagnosis of multiple kidney and urinary tract diseases. FDA 510(k) submission
for this procedure was approved in 1998.
The MICRO21 now also supports animal applications for use in veterinary,
pharmaceutical and other medical research.
The Company believes that, similar to the automation of the WBC differential,
the automation of additional procedures will potentially result in cost
reductions, enhanced analytical accuracy and consistency, increased productivity
of medical technologists and improved patient care. No assurances can be given,
however, that the Company will successfully develop additional procedures or
ultimately obtain FDA clearance for the MICRO21 system for such new procedures.
In December 1998 the Company's new blood slide maker, HSM, was commercially
released. The HSM fully automates the process of blood slide making/staining.
The HSM was designed so that results from the hematology analyzers manufactured
by Bayer and Beckman-Coulter can trigger the automatic preparation of a slide,
providing the lab significant labor savings and improved operational efficiency.
Once prepared, the slides can be automatically reviewed by the MICRO21,
providing even greater labor savings and improved operational efficiency.
PRODUCT DEVELOPMENT
NeuralVision is the Company's internally-developed, proprietary software
platform, incorporating neural network, image processing and hardware operation
programs. NeuralVision's neural network provides the foundation for the MICRO21
system's visual artificial intelligence. Unlike conventional software, which
simply executes a series of instructions, neural network software is capable of
simulating the human ability to learn from experience and, consequently, to
recognize complex patterns. The Company believes that this capability allows
NeuralVision to be trained to recognize a wide variety of cells and other
structures associated with microscopic analysis. The NeuralVision software
platform was developed using object-oriented programming and an automated
software change management system to facilitate system upgrades and adaptation
for performing many microscopic procedures. To train the neural network,
NeuralVision is "shown" representative samples of various cell types through a
color video camera attached to a microscope and through this process "learns"
characteristic interrelationships that can later be recalled to identify
specific cell types. The Company believes that system upgrades and additional
procedures could enable existing customers to increase utilization of the
MICRO21 system, thereby further reducing costs and enhancing efficiency while
expanding the Company's market base to include lower volume laboratories. The
MICRO21 system utilizes an "open systems" architecture design adaptable to
specific customer requirements, such as the integration with a facility's
existing laboratory information system and the networking of multiple review
stations, archival storage devices and other peripherals. The MICRO21 system's
ability to transmit cell images, commonly known as "telemedicine," allows for
remote review of patient results by supervising physicians and specialists to
provide more timely and enhanced diagnostic results, which should lead to
improved patient care.
The goal of IMI's product development is to allow the MICRO21 to be used in
conjunction with other laboratory equipment automatically and eliminate the need
for much of the time-consuming and potentially dangerous handling of samples.
New products under development include:
o Urine Slide Maker, an automated slide maker which will prepare urine
samples for examination by a technologist or by the MICRO21; and
o CoreLab, IMI's total hematology solution. It will be designed to be
integrated with many hematology analyzers on the market today and will
automatically respond to flags for full sample examination, prepare slides
as required and perform the search and display functions using the MICRO21
system.
The Company spent approximately $5,311,333, $5,022,670, $2,113,565 and
$1,793,769 on research and development in 1998, 1997, 1996 and 1995,
respectively.
MANUFACTURING
The Company's manufacturing process consists of final assembly and testing of
major components and is performed at the Company's 20,800 square-foot leased
manufacturing facility in Palm Beach Gardens, Florida. All major assembly,
software download, and final quality test and inspection functions are performed
by the Company. Some of the components of the MICRO21 system are designed to
Company specifications and manufactured by third-party contract manufacturers,
while other components are readily available from a variety of suppliers. Most
of the hardware components constituting the MICRO21 system are readily available
from multiple sources, although the Company obtains certain components from
single-source suppliers. The MICRO21 system was designed for assembly with
third-party manufactured hardware and equipment components to minimize hardware
development costs and to facilitate substitution in the event that technology
improves or more cost-effective components become available.
The Company maintains a comprehensive quality assurance and quality control
program, which includes complete documentation of all material programs and
quality control test methods. Upon final assembly, each MICRO21 system is tested
to assure that electrical, mechanical, computer and other subsystems are
operating within established parameters and that all subsystems are properly
integrated. The Company's in-house medical technologists then perform multiple
WBC differentials, reticulocyte counts, ANA and nDNA screens and other
procedures to determine whether the system's location, display,
pre-classification and other functions are performing to specification.
In September 1997, IMI obtained Quality Management Institute ("QMI")
registration to ISO 9001 for its quality management system. Such registration
means IMI's design, development, manufacturing, installation and servicing
processes have successfully completed a quality audit by QMI, a worldwide
accredited auditor. In November 1996, IMI obtained the necessary safety,
emissions and immunity certification for the MICRO21 to qualify for CE Mark
certification. Although the MICRO21 did not previously fall under a particular
CE directive, a new directive is expected to be adopted (the European In Vitro
Diagnostic Directive). Based on drafts of the new directive made available, IMI
believes the MICRO21 will comply with the new directive.
COMPETITION
The MICRO21 system faces competition from several sources, including medical
technologists, software companies and manufacturers of in vitro diagnostic
equipment. The Company believes that the primary competition to the MICRO21
system is the use of medical technologists to perform manual microscopic
analysis. The Company believes that use of the MICRO21 system will permit a
laboratory to reduce costs and potential liabilities, enhance analytical
accuracy and consistency, increase the productivity of medical technologists and
improve patient care. The Company also faces competition from software companies
engaged in the development of neural network-based software with optical
recognition applications. Some of these neural networks may be adapted for uses
competitive with the Company's MICRO21 system. Further, the Company's products
must compete for market share against numerous companies offering products or
services that can assist laboratories in performing hematological analyses and
procedures, whether or not such products or services utilize automated cell
analysis or intelligent microscopes. For example, with regard to the WBC
differential, the MICRO21 system competes indirectly with flow cytometers
performing complete blood counts and partial WBC differentials, including flow
cytometers manufactured and sold by Coulter Corporation, Abbott Laboratories and
Sysmex as well as with older image-based systems.
The Company is aware of one other intelligent optical system utilizing neural
network software, manufactured and developed by Neuromedical Systems, Inc.
("Neuromedical"). The Company believes that Neuromedical's product has been
developed primarily for the Pap smear procedure. Neuromedical has notified the
Company of its belief that the MICRO21 system may infringe certain patents held
by Neuromedical. In addition, other companies, including NeoPath, Inc. and
International Remote Imaging Systems, Inc. ("IRIS"), are marketing or may market
intelligent optical systems applicable to microscopic testing procedures that
compete or may compete with the MICRO21 system. See "Item 3. Legal Proceedings."
GOVERNMENT REGULATION
The Company's products are subject to stringent government regulation in the
United States and other countries. In the United States, the Food, Drug and
Cosmetics Act and other statutes and regulations govern the testing,
manufacture, distribution, sale, marketing, labeling, storage, record keeping,
advertising and promotion of such products. Failure to comply with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, withdrawal of existing product approvals or
clearances, refusal to approve or clear new applications or notices and criminal
prosecution.
The Company submitted a 510(k) (application for Pre-Market Certification) for
the MICRO21 system in November 1992 and obtained FDA 510(k) clearance in July
1993 to market the MICRO21 system as a Class II automated cell locating device
for the automated location and display of nucleated blood cells to assist
medical technologists in performing WBC differential and WBC morphological
analysis and for the display of wide-field images from a blood sample on a slide
to assist a medical technologist in assessing RBC morphologies and in estimating
platelet counts. Since that clearance was obtained, the Company has made a
number of improvements in the device and its labeling. The Company has not
sought a new 510(k) clearance for any of these improvements on the basis of the
Company's conclusion, reflected in the Company's technical report addressing
this matter, that none of the improvements could significantly affect the
safety, effectiveness or intended use of the original product. Under the FDA's
regulatory scheme, the decision whether to seek 510(k) clearance for a modified
device is left to the manufacturer in the first instance. There can be no
assurance, however, that the FDA would agree with the Company's conclusion, that
the FDA would not require the Company to cease marketing and obtain 510(k)
clearance for the MICRO21 system (as improved), or that such clearance, if
required, would be obtained.
In May 1996, IMI received FDA 510(k) clearance for two additional commonly
performed microscope procedures: reticulocyte count and anti-nuclear antibodies
(ANAs). The reticulocyte procedure, which is now implemented, measures the
number of reticulocytes (immature red blood cells produced in the bone marrow)
and is performed to monitor bone marrow production during the treatment of
particular anemias in order to track the effectiveness of the therapies being
utilized. An ANA analysis is used to identify cells associated with general
connective tissue and autoimmune diseases such as systemic lupus erythematosus
(SLE), scleroderma and Sjogrens syndrome. In January 1997, the Company received
FDA 510(k) clearance for the nDNA procedure. nDNA is an indirect enzyme antibody
test which is used for the semi-quantitative detection of nDNA antibody in human
serum. This procedure is used as an aid in the diagnosis of SLE and other
connective tissue disease. In October 1997, the Company received FDA 510(k)
clearance for cerebrospinal fluid (CSF) WBC differential procedure. The CSF
procedure automates cytological analysis of white blood cells in human
cerebrospinal fluid and is used to diagnose inflammation and infection of the
central nervous system, including meningitis. In December 1997, the Company
received FDA 510(k) clearance for the WBC estimate procedure which is integrated
into the WBC differential procedure. The WBC estimate provides confirmation of
white blood cell count figures provided by hematology analyzers.
EMPLOYEES
As of April 9, 1999, the Company had 34 full-time employees. The Company also
has consulting arrangements with three additional persons. Of its total
workforce (including the three consultants), 15 persons are engaged in research
and development activities, 4 persons are engaged in manufacturing and quality
assurance, 6 are engaged in sales and marketing, 9 are engaged in customer
support and 3 are devoted to administrative functions. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
that it maintains good relations with its employees.
ITEM 2. PROPERTIES
As of April 9, 1999, the Company's headquarters are located in approximately
5,116 square feet of leased office space at 4360 Northlake Boulevard, Palm Beach
Gardens, Florida 33410. During 1998 the Company office space was reduced from
10,700 square feet to 5,116 square feet as certain expiring leases were not
renewed. The terms of the remaining leases for the Company's office space expire
on May 31, 1999 and September 30,1999, respectively. The Company does not intend
to renew these leases. In January 1997, the Company moved its manufacturing
division from 1006 W. 15th Street, Riviera Beach, Florida to 20,800 square feet
of leased office and manufacturing space located at 3960 RCA Boulevard, Palm
Beach Gardens, Florida. The lease for the manufacturing facility expires April
30, 1999.
ITEM 3. LEGAL PROCEEDINGS
DIASYS CORPORATION. In November 1996, the Company and DiaSys Corporation
("DiaSys") (Nasdaq, DIYS) entered into a Product Integration Agreement (the
"DiaSys Agreement"). DiaSys designs, develops, manufactures and distributes
workstation products which prepare fluid samples. Under the DiaSys Agreement,
the Company was granted a nonexclusive, nontransferable license to integrate the
patented DiaSys wet-preparation specimen handling system together with the
MICRO21 in order to produce integrated systems for resale to MICRO21 end users.
The DiaSys Agreement was terminated in July 1997, when the Company rejected
products delivered by DiaSys and returned them. The DiaSys Agreement provides
for mandatory and binding arbitration of disputes between the parties. On
January 12, 1998, DiaSys filed a demand for arbitration of the dispute. In its
demand for arbitration, DiaSys sought damages in excess of $1,000,000 for the
Company's alleged breach of the DiaSys Agreement and the Company's alleged
defamation of DiaSys and its products. The Company filed its response on
February 9, 1998, denying that it breached the DiaSys Agreement or defamed
DiaSys, stating that it properly rejected products supplied by DiaSys due to
non-conformance and seeking damages for libelous statements made by DiaSys in a
July 2, 1997 press release issued by DiaSys, and for delays in the Company's
product development efforts caused by DiaSys's breach of the DiaSys Agreement.
On October 7, 1998 the arbitration hearings were completed and on November 6,
1998 written arguments were presented to the arbitration panel. On December 15,
1998, the arbitration panel issued its findings in this dispute. The panel found
that the Company breached its contract with DiaSys by failing to provide DiaSys
with an adequate opportunity to repair or replace goods DiaSys delivered to the
Company which the Company contended were non-conforming. The arbitration panel
rejected DiaSys' claim for lost profits and limited DiaSys' recoverable damages
to its actual costs to produce and deliver the units sold to the Company,
including allocable overhead, and its attorneys fees, less net proceeds realized
from the resale of the returned units. The panel will hear additional evidence
on the calculation of these limited damages. The arbitration panel additionally
determined that IMI libeled DiaSys but awarded damages of only $10,000 to DiaSys
on this claim. While the Company believes the calculation of DiaSys' recoverable
damages will result in minimal damages, there can be no assurance that the
damages which are awarded to DiaSys will not have a material adverse effect on
the Company's liquidity, financial condition and results of operations. It is
possible that the Company's results of operations or cash flows in a particular
quarter or annual period or its financial position could be materially affected
by an unfavorable outcome. As of December 31, 1999, the Company has not accrued
any loss contingencies or related expenses in connection with this arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Part II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the Nasdaq National Market System under
the symbol "IMII." On October 30, 1998 the Company was notified by Nasdaq of a
potential delisting of the Company's common stock from the Nasdaq National
Market due to the Company's failure to comply with Nasdaq's $1.00 minimum bid
price requirement for continued listing on the Nasdaq National Market. The
Company appealed this proposed delisting and on April 8, 1999 the Company's
appeal of this proposed delisting was heard by a Nasdaq hearing panel. A
decision on the Company's appeal is expected within three weeks of the hearing
date. Pending the Nasdaq hearing panel's decision, the Company's common stock
will remain listed on Nasdaq's National Market System. See "General" above for
more information on the proposed Nasdaq delisting. The following table
represents the high and low bid prices for the Company's common stock for each
quarter of fiscal 1997 and 1998, as reported by the Wall Street Journal.
1998 High Low
4th Quarter $1.19 $0.44
3rd Quarter $3.75 $0.56
2nd Quarter $5.00 $2.81
1st Quarter $4.00 $1.31
1997 High Low
4th Quarter $5.25 $3.00
3rd Quarter $7.47 $4.13
2nd Quarter $6.38 $4.00
1st Quarter $8.25 $5.25
As of March 23, 1999, there were 171 registered shareholders of record of the
Company's common stock, excluding shareholders whose shares are held in nominee
or street name by brokers.
The Company has not paid in the past, and does not anticipate paying in the
foreseeable future, any cash dividends. The Company intends to retain future
earnings to develop and expand its business. Any further determination to pay
dividends will be at the discretion of the Company's Board of Directors and is
subject to certain limitations under the General Corporation Law of the State of
Delaware and will depend upon the Company's results of operations, financial
condition and other factors deemed relevant by the Board of Directors
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Product sales and License fees net $118,173 $1,392,883 $1,460,675 $3,770,489 3,762,035
Cost of sales -- 1,135,499 1,227,216 3,328,394 3,731,709
-- --------- --------- --------- ---------
Gross margin 118,173 257,384 233,459 442,095 30,326
Operating expenses:
Selling, general and
administrative 1,215,686 2,462,553 3,960,625 8,183,800 9,032,740
Research and development 1,101,463 1,793,769 2,113,565 5,022,670 5,311,333
Provision for contract
settlement -- -- 2,062,000 -- --
-- -- --------- -- --
Total operating expenses 2,317,149 4,256,322 8,136,190 13,206,470 14,344,073
--------- --------- --------- ---------- ----------
Loss from operations (2,198,976) (3,998,938) (7,902,731) (12,764,375) (14,313,747)
Other income (expense):
Interest income -- 13,046 1,112,227 1,035,210 198,125
Interest expense (216,879) (175,074) (141,699) -- (1,051,711)
-------- -------- -------- -- ----------
Other income (expense) (216,879) (162,028) 970,528 1,035,210 (853,586)
Loss before extraordinary item (2,415,855) (4,160,966) (6,932,203) (11,729,165) (15,167,333)
Extraordinary item--gain on early
extinguishment of debt -- 173,575 76,475 -- --
-- ------- ------ -- --
Net loss ($2,415,855) ($3,987,391) ($6,855,728) ($11,729,165) (15,167,333)
=========== =========== =========== ============ ===========
Loss per common share - basic and
diluted (1):
Before extraordinary item ($0.75) ($0.73) ($0.70) ($1.07) ($1.33)
Extraordinary item--gain on early
extinguishment of debt -- .03 .01 -- --
-- -- -- -- --
Net loss per common share - basic
and diluted ($0.75) ($0.70) ($0.69) ($1.07) ($1.33)
====== ====== ====== ====== ======
Weighted average number of common
shares outstanding (1) 3,213,678 5,720,640 9,937,440 10,952,330 11,419,666
========= ========= ========= ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and investments available-
for-sale $1,494,481 $75,821 $25,081,873 $7,083,173 31,923
Total assets 2,406,769 2,705,330 30,732,023 17,406,409 8,545,353
Total debt and non-current
obligations 3,860,379 2,182,160 -- -- 3,294,526
Accumulated deficit (4,560,996) (8,548,387) (15,346,088) (27,102,275) (40,300,613)
Total shareholders' equity
(net capital deficiency) (2,480,816) (1,225,022) 26,866,695 15,317,345 1,746,410
</TABLE>
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of net loss per common share and weighted average number of common
shares outstanding.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. OVERVIEW
The Company has developed and is marketing the MICRO21 system, an intelligent,
automated microscope system, for diagnostic use in hospital, commercial
reference and physician group-practice laboratories. The MICRO21 system is
designed to automate a broad range of manual microscopic procedures, potentially
enabling the clinical laboratory to reduce costs and exposure to liabilities,
enhance analytical accuracy and consistency, increase the productivity of
medical technologists and improve patient care.
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.
On April 20, 1998, the Company signed a customer financing agreement with Prime
Capital Corp. ("Prime") to provide up to $36 million of financing for customers
acquiring the MICRO21 System Workstation. Under the terms of the agreement, the
Company and Prime agreed to establish a wholesale customer finance relationship
under which Prime will provide a "Private Label Fee Per Slide" financing
facility to customers of the Company for an ongoing vendor leasing program.
Prime agreed to provide up to $12 million of customer financing per year over
three years. Notwithstanding the execution of this agreement, as of April 9,
1999 the Company and Prime had not established a customer finance relationship
and none of the Company's customers have obtained financing under this agreement
with Prime. If and when it is ever implemented, this agreement will provide a
financing alternative for IMI's customers.
On June 30, 1998 the Company completed the sale of $3,000,000 of 6% convertible
debentures, due June 30, 2001 (the "Debentures"). See Footnote 8 of Notes to
Financial Statements in Part II, Item 8 of this Form 10-K. As of April 9, 1999,
the holder of the Debentures had converted $345,000 of the original $3,000,000
principal amount of the Debentures into shares of the Company's common stock,
leaving Debentures in the principal amount of $2,655,000 outstanding as of April
9, 1999. If the Company's common stock is delisted from the Nasdaq National
Market and not allowed to be listed on the Nasdaq SmallCap Market as discussed
below the Debentures will be in default. The Company does not have capital
available to pay the outstanding principal amount of the Debenture in the event
of such a default.
On August 14, 1998 the Company received full repayment of all amounts due with
respect to an advance which the Company made to the Company's President in
January 1998 in the amount of $196,000. With respect to repayment of the
Company's advance to a former director, R. Wayne Fritzsche, as of December 31,
1998 payments in the amount of $290,000, plus a $75,000 credit offset for
consulting fees past due or payable to Mr. Fritzsche by the Company, have been
applied against the amount due, leaving a balance due of $86,684.
Repayment of the balance of $86,684 has been extended to August 28, 1999.
On October 30, 1998 the Company was notified by Nasdaq of a potential delisting
of the Company's common stock from the Nasdaq National Market, effective
February 1, 1999, due to the Company's failure to comply with Nasdaq's $1.00
minimum bid price requirement for continued listing on the Nasdaq National
Market. On January 28, 1999 the Company requested a hearing before a Nasdaq
Hearing Panel to appeal the proposed delisting, which effectively stayed the
delisting of the Company's common stock. On March 25, 1999 the Company was
further notified by Nasdaq that the Company did not meet the $4,000,000 net
tangible assets requirement for continued listing on the Nasdaq National Market.
The Company's request for a hearing was granted by Nasdaq and the hearing was
held on April 8, 1999. The Company expects Nasdaq to render a decision on the
Company's appeal of the proposed delisting within three weeks of the date of the
hearing. In the event that the Company's appeal is denied and the Company's
common stock is delisted from the Nasdaq National Market, the Company has
requested that Nasdaq permit the Company's common stock to be listed on the
Nasdaq SmallCap Market. There can be no assurance that the Company's appeal of
Nasdaq's proposed delisting of the Company's common stock will be successful and
it appears likely that the Company's common stock will eventually be delisted
from the Nasdaq National Market. There also can be no assurance that Nasdaq will
permit the Company's common stock to be listed on the Nasdaq SmallCap Market
since such listing will require that the Company convince Nasdaq that it can
sustain long term compliance with all applicable continued listing requirements.
In the event that the Company's common stock is delisted from the Nasdaq
National Market and the Company is not successful in its request that its common
stock be listed on the Nasdaq SmallCap Market, the Company's common stock will
commence trading on the OTC Bulletin Board, in which case a shareholder may find
it more difficult to sell, or to obtain quotations as to the price of, the
Company's common stock. In addition, the failure of the Company's common stock
to be listed for trading on the Nasdaq National Market or the Nasdaq SmallCap
Market would constitute an event of default under the Debentures, 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 any remaining borrowing capacity under the related convertible debenture
agreement could be further limited. Pending the Nasdaq hearing panel's decision,
the Company's common stock will remain listed on Nasdaq's National Market
System.
On November 16, 1998 the Company entered into three related agreements with
Bayer Corporation ("Bayer") involving the Company's blood slide maker, the HSM.
The three agreements, a Licensing Agreement, Instrument Supply Agreement and an
After Market Supply Agreement, provide Bayer with certain non-exclusive rights
to manufacture and sell products based on the HSM. Pursuant to the Licensing
Agreement Bayer paid the Company a one-time licensing fee of $1,100,000. The
Licensing Agreement further provides for Bayer to pay the Company a royalty
payment of $2,000 on each of the first 400 HSM-based units it manufactures and
sells in exchange for the non-exclusive right to manufacture and sell HSM-based
products and the right to negotiate for the manufacture and distribution of the
Company's MICRO21 System, Urine Slide Maker ("USM") and any other new Company
products. The Instrument Supply Agreement provides that Bayer will manufacture
the HSM for the Company for at least two years in the event the Company chooses
not to manufacture the HSM or chooses to have Bayer manufacture the HSM to
supplement the Company's manufacture of this product. Finally, pursuant to the
After Market Supply Agreement, with limited exceptions Bayer is required to
recommend the Company as a sole source of consumables used on all HSM-based
products manufactured and sold by Bayer until the earlier to occur of (a) three
years following Bayer's sale of 200 HSMs or (b) five years after Bayer's initial
sale of an HSM. As of April 9, 1999, the Company has received the entire license
fee of $1,100,000. At December 31, 1998, the Company had received $520,000 of
the $1,100,000 license fee in connection with this agreement.
On November 23, 1998, the Company entered into an Invoice Purchase and Sale
Agreement with Finova Capital Corporation ("Finova") pursuant to which Finova
purchased certain invoices from the Company at an invoice purchase price of 95%
of the net amount of the invoice. Eighty percent (80%) of the purchase price is
payable to the Company at the time of the acceptance of the invoice by Finova
and the remainder of the purchase price is due to the Company upon payment of
the invoice by the account debtor. As of April 9, 1999, the Company had sold
invoices with an aggregate net amount of $1,057,000 to Finova.
On December 17, 1998, the Company entered into a distribution agreement with
Beckman-Coulter involving the Company's blood slide maker, the HSM. The
non-exclusive distribution agreement has a term of ten years and allows
Beckman-Coulter to obtain the HSM on a volume discount basis for re-sale to its
customers. Domestically IMI will have prime responsibility for customer support,
with Beckman-Coulter field support personnel providing installation and field
maintenance services on a fixed fee basis. In foreign markets, Beckman-Coulter
will have total responsibility for customer support. Beckman-Coulter will
recommend IMI as the sole source for consumables on all HSMs it sells,
domestically and overseas. As of April 9, 1999, Beckman-Coulter has purchased
two HSMs under the distribution agreement.
The Company has implemented strategic steps in an effort to remain viable until
sufficient market penetration for the Company's products is achieved. This plan,
which includes personnel reductions, has reduced monthly expenditures from
approximately $1,100,000 in July 1998 to $350,000 as of April 9, 1999, with the
reduction in extraordinary development expenditures coinciding with the
completion of the HSM instrument and across the board reductions in IMI's
operating costs. In connection with these cost reductions, the Company decided
to discontinue its operations in Europe and, instead, rely on qualified
distributors. The IMI Europe office was officially closed on July 31, 1998.
The Company has also reduced sales expenditures, while emphasizing a sales
process that better targets prospective customers who are closest to making a
purchase decision. The reduction of sales expenditures is in furtherance of the
strategy of focusing on specific customer groups and markets and the de-emphasis
on providing total market coverage to all types of prospects. The Company is
implementing a plan that will segment the market according to product fit and
geographic location.
Notwithstanding the reductions in personnel and corporate expenditures and the
strategic planning referenced above, the Company has depleted its cash reserves
and has been delinquent in its payroll obligations since March 31, 1999. As of
April 9, 1999 the Company is delinquent in its payroll obligations (including
wages, severance pay and accrued vacation pay) in the amount of $189,000. In
addition, the Company is currently delinquent in the payment of its accounts
payable. In addition, the Company is currently in default in the amounts of
$57,213 and $178,280 with respect to the payment of two secured promissory notes
to the Company's legal counsel, Edwards & Angell, LLP. The Company's failure to
pay its employees is likely to adversely affect the Company's efforts to
maintain a competent and capable sales and marketing staff. The Company will
continue to lose employees unless it can raise capital promptly. In addition,
the Company's inability to timely pay its accounts payable has had an adverse
effect on the Company's relationship with its vendors, resulting in some vendors
refusing to ship products or to provide services to the Company. The Company
continues to explore a variety of alternatives for increasing its sales and
distribution capacity and raising sufficient capital to fund its operations.
Implementation of the Company's business strategy requires significant
expenditures of capital. The Company is currently seeking additional funds
through debt or equity. There can be no assurance that such funds can be
obtained on favorable terms, if at all. If the Company's efforts to raise
capital are unsuccessful, the Company will have to cease operations.
B. RESULTS OF OPERATIONS
Product sales for 1998 were $3,162,035 as compared to $3,770,489 in 1997. The
decrease in product sales for 1998 was primarily due to a decrease in sales of
the MICRO21 in the international market and less sales than expected in the
United States. License fees in 1998 of $600,000 were earned in connection with
the Bayer Agreement.
Cost of sales for 1998 were $3,731,709 as compared to $3,328,394 in 1997. The
increase in costs of sales for 1998 is primarily attributable to depreciation
recorded on revenue equipment, allowances for obsolete inventory and costs
associated with idle capacity.
Selling, general and administrative expenses were $9,032,740 in 1998, compared
with $8,183,800 in 1997. Selling, general and administrative expenses increased
in 1998 primarily due to the continued growth of the Company through the first
quarter of 1998 due to the need for additional personnel following the Company's
termination of the Coulter Agreement. In 1998, selling, general and
administrative expenses included consulting fees of $511,651 and the
amortization of deferred compensation of $185,252 associated with common stock
issued to employees and members of the Board of Directors. Selling, general and
administrative expenses should decrease substantially now that the Company has
taken drastic measures to reduce operating expenses.
Research and development expenses were $5,311,333 in 1998, compared with
$5,022,670 in 1997. Research and development expenses increased in 1998
primarily due to resources being utilized in the development of the recently
released Hematology Slide Maker and the Urine Slide Maker-which is still in the
development stage.
Interest income was $155,914 in 1998, a 84.9% decrease from $1,035,210 in 1997.
The decrease in 1998 was primarily due to a decrease in investment funds.
Investments decreased because the funds were used to maintain operations.
Interest expense was $1,051,711 in 1998 and $0 in 1997, an increase of
$1,051,711. In 1998, the increase in interest expense was due to the
amortization of discounts relating to the sale of $3,000,000 of 6% convertible
debentures. See footnote 8 of Notes to Financial Statements in Part II, Item 8
of this Form 10-K.
Other income in 1998 consists primarily of foreign currency adjustments
resulting from transactions occurring in overseas markets.
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.
Investments available-for-sale in 1997 consisted 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 1998, 1997 and 1996, the Company had cash flow used in operations of
$9,769,902, $17,126,837 and $6,966,570, respectively. The decrease in cash flows
was primarily due to major reductions in inventory and the elimination of the
contingent settlement liability.
For the year ended December 31, 1998, net cash provided by investing activities
of $5,856,875 was primarily the result of sales of investments
available-for-sale for use in operations. In 1997 net cash provided by investing
activities also was primarily the result of sales of investmnets. In 1996, the
Company used cash of $25,501,141 to purchase investments available-for-sale and
property and equipment.
For the year ended December 31, 1998, net cash provided by financing activities
of $3,091,786 was primarily the result of proceeds from the sale of convertible
debentures. During 1997 and 1996, the Company had cash provided by financing
activities of $113,585 and $32,679,891, 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, 1998, the Company had net operating loss (NOL) carryforwards of
approximately $35,615,000 available for income tax purposes that expire in 2010
through 2018. 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 has not completed a study
to determine the effects that this change of ownership will have on these net
operating losses.
On November 23, 1998, the Company entered into an Invoice Purchase and Sale
Agreement with Finova Capital Corporation ("Finova") pursuant to which Finova
purchased certain invoices from the Company at an invoice purchase price of 95%
of the net amount of the invoice. Eighty percent (80%) of the purchase price is
payable to the Company at the time of the acceptance of the invoice by Finova
and the remainder of the purchase price is due to the Company upon payment of
the invoice by the account debtor. As of April 9, 1999, the Company had sold
invoices with an aggregate net amount of $1,057,000 to Finova.
The Company's business strategy is taking longer to accomplish and is proving to
be more costly than originally anticipated. Currently, the Company does not
have, and is not generating from operations, sufficient cash to meet its
obligations as they become due. 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 11) adversely affected the
Company's business, reuslts of operations and financial condition in 1998, 1997
and 1996. The Company's 1999 operating plan contemplates focusing activities on
expanding sales revenue through the efforts of its internal sales, until
sufficient market penetration for the Company's products is achieved. This plan
which commenced in 1998, includes personnel reductions and reductions in other
operating costs.
The Company has depleted its cash reserves and has been delinquent in its
payroll obligations since March 31, 1999. As of April 9, 1999 the Company is
delinquent in its payroll obligations (including wages, severance pay and
accrued vacation pay) in the amount of $189,000. In addition, the Company is
currently delinquent in the payment of its accounts payable in the amount of
$1.6 million and is in default on a note payable in the amount of $128,780 due
to failure to pay the note at its maturity date. At December 31, 1998, the
Company had no cash as compared to $853,164 at December 31, 1997. As such, it
will be necessary for the Company to raise significant capital within the next
_____ days in order to continue operations. The Company is currently seeking
alternative sources of financing and exploring strategic alternatives. There can
be no assurance that such funds can be obtained on favorable terms if at all. If
the Company's efforts to raise capital are unsuccessful, the Company will have
to cease operations.
The Company's independent accountants have included an explanatory paragraph in
their report making reference to Note 15 to the financial statements, which
discusses the fact that the Company's financial statements for the years ended
December 31, 1998 and 1997 have been prepared assuming that the Company will
continue as a going concern, and that the substantial losses from operations
suffered by the Company, its significant reliance on obtaining capital to
satisfy its liquidity requirements, its default on the note payable referenced
above and the potential violation of one of its debenture covenants described in
the overview above, raise substantial doubt about the Company's ability to
continue as a going concern.
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 1998 and may continue to do so through 1999. 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 provides 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 1998
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 1998. 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 November 1996, the Company and DiaSys
Corporation ("DiaSys") (Nasdaq, DIYS) entered into a Product Integration
Agreement (the "DiaSys Agreement"). DiaSys designs, develops, manufactures and
distributes workstation products which prepare fluid samples. Under the DiaSys
Agreement, the Company was granted a nonexclusive, nontransferable license to
integrate the patented DiaSys wet-preparation specimen handling system together
with the MICRO21 in order to produce integrated systems for resale to MICRO21
end users. The DiaSys Agreement was terminated in July 1997, when the Company
rejected products delivered by DiaSys and returned them. The DiaSys Agreement
provides for mandatory and binding arbitration of disputes between the parties.
On January 12, 1998, DiaSys filed a demand for arbitration of the dispute. In
its demand for arbitration, DiaSys sought damages in excess of $1,000,000 for
the Company's alleged breach of the DiaSys Agreement and the Company's alleged
defamation of DiaSys and its products. The Company filed its response on
February 9, 1998, denying that it breached the DiaSys Agreement or defamed
DiaSys, stating that it properly rejected products supplied by DiaSys due to
non-conformance and seeking damages for libelous statements made by DiaSys in a
July 2, 1997 press release issued by DiaSys, and for delays in the Company's
product development efforts caused by DiaSys's breach of the DiaSys Agreement.
On October 7, 1998 the arbitration hearings were completed and on November 6,
1998 written arguments were presented to the arbitration panel. On December 15,
1998, the arbitration panel issued its findings in this dispute. The panel found
that the Company breached its contract with DiaSys by failing to provide DiaSys
with an adequate opportunity to repair or replace goods DiaSys delivered to the
Company which the Company contended were non-conforming. The Arbitration Panel
rejected DiaSys' claim for lost profits and limited DiaSys' recoverable damages
to its actual costs to produce and deliver the units sold to the Company,
including allocable overhead, and its attorneys fees, less net proceeds realized
from the resale of the returned units. The panel will hear additional evidence
on the calculation of these limited damages. The arbitration panel additionally
determined that IMI libeled DiaSys but awarded damages of only $10,000 to DiaSys
on this claim. While the Company believes the calculation of DiaSys' recoverable
damages will result in minimal damages, there can be no assurance that the
damages which are awarded to DiaSys will not have a material adverse effect on
the Company's liquidity, financial condition and results of operations. As of
December 31, 1998, the Company has accrued $10,000 in connection with this
arbitration.
YEAR 2000 COMPLIANCE. 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
(of which $-0- has been capitalized and $35,000 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
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:
o the immediate need for the Company to raise significant additional capital
to satisfy delinquent payroll and accounts payable obligations and finance
operations in the near-term, and the inability to provide assurances that
such capital will be available on terms favorable to the Company, if at
all;
o the delay in the Company's achievement of substantial market penetration
and widespread acceptance of the MICRO21 system;
o the uncertainty of the commercial viability and potential market acceptance
of other IMI products such as the newly developed HSM and USM, which have
not yet been manufactured or sold in commercial volumes;
o the potential failure of the Company's sales team, Bayer Corporation and
Beckman-Coulter or other distributors to sell HSMs in amounts sufficient to
generate a meaningful recurring revenue base associated with HSM
consumables and to sell MICRO21 systems in amounts sufficient to help the
Company achieve its sales goals;
o uncertainty as to whether strategic partners will become involved in
MICRO21 sales;
o uncertainty as to the ability of the Company to achieve sales and marketing
goals following implementation of the Company's revised sales approach,
including increased reliance on strategic partners for worldwide
sales/service and reductions in the Company's sales and marketing
personnel, due to the decrease in personnel, and the possible adverse
impact on potential customer perception of the Company;
o uncertainty due to industry consolidation and customer budget processes and
restrictions;
o the possibility that the Company's appeal of Nasdaq's proposed delisting
will be unsuccessful, resulting in the termination of listing of the
Company's common stock on Nasdaq or that, even if such appeal is
successful, the Company's future financial results will not sustain
continued listing on Nasdaq;
o the possibility that agreements with strategic partners will not result in
significant improvements in results; o the uncertainty as to the actual
amount of damages which the Company will be obligated to pay DiaSys
pursuant to a pending decision on damages by an arbitration panel;
o 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;
o 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;
and
o the uncertainty of profitability and sustainability of revenues and
profitability.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required by this item can be found at the pages listed in
the following index:
PAGE
Report of Independent Certified Public Accountants F-2
Balance Sheets at December 31, 1998 and 1997 F-3
Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Statements of Shareholders' Equity (Net Capital Deficiency)
for the years ended December 31, 1998, 1997 and 1996 F-5
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Financial Statements F-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, 1998 and 1997, 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, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intelligent Medical Imaging,
Inc. at December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with general accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
Intelligent Medical Imaging, Inc. will continue as a going concern. As more
fully described in Note 15, the Company has incurred operating losses each year
since inception and has limited sources of financing available at December 31,
1998. Additionally, the Company is in default on outstanding notes payable and
faces potential violation of its convertible debenture covenants. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the outcome of this uncertainty.
/s/ Ernst & Young LLP
---------------------
West Palm Beach, Florida
April 9, 1999
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1998 1997
------------- -------------
Current assets:
<S> <C> <C>
Cash $ 31,923 $ 853,164
Investments available for sale - 6,230,009
Accounts receivable, net of allowance for 1,002,780 671,905
uncollectible accounts of $40,000 at
December 31, 1998 and 1997
Note receivable, related party 86,684 -
Inventory 3,157,537 5,933,815
Prepaid expenses 67,408 61,799
Current portion of investment in sales-type leases 297,000 222,213
Accrued interest receivable - 13,151
------------- -------------
Total current assets 4,643,332 13,986,056
Long-term portion of investment in sales-type leases 451,808 240,145
Revenue equipment, net 544,215 263,632
Property and equipment, net 2,556,347 2,789,693
Other assets 52,650 126,883
Deferred financing costs, net of accumulated
amortization of $19,400 297,001 -
------------- -------------
$ 8,545,353 $ 17,406,409
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable in default $ 235,493 $ -
Accounts payable 1,259,737 1,298,811
Accrued salaries and benefits 372,149 394,190
Other accrued liabilities 258,671 101,816
Advances from factor 320,000 -
Current portion of amount due to financing 297,000 -
companies
Current portion of capital lease obligation 30,562 -
Current portion of deferred revenue 318,381 74,673
------------- -------------
Total current liabilities 3,091,993 1,869,490
Deferred revenue 412,424 219,574
Amount due to financing companies 451,808 -
Capital lease obligation 54,719 -
Convertible debentures, net of unamortized discount 2,787,999 -
of $187,001
Stockholders' equity:
Common Stock, $.01 par value-authorized 35,000,000
shares; issued and outstanding, 11,631,484 shares
in 1998 and 11,023,938 shares in 1997 116,315 110,239
Additional paid-in capital 44,416,708 42,537,633
Deferred compensation (486,000) (228,252)
Net unrealized investment gains 0 31,005
Accumulated deficit (42,300,613) (27,133,280)
----------- -----------
Total shareholders' equity 1,746,410 15,317,345
----------- ------------
$ 8,545,353 $17,406,409
============= =============
</TABLE>
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------------ ----------------- ------------------
<S> <C> <C> <C>
Product sales, net (Note 11) $ 3,162,035 $ 3,770,489 $ 1,460,675
License fees 600,000 - -
------------------ ----------------- ------------------
3,762,035 3,770,489 1,460,675
Cost of sales 3,731,709 3,328,394 1,227,216
------------------ ----------------- ------------------
Gross margin 30,326 442,095 233,459
Operating expenses:
Selling, general and administrative 9,032,740 8,183,800 3,960,625
Research and development 5,311,333 5,022,670 2,113,565
Provision for contract settlement - - 2,062,000
------------------ ----------------- ------------------
Total operating expenses 14,344,073 13,206,470 8,136,190
------------------ ----------------- ------------------
Loss from operations (14,313,747) (12,764,375) (7,902,731)
Other income (expense):
Investment and interest income 155,914 1,035,210 1,112,227
Other income 42,211 - -
Interest expense (1,051,711) - (141,699)
------------------ ----------------- ------------------
Other income (expense) (853,586) 1,035,210 970,528
------------------ ----------------- ------------------
Loss before extraordinary item (15,167,333) (11,729,165) (6,932,203)
Extraordinary item--gain on early
extinguishment of debt - - 76,475
----------------- ----------------- -----------------
Net loss $ (15,167,333) $ (11,729,165) $ (6,855,728)
================== ================ =================
Loss per common share--basic and diluted:
Before extraordinary item $(1.33) $(1.07) $(0.70)
================== ================= ==================
Extraordinary item--gain on early
extinguishment of debt 0.00 0.00 0.01
Net loss per common share-basic and diluted $(1.33) $(1.07) $(0.69)
================== ================= ==================
Weighted average common
shares outstanding 11,419,666 10,952,330 9,937,440
================== ================= ==================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
ACCUMULATED PAID-IN DEFERRED SHAREHOLDER'S
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 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 - - - 90,333 - 90,333
compensation
Adjustment 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 - - - 93,252 - 93,252
compensation
Adjustment for unrealized gains on
securities available-for-sale - - - - (27,022) (27,022)
Net loss - - - - (11,729,165) (11,729,165)
------------------------------------------------------------------------------------------
Balance at December 31, 1997 11,023,937 110,239 42,537,633 (228,252) (27,102,275) 15,317,345
Exercise of stock options 440,940 4,409 82,228 - - 86,637
Exercise of warrants 93,456 935 (935) - - -
Conversion of convertible
debentures to
common stock 48,152 482 25,169 - - 25,651
Common stock issued for services 25,000 250 82,563 - - 82,813
Deferred compensation associated
with - - 443,000 (443,000) - -
stock option grants
Amortization of deferred - - - 185,252 - 185,252
compensation
Discount on convertible debentures - - 1,247,050 - - 1,247,050
Adjustment for unrealized gains on
securities available-for-sale - - - - (31,005) (31,005)
Net Loss - - - - (15,167,333) 15,167,333)
==========================================================================================
Balance at December 31, 1998 11,631,485 $ 116,315 $44,416,708 $ (486,000) $ (42,300,613) $ 1,744,410
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Year Year
ended ended ended
Dec 31,1998 Dec 31,1997 Dec 31,1996
------------------- ------------------ ---------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (15,167,334) $ (11,729,165) $ (6,855,728)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,431,681 1,025,419 299,338
Amortization of deferred revenue (105,694) - -
Amortization on discounts on convertible
debentures 963,048 - -
Gain on early extinguishment of debt - - (76,475)
Services received in exchange for common
stock and stock options 268,065 93,252 93,833
Reduction in note receivable, related
party in exchange for services 75,000 - -
Note payable in exchange for services 235,493 - -
Provision for contract settlement - - 2,062,000
Changes in operating assets and
liabilities:
Accounts receivable (330,875) (494,809) 4,904
Inventory 1,975,300 (3,581,551) (2,401,545)
Prepaid expenses (5,609) (9,374) (208,246)
Investment in sales-type leases 462,358 (462,358) -
Accrued interest receivable 13,151 146,276 -
Other assets 74,233 (74,631) 50,204
Revenue equipment (397,363) (263,632) -
Accounts payable (4,073) 235,832 28,512
Accrued salaries and benefits (22,041) 74,973 114,979
Other accrued liabilities 172,506 (319,316) 176,654
Deferred revenue 542,252 294,247 -
Contingent settlement liability - (2,062,000) (105,000)
Customer advance - - (150,000)
------------------- ------------------ ---------------------
Net cash used in operating activities (9,819,902) (17,126,837) (6,966,570)
INVESTING ACTIVITIES
Purchases of property and equipment (180,445) (958,426) (765,296)
Purchases of investments held for sale - (3,683,412) (33,226,690)
Sale of investments held for sale 6,199,004 22,220,253 8,490,845
Advances to related parties (622,267) - -
Repayments of advances to related parties 460,583 - -
------------------- ------------------ ---------------------
Net cash provided by (used in) investing 5,856,875 17,578,415 (25,501,141)
activities
</TABLE>
CONTINUED ON NEXT PAGE
<PAGE>
<TABLE>
<CAPTION>
FINANCING ACTIVITIES
<S> <C> <C> <C>
Proceeds from sale of common stock 86,637 113,585 34,495,585
Proceeds from long-term notes payable - - 60,000
Repayment of long-term notes payable
and capitalized lease obligations (64,851) - (773,839)
Advances from factor 320,000 - 2,216,614
Repayments to factor - - (2,216,614)
Proceeds from notes payable to related parties - - 74,784
Repayment of notes payable related parties - - (1,176,639)
Convertible debentures, net of deferred
financing costs of $200,000 2,800,000 - -
------------------ ------------------- ---------------------
Net cash provided by financing activities 3,141,786 113,585 32,679,891
------------------ ------------------- ---------------------
Net (decrease) increase in cash (821,241) 565,163 212,180
Cash at beginning of year 853,164 288,001 75,821
------------------ ------------------- ---------------------
Cash at end of year $ 31,923 $ 853,164 $ 288,001
================== =================== =====================
Supplemental Information
Stock purchase warrants issued for financing $ 116,400 $ - $ -
costs ================= ================ ===================
Inventory transferred to property and equipment $ 800,978 $ 1,109,729 $ 514,733
================= ================ ===================
Assets under capital lease obligations $ 100,132 $ - $ -
================= ================ =================
Interest paid $ - $ - $ 319,073
================ =============== ==================
Notes payable and notes payable to related
parties converted to common stock $ - $ - $ 300,000
================= =============== ===================
Convertible debentures converted to stock $ 25,651 $ - $ -
================= ================ ===================
</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.
REVENUE RECOGNITION
Revenue is generally recognized as units are delivered to and accepted by
customers and when all services essential to the functionality of the units has
been provided. 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. There were no sales under bill and hold
arrangements at December 31, 1997 or 1998.
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 which the Company has adopted for
transactions entered into during the year beginning January 1, 1998. SOP 97-2
provides guidance for recognizing revenue on software transactions and
supersedes SOP 91-1, SOFTWARE REVENUE RECOGNITION. In March 1998, the AICAP
issued SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF A PROVISION OF SOP 97-2,
SOFTWARE REVENUE RECOGNITION. SOP 98-4 defers, for one year, the application of
certain passages in SOP 97-2 which limit what is considered vendor-specific
objective evidence necessary to recognize revenue for software licenses in
multiple-element arrangements when undelivered elements exist. In December 1998,
the AICPA issued SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS. SOP 98-9 specifies the
accounting to be used when (1) there is vendor-specific objective evidence of
the fair values of all undelivered elements in a multiple-element arrangement
that is not accounted for using long-term contract accounting, (2)
vendor-specific objective evidence of fair value does not exist for one or more
of the delivered elements in the arrangement, and (3) there is vendor-specific
objective evidence of the fair value of each of the undelivered elements. SOP
98-9 also amends SOP 98-4 to extend the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. Adoption of SOP 97-2 did not have a material impact on
revenue recognition during 1998 and adoption of SOP 98-9 is not expected to have
a material impact in the future.
In November 1998, the Company entered into a license agreement with Bayer
Corporation (Bayer) whereby the Company has granted Bayer a nonexclusive right
to develop, make, have made, use, sell and have sold the Hematology Slide Maker
in exchange for $1,100,000 and a royalty of $2,000 per unit sold for the first
400 units manufactured and sold by Bayer or its sublicensed affiliates. The
license fee of $1,100,000 is payable upon the Company achieving certain
milestones as specified in the license agreement. As of December 31, 1998, the
Company had achieved milestones for which it was entitled to receive payment of
$600,000 of the license fee. This amount is classified as "license fees" on the
accompanying statements of operations. On November 16, 1998 the Company entered
into three related agreements with Bayer Corporation ("Bayer") involving the
Company's blood slide maker, the Hematology Slide Master(TM) (HSM(TM)). The
three agreements, a Licensing Agreement, Instrument Supply Agreement and an
After Market Supply Agreement, provide Bayer with certain non-exclusive rights
to manufacture and sell products based on the HSM. Pursuant to the Licensing
Agreement Bayer paid the Company a one-time licensing fee of $1,100,000. The
Licensing Agreement further provides for Bayer to pay the Company a royalty
payment of $2,000 on each of the first 400 HSM-based units it manufactures and
sells in exchange for the non-exclusive right to manufacture and sell HSM-based
products and the right to negotiate for the manufacture and distribution of the
Company's MICRO21 System, Urine Slide Maker ("USM") and any other new Company
products. The Instrument Supply Agreement provides that Bayer will manufacture
the HSM for the Company for at least two years in the event the Company chooses
not to manufacture the HSM or chooses to have Bayer manufacture the HSM to
supplement the Company's manufacture of this product. Finally, pursuant to the
After Market Supply Agreement, with limited exceptions Bayer is required to
recommend the Company as a sole source of consumables used on all HSM-based
products manufactured and sold by Bayer until the earlier to occur of (a) three
years following Bayer's sale of 200 HSMs or (b) five years after Bayer's initial
sale of an HSM.
Sales to one customer, Coulter Corporation, (Coulter), the Company's exclusive
worldwide distributor through October 1996, accounted for 4% and 50% of the
Company's sales in 1998 and 1997, respectively, and all sales of equipment in
1996. Sales to another customer, Bayer Corporation (Bayer), accounted for 16% of
the Company's sales in 1998. There were no sales to Bayer in 1997 or 1996. The
Company performs credit evaluations of these customers and does not require
collateral. Sales outside of the United States accounted for 13% and 24% of
total sales in 1998 and 1997, respectively; sales to one customer in Japan
(Coulter K.K., an affiliate of Coulter) accounted for 2% and 15%, respectively,
of such sales. There were no sales outside of the United States in 1996. At
December 31, 1998 and 1997, respectively, $245,000 and $165,000 of the Company's
accounts receivable were due from customers outside of the United States.
INVESTMENTS AVAILABLE-FOR-SALE
Investments available-for-sale at December 31, 1997 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 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 $157,000 and $80,000 at December 31, 1998 and 1997,
respectively. 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.
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.
DEFERRED FINANCING COSTS
Deferred financing costs represent costs incurred in connection with the
issuance of convertible debentures and are amortized on a the interest method
over the three year term of the debentures.
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 $75,000 at
December 31, 1998 and $64,000 at December 31, 1997, is included in the caption
"other accrued liabilities" in the accompanying balance sheets.
NET LOSS PER SHARE
Net loss per share was computed by dividing the net loss by the weighted average
number of common shares outstanding during the period. 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 12.
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.
ADVERTISING COSTS
Advertising costs are expensed as incurred and totaled approximately $175,000,
$108,000 and $34,000 in 1998, 1997 and 1996, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amount reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. INVENTORY
The components of inventory are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
----------------- --------------------
<S> <C> <C>
Raw materials $ 1,668,361 $ 3,773,526
Work in process 1,087,928 407,821
Finished goods 401,247 1,752,468
================= ====================
$ 3,157,536 $ 5,933,815
================= ====================
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
Furniture, fixtures and
office equipment $ 1,338,283 $ 1,403,234
Computer and development
equipment 3,949,042 2,962,150
---------------- ----------------
5,287,325 4,365,384
Accumulated depreciation (2,730,978) (1,575,691)
---------------- ----------------
$ 2,556,347 $ 2,789,693
================ ================
</TABLE>
Included in furniture, fixtures and office equipment at December 31, 1998 are
assets under capital lease totaling $99,023, less accumulated amortization of
$6,601.
4. INVESTMENTS AVAILABLE-FOR-SALE
At December 31, 1998, all investments held for sale had been sold and realized
gains and losses on the investments are included in the statements of
operations. Investments-available-for-sale at December 31, 1997 consist of the
following:
<TABLE>
<CAPTION>
Gross Estimated
Unrealized Fair
Cost Gain Value
----------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 164,708 $ - $ 164,708
U.S. Government agency bonds and 3,677,946 5,4660 3,683,412
mortgages
Mortgages and asset backed securities 2,356,350 25,5390 2,381,8890
========================================
$6,199,0040 $ 31,005 $6,230,009
========================================
</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
$0 and $31,005 at December 31, 1998 and 1997, respectively, are included as a
separate component of shareholders' equity.
Gross realized gains and gross realized losses from the sale of securities
classified as available-for-sale were not material for the years ended December
31, 1998 and 1996. Gross realized gains and gross realized losses from the sale
of securities classified as available-for-sale for the year ended December 31,
1997 were $137,000 and $450,000, respectively. For the purpose of determining
gross realized gains and losses, the cost of securities sold is based upon
specific identification.
5. ACCOUNTS RECEIVABLE ASSIGNED TO FACTOR
On November 23, 1998, the Company entered into a factoring agreement to sell its
accounts receivable on a recourse basis.. The factoring agreement provides that
the Company can sell up to 95% of the invoice amount; 80% of the invoice amount
is payable to the Company at the time of acceptance of the invoice by the factor
and the remainder is due upon the payment of the invoice by the customer. The
initial factoring charge is 5%. During 1998, the Company assigned $400,000 of
its accounts receivable to the factor. Funds advanced from the factor on
accounts not yet collected totaled $320,000 at December 31, 1998 and are
recorded as a current liability.
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.
6. TRANSFER OF FINANCIAL ASSETS
The Company often finances amounts due from customers with financial
institutions on a non-recourse basis. The Company follows Statement of Financial
Accounting Standards No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES, which applies a
control-oriented, financial components approach to financial asset transfer
transactions whereby the Company (1) recognizes the financial and servicing
assets it controls and the liabilities it has incurred, (2) derecognizes
financial assets when control has been surrendered, and (3) derecognizes
liabilities once they are extinguished. During 1998, the Company sold $1,075,000
of lease receivables in transactions whereby control of the lease receivable
and/or related equipment has not been surrendered. At December 31, 1998,
approximately $749,000 is reflected as investments in sales-type leases and a
corresponding note payable because the Company is contingently liable for these
assets.
7. RELATED PARTY TRANSACTIONS
In January 1998, $196,000 was advanced to the Company's President and Chief
Executive Officer and $424,000 was advanced to an individual who was at that
time a member of the Board of Directors. The advance of $196,000 to the
Company's President, plus all accrued interest thereon, was repaid in full on
August 14, 1998. The original due date for the advance in the amount of
$424,000, which is secured by shares of the Company's common stock and bears
interest at the rate of prime plus 1% per annum, was April 8, 1998. During the
year, payments in the amount of $290,000, including accrued interest, plus a
$75,000 credit offset in consulting fees due the former member of the Board of
Directors have been made leaving a balance of $86,684. The balance of $86,684
has been extended to August 28, 1999.
The Company incurred expenses of $147,040, $129,676 and $150,000 for the years
ended December 31, 1998, 1997 and 1996, respectively in connection with a
consulting agreement with the former member of the Board of Directors referred
to above. The agreement provides that the Company will pay $8,500 per month from
1997 through December 31, 1999 in exchange for introductions to lease/financing
participants or marketing partners. This agreement was terminated in 1998 with
the parties agreeing to a settlement of the agreement in the amount of $75,000
which was applied to the outstanding balance of the note receivable as described
above.
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.
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 amounted to approximately $15,000 for the year ended December 31, 1996. No
interest was incurred for the years ended December 31, 1998 or 1997.
The Company purchased inventory of approximately $110,507 and $241,000 in 1998
and 1997, respectively from a company owned by a member of the Board of
Directors.
8. CONVERTIBLE DEBENTURES
On June 30, 1998 ("Original Issue Date") the Company issued, in a private
placement transaction, $3,000,000 of 6% convertible debentures, due June 30,
2001 (the "Debentures"). Subject to adjustment in certain events, twenty-five
percent (25%) of the aggregate principal amount of the Debentures is convertible
into the common stock of the Company beginning on September 28, 1998 ("Initial
Conversion Date") and on the first, second and third month anniversaries of the
Initial Conversion Date up to 50%, 75% and 100%, respectively, of the aggregate
principal amount of the Debentures originally issued on the Original Issue Date
is convertible. The Debentures are convertible at a conversion price
("Conversion Price") equal to the lesser of (a) 120% of the average of the
closing bid price for the common stock of the Company for the five (5) trading
days immediately preceding the Original Issue Date or (b) 86% multiplied by the
average of the five (5) lowest closing bid prices of the common stock of the
Company during the twenty-five (25) trading days immediately preceding the date
of the applicable conversion notice. The Company recorded a debt discount of
$906,250 representing the intrinsic value of the beneficial conversion feature
of the Debentures. Interest is payable quarterly and may, at the Company's
option and subject to certain restrictions, be paid in shares of the Company's
common stock based on the Conversion Price. Subject to certain notification
requirements and the payment of a prepayment premium which is tied to the
applicable Conversion Price and the closing bid price of the common stock on the
date of prepayment, the Company has the right to prepay all or any portion of
the outstanding principal amount of the Debentures which has not previously been
repaid or converted. The principal amount of the Debentures for which conversion
notices have not previously been received or for which prepayment has not been
made will be automatically converted on June 30, 2001 at the Conversion Price on
such date. The Debentures may be converted in whole or in part at the option of
the holder if the average of the closing sales prices of the common stock for
any twenty (20) consecutive trading days is equal to or greater than 175% of the
average of the per share market values for the five (5) trading days immediately
preceding the original issue date. The principal amount of Debentures for which
conversion notices have not previously been received or for which prepayment has
not been made or required shall be automatically converted on the third
anniversary of the Original Issue Date at the Conversion Price on such date.
This automatic conversion shall not occur if (a) (1) an Underlying Securities
Registration Statement is not then effective that names the holder as a selling
stockholder thereunder or (2) the holder is not permitted to resell underlying
shares pursuant to Rule 144(k) promulgated under the Securities Act of 1993,
without volume restrictions; (b) there are not sufficient shares of common stock
authorized and reserved for issuance upon such conversion; and (c) the Company
shall not have defaulted on its covenants and obligations hereunder or under the
Purchase Agreement or Registration Rights Agreement. The Company incurred
financing costs of $200,000 in connection with the issuance of the Debentures,
which will be amortized over the life of the Debentures. On July 30, 1998, the
Company filed a registration statement on Form S-3 with the Securities and
Exchange Commission ("SEC") to register the common stock underlying the
convertible debentures issued in connection with the transaction.
This registration statement was declared effective by the SEC on October 20,
1998.
9. NOTE PAYABLE IN DEFAULT
At December 31, 1998, note payable in default consists of a $128,280 secured
promissory note which was due on February 1, 1999. The note bears interest at an
annual rate of 10%. A late fee of 5% can be imposed on any amount which is not
paid timely. After maturity, whether by acceleration or otherwise, interest
shall accrue on the unpaid principal and on any unpaid interest at the rate of
10% per annum. The note is secured by all of the Company's personal property. At
April 9, 1999 the note remains outstanding and is therefore classified as notes
payable in default.
10. CAPITAL LEASE OBLIGATION
At December 31, 1998, future minimum annual rental commitments under the
Company's capital lease obligation is as follows:
Year ending December 31:
1999 $ 40,704
2000 40,704
2001 20,352
---------
Total minimum lease payments 101,760
Less amount representing interest (16,479)
---------
Present value of net minimum lease 85,281
payments
Less current maturities of capital
lease obligations (30,562)
=========
Capital lease obligation $54,719
=========
The lease expires in June 2001.
11. 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: (i) 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
and 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 16, 1998 the Company entered into three related agreements with
Bayer involving the Company's blood slide maker, the Hematology Slide Maker(TM)
(HSM(TM)). The three agreements, a Licensing Agreement, Instrument Supply
Agreement and an After Market Supply Agreement, provide Bayer with certain
non-exclusive rights to manufacture and sell products based on the HSM. Pursuant
to the Licensing Agreement, Bayer paid the Company a one-time licensing fee of
$1,100,00. The Licensing Agreement further provides for Bayer to pay the Company
a royalty payment of $2,000 on each of the first 400 HSM-based units it
manufactures and sells in exchange for the non-exclusive right to manufacture
and sell HSM-based products and the right to negotiate for the manufacture and
distribution of the Company's MICRO21 System, Urine Slide Maker ("USM") and any
other new Company products. The Instrument Supply Agreement provides that Bayer
will manufacture the HSM for the Company for at least two years in the event the
Company chooses not to manufacture the HSM or chooses to have Bayer manufacture
the HSM to supplement the Company's manufacture of this product. Finally,
pursuant to the After Market Supply Agreement, with limited exceptions Bayer is
required to recommend the Company as a sole source of consumables used on all
HSM-based products manufactured and sold by Bayer until the earlier to occur of
(a) three years following Bayer's sale of 200 HSMs or (b) five years after
Bayer's initial sale of an HSM.
On November 1, 1996, the Company and DiaSys (DiaSys) Corporation entered into a
Product Integration Agreement (the DiaSys Agreement). Under the DiaSys
Agreement, the Company was granted a nonexclusive, nontransferable license to
integrate the patented DiaSys wet- preparation specimen handling system together
with the MICRO21 in order to produce integrated systems for resale to MICRO21
end users. The DiaSys Agreement was terminated in July 1997, when the Company
rejected products delivered by DiaSys and returned the products to them. The
DiaSys Agreement provides for mandatory and binding arbitration of disputes
between the parties. On January 12, 1998, DiaSys filed a demand for arbitration
of the dispute. In its demand for arbitration, DiaSys sought damages in excess
of $1,000,000 for the Company's alleged breach of the DiaSys Agreement and the
Company's alleged defamation of DiaSys and its products.
On December 15, 1998 the arbitration panel found that the Company breached its
contract with Diasys to provide Diasys with an adequate opportunity to repair or
replace goods Diasys delivered to the Company which the Company contended were
non-conforming. The arbitration panel rejected Diasys' claim for lost profits
and limited Diasys' recoverable damages to its actual costs to produce and
deliver the units sold to the Company including allocable overhead, less net
proceeds realized from the resale of the returned units and its attorneys fees.
Additional arbitration proceedings are scheduled to determine the amount, if
any, that the Company will be required to pay to DiaSys. As of April 9, 1999,
Diasys has not asserted the amount of its claim with respect to the recoverable
damages. This matter is in the discovery stage and a reasonable estimate of a
potential range of loss cannot presently be determined. The Company has accrued
$10,000 with respect to the determination of the arbitration panel that the
Company had defamed DiaSys and its products. While the Company believes the
calculation of DiaSys' recoverable damages will result in minimal damages, there
can be no assurance that the ultimate outcome of this matter will not have a
material adverse effect on the Company's liquidity, financial condition and
results of operations. It is possible that the Company's results of operations
or cash flows in a particular quarter or annual period or its financial position
could be materially affected by an unfavorable outcome.
On April 20, 1998, the Company signed a customer financing agreement with Prime
Capital Corp. ("Prime") to provide up to $36 million of financing for customers
acquiring the MICRO21 System Workstation. Under the terms of the agreement, the
Company and Prime will establish a wholesale customer finance relationship under
which Prime will provide a "Private Label Fee Per Slide" financing facility to
customers of the Company for an ongoing vendor leasing program. Prime will
provide up to $12 million of customer financing per year over 3 years.
Notwithstanding the execution of this agreement, as of April 9, 1999 the Company
and Prime have not established a customer finance relationship and none of the
Company's customers have obtained financing under this agreement with Prime.
When implemented this agreement will provide a financing alternative for the
Company's customers.
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.
The Company leases office equipment and office and warehouse space under
renewable operating leases through September 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, 1998, 1997 and 1996, was approximately
$454,500, $379,000 and $196,000, respectively.
Future minimum lease payments under operating leases as of December 31, 1998,
are as follows: 1999--$143,000. All leases expire after 1999.
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 (See
below) 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.
12. COMMON STOCK, WARRANTS AND OPTION PLAN
Common Stock
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.
Stock Option Plans
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 non-qualified 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 non-qualified 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 1998, the Company granted stock options to employees for the purchase of
279,228 common shares at an exercise price of $1.60 per share. 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. Deferred compensation of $443,000
and $13,980 was recorded in connection with the issuance of these options based
on a fair market value of $3.19 per share in 1998 and $9 per share in 1996. The
Company amortizes the deferred compensation over the employees' required service
period of four years. Compensation expense for the years ended December 31,
1998, 1997 and 1996, totaled $ 185,252, $93,252 and $93,833, 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 non-employee and non-consultant 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 1998,
1997 and 1996: risk-free interest rates of 5.19%, 5.75% and 6.11%; dividend
yields of 0%; volatility factors of the expected market price of the Company's
common stock of 1.177, .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
EXERCISE OPTION
SHARES PRICE PRICE
------ ----- -----
<S> <C> <C> <C>
Options outstanding at January 1, 1996 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
Granted 831,728 $1.17
Canceled (405,722) $5.76
Exercised (440,940) $0.20
---------
Options outstanding at December 31, 1998 1,783,141
Exercisable at December 31, 1998 805,420
=========
Exercisable at December 31, 1997 1,076,642
=========
Exercisable at December 31,1996 810,459
=========
Reserved for future option grants at
December 31, 1998 2,160,142
Weighted average fair value of options
granted in 1998 $1.60
=====
Weighted average fair value of options
granted in 1997 $3.83
=====
Weighted average fair value of options
granted during 1996 $3.90
=====
</TABLE>
During 1998, certain options were granted at exercise prices which differed from
the fair market value of the Company's stock on the date of grant as follows:
Options Whose Exercise
Price on the Date of Weighted Average Weighted Average Fair
Grant: Exercise Prices Values
Equals market price 0.91 0.86
Exceeds market price 1.60 2.72
Is less than market 0.00 0.00
price
The weighted average remaining contractual life of options outstanding at
December 31, 1998 is 8.71 years.
<PAGE>
The following table sets forth information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Number Remaining Average Number
Range of Exercise Outstanding as of Contractual Exercise Exercisable as of
Prices December 31, 1998 Life Price December 31, 1998
<S> <C> <C> <C> <C>
$ 0.03 - $ 5.25 1,423,378 5.2 years $ 1.17 625,395
$ 5.38 - $10.75 310,263 8.0 years $ 6.12 150,463
$11.00 - $14.75 7,500 7.8 years $14.75 4,562
$15.00 - $20.06 42,000 7.5 years $16.82 25,000
------ ------ ------
1,783,141 $2.49 787,270
</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 awards made in 1995 through 1998 in 1998, 1995 through 1997
awards in 1997 and the vesting of 1996 and 1995 awards in 1996, in accordance
with Statement 123. Because compensation expense associated with a stock option
award is recognized over the vesting period, the initial impact of applying
Statement 123 may not be indicative of compensation expense in future years,
when the effect of the amortization of multiple awards will be reflected in pro
forma net loss. The Company's pro forma information follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(15,615,740) $(12,547,611) $(7,000,652)
============== ============= ============
Pro forma net loss per share $(1.37) $(1.15) $(.70)
======= ======= ======
</TABLE>
Stock Purchase Warrants
In connection with the issuance of the Debentures described in Note 8, the
Company issued warrants to the holders of the Debentures to purchase 120,000
shares of the Company's common stock at $3.93 per share. The warrants are
exercisable immediately through June 30, 2003. The fair value of the warrants
based on the Black-Scholes valuation method is $1.87. The Company recorded a
debt discount of $224,400 representing the fair value of the warrants.
In addition, the Company issued a warrant to a financial consultant to purchase
60,000 shares of the Company's common stock at $3.63 per share. The warrant is
exercisable immediately through June 30, 2003. The Company recorded deferred
financing costs of $116,400 in connection with the issuance of the warrant. Such
costs will be amortized over the term of the Debentures. The assumptions used to
compute the value of the warrants were 5.48% for the risk-free interest rate;
.598 for the volatility factor of the expected market price of the Company's
common stock; expected life of 5 years; and a 0% dividend yield rate.
The following table summarizes information relative to the Company's warrants:
SHARES PRICE RANGE
Outstanding at January 1, 1996 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 (32,199) $2.00
--------
Outstanding at December 31, 1997 637,377 $0.35--$2.50
Granted 180,000 $3.63-$3.93
Exercised (144,043) $2.00
--------
Outstanding at December 31, 1998 673,334 $0.35-$3.93
========
Shares of common stock reserved for future issuance at December 31, 1998 are as
follows:
Convertible debentures 3,000,000
Options 3,943,283
Warrants 673,334
----------
7,616,617
==========
13. INCOME TAXES
At December 31, 1998, the Company had tax net operating loss (NOL) carryforwards
of approximately $25,615,000 available for income tax purposes that expire in
2010 through 2018. 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. The Company has not completed a study
to determine the effects that this change of ownership will have on these net
operating losses.
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 $15,044,000 and $9,582,000 at
December 31, 1998 and 1997, respectively. However, realization of these deferred
assets is not reasonably assured; therefore, they were fully reserved by a
valuation allowance of $15,044,000 and $9,582,000 at December 31, 1998 and 1997,
respectively.
Significant components of the Company's deferred income taxes are as follows:
DECEMBER 31
1998 1997
---- ----
NOL carryforwards $13,402,000 $8,544,000
--- --
Depreciation 395,000 141,000
--- --
Accrued liability 179,000 172,000
Unamortized stock option cost 106,000 71,000
Inventory 687,000 543,000
Deferred revenue 275,000 111,000
------- --------
15,044,000 9,582,000
Less valuation allowances for
deferred tax assets (15,044,000) (9,582,000)
------------ -----------
$ - $ -
============ ===========
The net change in the valuation allowance for the years ended December 31, 1998
and 1997 was an increase of approximately $5,462,000 and $4,726,000,
respectively, resulting primarily from net operating losses generated during the
respective years.
The reconciliation of income tax computed at the U.S. federal statutory rate to
income tax expense as follows:
Year ended December 31
1998 1997
--------------- ---------------
Tax at U.S. statutory rate (34.00)% (34.00)%
State taxes, net of federal benefit (3.61)% (3.61)
Nondeductible items 0.17 .19
Change in valuation allowance 36.01 40.29
Other 1.43 (2.87)
=============== ===============
-- --
=============== ===============
14. 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 and capital lease obligations are
reflected in the financial statements at fair value calculated based on
discounted cash flow using a discount rate of 6%. There is no established market
or trading history for the Company's convertible debenture. In addition, as a
result of the liquidation issues discussed in Note 15, the Company believes that
the fair value of these securities has been impaired.
<PAGE>
15. MANAGEMENT'S PLANS
The Company reported a net loss of approximately $15,167,000 for the year ended
December 31, 1998, incurred cumulative losses from inception to December 31,
1998, aggregating approximately $42,251,000, and reported negative cash flows
from operations for the year ended December 31, 1998, of approximately
$9,819,000. In addition, the Company is in default on a $128,000 note payable
due to the Company's failure to repay the note upon its maturity in February
1999. At December 31, 1998, the Company has working capital of approximately
$1,566,000 and shareholders' equity of approximately $1,796,000. The Company's
business strategy is taking longer to accomplish and is proving to be more
costly than originally anticipated. Currently, the Company does not have, and is
not generating from operations, sufficient cash to meet its obligations as they
become due. 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 11) adversely affected the Company's business, results of
operations and financial condition in 1998, 1997 and 1996. The Company's 1999
operating plan contemplates focusing activities on expanding sales revenue
through the efforts of its internal sales, marketing and service force. In
addition, the Company has implemented strategic steps in an effort to remain
viable until sufficient market penetration for the Company's products is
achieved. This plan, which commenced in 1998, includes personnel reductions and
reductions in other operating costs. In addition, the Company completed the
development of its Hematology Slide Master in 1998 and curtailed the development
of the Urine Slide Master which will result in decreased amounts of costs
associated with research and development. Furthermore, in July 1998 the Company
closed its office in Europe. The Company has also reduced sales expenditures,
while emphasizing a sales process that better targets prospective customers who
are closest to making a purchase decision. The Company is implementing a plan
that will segment the market according to product fit and geographic locations.
In the fourth quarter of 1998, the Company introduced the Hematology Slide Maker
and two additional procedures for the Micro21 System which management believes
will offer significant opportunities for expanding the Company's potential
customer base. In November 1998, the Company entered into a license agreement
with Bayer whereby the Company has granted Bayer a nonexclusive right to
develop, make, have made, use, sell and have sold the Hematology Slide Master in
exchange for $1,100,000 and a royalty of $2,000 per unit sold for the first 400
units manufactured and sold by Bayer or its sublicensed affiliates. The Company
received payments under this agreement totaling $520,000 through December 31,
1998 and $580,000 (net of $45,000 paid to a factor) through April 9, 1999.
Historically, the cash necessary to fund the Company's working capital,
operating losses and capital expenditures has been provided by debt or equity
financing. 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. On October 30,
1998 the Company was notified by Nasdaq of a potential delisting of the
Company's common stock from the Nasdaq National Market, effective February 1,
1999, due to the Company's failure to comply with Nasdaq's $1.00 minimum bid
price requirement for continued listing on the Nasdaq National Market. On
January 28, 1999 the Company requested a hearing before a Nasdaq Hearing's Panel
to appeal the proposed delisting, which effectively stayed the delisting of the
Company's common stock. On March 25, 1999 the Company was further notified by
Nasdaq that the Company did not meet the $4,000,000 net tangible assets
requirement for continued listing on the Nasdaq National Market. The Company's
request for a hearing was granted by Nasdaq and the hearing was held on April 8,
1999. The Company expects Nasdaq to render a decision on the Company's appeal of
the proposed delisting within three weeks of the date of the hearing. In the
event that the Company's appeal is denied and the Company's common stock is
delisted from the Nasdaq National Market, the Company has requested that Nasdaq
permit the Company's common stock to be listed on the Nasdaq Smallcap Market.
There can be no assurance that the Company's appeal of Nasdaq's proposed
delisting of the Company's common stock will be successful and it appears likely
that the Company's common stock will eventually be delisted from the Nasdaq
National Market. There also can be no assurance that Nasdaq will permit the
Company's common stock to be listed on the Nasdaq Smallcap Market since such
listing will require that the Company convince Nasdaq that it can sustain long
term compliance with all applicable continued listing requirements. At December
31, 1998, the Company's tangible net worth is $1,499,000 which is below the
minimum listing requirements of the Nasdaq SmallCap market. In the event that
the Company's common stock is delisted from the Nasdaq National Market and the
Company is not successful in its request that its common stock be listed on the
Nasdaq Smallcap Market, the Company's common stock will commence trading on the
OTC Bulletin Board. In addition, the failure of the Company's common stock to be
listed for trading on the Nasdaq National Market or the Nasdaq Smallcap Market
would constitute an event of default under the Debentures, in which event the
full principal amount of the Debentures, together with all accrued interest
thereon, would become immediately due and payable in cash. Pending the Nasdaq
hearing panel's decision, the Company's common stock will remain listed on
Nasdaq's National Market System.
The Company continues to explore a variety of alternatives for increasing its
sales and distribution capacity and raising sufficient capital to fund its
operations. Implementation of the Company's business strategy requires
significant expenditures of capital. The Company is currently seeking additional
funds through debt or equity. There can be no assurance that such funds can be
obtained on favorable terms, if at all. If the Company is unable to achieve its
operating plan with respect to increased revenue and to obtain additional debt
or equity financing, it will have to cease operations. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from this uncertainty.
<PAGE>
16. FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
In the fourth quarter of 1998 an adjustment to provide an additional allowance
for slow moving and obsolete inventory of approximately $742,000 was recorded.
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
YEAR EXPENSES OF YEAR
Year ended December 31, 1998: Deducted from asset accounts:
<S> <C> <C> <C>
Valuation allowance for deferred tax assets $9,582,000 $5,462,000 $15,044,000
Allowance for uncollectible accounts 40,000 0 40,000
Allowance for obsolete inventory 1,039,000 961,000 2,000,000
--------- ------- ---------
Total $10,661,000 $6,423,000 $10,661,000
=========== ========== ===========
Year ended December 31, 1997:
Deducted from asset accounts:
Valuation allowance for deferred tax assets $4,856,000 $4,726,000 $9,582,000
Allowance for uncollectible accounts 40,000 0 40,000
Allowance for obsolete inventory 200,000 839,000 1,039,000
------- ------- ---------
Total $5,096,000 $5,565,000 $10,661,000
========== ========== ===========
Year ended December 31, 1996: Deducted from asset accounts:
Valuation allowance for deferred tax assets $2,162,000 $2,694,000 $4,856,000
Allowance for uncollectible accounts -- 40,000 40,000
Allowance for obsolete inventory -- 200,000 200,000
----------- ------------ ------------
Total $2,162,000 $2,934,000 $5,096,000
========== ========== ==========
</TABLE>
INTELLIGENT MEDICAL IMAGING, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END
YEAR EXPENSES OF YEAR
---- -------- -------
<S> <C> <C> <C>
Year ended December 31, 1998: Deducted from
asset accounts:
Valuation allowance for deferred tax assets $4,856,000 $4,726,000 $9,582,000
Allowance for un-collectible accounts 40,000 0 40,000
Allowance for obsolete inventory 200,000 839,000 1,039,000
------- ------- ---------
Total $5,096,000 $5,565,000 $10,661,000
========== ========== ===========
Year ended December 31, 1996: Deducted from
asset accounts:
Valuation allowance for deferred tax assets $2,162,000 $2,694,000 $4,856,000
Allowance for un-collectible accounts -- 40,000 40,000
Allowance for obsolete inventory -- 200,000 200,000
---------- ------- -------
Total $2,162,000 $2,934,000 $5,096,000
========== ========== ==========
Year ended December 31, 1995: Deducted from
asset accounts:
Valuation allowance for deferred tax assets $1,037,000 $1,125,000 $2,162,000
---------- ---------- ----------
Total $1,037,000 $1,125,000 $2,162,000
========== ========== ==========
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Part III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS. Set forth below is information regarding the Company's directors,
including their respective ages and principal occupations or employment and
business experience during at least the last five years:
<TABLE>
<CAPTION>
Name Age Position with Company Has Served as
---- --- --------------------- Director Since
---------------
<S> <C> <C> <C>
Tyce M. Fitzmorris(1) 56 Chairman of the Board of Directors, President 1989
and Chief Executive Officer
Gene M. Cochran (1) 58 Chief Financial Officer, Treasurer, Secretary 1994
and Director
James E. Davis (3) 65 Director 1996
George Masters(2) 58 Director 1994
William Whittaker (2)(3) 65 Director 1991
</TABLE>
- - ------
(1) Member of Non-Employee Director Stock Option Plan Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Mr. Fitzmorris is the Company's founder and has served as Chief Executive
Officer since June 1989. He served as its President from June 1989 until June of
1991. Mr. Fitzmorris was re-appointed as President of the Company in July 1993.
In 1985, Mr. Fitzmorris founded Vistech Corporation ("Vistech") and served as
Chairman of the Board and President until Vistech was sold in 1988. Vistech
developed high-speed computerized vision inspection systems for beverage
containers, which systems are being placed worldwide with Coca-Cola Enterprises,
Inc., PepsiCo, Inc. and other bottlers.
Mr. Cochran has served as Chief Financial Officer since October 1994. Prior
to joining the Company, Mr. Cochran served from 1970 to 1995 as the principal of
Gene M. Cochran & Co., an accounting and consulting firm. From 1987 to 1994, Mr.
Cochran served as Chief Financial Officer and director for WHW Holding Company,
Krisam Group, Inc., CW Travel, Inc. and NuPhase Technology, Inc. Prior to 1989,
Mr. Cochran was a director of Vistech Corporation ("Vistech"), and from 1978
until Vistech was sold in 1983, he served as Chief Executive Officer and
director of Mission Home Health, Inc., a home healthcare company.
Mr. Davis is the founder of 3-D Machining, Inc., an industrial design and
machining company, and has served as its President since its inception in June
1994. He is also the founder, Vice President and a director of Cross Match
Technologies, Inc., formerly known as Cross Check Corporation, a company engaged
in the development of electro-optic devices to photograph fingerprints for
access control. From 1987 to 1991, Mr. Davis served as Chief Executive Officer
and a director of Tele-Optics, Inc. From 1991 to June 1994, Mr. Davis was
employed by Ogden Corporation as Assistant to the President following Ogden
Corporation's acquisition of a division of Tele-Optics, Inc.
Mr. Masters served as Vice Chairman, President and Chief Executive Officer
of Seragen, Inc., a publicly-held biotechnology company ("Seragen"), from April
1993 until November 1996. Prior to joining Seragen in 1993, Mr. Masters served
as President and Chief Executive Officer of Verax Corporation, a bioprocessing
company, from 1991 to 1993. He also served as President and Chief Executive
Officer of Hemosol, Inc., a biopharmaceutical company, from 1989 to 1991. Mr.
Masters is on the Governing Board of the Biotechnology Industry Organization in
Washington, D.C. and is Chairman of the Small Business Development Board for the
State of Maine. He is also on the Board of Visitors of Boston University School
of Medicine and the Board of Associates of the Whitehead Institute for
Biomedical Research at Massachusetts Institute of Technology. Mr. Masters serves
as Chairman of the Board of Directors of Immucell, Inc., a biopharmaceutical
company; Vice Chairman of the Board of Directors of Hemosol, Inc., a developer
of artificial red blood cells; and Vice Chairman of the Board of Directors of
CME Telemetrix, Inc., a medical instrumentation company, all of which companies
are publicly-held. Mr. Masters also serves as a member of the Board of Directors
of the following privately held companies: BioCatalyst Yorkton, Inc. (Chairman),
PharmX, Inc., ProScript, Inc., CompuCyte, Inc. and Apollo BioPharmaceutics.
Mr. Whittaker is currently retired. He served as the President and Chief
Operating Officer of the Company from June 1991 through July 1993. From 1982 to
1989, Mr. Whittaker was employed by National Medical Care, Inc. ("National
Medical Care"), a division of W.R. Grace & Company ("W.R. Grace"). From 1987 to
1989, Mr. Whittaker served in several senior management positions at W.R. Grace,
including Senior Vice President Corporate, President of the Medical Products
Division and President of the Home Care Division of National Medical Care. After
his departure from W.R. Grace in 1989, Mr. Whittaker worked as a private
management consultant. Mr. Whittaker serves as a director of Marcor, Inc., a
privately held water treatment company.
There are no family relationships between any directors or executive officers of
the Company.
EXECUTIVE OFFICERS. Officers are appointed by the Board of Directors and serve
at the discretion of the Board. Set forth below is the name and age of each
executive officer of IMI, all positions and offices each holds with IMI and his
or her business experience for the past five years:
Name Age Position
Tyce M. Fitzmorris (1) 56 President, Chief Executive Officer and Chairman
Gene M. Cochran (1) 58 Chief Financial Officer, Treasurer, Secretary
and Director
Eric Espenhahn 34 Vice President -- Product Development
Jaime Pereira 33 Vice President -- Engineering
- - ------
(1) The prior business experience of this Named Officer is set forth above in
the section entitled "Directors".
Mr. Espenhahn has served as Vice President--Product Development since the
Company's inception in June 1989. Mr. Espenhahn also served as a director of the
Company from June 1989 until July 1996, when he resigned from the Board of
Directors. From 1985 until 1989, Mr. Espenhahn was employed by Vistech
Corporation ("Vistech") and for a short period by an affiliate of Inex Vision
Systems (Inex, Inc.), the company that purchased Vistech's assets, as a computer
vision software engineer.
Mr. Pereira has served as Vice President--Engineering since April 1992. Mr.
Pereira joined the Company as a senior engineer in September 1989. Prior to
September 1989, Mr. Pereira was employed by Vistech and then Inex, Inc.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the Company's
directors, executive officers and persons who beneficially own more than ten
percent (10%) of the Common Stock of the Company to file reports of ownership
and changes of ownership with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc. Copies of all filed reports are
required to be furnished to the Company pursuant to Section 16(a). Based solely
on the reports received by the Company and on written representations from
reporting persons, the Company believes that the directors, executive officers
and greater than ten percent (10%) beneficial owners complied with all
applicable filing requirements during the fiscal year ended December 31, 1998,
with the exception that Gene M. Cochran, an executive officer and director,
inadvertently failed to file until July 1998 a Form 4 to correct a Form 4 filed
in April 1997 to void previously reported options.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows all compensation paid to the Company's Chief
Executive Officer and the Company's three other executive officers who were
serving as executive officers at the end of fiscal 1998 (collectively, the
"Named Officers"), for all services rendered to the Company for each of the last
three completed fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Name and Principal Position Year Salary ($) Bonus ($)
- - --------------------------- ---- ---------- ---------
<S> <C> <C> <C>
Tyce M. Fitzmorris, 1998 235,019 --
Chairman of the Board of Directors, President 1997 220,000 --
and Chief Executive Officer 1996 200,000 40,000(1)
Gene M. Cochran, 1998 115,500 --
Chief Financial Officer, Treasurer, Secretary 1997 115,000 --
and Director 1996 108,846 11,000(1)
Eric Espenhahn, 1998 126,500 --
Vice President-Product Development 1997 126,500 --
1996 119,423 14,375(1)
Jaime Pereira, 1998 126,500 --
Vice President-Engineering 1997 126,500 --
1996 119,423 14,375(1)
</TABLE>
- - -------
(1) Bonus awarded by the Board of Directors in recognition of technological
development of the MICRO21 system and execution of strategic development
and license agreements.
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Percent of
Total
Options
Number of Granted to Potential Realizable Value
Securities Employees Exercise at Assumed Annual Rates
Underlying in Fiscal Price Expiration of Price Appreciation
Name Option Year ($/Sh) Date for Option Term (1)
- - ----------------------- ------------- -------------- ------------- -------------- -------------------------------
5% ($) 10% ($)
------ -------
<S> <C> <C> <C> <C> <C> <C>
Gene Cochran 10,000 1.2% $0.75 10/23/08 4,700 12,000
Eric Espenhahn 25,000 3.1% $0.75 10/23/08 11,750 30,000
Jaime Pereira 25,000 3.1% $0.75 10/23/08 11,750 30,000
</TABLE>
(1) The values shown here are based on the indicated assumed annual rates of
appreciation compounded annually. The actual value the Named Officer may
realize will depend on the extent to which the stock price exceeds the
exercise price of the options on the date the option is exercised.
Accordingly, the value, if any, realized by the Named Officer will not
necessarily equal any of the amounts set forth in the table above. These
calculations are not intended to forecast possible future appreciation, if
any, of the price of the Company's common stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Officers certain
information concerning the number of options exercised by each of them in the
fiscal year ended December 31, 1998 and the value of such Named Officers'
unexercised options as of December 31, 1998.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Acquired Value Options at December 31, 1998 at December 31, 1998 ($) (1)
on Exercise Realized($) ---------------------------- ----------------------------
----------- ----------- Exercisable Unexercisable Exercisable Unexercisable
Name ----------- ------------- ------------ -------------
----
<S> <C> <C> <C> <C> <C> <C>
Tyce M. Fitzmorris 198,377 823,681 -- -- -- --
Gene M. Cochran -- -- 31,666 17,500 -- --
Eric Espenhahn 203,377 678,933 -- 25,000 -- --
Jaime Pereira -- -- 266,676 25,000 -- --
</TABLE>
- - ----------
(1) Calculated by determining the difference between the exercise price of the
options and $0.5438, the average closing price of the Company's Common
Stock for the five business days preceding December 31, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Davis and Whittaker, each of whom
are outside directors.
The Company leased its manufacturing facility in Riviera Beach, Florida, from a
partnership of which James E. Davis is a general partner; the rent expense paid
under such lease in 1997 was approximately $22,100. The lease for this
manufacturing facility terminated on March 31, 1997. In addition, the Company
purchased approximately $220,800 of inventory in 1997 from 3-D Machining, Inc.,
a company owned by Mr. Davis (76 percent) and his sons. Mr. Davis is President
of 3-D Machining, Inc.
Mr. Whittaker was employed by the Company pursuant to the terms of a Service
Agreement dated June 20, 1991 and was elected President and Chief Operating
Officer and appointed to the Board of Directors. In connection therewith, the
Company granted Mr. Whittaker a warrant (the "Whittaker Warrant") for the
purchase of 690,000 shares of Common Stock at an exercise price of $1.67 per
share, and Mr. Whittaker invested $100,000 for the purchase of 60,000 shares of
Common Stock at $1.67 per share. The Whittaker Warrant was to expire on
September 30, 1997, and included a vesting schedule tied to Mr. Whittaker's
tenure of employment. The Company was unable to pay Mr. Whittaker's salary in
full. In June 1993, the Service Agreement was amended changing Mr. Whittaker's
relationship with the Company from employee to consultant. In connection with
this amendment, the Whittaker Warrant was exchanged for a new, fully-vested
warrant (the "New Whittaker Warrant") to purchase 300,000 shares of Common Stock
at an exercise price of $1.00 per share, which expires in October 2001, and Mr.
Whittaker resigned as President. In October 1994, Mr. Whittaker and the Company
entered into an agreement pursuant to which Mr. Whittaker agreed to forbear from
collection of a total of $275,000 due to him under the Service Agreement in
exchange for the Company's agreement to pay him $275,000 plus interest at the
prime rate of a local bank on the earlier of October 5, 2001, or ten days after
the Company consummated its initial public offering. On April 1, 1996, the
Company repaid Mr. Whittaker the full amount of $318,569 from the proceeds of
its initial public offering.
COMPENSATION OF DIRECTORS
The Company's current policy is to pay each outside director who is neither an
employee, officer or directly or indirectly a paid consultant to the Company an
annual retainer of $10,000 per year, paid quarterly in arrears. Each such
director is also paid $500 for each regular or special Board of Directors
meeting ($250 with respect to meetings held by telephonic conference) and $500
for each meeting of any committee on which such director serves ($100 per hour
with respect to committee meetings held by telephonic conference). The directors
currently eligible to receive the foregoing compensation are Messrs. Davis,
Masters and Whittaker. The Company reimburses all directors for their authorized
expenses.
The Company granted to each of Messrs. Cochran and Masters, upon their election
to the Board of Directors in 1994, non-statutory stock options to purchase up to
19,800 shares of Common Stock. The options vest over a three year period with
respect to 1,650 shares for each regular quarterly Board of Directors meeting
attended by each such director. The options have a ten-year term and are
exercisable at an exercise price of $2.00 per share, the fair market value of
the Common Stock at the date of grant as determined by the Board of Directors.
All of the foregoing options were granted pursuant to the Company's 1990 Stock
Option Plan. With respect only to the options granted to Mr. Cochran, the Chief
Financial Officer, Treasurer, Secretary and an employee of the Company, the
stock option agreement evidencing the grant of such options was amended to
provide that Mr. Cochran could exercise only those options that had vested
thereunder as of December 23, 1995, for the purchase of 8,250 shares.
In December 1995, the Board of Directors adopted the 1995 Non-Employee Director
Stock Option Plan (the "1995 Plan"). The 1995 Plan generally authorizes the
grant of options to members of the Board of Directors who are not employees,
officers or paid consultants of the Company, except that William Whittaker is
not eligible to receive options under the 1995 Plan. Options granted under the
1995 Plan are non-statutory stock options. A total of 268,650 shares are
reserved for issuance under the 1995 Plan. As of this date, only Messrs. Davis
and Masters are eligible to receive options under the 1995 Plan. The 1995 Plan
is administered by the Non-Employee Director Stock Option Committee (the
"Committee"). The Committee has full authority to make all determinations
required or permitted under the 1995 Plan. Each director (other than Mr.
Masters) eligible to receive options under the 1995 Plan will receive options to
purchase 19,800 shares of Common Stock on the date that he or she is first
elected to the Board of Directors with respect to any election held on or after
January 1, 1996. Provided that a director has served on the Board of Directors
for the preceding three-year period, he or she is eligible to receive options to
purchase another 19,800 shares upon his or her re-election to the Board of
Directors for his or her fourth, seventh, tenth, thirteenth and sixteenth
consecutive one-year term. The exercise price of options, on a per share basis,
may not be less than 100 percent of the fair market value of the Common Stock on
the date of grant. No option may be granted having a term exceeding ten years.
Each option will terminate within three months of the date following the
termination of the optionee's status as a member of the Board of Directors for
any reason. Options granted under the 1995 Plan will generally become
exercisable as to one-twelfth of the shares subject to the option each quarter
following the date of grant, provided that the optionee continued to serve on
the Board of Directors through the end of such quarter. If an optionee fails to
attend at least 50 percent of the regular or special Board of Directors meetings
held in any year, options which become exercisable in such year but were not
exercised as of the end of such year shall, in the discretion of the Board of
Directors, terminate immediately.
The initial grant of options under the 1995 Plan to Mr. Masters was subject to
certain adjustments in the number of options granted, the dates such options
were granted, and the dates such options became exercisable, because Mr. Masters
previously received options upon his election to the Board of Directors in
December 1994 pursuant to the Company's 1990 Stock Option Plan. Mr. Davis was
granted options to purchase 19,800 shares upon his re-election to the Board of
Directors at the 1997 Annual Meeting. Mr. Masters was granted options to
purchase 21,450 shares upon his re-election to the Board of Directors at the
1998 Annual Meeting.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of IMI met eight times during 1998. All directors
attended at least 75% of the Board of Directors meetings held in 1998.
The Board of Directors has the following standing committees: Audit,
Compensation, Non-Employee Director Stock Option Plan and Nominating.
The Audit Committee reviews the records and affairs of IMI to determine their
financial condition, oversees the adequacy of the systems of internal control
and monitors IMI's adherence in accounting and financial reporting to generally
accepted accounting principles. The Audit Committee met one time in 1998. The
Audit Committee is currently comprised of Messrs. Masters and Whittaker.
The Compensation Committee determines compensation for officers and administers
the Company's 1990 Stock Option Plan. No officer serving on the Board of
Directors or the Compensation Committee has participated in decisions awarding
compensation or granting of stock options to himself. The Compensation Committee
met one time in 1998. The Compensation Committee is currently comprised of
Messrs. Davis, Skinner and Whittaker.
The Non-Employee Director Stock Option Plan Committee administers the Company's
1995 Non-Employee Director Stock Option Plan. This Committee met one time in
1997. The Non-Employee Director Stock Option Plan Committee is currently
comprised of Messrs. Fitzmorris and Whittaker.
The Nominating Committee evaluates and nominates candidates for election to the
Board of Directors. This Committee was formed in April 1998, and met one time in
1998. The Nominating Committee is currently comprised of Messrs. Fitzmorris,
Masters and Whittaker. Stockholders may nominate persons to stand for election
to the Board of Directors by complying with the procedure for such nominations
set forth in the Company's Bylaws.
COMPENSATION COMMITTEE REPORT
OVERVIEW AND PHILOSOPHY
The Compensation Committee of the Board of Directors (the "Compensation
Committee") is composed of three members, all of whom are outside directors of
the Company. The Compensation Committee provides overall guidance on the
Company's compensation and benefits philosophy. In addition, the Compensation
Committee approves and monitors the Company's:
o executive compensation and benefits programs
o executive employment agreements, if any
o 1990 and 1995 Stock Option Plans
The primary objectives of the Compensation Committee are to assure that the
Company's executive compensation and benefits program:
o reflects the Company's entrepreneurial orientation
o is competitive with other growing technology-based companies
o safeguards the interests of the Company and its stockholders
o is effective in driving performance to achieve financial goals and create
stockholder value o fosters teamwork on the part of management
o is cost-efficient and fair to employees, management and stockholders
o is well communicated to and understood by program participants
The Company's executive compensation policies are designed to attract, motivate
and retain highly qualified executive officers who can enhance stockholder
value, and to support a performance-oriented environment that rewards
achievement of the Company's financial goals. The Compensation Committee meets
periodically during each fiscal year to review the Company's existing
compensation and benefits programs and to consider modifications that seek to
provide a direct relationship between executive compensation and sustained
corporate performance.
The Company compensates its executive officers through three principal types of
compensation: annual base salary, annual incentive bonuses and long-term
incentive award through stock options. The Company, as a matter of policy,
places substantial emphasis on long-term stock options since this form of
compensation is viewed as very effective at correlating executive officer
compensation with corporate performance and increases in stockholder value.
BASE SALARY
The annual base salary of each executive officer is based on the scope of his or
her responsibility and accountability within the Company, as well as on
performance and experience criteria. In addition, the Compensation Committee
considers salary and other compensation arrangements of other technology-based
companies of similar size and similar growth to determine appropriate levels
required to attract, motivate and retain the most qualified management
personnel.
The Compensation Committee determines and makes final decisions regarding base
salary of executives on an annual basis. The Compensation Committee recognizes
that, to some degree, the determination of an executive officer's base salary
involves subjective considerations.
INCENTIVE BONUSES
A significant component of an executive officer's total cash compensation may
consist of an incentive bonus, which is intended to make the executive officer's
compensation dependent on the Company's performance and to provide executive
officers with incentives to achieve Company goals, increase stockholder value,
and work as a team.
In 1998, the Compensation Committee determined that no incentive bonuses would
be paid to any executive officer. Although the Compensation Committee recognized
that the Company made significant progress in assembling an effective internal
sales, marketing and service organization, and had achieved certain other
milestones, such as the execution of a distribution agreement with
Beckman-Coulter relating to the non-exclusive distribution of the HSM and the
execution of three related agreements with Bayer relating to the non-exclusive
licensing and manufacture of the HSM, the Compensation Committee determined that
the payment of incentive bonuses to its executive officers should be deferred to
such time as the Company is profitable, or, in the alternative, has achieved
such further technological, marketing and financial milestones that the payment
of incentive bonuses is otherwise warranted.
The Compensation Committee expects that the achievement of specific performance
targets and goals will directly impact eligibility for and the amount of
executive incentive bonuses for 1999. The targets and goals may include the
following:
o The Company's ability to increase its customer base and place MICRO21
systems with end users in the US and abroad through strategic partners.
o The Company's ability to increase revenues through the implementation of
its cost per slide program, which commenced in the first quarter of 1999,
and the development and sales of reagents and custom slides used on the
Company's products.
o Significant progress in the development of the MICRO21 "workstation"
system, including the successful launch of the Company's UriSlide Master,
an automated slide maker which prepares urine samples for either MICRO21 or
technologist examination, and Hematology Master, an automated slide
maker/stainer which prepares patient samples for several hematological
procedures for either MICRO21 or technologist examination.
o Obtain working capital to sustain operations in 1999.
LONG-TERM STOCK OPTION COMPENSATION
The Compensation Committee believes that providing all employees, including
executive officers, with the opportunity to acquire stock ownership over time is
the most desirable way to align their interests with those of the Company's
stockholders. Stock options, awarded under the Company's 1990 Stock Option Plan,
provide an incentive that focuses the attention of executive officers on
managing the Company from the perspective of an owner with an equity interest in
the business. In addition, stock options are a key part of the Company's program
for motivating and rewarding managers and other employees and consultants over
the long term. Through the grant of stock options, the Company has encouraged
its managers and other employees and consultants to obtain and hold the
Company's stock. Stock options granted to employees are tied to future
performance of the Company's stock and will provide value only when the price of
the Company's stock exceeds the option grant price.
The Compensation Committee determines and makes final decisions regarding stock
option awards made under the Company's 1990 Stock Option Plan. Such factors as
performance and responsibilities of individual managers and the management team
as a whole, as well as general industry practices play an integral role in the
determination of the number of options awarded to a particular executive officer
or employee. In determining the size of the individual award of options, the
Compensation Committee also considers the amounts of options outstanding and
previously granted, the amount of options remaining available for grant under
the Company's 1990 Stock Option Plan, the aggregate amount of current awards,
and the amount necessary to retain qualified personnel.
In accordance with its business strategy and compensation philosophy, the
Company has granted stock options to all employees to afford them an opportunity
to participate in the Company's future growth and to focus them on the
contributions which are necessary for the financial success and business growth
of the Company and, thereby, the creation of value for its stockholders.
Stock options are typically awarded based on an assessment of each recipient's
ongoing contribution to overall corporate performance. As a means to encourage a
stock option recipient to remain in service with the Company, stock option
awards vest over time, over a period of four years from the date of grant. All
incentive stock options have exercise prices at least equal to the fair market
value of the Company's stock on the date of grant.
In 1998, the Compensation Committee granted stock options to Messrs. Cochran,
Espenhahn and Pereira. The Compensation Committee believes that the preexisting
stock options provide the remaining executive officers with sufficient
incentives to achieve Company goals, increase stockholder value, and work as a
team.
1998 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
The general policies described above for the compensation of the executive
officers also apply to the compensation approved by the Compensation Committee
with respect to the 1998 compensation for Mr. Fitzmorris, the Company's founder,
President and Chief Executive Officer.
Mr. Fitzmorris' base salary was $235,019 in 1998, $220,000 in 1997, $200,000, in
1996 and $200,000 in 1995. Mr. Fitzmorris was not paid a bonus in 1998 due to
the reasons discussed above with respect to executive officers generally.
At December 31, 1998, Mr. Fitzmorris did not have any options available for
exercise. The Compensation Committee did not grant Mr. Fitzmorris any stock
options during 1998.
Mr. Fitzmorris continues to fulfill a central and critical role in the
development of the Company as a whole, including but not limited to the
achievement of the Company's sales goals, and it is the Compensation Committee's
expectation that he will continue to have an important influence on the
Company's goals outlined above for 1999. The Compensation Committee believes
that Mr. Fitzmorris' compensation arrangement reflects the above-described
compensation philosophy of the Company designed to align management compensation
closely with financial performance and increased stockholder value.
IRS MATTERS
Under Section 162(m) of the Internal Revenue Code and the regulations
promulgated thereunder, deductions for employee remuneration in excess of $1
million which is not-performance-based are disallowed for publicly traded
companies. Since levels of compensation paid by the Company are expected to be
significantly below $1 million, the Compensation Committee has determined that
it is unnecessary at this time to seek to qualify the components of its
compensation program as performance-based compensation within the meaning of
Section 162(m).
COMPENSATION COMMITTEE:
James E. Davis
William Whittaker
PERFORMANCE GRAPH
The following graph illustrates a twenty one (33) month comparison of cumulative
total returns for the Company's Common Stock, the S&P SmallCap 600 Index, and
the S&P Health Care (Medical Products and Supplies) Index from March 21, 1996
through December 31, 1998. Cumulative total return for the periods shown in the
Performance Graph is measured assuming an initial investment of $100 on March
21, 1996, the date of the Company's initial public offering, and the
reinvestment of dividends, if any.
Note: Management cautions that the historic stock price performance information
shown in the graph may not be indicative of current stock price levels or future
stock price performance.
<TABLE>
<CAPTION>
Cumulative Total Return
- - -----------------------------------------------------------------------------------------------------------------------------------
3/21/96 3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/21/98 6/30/98 9/30/98 12/31/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
100 95 119 115 51 57 54 36 29 27 28 5 4
100 102 107 111 117 111 130 152 147 164 156 129 151
100 99 98 109 110 109 130 135 137 158 174 163 198
</TABLE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of December
31, 1998 by (i) each person who is known by the Company to own beneficially more
than 5 percent of the outstanding shares of Common Stock, (ii) each of the
Company's directors, (iii) the Named Officers, and (iv) all Named Officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
of Beneficial Owner(1) of Beneficial Ownership (2) Percent of Class
--------------------------------- --------------------------- ----------------
<S> <C> <C> <C>
T. Rowe Prices Associates, Inc. 950,000 (3) 8.2%
100 E. Pratt Street
Baltimore, MD 21202
Fitzmorris Family Investments Limited Partnership 1,245,000 (4) 10.7%
502 East John Street
Carson City, NV 89706
Fitzmorris Holdings, Inc. 1,245,000 (4) 10.7%
502 East John Street
Carson City, NV 89706
Gene M. Cochran 48,716 (5) *
James E. Davis 17,794 (6) *
Eric Espenhahn 720,647 (7) 6.2%
Tyce M. Fitzmorris 1,887,902 (8) 16.2%
R. Wayne Fritzsche 798,613 (9) 6.8%
George Masters 16,500 (10) *
Jaime Pereira 480,329 (11) 4.1%
William Whittaker 330,756 (12) 2.8%
All Named Officers and directors as a group 4,301,257 (13) 36.9%
(8 persons)
</TABLE>
- - --------
* Less than 1% of the outstanding Common Stock.
(1) Unless otherwise indicated, the address for each beneficial owner is c/o
Intelligent Medical Imaging, Inc., 4360 Northlake Boulevard, Suite 214,
Palm Beach Gardens, FL 33410.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. Shares of Common Stock issuable upon the
exercise of stock options or stock warrants currently exercisable or
convertible, or exercisable or convertible within sixty days, are deemed
outstanding for computing the percentage ownership of the person holding
such stock options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other person. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common
Stock listed in the table, based on information furnished by such owners,
have sole investment and voting power with respect to such shares.
(3) These securities are owned by various individual and institutional
investors including T. Rowe Price Small Cap Value Fund, Inc. (which owns
950,000 shares, representing 8.6% of the shares outstanding), which T.
Rowe Price Associates, Inc. ("Price Associates") serves as investment
adviser with power to direct investments and/or sole power to vote the
securities. For purposes of the reporting requirements of the Securities
Exchange Act of 1934, Price Associates is deemed to be a beneficial owner
of such securities; however, Price Associates expressly disclaims that it
is, in fact, the beneficial owner of such securities.
(4) These shares are owned by Fitzmorris Family Investments Limited
Partnership, a Nevada limited partnership ("FFI"), the sole general
partner of which is Fitzmorris Holdings, Inc. ("FHI"). Tyce M. Fitzmorris
is the sole director, President and a majority shareholder of FHI, and may
therefore be deemed to control FFI.
(5) Includes 31,666 shares issuable upon exercise of stock options exercisable
within 60 days.
(6) Represents 17,794 shares issuable upon exercise of stock options
exercisable within 60 days.
(7) Includes 100,000 shares held of record by Mr. Espenhahn's wife and 8,000
shares held of record by Mr. Espenhahn as custodian for his son. Mr.
Espenhahn disclaims beneficial ownership of such securities. Excludes
115,000 shares held of record by an irrevocable trust created by Mr.
Espenhahn for the benefit of his children, of which Jaime Pereira is
trustee.
(8) Includes 10,000 shares held of record by Mr. Fitzmorris' daughter, who has
granted Mr. Fitzmorris a voting proxy and purchase option with respect such
shares. Mr. Fitzmorris disclaims beneficial ownership of such shares. Also
includes 1,245,000 shares held of record by FFI. Excludes 24,039 shares
beneficially owned by Mr. Fitzmorris' parents, as to which Mr. Fitzmorris
disclaims beneficial ownership.
(9) Includes 213,489 shares issuable upon the exercise of warrants and 120,000
shares held of record by Mr. Fritzsche's IRA Account. Does not include
36,000 shares held of record by an irrevocable trust for the benefit of Mr.
Fritzsche's children.
(10) Includes 16,500 shares issuable upon exercise of stock options exercisable
within 60 days.
(11) Includes 266,675.5 shares issuable upon exercise of stock options
exercisable within 60 days, and 115,000 shares held of record by an
irrevocable trust created by Mr. Espenhahn, The Espenhahn Descendants
Trust, of which Mr. Pereira is trustee. Does not include 15,548 shares held
of record by irrevocable trusts for the benefit of Mr. Pereira's nieces and
nephews.
(12) Includes 200,000 shares issuable upon exercise of warrants exercisable
within 60 days.
(13) Includes shares described in footnotes (4) through (12).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Fritzsche & Associates, Inc. ("FAI"), which is owned by R. Wayne Fritzsche,
entered into a Consulting Agreement with the Company dated as of December 1,
1993 (the "FAI Consulting Agreement") pursuant to which the Company engaged FAI
to provide corporate finance, strategic planning and marketing assistance and
other consulting services. As amended to date, the FAI Consulting Agreement
provides for annual consulting fees (payable in monthly installments) of
$102,000 in 1995, $150,000 in 1996 and $102,000 in each of 1997, 1998 and 1999;
provided, however, that the Company and FAI agreed to renegotiate the schedule
of payments for 1997, 1998 and 1999 due to a material shortfall in anticipated
revenues from international sales of the MICRO21 system in those years. The
Company paid FAI $52,500 in 1994, $102,000 in 1995, $127,339 in 1996, $121,176
in 1997, and $93,500 in 1998. In addition to these payments, the Company offset
the $102,000 in consulting fees due to Mr. Fritzsche in 1999 against the
outstanding advance due from Mr. Fritzsche to the Company. Accordingly, the
Company has paid all amounts due under the FAI Consulting Agreement.
In June 1994, Mr. Fritzsche made loans to the Company in the aggregate
amount of $300,000, evidenced by a 10% Secured Convertible Promissory Note (the
"Convertible Note") payable on July 1, 1996, which was converted as of that date
into 274,389 shares of Common Stock at a conversion rate of $1.09 per share. As
additional consideration for the loan, Mr. Fritzsche received warrants for the
purchase of 274,389 shares of Common Stock at an exercise price of $1.09 per
share. These warrants expire, if unexercised, in July 1999.
In May 1997, the Board of Directors authorized the Company to loan to Mr.
Fitzmorris up to $500,000 on a secured recourse basis. During 1997, advances of
approximately $367,000 were made to Mr. Fitzmorris. All amounts advanced,
including interest accrued at the rate of 8.5% per annum, have been repaid by
Mr. Fitzmorris in full.
In January 1998, the Company advanced $196,000 to Mr. Fitzmorris and
$424,000 to Mr. Fritzsche. On August 14, 1998 the Company received full
repayment of all amounts due with respect to the advance to Mr. Fitzmorris. With
respect to repayment of the Company's advance to Mr. Fritzsche, as of December
31, 1998 payments in the amount of $290,000, plus a $75,000 credit offset for
consulting fees past due or payable to Mr. Fritzsche by the Company, have been
applied against the amount due, leaving a balance due of $86,684. Repayment of
the balance of $86,684 has been extended to August 28, 1999. The advance to Mr.
Fritzsche is secured by shares of the Company's common stock held by Mr.
Fritzsche and bears interest at the rate of prime plus 1% per annum.
<PAGE>
Part IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
FINANCIAL STATEMENTS
The list of financial statements required by this item is set forth in Item 8,
"Financial Statements and Supplementary Data."
FINANCIAL STATEMENT SCHEDULE
Schedule II - "Valuation and Qualifying Accounts" is set forth at the end of
Item 8.
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of
schedules.
EXHIBITS
3.1 Certificate of Incorporation of the Company. (1)
3.2 Certificate of Merger and Agreement and Plan of Merger between
Intelligent Medical Imaging, Inc., a Florida Corporation, and the
Company approved by a majority of the Company's stockholders on
January 10, 1996.(1)
3.3 By-Laws of the Company.(1)
4.1 Form of Stock Certificate.(1)
10.2 *Distribution Agreement dated August 28, 1995 between Coulter
Corporation and the Company, as amended on January 5, 1996.(1)
10.3 Amended and Restated 1990 Stock Option Plan.(1) 10.4 1995 Non-Employee
Director Stock Option Plan.(1) 10.5 Consulting Agreement dated
December 1, 1993 between Fritzsche & Associates, Inc., and the
Company, and an amendment thereto dated October 17, 1995.(1)
10.6 Commercial Lease dated November 1, 1995, between West 15th Street
Associates, Ltd. and the Company.(1)
10.7 Lease Modification Agreement dated August 24, 1995 between Palm Beach
Gardens Limited Partnership and the Company (the "Lease").(1)
10.8 Unconditional Guaranty provided by Tyce M. Fitzmorris to Palm Beach
Gardens Limited Partnership in connection with the Lease.(1)
10.9 Settlement Agreement between the Company and William D. Whittaker
dated October 5, 1994.(1)
10.16 Amended and Restated Registration Rights Agreement by and between R.
Wayne Fritzsche and the Company dated as of December 1, 1994.(1)
10.17 Form of Registration Rights Agreement by and among the Company and
certain stockholders of the Company dated as of December 1, 1994.(1)
10.18 Form of the Company's Employee Disclosure, Confidential Information
and Non-Competition Agreement.(1)
10.19 Letter of Understanding and Agreement between Pacific Growth Equities,
Inc. and the Company dated September 2, 1994, and as amended on
September 7, 1994, October 21, 1994 and March 3, 1995.(1)
10.24 Proprietary Rights Agreement dated July 23, 1994 between the Company
and XL Vision, Inc.(1)
10.25 *Product Integration Agreement between the Company and DiaSys
Corporation dated as of November 1, 1996. (2)
10.26 *License Agreement between the Company and MonoGen, Inc. dated as of
November 17, 1996. (2)
10.27 *Settlement Agreement with Coulter Corporation dated as of March 27,
1997. (2)
10.28 Assignment and Assumption of Lease Agreement dated December 30, 1996
between the Company and Lenzar Electrooptics, Inc., with respect to
Lease Agreement dated March 9, 1994 between CTB Realty Ventures XVI,
Inc. and Lenzar Electrooptics, Inc. (incorporated by reference to
Exhibit 10.28 to the Company's Form 10-K for the fiscal year ended
December 31, 1997)
10.29 Distribution and Field Service Agreement dated as of December 1, 1998
between the Company and Beckman-Coulter, Inc. (3)
10.30 License Agreement dated as of November 17, 1998 between the Company
and Bayer Corporation (3) 10.31 HSM After-Market Supply Agreement
dated November 17, 1998 between the Company and Bayer Corporation (3)
10.32 HSM Instrument Supply Agreement dated November 17, 1998 between the
Company and Bayer Corporation (3)
10.33 Invoice Purchase and Sale Agreement dated November 23, 1998 between
the Company and Finova Capital Corporation (3)
23.1 Consent of Ernst & Young LLP, Independent Certified Public Accountants
(3) 27.1 Financial Data Schedule(3)
* Confidential treatment was requested of and approved by the Securities
and Exchange Commission with respect to portions of this exhibit
(1) Incorporated by reference to the same exhibit number in the Company's
Registration Statement on Form S-1 (File No. 33-636) as filed with
Securities and Exchange Commission
(2) Incorporated by reference to the same exhibit number in the Company's
Form 10-K for the fiscal year ended December 31, 1996 (3) Filed
herewith
REPORTS ON FORM 8-K
In a Current Report filed on Form 8-K dated October 16, 1998, the Company
reported that it had experienced a reduction in revenue and increased costs
which had, in turn, affected the Company's current results of operations and
liquidity and caused the Company's independent accountants to issue an updated
accountants' report, a copy of which is filed with the Form 8-K.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palm Beach
Gardens, State of Florida, on the 15th day of April, 1999.
Intelligent Medical Imaging, Inc.
By: /s/ GENE COCHRAN
--------------------
Gene Cochran, Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 15, 1999.
SIGNATURE TITLE
/s/ TYCE M. FITZMORRIS Chairman of the Board, Chief Executive
- - ---------------------------- Officer and President
(Tyce M. Fitzmorris)
/s/ GENE M. COCHRAN Chief Financial Officer, Secretary,
- - ---------------------------- Treasurer
(Gene M. Cochran)
/s/ JAMES E. DAVIS Director
- - ----------------------------
(James E. Davis)
/s/ GEORGE MASTERS Director
- - ----------------------------
(George Masters)
/s/ WILLIAM D. WHITTAKER Director
- - ----------------------------
(William D. Whittaker)
Exhibit 10.29
DISTRIBUTION AND FIELD SERVICE AGREEMENT
THIS DISTRIBUTION AND FIELD SERVICE AGREEMENT, effective as of December 1,
1998 (hereinafter "Agreement") is made by and between Intelligent Medical
Imaging, Inc., a Florida corporation with its principal offices at 4360
Northlake Blvd. Palm Beach Gardens, Florida 33410 (hereinafter "IMI") and
Beckman Coulter Inc., a Delaware corporation having its principal office at 4300
North Harbor Boulevard, Fullerton, California 92834-3100 (hereinafter "BCI").
PREMISES
WHEREAS, IMI has designed, developed and intends to manufacture an
automated, stand-alone instrument for making and staining blood slides, such
instrument being designated by IMI as its Hematology Slide Master (HSM)
Instrument ; and
WHEREAS, IMI desires to sell its HSM Instrument and related software and
hardware accessories (hereinafter collectively referred to as "HSM Products")
through non-exclusive distributors that are capable of both selling and
servicing such instruments and accessories; and
WHEREAS, BCI and its Affiliates, as defined herein, are in the business of
manufacturing, selling and servicing hematology and related instruments; and
WHEREAS, IMI desires to have BCI and its Affiliates sell and service its
HSM Products in accordance with the terms and conditions provided herein, and
BCI and its Affiliates are willing to provide such services to IMI;
NOW THEREFORE, in consideration of the promises and mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby mutually acknowledged, the parties
hereto agree as follows:
GENERAL
It is understood that this Agreement inures to the benefit of and is
binding upon the respective Parties to this Agreement and their respective
Affiliates. An "Affiliate" of a Party refers to a corporation or other legal
entity which, directly or indirectly, controls, is controlled by or is under
common control with, that Party. A corporation or other entity shall be regarded
as in control of another corporation or entity if it owns or directly or
indirectly controls more than fifty percent (50%) of the voting stock or other
ownership interest of the other corporation or entity, or if it possesses,
directly or indirectly, the power to cause the direction of the management and
policies of the corporation or other entity. Thus, hereinafter, when the rights
or obligations of either Party, IMI or BCI, are referenced, such rights or
obligations can be exercised or fulfilled either (a) directly by the Party
referenced, or (b) indirectly through the respective Affiliates of such Party.
ARTICLE I
APPOINTMENT OF DISTRIBUTOR
1.1 Appointment. As of the effective date hereof and continuing throughout
the term of this Agreement, IMI hereby appoints BCI as a non-exclusive
distributor of its HSM Products and grants BCI the right to market and sell the
HSM Products in all countries of the world. IMI reserves the right to sell its
HSM Products in all countries, either directly, or through other distributors,
dealers, representatives or agents.
1.2 Relationship. It is understood that BCI is acting hereunder as an
independent contractor and, hence, is not subject to the direct control of IMI.
Except as provided in this Agreement, neither party has the authority to legally
bind the other party for any purpose.
ARTICLE II
DISTRIBUTION OF HSM PRODUCTS
2.1 Distribution. IMI will sell HSM Products to BCI and BCI will resell
such Products to BCI's end users or to BCI's sub-dealers, or third party
distributors utilized by BCI in the normal course of business and upon terms and
conditions consistent with this Agreement.
2.2 Inventory Requirements. IMI will maintain an inventory of HSM Products
sufficient to fill forecasted orders from BCI, as provided by Section 3.4 below,
and to actively promote firm orders for HSM Products.
2.3 Consumables. BCI agrees to recommend the purchase of HSM reagents and
other consumables (the "HSM Consumables") exclusively from IMI for the HSM
product.
ARTICLE III
ACCEPTANCE/PRICING/FORECASTING/ORDERING/
BILLING/INSPECTING
3.0 Acceptance. The rights and obligations of the parties to this agreement
are subject to the acceptance of the HSM Product by BCI. Acceptance of the HSM
Product by BCI for the purposes of this agreement will be based on compliance
with HSM System Specifications as determined by BCI test results. HSM System
Specifications are shown in Exhibit A.
3.1 Product Pricing. Pursuant to a Purchase Order Contract (defined in
Section 3.4 below), BCI shall purchase each HSM Product at the pricing set forth
in the attached Exhibit B. Such pricing is subject to semi-annual price
adjustments, not to exceed the annual U.S. inflation rate for the preceding
year. The price of HSM Products shall be reduced to the Projected Price in
Exhibit B by July 1, 1999, unless there have been design enhancements to the HSM
Product, in which case the price of the design-enhanced HSM Product will be
adjusted upwards to reflect such design enhancement and the Projected Price as
reflected on Exhibit B will not be applicable. IMI will provide BCI most favored
pricing for the HSM Product, such that the price paid by BCI to IMI for each HSM
Product is equal to the lowest price at which IMI sells the HSM Product to any
other Distributor at comparable volume levels. BCI has the right to audit(s) to
verify such favored pricing.
3.2 Spare Parts. IMI agrees to offer functionally equivalent replacement
and repair parts/components for sale to BCI, throughout the period during which
the HSM Products are manufactured by IMI and for five (5) years after the HSM
Instrument has been discontinued or this Agreement is terminated, whichever is
later. Spare parts will be supplied by IMI to BCI at IMI's standard
manufacturing cost (material, labor and overhead, plus 20% profit). IMI will
maintain a three months supply of the spare parts, based on the previous six
months sales.
3.3 Demonstrator Units. At such time as BCI has purchased five (5) HSM
Instruments in accordance with the price schedule set forth in Exhibit B, BCI
shall be entitled to purchase three Demonstrator HSM Instruments at a price of
$23,500.00 each. Thereafter, for every five (5) HSM Instruments purchased in
accordance with the price schedule set forth in Exhibit B, BCI is entitled to
purchase one (1) additional Demonstrator HSM Instrument at a price of (i)
$23,500.00 per instrument if purchased prior to July 1, 1999, or (ii) $18,000.00
per instrument if purchased on or after July 1, 1999, provided, however, that
BCI shall be entitled to purchase no more than five (5) Demonstrator HSM
Instruments pursuant to this Section 3.3. The number of Demonstrator instruments
which may be purchased by BCI from IMI will be reviewed within the first six (6)
months of this agreement. If mutually agreed to by both IMI and BCI, BCI shall
be entitled to purchase additional Demonstrator HSM instruments at a price of
(i) $23,500.00 per instrument if purchased prior to July 1, 1999, or (ii)
$18,000.00 per instrument if purchased on or after July 1, 1999.
3.3.1 If BCI sells or leases any Demonstrator HSM
Instrument(s) to end users, such Instrument(s) shall no longer be
considered Demonstrator HSM Instrument(s), and the balance of the
instrument price will be paid promptly by BCI to IMI based on the
highest discounted pricing (25%) in Exhibit B.
3.3.2. If IMI fails to provide to BCI a Multi-Rack Loader by
April 1, 1999, BCI will be entitled to return any and all Demonstrator
HSM Instruments to IMI that have not been sold and receive a refund
equal to the purchase price, provided there is no extraordinary damage,
in which case the cost of repair will be deducted. A Multi-Rack Loader
is an apparatus by which up to twelve (12) BCI GENoS/STKS cassettes at
a time can be presented to an HSM instrument for processing. The
requirements for the Multi-Rack Loader will be as mutually-agreed to by
BCI and IMI.
3.4 Forecasting. On the fifteenth day of each month during the term of this
Agreement, BCI shall deliver to IMI a rolling forecast of BCI's monthly
requirements for HSM Instruments for the twelve-month period commencing on the
first day of the following month. See example forecast in Exhibit C. BCI's
forecasted requirements for the first three months of each twelve-month period
shall constitute a firm purchase order (hereinafter referred to as a "Firm
Purchase Order") (i.e., will constitute a firm BCI obligation to purchase the
forecasted requirements for such three-month period), provided, however, that
IMI's obligation to deliver BCI's forecasted requirements under a Firm Purchase
Order from time to time during the term of this Agreement (the "Minimum Delivery
Requirement") shall be limited as follows, (a) for the initial Firm Purchase
Order under this Agreement IMI's Minimum Delivery Requirement shall be limited
to the lower of BCI's forecasted requirements under such initial Firm Purchase
Order or ten (10) HSM Instruments and (b) for each Firm Purchase Order
thereafter IMI's Minimum Delivery Requirement shall be limited to the lower of
(i) BCI's forecasted requirements under such Firm Purchase Order, (ii) 130% of
IMI's Minimum Delivery Requirement for the preceding three-month period, or
(iii) ten (10) HSM Instruments in the event IMI is unable to factor or otherwise
borrow against the Firm Purchase Order an amount equal to 75% of the total
Direct Material Costs and Direct Labor Costs required to fulfill such Firm
Purchase Order.
3.5 Ordering. A Purchase Order Contract refers to the documentation of
individual purchases of HSM Product from IMI by BCI pursuant to this Agreement.
The Purchase Order Contract consists of two parts, (a) a purchase order issued
by BCI to IMI, which describes the HSM Product, quantity, price, delivery date,
and "ship to" address and (b) an acknowledgment of the purchase order, issued by
IMI to BCI within ten (10) working days after receiving the purchase order.
Additional or different terms and conditions appearing on the face or reverse
side of any BCI purchase order shall become part of the terms and conditions of
the purchase, provided that this Agreement shall supersede any inconsistent
terms and conditions in the purchase order. No additional or different terms and
conditions appearing on the face or reverse side of IMI's invoice or
acknowledgment shall become part of such purchase order without BCI's approval.
3.6 Billing. Billing will be generated by IMI at the time of shipment of
HSM Product by IMI. Payment by BCI to IMI will be due no later than sixty (60)
days after the invoice date. However, if either BCI or IMI wishes to change
billing and payment dates for any reason, the prior written agreement of both
parties is necessary.
3.7 Inspecting. HSM Products ordered by BCI pursuant to this Agreement
shall be subject to inspection by BCI after delivery, to determine conformity
with Product Specifications and BCI's purchase order. BCI shall have the right
to reject non-conforming Products by written notice to IMI of such
non-conformity within thirty (30) working days following the arrival of the
Product at the delivery destination. BCI shall not waive any warranty rights
under this Agreement by inspecting or failing to inspect the Product.
ARTICLE IV
WARRANTY; INDEMNITY; LIABILITY
4.1 Product Warranty. IMI warrants that all HSM Products sold to BCI will
be free from defects in materials and workmanship at the time of the
installation and for one (1) year thereafter, or until the expiration of fifteen
(15) months from the date of delivery of the HSM Product to BCI or its designee,
whichever occurs first. This warranty shall inure to the benefit of BCI's
customers, third party distributors and sub-dealers. To the extent permitted by
law or contractual obligations, IMI assigns any warranties and indemnities it
receives from IMI's component vendors to BCI. BCI, BCI's sub-dealers, or
third-party distributors of BCI may convey the foregoing IMI warranties and
indemnities to the HSM Product end users. BCI shall in any event convey the
warranty disclaimers set forth in Section 4.3 and 4.4 to the HSM Product end
users and to any BCI third party distributor or sub-dealer.
4.2 Warranty Action. If a defect in a HSM Product or component thereof is
found and IMI receives notice from BCI within thirty days of BCI's actual
knowledge of such defect, IMI shall at its cost, cure such defect either by
repairing the defective HSM Product or component thereof at IMI's facility or,
at its option, by sending a replacement part.
4.3 No Other Warranties. The Warranty and the remedy provided for in
Sections 4.1 and 4.2 above supersede and are in lieu of all other warranties or
conditions, expressed or implied, and all other obligations or liabilities of
IMI, including any warranty of merchantability and fitness for a particular
purpose. BCI is not authorized to make any warranties on behalf of or in the
name of IMI or to assume for IMI any other liability in connection with the HSM
Products. IMI makes no representations or warranties as to performance of
products or as to service to BCI or to any other person, except as set forth
above.
4.4 Limitation on Liability. With regard to the sale or use of any HSM
Products, in no event shall IMI be liable for any indirect, incidental,
consequential, or special damages, including lost profits, sustained or incurred
in connection with the products, or caused by defects in the products,
regardless of the form of action, whether in contract, tort (including, without
limitation, negligence and strict liability), or otherwise, and whether or not
such damages were unforeseen.
4.5 Reciprocal Limitation on Liability. BCI and IMI may be liable to each
other for damages resulting from a breach of the obligations of such party under
this Agreement including reasonable attorney fees and costs incurred in
connection with litigation involving a dispute under this Agreement; provided
that in no event will BCI or IMI be liable to the other for any indirect,
incidental consequential or special damages, including lost profits, as a result
of a breach of such obligations.
4.6 Liability to Third Party. If a HSM Product causes injury to person or
property and such injury results from design or manufacture of the HSM Product,
IMI shall assume the responsibility for such injury, unless BCI has manufactured
the defective HSM Product pursuant to Section 6.1 hereof, in which case BCI
shall be responsible for such injury. IMI will purchase and maintain product
liability insurance sufficient to cover potential compensation for injuries to
life, health or damage to the property of a third party in the minimum amount of
$5,000,000 per incident. IMI will provide BCI with a certificate of insurance
evidencing such coverage and naming BCI as additional insured party as its
interest may appear. If injury to person or property results from the
intentional or negligent acts or omissions of BCI or its employees, contractors,
agents or representatives, BCI shall assume the responsibility for such injury.
BCI will purchase and maintain appropriate liability insurance relating to its
activities in product support, servicing, training, installation, maintenance,
sales and other services, sufficient to cover potential compensation for
injuries to life, health or damage to the property of a third party. BCI will
provide IMI with a certificate of insurance evidencing such coverage and naming
IMI as additional insured party as its interest may appear.
ARTICLE V
TERM AND TERMINATION
5.1 Term. The term of this Agreement shall be for a period of ten (10)
years from the date hereof and shall be renewed automatically thereafter for
consecutive one (1) year renewal terms unless and until this Agreement is
terminated pursuant to this Article V.
5.2 Termination for Cause. Any material breach of this Agreement by either
party shall constitute a default if not cured within 30 days after written
notice of such breach is given. Upon default by one party, then the
non-defaulting party can terminate this Agreement on ten (10) days written
notice, during which time the defaulting party can cure the outstanding breach.
BCI and IMI agree that for purposes of this Agreement a "Material Breach" shall
be defined as a breach of any obligation under Section 3.1, 3.3, 3.4, 3.6, 4.1,
4.2, 6.1, 8.1, 8.2, 11.2, 11.4 or 11.7 hereof.
5.3 Unilateral Termination. After the initial ten-year term, either party
can unilaterally terminate this Agreement at any time without cause upon at
least 180 days written notice to the other party.
5.4 Effect of Termination or Expiration. IMI and BCI agree that in the
event of any termination or expiration of this Agreement they will continue to
cooperate in good faith and work together during the transition period following
such termination or expiration for the purpose of providing continuing service
and ensuring customer satisfaction among all the end users. Within sixty (60)
days after termination of this Agreement by BCI pursuant to Section 5.2 hereof,
IMI agrees to repurchase any and all inventory, including spare parts,
demonstrator instruments, and rental instruments, at a price equal to the book
value of such items, which book value shall include appropriate reserves which
reflect excess and obsolete inventory items in accordance with generally
accepted accounting principles.
ARTICLE VI
FAILURE TO MANUFACTURE
6.1 Failure to Manufacture. If for any reason other than a Force Majeur
Event as defined in Section 12.8 hereof, IMI is unable or unwilling, for two (2)
consecutive three-month periods during the term of this Agreement, to
manufacture or supply a quantity of HSM Instruments equal to the IMI Minimum
Delivery Requirement for each such three-month period, BCI may elect, in a
written notice to IMI, to manufacture the HSM Instrument itself, or to have
another party manufacture the HSM Instrument for BCI's sale and distribution.
IMI shall be entitled to a royalty for BCI's right to use IMI's proprietary
technology as reflected in Exhibit D and to manufacture the HSM Instrument or
any derivative instrument in an amount equal to $10,000 per HSM Instrument
manufactured by BCI pursuant to this Section 6.1 until the earlier to occur of
(i) BCI's manufacture of or purchase from IMI of 400 HSM Instruments or (ii) the
expiration of five (5) years since the date on which BCI manufactured the first
HSM Instrument pursuant to this Section 6.1. In the event BCI elects to
manufacture the HSM Instrument pursuant to Section 6.1, BCI will be credited
with an amount equal to its start-up costs, but not to exceed $1,000,000, which
shall be applied against 75% of each royalty payment due IMI hereunder, until
such time as BCI's start-up costs or the $1,000,000, as the case may be, is
recovered. In the event BCI elects to manufacture the HSM Instrument pursuant to
this Section 6.1, IMI will provide BCI with detailed manufacturing drawings,
specifications and other information necessary for BCI to manufacture the HSM
Products or have the HSM Products manufactured by a third party; provided, that
such third party shall agree to be bound by the confidentiality provisions
contained herein. Notwithstanding the above, Section 2.3 hereof shall remain in
full force and effect provided IMI is in a position to manufacture and supply
the HSM Consumables.
6.2 Vaulted Documents. In order to further protect IMI's and BCI's interest
in maintaining a reliable supply in case of a "Force Majeur Event" or IMI's
failure or unwillingness to manufacture the HSM Products, IMI agrees to secure a
set of documentation at an agreed upon location by both IMI and BCI required to
manufacture the HSM Products. Release of this documentation will require mutual
agreement and authorization by an officer of both IMI and BCI. In the event that
IMI and BCI do not mutually agree to release these documents, it will be deemed
an immediate dispute and handled pursuant to Article 12.9.
ARTICLE VII
SHIPPING/RISK OF LOSS/GOVERNMENT COMPLIANCE
7.1 Shipping. Shipments of HSM Product to BCI or BCI's sub-dealers,
third-party distributors or end users in the United States will be made F.O.B.
Palm Beach Gardens, Florida, USA (or another shipping point as determined from
time to time by BCI). If BCI requests IMI to arrange the transportation for any
HSM Product to a BCI customer outside the U.S.A., IMI shall ship HSM Product in
accordance with the instructions in BCI's purchase order and IMI shall be
reimbursed for any shipping fees or costs incurred in shipping the HSM Product.
7.2 Product Ownership and Risk of Loss. Product ownership and risk of loss
transfers from IMI to BCI upon delivery to the common carrier at the IMI
Shipping Point.
7.3 Governmental Compliance. Except as provided in Article VIII, BCI shall
be responsible for current and ongoing familiarity and compliance with
governmental laws, regulations and other requirements applicable to the
marketing, sale, shipment and support of the HSM Product.
ARTICLE VIII
INSTALLATION, TRAINING, CUSTOMER SUPPORT AND FIELD SERVICE
FOR UNITED STATES AND CANADIAN CUSTOMERS
8.1 Installation and Training. BCI is responsible for the installation of
the HSM Products at BCI customer's site in accordance with IMI's specifications,
for customer training on the proper use of the HSM Products, and for obtaining
acceptance of HSM Products by the customer. As consideration for performing
these services, BCI shall be entitled to the fees set forth in Exhibit E from
time to time. When requested, BCI will provide installation services to those
IMI customers who have purchased HSM Products directly from IMI and shall be
compensated for such services in accordance with the fee schedule set forth in
Exhibit E from time to time.
8.2 Customer Support and Field Service. IMI will be primarily responsible
for U.S. and Canadian customer support. IMI Customer Support will receive
customer warranty service and maintenance service telephone calls and will
provide first line customer intervention for the HSM Products. In the event that
resolution cannot be obtained through telephone contact, IMI will request
assistance from BCI's field service specialists. BCI's field service specialists
will obtain service call numbers upon dispatch and will be required to close out
service calls with IMI Customer Support upon completion. IMI's Technical Support
staff will provide telephone support to BCI's field service representatives. As
consideration for these services BCI shall be entitled to the fees set forth in
Exhibit E from time to time.
8.3 Replacement Parts. IMI will provide a sufficient car stock to BCI field
service specialists to enable these specialists to perform the warranty service
and maintenance service at a customer site. The initial car stock will be
determined by IMI and will be consigned to BCI. This car stock will be
replenished by IMI as necessary to promptly serve the customers. There will be
no charge to BCI for replacement parts for field service.
8.4 Training. IMI Training Services shall provide BCI field service
specialists with the technical training required to perform field servicing of
the HSM Products. The training sessions performed pursuant to this Section 8.4
as well as the training sessions to be performed pursuant to Section 9.3 hereof
(the "Training Sessions") shall be conducted at IMI's Palm Beach Gardens,
Florida facility or at such other location as IMI shall designate from time to
time. While IMI will not be compensated for its time and expense incurred in
conducting the Training Sessions, BCI shall be responsible for all
transportation, meals, lodging and other expenses incurred by BCI or its
employees in connection with BCI employees' or representatives' attendance at
the Training Sessions. In the event BCI requests that the Training Sessions be
conducted at a location other than IMI's Palm Beach Gardens, Florida facility,
IMI will use its best efforts to accommodate such request, provided, however,
that if IMI does accommodate such request, BCI shall reimburse IMI for all
transportation, meals, lodging and other expenses incurred by IMI as a result of
conducting the Training Session at such other location.
8.5 Billing. Billing will be generated by BCI at the time service is
performed. Payment will be due no later than sixty (60) days after the invoice
date. However, if either BCI or IMI wishes to change billing and payment dates
for any reason, the prior written agreement of both parties is necessary.
8.6 Adjustment of Exhibit E Installation and Service Fee Schedule. During
the first 18 months following BCI's initial sale of an HSM Instrument which was
purchased from IMI pursuant to this Agreement, the fee schedule for services
performed by BCI pursuant to this Article VIII, as reflected on Exhibit E, shall
be adjusted by mutual agreement of BCI and IMI at each six-month interval during
this 18-month period.
ARTICLE IX
INSTALLATION, TRAINING, CUSTOMER SUPPORT AND FIELD SERVICE
FOR FOREIGN CUSTOMERS (NOT INCLUDING CANADA)
9.1 Installation, Training, Support, and Field Services. BCI shall be
responsible for providing HSM Product customers outside the United States with
installation service, customer training, customer support service and field
service. BCI shall bill the customer directly for any such services outside the
warranty period and, during the warranty period, shall be entitled to the fees
set forth in Exhibit E. BCI shall be entitled to provide maintenance service
agreements to any Product purchaser located outside the United States.
9.2 Replacement Parts. IMI will provide a sufficient depo stock for BCI
field service specialists to enable these specialists to perform the warranty
service and maintenance service at a customer site. The initial depo stock will
be recommended by IMI and will be purchased by BCI. This depo stock will be
replenished by IMI as necessary to promptly serve the customers. There will be
no charge to BCI for replacement of warranty parts if BCI has accepted IMI's
recommendation with respect to such parts.
9.3 Training. IMI Training Services shall provide BCI field service
specialists with the technical training required to perform field servicing of
the HSM Products. The parties' responsibilities with regard to the expenses
incurred in connection with the training performed by IMI pursuant to this
Section 9.3 shall be as set forth in Section 8.4 hereof.
9.4 Billing. Billing will be generated by BCI at the time service is
performed. Payment will be due no later than sixty (60) days after the invoice
date. However, if either BCI or IMI wishes to change billing and payment dates
for any reason, the prior written agreement of both parties is necessary.
9.5 Adjustment of Exhibit E Installation and Service Fee Schedule. During
the first 18 months following BCI's initial sale of an HSM Instrument which was
purchased from IMI pursuant to this Agreement, the fee schedule for services
performed by BCI pursuant to this Article IX, as reflected on Exhibit E, shall
be adjusted by mutual agreement of BCI and IMI at each six-month interval during
this 18-month period.
ARTICLE X
PRODUCT QUALITY ASSURANCE
10.1 FDA and FY 2000 Compliance Representation. Each HSM System component
is hereby guaranteed by IMI as of the date of shipment or delivery, to be, on
such date, not adulterated or misbranded within the meaning of the Federal Food,
Drug and Cosmetic Act, and not an article which may not, under the provisions of
Section 510(k) or 515 of the act, be introduced into interstate commerce and
shall be FY 2000 compliant.
10.2 Product Quality Control and Management. IMI will manufacture, manage
quality, and ship HSM Products according to GMPs and ISO 9000 practices for
medical devices in effect at the time the Product was manufactured. In addition,
IMI's manufacturing facility shall be equipped with a quality assurance system,
product standard documentation, product quality standard documentation,
documented work procedure instruction, work operations record file, and other
procedures required under GMP and other applicable regulations. Responsibility
for FDA compliance applicable is with IMI.
10.3 Product Recall and its Costs. If there is a concern for possible loss
or injury to the life, health and property of a third party due to a cause
attributable to a HSM Product, as determined by mutual agreement of IMI and BCI,
IMI will promptly notify the FDA and all BCI customers. IMI will be responsible
for the expense of such action unless the recall is necessary because of actions
or omissions of BCI, its sub-dealers, or third party distributors.
ARTICLE XI
INTELLECTUAL PROPERTY
11.1 Intellectual Property Rights. IMI represents and warrants to BCI that
IMI owns or has licensed all intellectual property rights relating to the
making, using, selling and servicing of all HSM Product, including, without
limitation the hardware design, including electrical and mechanical, software,
ideas, drawings, source code, data, patents pending, patentable rights or
inventions. During the term of this Agreement, BCI can gain access to certain
aspects of IMI's HSM intellectual property rights, as deemed necessary by IMI,
solely for the purpose of enabling BCI to provide Field Service.
11.2 Trademark License. IMI hereby grants to BCI the right to use IMI's
trade name and trademark in connection with the sale of HSM Products hereunder.
11.3 Private Label. If requested by BCI, IMI will arrange for BCI's name,
logo and/or trademark to be placed on the HSM Product purchased by BCI. BCI
agrees that IMI retains the right to place the words "by IMI" or similar
language and the IMI logo and/or trademark on the Product.
11.4 Advertising Materials. BCI will not publish, cause to be published, or
distribute any advertising or other materials which describe or pertain to the
Product, or refer to IMI unless the materials are furnished or approved by IMI.
IMI's logo, name and trademarks will be prominently displayed on all advertising
materials and on the Product itself.
11.5 Protection of Intellectual Property Rights. If a third party violates
IMI's intellectual property rights, IMI must resolve the problem at its own cost
and expense.
11.6 Infringement Claim by a Third Party. IMI shall protect, defend and
indemnify BCI, at IMI's sole cost and expense, from and against any claim, suit
or other action by a third party alleging that IMI products subject to the
Agreement have infringed such third party's intellectual property right(s),
except that BCI shall bear proportionate responsibility for any infringement
caused by actions or omissions of BCI. If BCI is prevented from selling a HSM
Product because of such alleged infringement, IMI shall either:
a. Replace or modify such Product so that it becomes non-infringing;
b. Procure for BCI the right to continue using such Product; or
c. Permit BCI to terminate this Agreement.
11.7 Protection of Proprietary Information. Both BCI and IMI will protect
the confidentiality of product information, technical know-how and other
information concerning corporate business management which is obtained through
this Agreement and through the negotiations leading to this Agreement with the
same degree that is used to protect their own similar confidential information.
For a period of five (5) years from the date of disclosure, neither party will
share any such proprietary information with any third party. It is expressly
understood by both parties that this Agreement of confidentiality shall not
apply to:
a. information which, at time of disclosure, was already in the public
domain; or
b. information which, at the time of disclosure, was rightfully
possessed by recipient, as evidenced by written records of recipient; or
c. information which, after disclosure, becomes part of the public
domain through no act or omission on the part of recipient; or
d. information which, after disclosure, was rightfully acquired by
recipient, either by way of its own independent development, or by
acquiring it from others who did not obtain it under any pledge of secrecy
to the disclosing party.
ARTICLE XII
MISCELLANEOUS
12.1 Notices. Any notices required or permitted by this Agreement or given
in connection herewith, shall be in writing and shall be made by certified mail
return receipt requested or by overnight carrier. Notices sent in such manner
shall be deemed as received on the next business day after mailing. Notices
shall be addressed as follows:
If to BCI:
Attention: Office of the President
Coulter Corporation
11800 S.W. 147th Avenue
Miami, Florida 33196
Fax: 305-380-8312
If to IMI:
Attention: Office of the President
Intelligent Medical Imaging, Inc.
4360 Northlake BLVD
Palm beach Gardens, Florida 33410
12.2 Waiver. No waiver of any right or remedy with respect to any
occurrence or event on one occasion, will be deemed a waiver of such right or
remedy with respect to such an occurrence or event on any other occasion.
12.3 Prior Agreements. This Agreement contains the entire understanding of
the parties and cancels all prior agreements, oral or written, related to the
subject matter hereof. This Agreement may not be modified except by an
instrument in writing, executed by both parties.
12.4 Severability. If any provision of this agreement is held by a court of
competent jurisdiction to be illegal, invalid or unenforceable, that provision
shall be limited or eliminated to the minimum extent necessary so that this
Agreement shall otherwise remain in full force and effect and enforceable.
12.5 Transfer or Assignment. This Agreement, including all of its rights
and obligations, in total or in part, shall not be transferred or assigned to a
third party without previous written consent by the non-assigning party, which
shall not be unreasonably withheld. Consent will not be required for an
assignment or transfer of this Agreement as part of the transfer of all or
substantially all of a party's assets to a third party.
12.6 Controlling Law. All questions concerning the validity and operation
of this Agreement and the performance of the obligations imposed upon the
parties under this Agreement will be governed by the laws of the State of
Florida.
12.7 Compliance with Laws. The parties hereto shall comply with all
applicable federal, state, county and local laws in their respective performance
hereunder.
12.8 Force Majeur. If either BCI or IMI fails to perform its responsibility
or must delay completion of duties and obligations by reason of any event beyond
its reasonable control, including an Act of God, embargo, hostilities,
governmental action or inaction, blockage, riot, revolution, insurrection,
accidents, strikes, sabotage or other labor trouble, fire, flood, earthquake,
difficulty of communication or transport, inability to manufacture or procure
from third-party sources or shortage of HSM Instrument, HSM Products or other
materials or equipment, or any other similar causes, but excluding a hostile
takeover of its respective assets by a third party (a "Force Majeur Event"), it
will not be held liable for the incomplete work or delay, nor will the party be
found in violation of this Agreement. If any such Force Majeur Event shall
continue in such a manner as to make impossible performance by either party for
a period of more than three (3) months in any consecutive six-month period,
either party may terminate this Agreement upon written notification to the other
party.
12.9 Arbitration. In the event of any dispute relating to this Agreement,
BCI and IMI shall meet promptly to discuss the matter in good faith. Any dispute
that cannot be resolved in the above fashion within thirty (30) days after the
dispute was raised, shall be submitted to binding arbitration before a panel of
three (3) arbitrators, one of whom shall be chosen by BCI, another of whom shall
be selected by IMI, and the third of whom shall be chosen by the two arbitrators
already selected and all of whom shall possess sufficient business acumen and
experience as determined by mutual agreement of BCI and IMI. The panel shall
convene in Miami, Florida and shall observe the Commercial Arbitration Rules of
the American Arbitration Association then in effect. The decision of the panel
shall be binding and may be enforced by any court having competent jurisdiction
thereof. The parties hereby agree that jurisdiction for enforcement of any
decision of the arbitration panel shall lie in the Circuit Court for Palm Beach
County or the U.S. District Court for the Southern District, in the event the
dispute qualifies for federal jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first set forth above.
BECKMAN COULTER, INC.
By:/s/ Edward Vivanco /s/ Maria W. Lopez
-------------------------------------- ---------------------------
Witness
Title: President December 15, 1998
---------------------------------- ---------------------------
Date
INTELLIGENT MEDICAL IMAGING, INC.
By: /s/ Tyce Fitzmorris /s/ Gene Cochran
-------------------------------------- ---------------------------
Witness
Title: President December 18, 1998
----------------------------------- ---------------------------
Date
<PAGE>
Exhibit A
HSM SYSTEM SPECIFICATIONS
[GRAPHIC OMITTED][GRAPHIC OMITTED]
<PAGE>
Exhibit B
HSM PRICING SCHEDULE
[GRAPHIC OMITTED][GRAPHIC OMITTED]
500
500
Exhibit 10.30
LICENSE AGREEMENT
THIS AGREEMENT shall be effective this 17th day of November 1998 by and
between Intelligent Medical Imaging, Inc. (IMI), a corporation of the State of
Delaware and having a principal place of business at 4360 Northlake Blvd., Suite
214, Palm Beach Gardens, Florida 33410; and Bayer Corporation (Bayer), a
corporation of the State of Indiana, acting through its Business Group
Diagnostics having a principal place of business at 511 Benedict Avenue,
Tarrytown, New York 10591.
WHEREAS, IMI possesses certain technology relating to automated devices for
making and staining blood slides and automated image analyzers used in in vitro
diagnostics;
WHEREAS, Bayer desires to be granted a worldwide, nonexclusive license in
and to IMI's automated slide maker/stainer technology, and certain negotiation
rights for access to IMI's automated image analyzer technology or other new
products, for the purpose of developing and commercializing products; and
WHEREAS, IMI is willing to grant Bayer such nonexclusive license and
negotiation rights under the terms hereof;
NOW, THEREFORE, in consideration of the mutual promises herein, the parties
agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "Effective Date" shall mean the last date of execution of this
Agreement.
1.2 "Product(s)" shall mean an automated slide maker/stainer(s), including,
but not limited to that currently known as IMI's hematology slide maker/stainer
("HSM") as of the Effective Date, and the related small sample handler module.
1.3 "Patent Rights" shall mean any and all patent applications and granted
patents anywhere in the world owned or controlled by IMI covering inventions
conceived or reduced to practice by or on behalf of IMI, or under which IMI has
the right to grant sublicenses, prior to the Effective Date, which cover or
relate to Products or their manufacture or use, any and all continuations,
continuations-in-part, additions, and divisions thereof, and any and all patents
issuing from the aforesaid patent applications, and any reissues,
reexaminations, renewals, extensions, and substitutions of such patents. IMI
represents and warrants that, as of the Effective Date, there are no patent
applications or granted patents owned or controlled by or licensed to IMI which
cover or relate to Products or their manufacture or use. IMI shall promptly
notify Bayer if during the term hereof IMI files any patent application(s)
within the above definition.
1.4 "Valid Claim" shall mean a claim of any active, unexpired patent which
has not been withdrawn, canceled, or disclaimed, or held invalid or
unenforceable by a court or other tribunal of competent jurisdiction in a
decision from which an appeal has not or cannot be made.
1.5 "Know-How" shall mean the technical, marketing or other commercial
information or materials owned or controlled by IMI as of the Effective Date,
whether or not patentable, relating to Products or their manufacture or use, as
defined in Schedule I attached hereto and forming an integral part hereof, which
information and materials are not generally known to the trade and are necessary
or useful for Bayer, its sublicensed Affiliates and/or contract vendors to
develop, manufacture, use and/or sell Licensed Products hereunder, and includes,
without limitation, information and materials which has been provided by IMI to
Bayer under the terms of this Agreement or the Confidentiality Agreement of
February 3, 1998. Schedule I is divided into two parts: (a) a Primary List which
comprises those items which will be transferred to Bayer upon the execution of
this Agreement and (b) a Secondary List which comprises those items which will
be transferred to Bayer as soon as practicable after the execution of this
Agreement.
1.6 "Licensed Product" shall mean a Product which embodies Know-How or is
developed or manufactured using Know-How, or whose manufacture, use, or sale,
except for the license granted hereunder, would constitute an infringement of a
Valid Claim in Patent Rights.
1.7 "Affiliate" shall mean any corporation or other business entity
controlled by, controlling, or under common control with the affected party,
wherein control means direct or indirect ownership of at least fifty-percent
(50%) of the voting stock, or at least fifty-percent (50%) interest in the
income, of such corporation or other business entity, or in either case the
maximum amount allowed by local law.
ARTICLE 2
LICENSE TO BAYER
2.1 Grant - IMI hereby grants to Bayer a worldwide right and license, with
the right to grant sublicenses only to Affiliates, to develop, make, have made,
use, sell and have sold Licensed Products during the term hereof. The license to
develop, make, and have made Licensed Products shall be exclusive to Bayer
(except for development, manufacture, use, sale and distribution by IMI) until
March 31, 2000 (provided that Bayer continues to supply Licensed Products to IMI
for sale by IMI pursuant to the Instrument Supply Agreement between Bayer and
IMI), whereupon the license shall become non-exclusive. The license to use, sell
and have sold Licensed Products shall be non-exclusive for the full term hereof.
IMI covenants that it will not grant any right or license under the Patent
Rights or Know-How, or otherwise transfer the Know-How, to any third party in
conflict with the foregoing during the period prior to March 31, 2000. For the
avoidance of doubt, it is understood that during the period prior to March 31,
2000, only Bayer and IMI shall have right to develop and make Licensed Products
(provided that Bayer continues to supply Licensed Products to IMI for sale by
IMI pursuant to the Instrument Supply Agreement). Further, IMI shall have the
right to have Licensed Products made by a third party during the term prior to
March 31, 2000 if, and only if, Bayer is unwilling or unable to supply Licensed
Products to IMI for sale by IMI pursuant to the Instrument Supply Agreement).
2.2 Delivery of Primary Know-How - IMI shall deliver to Bayer all Know-How
identified in the Primary List of Schedule I on or before the Effective Date.
Bayer has investigated, observed, tested, operated, and studied IMI's two
engineering prototype HSMs undergoing testing at IMI. At the Effective Date,
Bayer shall deliver to IMI a Delivery and Testing Confirmation Certificate to
confirm in writing that IMI has delivered to Bayer the Primary List of Know-How
set forth in Schedule I and that Bayer is satisfied with its investigation,
observation, testing, operation, and study of the two IMI HSM engineering
prototypes, and has with IMI agreed upon recommended changes to incorporate into
the manufactured versions of the engineering prototypes, which changes shall be
identified in the Delivery and Testing Confirmation Certificate.
2.3 Delivery of Secondary Know-How - IMI shall deliver to Bayer all
Know-How identified in the Secondary List of Schedule I as soon as practicable
after the Effective Date, but no later than four (4) months after the Effective
Date. If Bayer is reasonably dissatisfied with the Know-How provided, then Bayer
shall deliver to IMI written notice within five (5) business days thereafter of
its reasonable dissatisfaction as to identified and specific variances from the
Secondary List of Schedule I. Following receipt of such notice, IMI shall
respond by correcting or modifying such Know-How delivery, as appropriate. After
IMI responds in writing to notify Bayer of IMI's corrections or modifications,
if Bayer continues to be reasonably dissatisfied with the Know-How provided,
then Bayer shall deliver to IMI written notice within five (5) business days
thereafter of its reasonable dissatisfaction as to identified and specific
variances from the Secondary List of Schedule I. This process shall continue
until the Know-How delivery is complete to the reasonable satisfaction of Bayer,
or until four (4) months after the Effective Date.
2.4 Technical Assistance - At the request of Bayer, IMI shall provide up to
Seventy-Five (75) man-days of consulting and technical assistance, at mutually
agreeable times and locations, to assure the effective and complete transfer of
the aforesaid Know-How. Bayer shall bear the cost of any out-of-pocket expenses,
e.g., travel, incurred by IMI in providing such assistance. If Bayer requests
assistance in excess of Seventy-Five (75) man-days, in addition to bearing IMI's
out-of-pocket costs, Bayer shall pay IMI for consulting or technical assistance
provided to Bayer at the applicable rate(s) as set forth in Schedule II attached
hereto and forming an integral part hereof.
2.5 Sharing of Know-How Fixes - During the first six (6) months following
the Effective Date, each party shall promptly provide to the other copies of any
and all engineering change orders generated in accordance with such party's
internal product development process, which change orders relate to corrections
or adjustments to the Know-How to obtain the intended functionality ("Fixes"),
but which do not relate to material improvements that enhance the intended
functionality or improve the marketability of Licensed Products
("Improvements"). Any such Fixes contributed by IMI shall be automatically
included in Know-How for no additional consideration. With respect to any such
Fixes contributed by Bayer, Bayer grants IMI a worldwide, non-exclusive,
perpetual royalty-free and paid-up right and license, with the right to grant
sublicenses, to develop, make, have made, use, sell and have sold any products
embodying such Fixes.
ARTICLE 3
ROYALTY TO IMI
3.1 License Fee - In consideration for the licenses granted hereunder,
Bayer shall pay IMI a license fee in the amount of One Million One Hundred
Thousand Dollars ($1,100,000.00), payable in installments. Bayer shall pay IMI
Two Hundred Thousand Dollars ($200,000.00) on the Effective Date. An additional
Four Hundred Thousand Dollars ($400,000.00) shall be paid by Bayer to IMI on or
before January 15, 1999. This $400,000 payment obligation applied towards the
License Fee is a firm unconditional commitment of Bayer ("$400,000 Commitment")
and is not subject to any condition precedent, condition subsequent, or
contingency other than delivery on the Effective Date by Bayer of the Delivery
and Testing Confirmation Certificate pursuant to Paragraph 2.2.
3.2 Third Installment of License Fee - Payment of the final Five Hundred
Thousand Dollars ($500,000.00) of the License Fee shall be made by Bayer on the
later of January 15, 1999 or the date of final acceptance by Bayer of the HSM
manufactured by IMI following its routine manufacturing process to produce a
product available for sale to an end user ("HSM IMI Manufactured Unit"). Final
acceptance shall be evidenced by Bayer's delivery to IMI of a Certificate of
Manufacturing Compliance. Within ten (10) days after delivery to Bayer by IMI of
an HSM IMI Manufactured Unit, Bayer shall subject such unit to substantially the
same process of investigation, observation, testing, operation and study as
Bayer performed on the two HSM engineering prototypes on October 7 and 8, 1998.
If within such 10 day period, Bayer determines that it is satisfied that the HSM
IMI Manufactured Unit has performed substantially as the engineering prototypes
and the identified changes to be made have been substantially implemented, then
Bayer shall deliver to IMI a written Certificate of Manufacturing Compliance to
the effect that the $500,000 remaining payment obligation to be applied towards
the License Fee shall constitute a firm unconditional commitment of Bayer
("$500,000 Commitment") to be made on January 15, 1999 (or within five (5)
business days if later) and such payment obligation shall not be subject to any
condition precedent, condition subsequent, or contingency other than delivery of
such Certificate of Manufacturing Compliance.
If Bayer is reasonably dissatisfied with the HSM IMI Manufactured Unit within
such 10 day period, then Bayer shall deliver to IMI written notice within five
(5) business days thereafter of its reasonable dissatisfaction as to identified
and specific variances in performance or missing agreed upon changes compared to
the engineering prototypes. Following receipt of such notice, IMI shall respond
by correcting or adjusting the HSM IMI Manufactured Unit, as appropriate. After
IMI responds in writing to notify Bayer of IMI's changes and adjustments, Bayer
shall have five (5) business days to deliver a Certificate of Manufacturing
Compliance or to notify IMI in writing as to its continued reasonable
dissatisfaction. This process shall continue until the HSM IMI Manufactured Unit
reasonably meets the standards set by the IMI engineering prototypes, as changed
in accordance with any change approved by IMI and Bayer and set forth in the
Delivery and Testing Confirmation Certificate.
Bayer agrees that IMI may transfer, pledge, grant a security interest in, or
assign the $400,000 Commitment and the $500,000 Commitment to a third party in
connection with any financing by IMI for purposes of raising capital.
3.3 Running Royalties - In further consideration for the licenses granted
hereunder, Bayer shall pay IMI a royalty of Two Thousand Dollars ($2000.00) per
Licensed Product (whether sold with or without the small sample handler module)
of the first Four Hundred (400) units manufactured and sold by Bayer or its
sublicensed Affiliates. If IMI has not satisfactorily delivered to Bayer all
Know-How identified in the Secondary List of Schedule I in accordance with
Paragraph 2.3 by four (4) months after the Effective Date, then Bayer shall be
entitled to off-set against running royalties due IMI its fully allocated and
burdened cost of developing or generating the deficient portion of such
Know-How. Upon payment in full of the license fee and running royalties
contemplated under Paragraphs 3.1 and 3.2, the licenses granted under Paragraph
2.1 hereof shall thereafter be deemed fully paid-up and irrevocable.
3.4 Deduction of Royalty Due Third Parties - If, in the opinion of outside
counsel retained by Bayer and subject to the reasonable approval of IMI, the
manufacture, use or sale of a Licensed Product infringes a patent held by a
third party, Bayer and its sublicensed Affiliates shall have the right to deduct
up to fifty-percent (50%) of any running royalty due IMI on account of sales of
such Licensed Product, for any royalty paid by Bayer or its sublicensed
Affiliates, respectively, to such third party in order to continue the
manufacture, use and sale of such Licensed Product, provided that any running
royalty due IMI on account of sales of such Licensed Product shall not be
reduced to less than fifty-percent (50%) of that otherwise due hereunder.
3.5 Most Favored Licensee - IMI shall, within thirty (30) days of granting
any license to a third party to make, have made, use and sell a Licensed
Product, provide Bayer with a complete and unedited copy of the license
agreement with such third party, or to the extent elements of such license
agreement relate to matters other than a license concerning a Licensed Product,
a complete and unedited copy of pages relevant to the license concerning a
Licensed Product or a detailed summary of the terms and conditions of such
license agreement (certified as accurate and complete by IMI's outside counsel
and accounting firm). [By way of clarification, a license to use and sell a
Licensed Product, but not to make or have made, shall not be subject to this
Paragraph 3.5.] If, taking into account all relevant terms and conditions,
including a comparison of all obligations of the third party to IMI, Bayer
determines that the terms and conditions provided to third party are more
favorable than the terms of this Agreement, Bayer shall have the option of
electing to have this Agreement amended to incorporate comparable terms and
conditions including comparable obligations of Bayer to IMI. If, for example,
any rights granted by IMI to a third party with respect to a Licensed Product
are granted in consideration of royalty obligations greater than those paid by
Bayer under this Agreement or in consideration of obligations to IMI relating to
other products, then Bayer may elect to have this Agreement amended to add the
more favorable terms effective as of the date of such third party license
agreement, provided Bayer also agrees to comply with such comparable additional
obligations. Notwithstanding the foregoing, the provisions of this Paragraph 3.5
shall not apply if Bayer is not supplying Licensed Products to IMI for sale by
IMI pursuant to the Instrument Supply Agreement.
3.6 Records - Bayer shall keep complete and accurate records containing all
information required for the computation and verification of the royalties to be
paid hereunder. Such records for a particular annual period shall be maintained
for a minimum of five (5) years after the close of such annual period.
3.7 Audit of Records - Bayer shall, upon request of IMI, permit an
independent certified public accountant selected and retained by IMI and
reasonably acceptable to Bayer, to have access, during ordinary business hours
and not more than once each calendar year, to such records as may be necessary
to determine either the accuracy of any report or the sufficiency of any payment
made under this Agreement for the three (3) year period immediately proceeding
the date of inspection.
3.8 Quarterly Reports and Payments - On or before sixty (60) days after the
end of each calendar quarter beginning with the quarter in which Bayer or a
sublicensed Affiliate makes the first commercial sale of the first Licensed
Product and ending with the quarter in which Bayer or a sublicensed Affiliate
sells the Four Hundredth (400th) unit of Licensed Product, Bayer shall deliver
to IMI a quarterly written statement accounting for the units of Licensed
Product sold during the preceding calendar quarter and a calculation of the
royalty due IMI.
3.9 Currency - All royalties due hereunder shall be payable in United
States Dollars.
ARTICLE 4
FURTHER DEVELOPMENTS AND NEW PRODUCTS
4.1 Further Developments - In the event that the parties enter into one or
more agreements for the further development of the technology licensed to Bayer
hereunder, such agreement(s) shall provide for the ownership of, and license
rights to use, resulting improvements and associated intellectual property,
whether patentable or unpatentable, in the development, manufacture, use and
sale of Licensed Products. However, whether or not the parties enter into any
such development agreement(s), if either party during the term hereof makes a
patentable improvement in the field of automated slide making/staining, the
other party shall have the option to be granted a worldwide, royalty-bearing,
nonexclusive license, with the right to sublicense Affiliates only, but
transferable in accordance with Paragraph 10.3 hereof, to practice such
improvement in the field of automated slide making/staining, provided that the
total consideration to be paid for such license shall not exceed five-percent
(5%) of the net sales of covered products.
4.2 Rights of Negotiation for New Products - Prior to initiating
discussions with a third party regarding the manufacture or distribution of a
device, reagent, or other product for use as an in vitro diagnostic other than
HSM, but including, without limitation MICRO 21 and USM ("New Product"), IMI
shall promptly disclose same in writing to Bayer and such shall be received by
Bayer in confidence under the relevant provisions of Article 6 hereof. If Bayer
responds in writing within ninety (90) days that it is interested in pursuing
discussions with IMI for the development and/or manufacture of such New Product,
for a period of six (6) months from the date of such response by Bayer, Bayer
shall have the non-exclusive right to negotiate with IMI in good faith toward an
agreement. During such six (6) month period, IMI covenants not to enter into any
agreement or arrangement with any third party that would preclude IMI from
entering into at least a non-exclusive agreement or arrangement with Bayer for
the manufacture and/or distribution of such New Product. If an agreement is not
reached between Bayer and IMI within such six (6) month period, IMI shall be
free to enter into an exclusive or non-exclusive agreement with any third party
for the manufacture and/or distribution of such New Product, provided that such
agreement is on terms and conditions no more favorable to such third party than
the terms and conditions last rejected by Bayer. The foregoing provisions of
this Paragraph 4.2 shall not apply to (a) any agreement executed prior to the
Effective Date, (b) the agreement for grant by IMI of non-exclusive distribution
and manufacturing rights (no sooner than March 31, 2000 as to manufacturing
rights) relating to the HSM currently contemplated and under negotiation with
Beckman-Coulter, provided that IMI shall not grant to Beckman-Coulter any rights
relating to New Products senior or more favorable than the rights granted to
Bayer under this Paragraph 4.2, or (c) any New Product resulting from a
development effort of IMI that is substantially entirely funded by a third party
or licensed from a third party, in either case where the third party is granted
priority to the manufacture and/or distribution of such New Product.
4.3 Confidentiality - Any and all information and materials exchanged
between the parties under the provisions of this Article 4 shall be treated in
accordance with the relevant confidentiality and nonuse provisions of Article 6
below.
<PAGE>
ARTICLE 5
REPRESENTATIONS, WARRANTIES, AND COVENANTS
5.1 Clear Title - IMI warrants good, clear title to the Know-How and Patent
Rights, and that it has the unrestricted right and power to enter into this
Agreement and to grant the licenses provided herein to Bayer without conflict
with any obligation or contract with any third party.
5.2 Validity of Patent Rights - IMI warrants, to the best of its knowledge
and belief, that all claims in Patent Rights, if any, are valid and enforceable.
IMI shall promptly notify Bayer if it should come into possession of any
information during the term hereof which could adversely impact the validity or
enforceability of any claim in Patent Rights, if any.
5.3 Freedom-to-Operate - IMI warrants, to the best of its knowledge and
belief, that there are no claims, actions, suits or proceedings commenced,
pending or threatened against IMI which will or might in any way adversely
affect or impair Bayer from fully exercising the rights licensed to Bayer
hereunder, and further, that no third party patent or other intellectual
property exist which are superior or dominant to the rights licensed to Bayer
hereunder or that would otherwise impair or prevent Bayer from fully exercising
such rights. IMI shall promptly notify Bayer if it should come into possession
of any information during the term hereof which could adversely impact the
freedom of Bayer to develop, manufacture, have manufactured, use or sell
Licensed Products.
5.4 Product Liability Indemnification - Except as specifically provided
under Paragraph 5.6 below, Bayer shall defend IMI at Bayer's cost and expense,
and will indemnify and hold harmless IMI, from and against any and all claims,
losses, costs, damages, fees, or expenses arising out of or in connection with
the manufacture, design, commercialization, use, marketing or sale of License
Product (other than claims based on infringement or misappropriation),
including, but not limited to, any actual or alleged injury, damage, death, or
other consequence occurring to any legal or natural person or property, as a
result, directly or indirectly, of the possession, use or consumption of any
Licensed Product, claimed by reason of breach of warranty, negligence, product
defect, or other similar cause of action, regardless of the form in which any
such claim is made. In the event of any such claim against IMI, IMI shall
promptly notify the Bayer in writing of the claim and the Bayer shall manage and
control, at its sole expense, the defense of the claim and its settlement. IMI
shall cooperate with Bayer and counsel selected by Bayer to defend the claim
(which counsel shall also serve as representation of IMI, provided that IMI may,
at its option and expense, be separately represented by counsel of its choosing
in any such action or proceeding).
5.5 Disclaimer of Warranties - Except as specifically provided under
Paragraph 5.6 below, Bayer acknowledges that it has conducted a thorough due
diligence review of the HSM under development at IMI, including a review and
analysis of the Know-How. Bayer acknowledges that it will have responsibility
for manufacturing Licensed Products using the Know-How subject to this Agreement
and Bayer will not rely on any representation or warranty from IMI as to the
merchantability or fitness for a particular purpose of the Licensed Products.
Bayer shall be responsible for any and all warranties which Bayer may convey to
its customers who purchase any of the Licensed Products from Bayer.
5.6 Year 2000 - IMI represents and warrants that the Know-How will not be
adversely affected in any way with the introduction of dates with the year 2000.
This will include date dependent data, computations, output or other functions,
including, but not limited to, calculating, comparing and sequencing, and all
Licensed Products will create, store, process and output information, as
required, relating to or including millennial dates without errors or omissions.
At Bayer's request, IMI will provide sufficient evidence to demonstrate the
adequate testing of the Know-How to meet the foregoing minimum requirements.
Notwithstanding the foregoing, IMI's representation and warranty shall not apply
to software that is modified by Bayer resulting in non-compliance.
ARTICLE 6
CONFIDENTIALITY
6.1 General Obligation - All information and materials exchanged between
the parties under the protection of the Confidentiality Agreement of February 3,
1998, and all information or materials exchanged between the parties under this
Agreement shall be deemed Confidential Matter and subject to the obligations set
forth in this Article 6.
6.2 Nondisclosure and Nonuse - Except as expressly provided herein,
Confidential Matter shall not be disclosed to any third party, or used for the
benefit of any third party.
6.3 Agreement and Terms - The existence of this Agreement and its terms,
including all schedules and exhibits, shall be considered Confidential Matter;
provided, that at the request of IMI, a mutually agreeable and joint press
release announcing the signing of this Agreement and its principal terms may be
issued, and further that IMI shall be permitted to disclose this Agreement as a
material contract in filings made with the Securities and Exchange Commission,
in which case IMI shall request confidential treatment to the greatest extent
possible.
6.4 Exclusions - The obligations of confidentiality and nonuse of this
Article 6 shall not apply to information:
(a) which was or is known by the receiving party prior to receipt from
the disclosing party as evidenced by documents in the possession of the
receiving party at the time of disclosure,
(b) which, after receipt from the disclosing party, is disclosed to
the receiving party by a third party having the legal right to do so,
(c) which is available to the public at the time of receipt from the
disclosing party,
(d) which becomes available to the public after receipt from the
disclosing party through no fault of the receiving party,
(e) which is developed by the receiving party independently of
information received from the disclosing party,
(f) which is required, in the opinion of legal counsel of Bayer or IMI
, to be disclosed for securing clearance of governmental health regulatory
agencies, including but not limited to the U.S. Food and Drug
Administration, to market Licensed Products,
(g) which is required, in the opinion of legal counsel of Bayer or IMI
to be disclosed for the filing of respective patent applications; provided
that neither Bayer nor IMI shall disclose Confidential Matter of the other
party in a patent application without the prior written approval of the
other party, which approval shall not be unreasonably withheld,
(h) which is reasonably necessary to be disclosed by the receiving
party to its individual agents or third parties who require knowledge
hereof in order to perform their normal duties or services, such as legal
counsel, certified public accountants, and the like, provided that such
agents and third parties are advised of and acknowledge the confidential
nature of such disclosure, or
(i) which is required to be disclosed by order or other requirement of
a court, administrative agency, or other governmental body provided that
the receiving party has provided reasonable advance notice to allow the
disclosing party the opportunity to seek a protective order or otherwise
contest, prevent or limit such disclosure.
6.6 Standard of Care - Each party shall use the same level of care in
complying with its obligations hereof respecting Confidential Matter as it does
with respect to its own information of similar nature.
6.7 Previous Agreements Superseded - All obligations of confidentiality and
nonuse created under the Confidentiality Agreement of February 3, 1998, shall be
superseded and replaced by the obligations defined in this Article 6.
6.8 Survival - All obligations of confidentiality and nonuse created under
the provisions of this Article 6 shall be and remain in effect for five (5)
years after any termination of this Agreement. All Confidential Matter of either
party shall be returned to such party upon any termination of this Agreement.
ARTICLE 7
INTELLECTUAL PROPERTY RIGHTS
7.1 Ownership - Subject to the license rights granted to Bayer hereunder,
IMI shall retain ownership of the entire right, title, and interest in and to
all Patent Rights and Know-How.
7.2 Participation Rights of Bayer - IMI agrees that during the term of this
Agreement, IMI shall provide Bayer with copies of all substantive communications
to and from patent offices regarding applications or patents in Patent Rights
promptly after the receipt thereof. IMI shall use reasonable efforts to
incorporate Bayer's comments into any substantive communications. IMI shall
timely notify Bayer (but in no event less than 30 days prior to the expiration
of any priority rights period) if it intends not to continue to seek patent
protection based on a particular patent or patent application in any country,
and Bayer shall have the right, at its expense and in IMI' name, to file,
prosecute, maintain, and enforce such patent or patent application in such
country.
7.3 Assistance - IMI shall provide to Bayer or Bayer's authorized
attorneys, agents, or representative reasonable assistance as necessary for
Bayer to exploit its right under Paragraph 7.2 to file, prosecute, maintain and
enforce patent applications and patents. IMI shall use its best efforts to have
signed all legal documents (prepared by Bayer at its expense) necessary to file,
prosecute, maintain, and enforce patent applications or patents at no charge to
Bayer.
7.4 Infringement
(a) Each party shall promptly report in writing to each other party during
the term of this Agreement any: (i) known infringement or suspected infringement
of any of the Patent Rights; or (ii) unauthorized use or misappropriation of the
Know-How by a third party of which it becomes aware, and shall provide each
other party with all available evidence supporting said infringement, suspected
infringement or unauthorized use or misappropriation. Within thirty (30) days
after IMI becomes, or is made, aware of any of the foregoing, it shall decide
whether or not to initiate an infringement or other appropriate suit and shall
advise Bayer of its decision in writing. The inability of IMI to decide on a
course of action within such thirty (30) day period shall for purposes of this
Agreement be deemed a decision not to initiate an infringement or other
appropriate suit.
(b) Within sixty (60) days after IMI becomes, or is made, aware of any
infringement, suspected infringement or unauthorized use or misappropriation by
a third party, as provided in Paragraph (a) above, and provided that IMI shall
have advised Bayer of its decision to file suit within the thirty (30) day
period provided in Paragraph (a) above, IMI shall have the right to initiate an
infringement or other appropriate suit anywhere in the world against such third
party. IMI shall provide Bayer with an opportunity to make suggestions and
comments regarding and prior to the initiation of such suit and shall promptly
notify Bayer of the commencement of such suit. IMI shall keep Bayer promptly
informed of, and shall from time to time consult with Bayer regarding, the
status of any such suit and shall provide Bayer with copies of all documents
filed in, and all written communications relating to, such suit.
(c) IMI shall select counsel for any suit referred to in Paragraph (b)
above. IMI shall, except as provided below, pay all expenses of the suit,
including, without limitation, attorneys' fees and court costs. Bayer, in its
sole discretion, may elect, within sixty (60) days after the receipt by Bayer
from IMI of notice of the commencement of such litigation, to contribute to the
costs incurred by IMI in connection with such litigation in an amount not to
exceed 50 percent of such costs. Any damages, settlement fees or other
consideration for past infringement received as a result of such litigation
shall be shared by IMI and Bayer pro rata based on their respective sharing of
the costs of such litigation. If necessary Bayer shall join as a party to the
suit but shall be under no obligation to participate except to the extent that
such participation is required as the result of being a named party to the suit.
Bayer shall have the right to participate and be represented in any suit by its
own counsel at its own expense. IMI shall not settle any such suit involving
rights of Bayer without obtaining the prior written consent of Bayer, which
consent shall not be unreasonably withheld.
(d) In the event that IMI does not inform Bayer of its intent to initiate
an infringement or other appropriate suit within the thirty (30) day period
provided in Paragraph (a) above, or does not initiate such an infringement other
appropriate action within the sixty (60) day period provided in Paragraph (b)
above, Bayer shall have the right, at its expense, to initiate an infringement
or other appropriate suit. In exercising its rights pursuant to this Paragraph
(d), Bayer shall have the sole and exclusive right to select counsel and shall
pay all expenses of the suit including without limitation attorneys' fees and
court costs. If necessary, IMI shall join as a party to the suit and shall
participate only to the extent that such participation is required as a result
of its being a named party to the suit or being the holder of any patent at
issue or being the owner of any Know-How at issue. IMI shall have the right to
be represented in any such suit by its own counsel at its own expense. Bayer
shall not settle any such suit involving rights of IMI without obtaining the
prior written consent of IMI, which consent shall not be unreasonably withheld.
ARTICLE 8
TERM AND TERMINATION
8.1 Term - This Agreement shall remain in effect unless and until
terminated in accordance with a provision set forth below.
8.2 Material Breach - Either party may terminate this Agreement at anytime
if the other party fails to perform any material covenant, condition, or
limitation herein, provided such other party shall not have remedied its failure
within sixty (60) days after receipt of written notice of such failure.
8.3 Disputes - Any dispute arising under this Agreement shall be resolved
in accordance with the provisions of Paragraph 20 of the Instrument Supply
Agreement between Bayer and IMI.
ARTICLE 9
NOTICES
Any notice required or permitted by this Agreement shall be in writing. A
notice shall be considered served when delivered in person or deposited in the
national postal system in a sealed envelope with sufficient postage affixed and
addressed to the party to whom such notice is directed at its post office
address given below:
If to IMI: Intelligent Medical Imaging, Inc.
4360 Northlake Blvd., Suite 214
Palm Beach Gardens, FL 33410
Attention: President
If to Bayer: Bayer Corporation
Business Group Diagnostics
511 Benedict Avenue
Tarrytown, New York 10591, USA
Attention: Law & Patents
ARTICLE 10
OTHER PROVISIONS
10.1 Governing Law - This Agreement shall be construed and the rights of
the parties hereunder shall be determined in the State of New York in accordance
with the laws thereof.
10.2 Effect of Headings - All article and paragraph captions or titles are
inserted herein for ready reference only and are without contractual
significance or effect.
10.3 Assignment - Except where the assignee is an Affiliate, a successor in
business or pursuant to a merger or consolidation, or a purchaser of
substantially all of the assets of a party relating to the subject matter of
this Agreement, a party hereto shall have no right or power to assign any right
or delegate any duty under this Agreement or any portion or term hereof without
the express written consent of the other party.
10.4 Integration - This writing constitutes the entire agreement between
the parties relating to the subject matter hereof. There are no understanding,
representations, or warranties of any kind except as expressly set forth herein.
10.5 Waiver - This Agreement may not be waived, altered, extended, or
modified except by written agreement of the parties.
10.6 Independent Contractors - The performance of each party hereunder is
undertaken as an independent contractor and not as an agent or partner of the
other party. Neither party shall enter into or incur, or hold itself out to
third parties as having authority to enter into or incur on behalf of the other
party, any contractual obligation, expense, or liability whatsoever.
10.7 Severability - If any provision of this Agreement is held
unenforceable or in conflict with the law of any jurisdiction, it is the
intention of the parties that the validity and enforceability of the remaining
provisions hereof shall not be affected by such holding, provided the provision
held unenforceable or in conflict will not deprive any party of the benefit of
its bargain.
IN WITNESS WHEREOF, the parties have duly signed this Agreement and have
made delivery to one another.
BAYER CORPORATION INTELLIGENT MEDICAL IMAGING, INC.
By: /s/ Gerald Wagner By: /s/ Tyce Fitzmorris
------------------------------------ ------------------------------
Name: /s/ Gerald Wagner Name: /s/ Tyce Fitzmorris
---------------------------------- ----------------------------
Title: Sr. VP, Laboratory Testing Title: President
--------------------------------- ---------------------------
Exhibit 10.31
Revision: 11/2/98
HSM AFTER-MARKET SUPPLY AGREEMENT
THIS HSM AFTER-MARKET SUPPLY AGREEMENT, effective this _____ day of __________,
1998, by and between BAYER CORPORATION, an Indiana corporation, acting through
its Diagnostics Division, having its principal place of business at 511 Benedict
Avenue, Tarrytown, New York 10591 (hereinafter referred to as "Bayer"); and
INTELLIGENT MEDICAL IMAGING INC., a Delaware corporation having its principal
place of business at 4360 North Lake Boulevard, Suite 214, Palm Beach Gardens,
Florida 33410 (hereinafter referred to as "IMI").
WITNESSETH
WHEREAS, IMI possesses certain know-how, expertise and technology relating to
the design, development, construction, manufacture and operation of automated
slide maker and slide stainer instruments, accessories and After-market Supplies
for use in or with automated slidemaker and slide stainer instruments
(hereinafter referred to as "IMI HSM Technology");
WHEREAS, pursuant to that certain License Agreement dated ___________ 1998 (the
"License Agreement") IMI authorized Bayer, utilizing IMI HSM Technology, to
make, have made, use, sell and service the HSM Automated Slide Maker/Stainer
with or without the IMI small sample handler incorporating certain future
modifications and improvements by IMI and/or Bayer (hereafter the "HSM
Instrument") for sale, lease or rent to third parties including end-users;
WHEREAS Bayer is a world wide manufacturer and supplier of hematology,
immunology and clinical chemistry analyzers, diagnostics, consumables and spare
part therefor;
WHEREAS, IMI and Bayer have entered into a separate HSM Instrument Supply
Agreement (the "HSM Instrument Supply Agreement") on the date hereof, pursuant
to which, among other things, Bayer has granted certain rights to IMI for the
purchase from Bayer and marketing of the HSM Instrument and the Bayer Auto
Sampler, and IMI has granted certain rights to Bayer for the purchase from IMI
and marketing of the IMI Small Sample Handler;
WHEREAS, Bayer wishes and has agreed to purchase, and Bayer wishes and has
agreed to offer and recommend to its customers who purchase HSM Instruments the
opportunity to purchase, from Bayer IMI's After-market Supplies to be used in
connection with the use and operation of HSM Instruments, including without
limitation reagents and disposables such as slides, labels, needles, tube caps,
rinse solutions, smearing blades, wiping gauze, as set forth in Appendix A.
("IMI After-market Supplies");
NOW THEREFORE, in consideration of the mutual undertakings contained herein and
other good and valuable consideration, as set forth below, the receipt and
sufficiency of which are hereby acknowledged, IMI and Bayer agree as follows:
1. DEFINITIONS
1.1 "Affiliate" shall mean, with respect to a party, an entity which,
directly or indirectly, majority owned by, or is under common majority
ownership with, that party. For purposes hereof, a partnership shall
be deemed an affiliate if Bayer is the managing partner or is a
general partner and has an active and significant economic interest
therein.
1.2 With respect to IMI After-market Supplies manufactured by IMI or its
designees, the "Manufacturing Party" shall mean either IMI or its
designated third party contractor who shall be bound by the
responsibilities contained herein by separate agreement, but IMI shall
have overall responsibility for compliance with the terms and
conditions hereto applicable to any such Manufacturing Party.
It is understood that IMI may acquire IMI After-market Supplies from
third party manufacturers, wholesalers, or distributors other than
such third party contractors or Manufacturing Parties.
1.3 The "Purchasing Party" shall mean Bayer and/or its worldwide
Affiliates with respect to the IMI After-market Supplies purchased
under the terms of this Agreement.
2. Grant of Supply and Purchasing Rights and Obligations
2.1 IMI Supply Rights and Bayer Purchase Obligations.
2.1.1 In connection with the manufacture and sale of HSM Instruments
by Bayer to IMI or to any other party including end user
customers of Bayer, Bayer and IMI hereby agree to the following
covenants and grant certain supply rights to IMI for sourcing the
IMI After-market Supplies as follows:
(a) IMI shall have the right to source all IMI After-market
Supplies set forth in Appendix A, and as amended from time
to time by mutual agreement, required for use and operation
of the HSM Instrument, Bayer Auto Sampler (collectively the
"HSM Products"). IMI will source IMI After-market Supplies
for the HSM Products purchased by IMI from Bayer and for HSM
Instruments manufactured and used, sold, leased or rented
and serviced by Bayer;
(b) Bayer hereby agrees to purchase all of such IMI After-market
Supplies set forth in Appendix A, as same may be amended by
mutual written agreement, from IMI with respect to supplies
Bayer needs to operate HSM Products which Bayer uses,
After-market Supplies and to recommend them to its end-user
customers or distributors provided same are, and continue to
be, competitively priced in accordance with the stipulations
set forth in Appendix C, utilize technology as to
performance, specificity, shelf life stability and other
demands of the then current marketplace and are available as
per this Agreement.
(c) Bayer will apply the same policies (including without
limitation, policies limiting warranties) to its customers
who purchase the HSM Products relating to the purchase and
use of IMI After-market Supplies, which policies Bayer would
apply with respect to an instrument manufactured and sold by
Bayer (other than the HSM Instrument or Bayer Auto Sampler)
for which Bayer sourced the consumable and disposable
After-market Supplies needed in the operation and use of
such instruments manufactured and sold by Bayer.
2.1.2 IMI will source HSM IMI After-market Supplies for the HSM
Instruments purchased by IMI from Bayer and for HSM
Instruments manufactured and used, sold, leased or rented
and serviced by Bayer.
2.2 Bayer Non-exclusive Purchasing and Marketing Rights
2.2.1 IMI hereby grants Bayer and its worldwide Affiliates the
right to purchase and market IMI sourced After-market
Supplies, the specifications for which are set forth in
Appendix A-2, attached hereto and made a part hereof.
2.2.2 IMI agrees to price the IMI After-market Supplies in
accordance with Appendix C
2.3.Additional Bayer Purchase Rights
2.3.1 It is understood and agreed that purchases under this
Agreement, and in furtherance thereof, may be made directly
from IMI by Bayer's parent, Affiliate and subsidiary
companies and the provisions contained herein shall be
equally applicable to said purchases.
2.3.2 It is understood and agreed that Bayer, its parent,
affiliate and subsidiary companies may purchase non-IMI
After-market Supplies (those supplies that do not appear on
Appendix A) sought by Bayer's end-user customers from
whomsoever it or they may choose, however, Bayer agrees to
negotiate to enable IMI to purchase same from such parties
at the same price Bayer pays for IMI's own use.
3. Manufacturing Responsibilities
3.1 Manufactured Products.
IMI will manufacture the IMI After-market Supplies not purchased from
third parties, if any, or have manufactured by third parties to the
manufacturing specification of IMI and Bayer, as have jointly been
agreed, as set forth in Appendix A-1, as amended by mutual agreement
from time to time, attached hereto and made a part hereof. If
applicable, IMI also agrees to have compliance with these
specifications monitored by Bayer's manufacturing group. The IMI
After-market Supplies purchased by Bayer or its customers will be
manufactured by IMI or its designee from said party's raw materials
and shall include thereon a Bayer label, part number and outer design
and color in the form of Appendix B, to be attached hereto and made a
part hereof within sixty (60) days of the effective date hereof.
3.2 IMI's Right to Grant Rights to Third Parties
Bayer acknowledges and agrees that IMI may, at any time, grant
purchase, sale, lease, rental, servicing and distribution rights with
respect to the IMI After-market Supplies to any other party, including
Beckman-Coulter Corporation.
4. Purchase and Supply of Products
4.1 During the term of this Agreement, IMI will supply to Bayer and/or to
its customers and Bayer or its customers will purchase from IMI the
quantities of products, as applicable, as set forth in confirmed
purchase orders pursuant to Section 5, meeting the specifications set
forth in Appendix A, for such product in accordance with pricing set
as per Appendix C.
4.2 Bayer will provide to IMI one (1) year non-binding rolling forecasts
to be updated on a quarterly basis. Attached as Appendix D is Bayer's
forecast covering the first year of this Agreement. IMI will use its
best efforts to meet the Purchasing Party's forecasted requirements.
If IMI at any time after receipt of a forecast, or of a purchase order
sent by a Purchasing Party pursuant to Section 4.4 below, becomes
aware of any potential difficulties in supplying the quantities of
products stated, IMI will immediately advise the Purchasing Party in
writing.
4.3 IMI will retain its rights to source the IMI After-market Supplies for
all HSM Products made, used, sold, rented, leased, or serviced by
Bayer provided IMI continues to provide such After-market Supplies to
paying customers in reasonable quantities and within a reasonable
period of time after receipt of purchase orders, as required for the
continued normal operation of the HSM Products by end-user customers,
and the conditions of Appendix C are adhered to. If particular
after-market supplies are contained on Appendix A but a documented
better product is available, i.e. a better stain, IMI shall have a
period of no greater than ninety (90) days, unless otherwise mutually
agreed upon, from written notice from Bayer, to add same to Appendix A
or Bayer may source, and will use its reasonable best efforts to
obtain the right for IMI to use or distribute, such supplies, as well,
for its own customers.
4.4 Shipments
IMI's shipments of products to Bayer or its customers will be based on
the following:
(i) Binding purchase orders for the products required in accordance
with the Manufacturing Party's stated lead time of ninety (90)
days. Purchase orders faxed to a Manufacturing Party shall
promptly be confirmed by such Manufacturing Party in accordance
with Article 5 hereof.
(ii) In the event of an unforecasted increase in demand, a
Manufacturing Party will use its best efforts to meet these
increased requirements.
(iii)All products purchased by the Purchasing Party shall be shipped
by the Manufacturing Party F.O.B. the Manufacturing Party's
manufacturing facility to any Purchasing Party facility, not to
exceed four (4) worldwide locations, or to any Bayer customer
location, and in such manner as specified by the Purchasing Party
or customer in each purchase order.
4.5 Prior to any change by IMI or any IMI designated third party
contractor in raw material specifications, in formulating and/or in
manufacturing of the IMI After-market Supplies, IMI will notify Bayer
in writing at least ninety (90) days in advance, except in cases of
emergency, which will be as soon as practical, of any such changes
with supporting data demonstrating no change in the performance,
reliability or safety of the products. IMI reserves the right to make
changes in vendors or suppliers of raw material or actual After-market
Supplies provided such changes do not alter performance, reliability,
or safety of the products determined by the specification or
compliance with governmental regulations including but not limited to
Ozone Depleting Chemicals (ODCs) pollutants, etc. IMI will notify
Bayer in writing at least thirty (30) days in advance, except in cases
of emergency, which will be as soon as practical, of any and all such
changes in vendors or suppliers of raw materials, and will provide
with such notification written data disclosing the suggested changes
and their effects on the products or any reagents incorporating the
same and Bayer shall have thirty (30) days to provide written consent
thereto, otherwise Bayer may continue to order the prior configuration
for a period not to exceed one (1) year.
4.6 The Purchasing Party may conduct periodic on site Quality Assurance
audits of the Manufacturing Party's or its designee's facilities
normally used in the production of the products in each case during
normal business hours, provided the Purchasing Party gives the
Manufacturing Party written advance notice not less than forty-eight
(48) hours before the beginning of any such audit.
4.7 Packing
All products shall be packed by the Manufacturing Party in suitable
containers for protection in shipment and storage. Packaging shall
conform to the requirements of the Packaging Specification attached
hereto as Appendix E and made a part hereof. Loss or damage discovered
within twenty (20) days of delivery which is determined to be due to
non-compliance with the Packaging Specification shall be for the
Manufacturing Party's account.
4.8 IMI After-market Supplies, Including Reagents and Stains
(i) IMI represents that it has or will obtain the production and
delivery capability by itself and/or through other vendors to
supply Bayer and its customers with appropriate kinds and amounts
of After-market Supplies, including reagents and stains to permit
continued operation of the HSM Product instruments provided
purchase orders with reasonable delivery dates and agreed prices
are presented to IMI. The Purchasing Party shall have the right
to make inspections of IMI suppliers to insure the foregoing on
reasonable notice and during reasonable business hours.
(ii) IMI further agrees that After-market Supplies, including reagents
and stains will continue to be furnished to Bayer and its
customers, in accordance with the pricing provisions of this
Agreement, for a period of seven (7) years following the sale of
the last HSM Instrument sold by Bayer. If at any time during the
term of this Agreement, any extension thereof or during the seven
(7) year period following the sale of the last HSM Instrument
sold by Bayer, IMI fails to deliver IMI After-market Supplies
(owned or manufactured by IMI), including reagents and stains as
agreed herein, Bayer shall automatically be licensed to
manufacture the same or have such IMI After-market Supplies
(owned or manufactured by IMI) made for it. IMI shall furnish
Bayer pursuant to Section 8 with all formulas, vendors' lists,
know-how and any other information and documentation required to
permit Bayer or its subcontractor to manufacture said IMI
After-market Supplies, including reagents and/or stains for the
period during which IMI was obligated but was unable to supply
such IMI After-market Supplies hereunder.
5. Purchase Orders
The Purchasing Party and its customers may place their order for IMI
After-market supplies on purchase order forms which are substantially the
same as the respective purchase orders attached hereto as Appendix F. The
terms and conditions printed on the reverse of such purchase orders are
incorporated herein by reference except where they are in conflict with the
terms of this Agreement, in which case the terms of this Agreement shall
prevail; provided that if the parties agree in writing to modified terms of
a purchase order, the modified terms shall prevail. The Manufacturing Party
shall acknowledge and confirm within seven (7) days of receipt all purchase
orders in a signed writing or by facsimile transmission back to the
Purchasing Party or its customers, as applicable.
6. Warranty
6.1 Title
The Manufacturing Party warrants that all products delivered hereunder
shall be free and clear of any and all liens, encumbrances or defects
in title, and the Manufacturing Party has no actual knowledge or
information indicating that any of the products to be supplied
hereunder infringes or may infringe in any respect upon patents, trade
secrets, intellectual property or other proprietary right owned by
other persons or entities. The Manufacturing Party has made a complete
disclosure to the Purchasing Party of all information relevant to this
issue and agrees, during the life of this Agreement, to bring any such
information to the Purchasing Party's attention promptly after first
becoming known to the Manufacturing Party.
6.2 Specifications, Defects and Product Recalls
The Manufacturing Party warrants that the products delivered hereunder
will (1) be free of defects in materials, design and workmanship, (2)
meet the specifications referred to in Appendix A, and (3) will comply
with all applicable warranties contained in the Appendices hereto.
Time periods of such warranties are governed by date of receipt. The
Manufacturing Party's sole responsibility shall be to repair or
replace at the Manufacturing Party's sole option.
As to any such defect, about which the Purchasing Party shall promptly
provide the Manufacturing Party with written notice, the Manufacturing
Party shall be relieved of all obligations of liability under this
warranty if the product is operated or used not in accordance with the
approved final specifications, or is operated with any fluid or
material not jointly approved by the Manufacturing Party and the
Purchasing Party, or is not operated or maintained in accordance with
the instructions furnished under this Agreement, or if the product is
altered or modified by an unauthorized person, provided that any of
the foregoing is the cause of the defect.
The Purchasing Party will promptly (within forty-eight (48) hours)
forward to the Manufacturing Party any and all verified complaints
received from its customers regarding the products. The Manufacturing
Party will promptly provide the Purchasing Party with copies of all
complaints received by it regarding the products. The Manufacturing
Party will promptly provide the Purchasing Party with copies of all
complaints received by it regarding the IMI After-market Supplies or
substantially identical products the Manufacturing Party sells. The
Manufacturing Party and the Purchasing Party will cooperate in
investigating all customer complaints in accordance with FDA
regulations as prescribed in 21 CFR 820 (cGMP), Quality System
Regulations (QSRs), and with applicable international standards such
as ISO 9000 (EN 46000). The Manufacturing Party at its expense shall
cooperate fully with the Purchasing Party concerning Product recalls
and Medical Device Reporting (MDR) requirements in accordance with
this Section 6.2.
In the event of a recall products withdrawal, market withdrawal or any
such products corrective action caused by any of the products to be
delivered to the Purchasing Party hereunder, the Manufacturing Party
shall provide replacement products at its expense for those products
being recalled or withdrawn.
The Manufacturing Party shall provide the Purchasing Party with
written notice as soon as possible after the discovery by it of any
matter affecting either the products being delivered to the Purchasing
Party hereunder or a similar product that might be construed as a
safety or performance problem, might cause any FDA or similar
governmental action, or might adversely affect the marketing of any of
the products to be delivered by the Manufacturing Party to the
Purchasing Party hereunder. The Purchasing Party shall provide the
Manufacturing Party notice of any recall affecting any product to
enable the Manufacturing Party to consider any corrective actions for
any of the products being delivered to the Purchasing Party hereunder.
6.3 Controlled Substances.
The Manufacturing Party warrants that none of the IMI After-market
Supplies provided to the Purchasing Party under this Agreement, will
contain or be manufactured with a controlled substance (i.e., a Class
I or Class II ozone-depleting substance as such terms are defined by
the Environmental Protection Agency in 40 CFR Part 82).
6.4 THE EXPRESSED WARRANTIES STATED OR PROVIDED FOR ABOVE (INCLUDING THEIR
LIMITATIONS) ARE THE ONLY WARRANTIES MADE BY THE MANUFACTURING PARTY
AND ARE IN LIEU OF ANY AND ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED.
THE MANUFACTURING PARTY MAKES NO OTHER EXPRESS OF IMPLIED WARRANTIES
WHATSOEVER WITH RESPECT TO THE PRODUCTS, INCLUDING, BUT NOT LIMITED
TO, THE IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
7. Prices
The prices for the HSM IMI After-market Supplies indicated in Attachment C
shall continue in effect for one (1) year from the effective date of this
Agreement, except to the extent prices are increased during that time by
vendors and suppliers of the IMI After-market Supplies to IMI which affect
IMI's ASP and IMI shall provide Bayer at least ninety (90) days prior
written notice of any such increase and proof thereof.
Prices during the term of the Agreement and any renewals thereof shall be
those in effect as of the date of a firm purchase order from the Purchasing
Party and not the date of delivery.
8. Inability to Supply
If at anytime and for any reason the Manufacturing Party is unable for
three successive months to produce and supply products of the quantity and
quality required herein, the Purchasing Party and the Manufacturing party
will cooperate in good faith to resolve the difficulty to both parties'
mutual satisfaction or if unable; to use documentation in order to make or
have made by a third party (selected by the Manufacturing Party and
approved by the Purchasing Party) the product involved. All costs to
establish alternative manufacturing will be borne by the Manufacturing
Party.
9. Term of Agreement
This Agreement shall be effective for a term of the earlier of five (5)
years from the first commercial sale of the Bayer manufactured and labeled
version of the HSM Instrument or three (3) years from the commercial sale
of 200 HSM Instruments manufactured by Bayer and shall continue in effect
thereafter for a maximum of five (5) successive one (1) year terms unless
terminated by either party on written notice to the other at least one
hundred and eighty (180) days prior to the expiration of the initial term
or one hundred and eighty (180) days prior to any renewal termination date
subsequent to the expiration of the initial term of this Agreement.
10. Product Liability Insurance
IMI shall maintain, for the term of this Agreement, policies of general
liability insurance with contractual and product liability coverages, with
aggregate minimum limits of One Million Dollars ($1,000,000) per occurrence
with Bayer named as an additional insured thereunder with respect only to
those products IMI manufactures or has manufactured for it and sells to
Bayer under this Agreement. IMI will furnish to Bayer a certificate of
insurance, which certificate shall evidence the foregoing coverage and
limits and the insurer's agreement to notify Bayer in writing of any
proposed cancellation of such policies at least thirty (30) days before any
such cancellation is to be effective.
11. Limitation of Damages
Except as provided in Article 15, "Patent Indemnification" below in no
other event, whether as a result of a breach of this Agreement, breach of
warranty, alleged negligence or otherwise, shall either party be liable for
special, indirect, punitive or consequential damages. In the event of a
patent infringement suit, in no event shall IMI be liable for the lost
profits of Bayer.
12. Governmental Requirements
The Manufacturing Party shall make its reasonable best efforts (a) to
obtain in cooperation with the Purchasing Party all necessary United States
governmental approvals and (b) to meet all United States governmental
requirements in order to market the products. The Manufacturing Party will
provide the Purchasing Party with such information and performance data
concerning the products as is necessary to obtain such approvals and meet
such requirements. The Purchasing Party may audit the manufacturing and
quality control procedures and records of the Manufacturing Party
pertaining to the products at any time during normal business hours and as
often as necessary during the initial term of this Agreement, and any
extension thereof, to determine the Manufacturing Party's compliance with
provisions of the Federal Food, Drug and Cosmetic Act (FDA), Department of
Transportation (DOT), Environmental Protection Agency (EPA) and Clean Air
Act of 1990, and the regulations issued thereunder, or any future
regulations thereunder, pertaining to the product.
The Manufacturing Party will cooperate with the Purchasing Party to obtain
any necessary foreign governmental approvals needed to market the products
in foreign countries, if applicable. The expense of obtaining any and all
such approvals shall be borne by the Purchasing Party.
13. Regulatory Requirements and laboratory Certifications
The Manufacturing Party shall be in compliance with United States' current
Good Manufacturing Practices (cGMP) and the Manufacturing Party shall use
its best efforts to meet the guidelines of the IVD Directive, Waste
Management Directive (Packaging) and Recyclable Material Directive of the
European Community and, if applicable, will obtain CE Mark approval, but in
any event will meet regulatory requirements to legally export products to
the European community, and agrees to supply FDA and cGMP as supplemented
by the Quality System Regulation ("QSR") and, if applicable, International
Organization for Standardization (ISO) 9000 Series compliance information
to the Purchasing Party and to answer the Purchasing Party's specific
quality assurance questions as soon as reasonably possible. The
Manufacturing Party represents that it is in compliance with all applicable
current FDA, and QSR requirements and agrees to make such adjustments as
may be reasonably required to maintain such compliance. The Manufacturing
Party will also provide the Purchasing Party with any information which it
has and which is not otherwise available to the Purchasing Party that may
be reasonable required by the FDA or any other U.S. or non-U.S.
governmental regulatory agency.
The Manufacturing Party represents that, if necessary, its products are or
will be approved by Canadian CSA and European Community ("EC") authorities.
The Manufacturing Party, if necessary, at its expense, shall maintain such
approvals and will implement such changes as necessary to meet or continue
to meet the requirements of CSA, EC, (ISO 9000 and IEC 1010) standards.
14. Proprietary Information
14.1 Definition
During the term of this Agreement and for three (3) years thereafter,
all technical, manufacturing, maintenance, installation, marketing or
other information of IMI or Bayer or its Affiliates which is marked
proprietary or confidential and made available by one party to the
other pursuant to this Agreement shall be held in confidence by the
other party and shall not be disclosed by it to third parties, or used
by it, except pursuant to this Agreement. The parties agree to take
all steps reasonably appropriate under the circumstances to protect
such information. The protection afforded hereunder to information
disclosed pursuant to this Agreement shall be in addition to, and
shall not act as a waiver of, the rights and protection afforded under
applicable patent, copyright and trademark laws and each party shall
continue to enjoy the protection thereunder, both during and after the
expiration of the three (3) year period provided above.
14.2 Nothing in this Article 14 shall be construed to impose a
confidentiality obligation on a party or its Affiliates in connection
with any information to the extent such information (i) is at the time
of disclosure already known to the receiving party (as clearly
established by such party's records); (ii) is at the time of
disclosure or subsequently becomes part of the public domain through
no fault or act of omission by the receiving party; is subsequently
disclosed to the receiving party by a third party whose receipt and
disclosure of such information does not constitute a violation of any
confidentiality obligation; or (iv) is independently developed by the
receiving party.
14.3 Continuing Rights for Service
In the event of expiration or termination of this Agreement by either
party for any reason, the Purchasing Party may retain and use in
perpetuity any confidential or proprietary information necessary in
order to service the products which the Purchasing Party has in
inventory or has sold, leased or rented.
15. Patent Indemnification.
15.1 The Manufacturing Party shall defend, indemnify and save wholly
harmless, the Purchasing Party, its Affiliates, along with its
successors, assigns and customers, from any losses, claims, suits,
including, but not limited to, costs, legal fees, disbursements,
reasonable out-of-pocket expenses and damages finally awarded arising
from or related to any claims alleging infringement of any claim or
claims of any United States Letters Patent of a third party, and which
suit or claim arises out of the use, sale, rental and/or leasing of
any of the products, in the form and for use in the manner originally
intended, by the Purchasing Party or any of its customers.
In the event that such suit or claim is filed by a third party against
the Purchasing Party, its Affiliates or any of its customers, as
described above, the Purchasing party shall notify the Manufacturing
Party within ten (10) days of being advised of the filing of such suit
or claim. Within ten (10) days of being advised of the filing of such
suit or claim, the Manufacturing Party will elect whether to defend
such suit or claim itself or to transfer the defense to the Purchasing
Party, and shall promptly notify the Purchasing Party of its election.
The Manufacturing Party shall have the primary responsibility, at its
costs and expenses, to defend the Purchasing Party and any of its
customers against such suit or claim. If the Manufacturing Party
elects to defend the suit or claim itself, the Purchasing Party may be
represented by advisory counsel, at its own expense, but all decisions
regarding the defense of the suit or claim shall be at the sole
discretion of the Manufacturing Party. If the Manufacturing Party
elects not to defend the suit or claim itself, the Purchasing Party
may undertake its own defense or the defense of any of its customers,
as the case may be, and all decisions regarding any such defense shall
be at the sole discretion of the Purchasing Party and, further, any
and all reasonable costs, legal fees, disbursements and expenses
incurred by the Purchasing Party shall be reimbursed by the
Manufacturing Party, who shall also be liable in any judgment or
damages levied against the Purchasing Party or any of its customers.
Furthermore, the Manufacturing Party shall provide all reasonable
assistance requested by the Purchasing Party for the defense of any
such suit or claim.
Any settlement of such suit or claim brought by a third party, whether
being defended by the Manufacturing Party or the Purchasing Party
shall be mutually agreed upon by the Manufacturing Party and the
Purchasing Party, which agreement shall not be unreasonably withheld.
The Manufacturing Party will be liable for all costs and expenses
incurred by the Purchasing Party, as well as its own costs and
expenses, in respect of any such settlement and, also, for any given
to the third party in consideration of settlement.
In the event that manufacture, use or selling of any products provided
hereunder is enjoined, or in the Manufacturing Party's opinion, is
likely to become the subject of such claim of infringement, the
Manufacturing Party will, at its sole expense, either procure for the
Purchasing Party the right to continue manufacture, if applicable, use
and marketing of the products, or will replace or modify the same so
that it is comparable and non-infringing. If the foregoing has not
been effected during the filing of any infringement suit by a third
party against the Purchasing Party or any of its customers, (i) the
obligations of either party under this Agreement with respect to such
enjoined products may, in either party's sole discretion, be suspended
and the Agreement will be extended for a like period following either
conclusion or settlement of the third party suit or removal of the
impediments as provided above; and (ii) in the event of a permanent
injunction against the Purchasing Party for making, using or selling
and the Manufacturing Party cannot cure such situation as provided
above, the Purchasing Party in its sole discretion, may terminate this
Agreement with respect to such enjoined products, along with any and
all obligations it then has to purchase such enjoined products
hereunder and may cancel any outstanding purchase orders placed with
the Manufacturing Party with respect to such enjoined products.
In the event of (ii), the Manufacturing Party will repurchase from the
Purchasing Party all of such enjoined products which the Purchasing
Party has in its inventory and which were purchased from the
Manufacturing Party under this Agreement, and the Manufacturing Party
shall pay to the Purchasing Party the same purchase price as was paid
by the Purchasing Party to the Manufacturing Party for such enjoined
products, plus cost of freight.
The obligations of the Manufacturing Party under this Article shall
expire eighteen (18) months from the date of termination of this
Agreement.
15.2 The Purchasing Party will defend, indemnify and hold harmless the
Manufacturing Party, and its Affiliates from any and all claims,
liabilities, damages and out-of-pocket expenses arising out of any and
all claims, and will pay all costs or damages finally awarded in,
and/or any settlements of, any proceedings with respect to any claims
arising from the use and operation of its other products, except to
the extent that the claim arises with respect to products manufactured
by the Manufacturing Party.
16. Quality Control
16.1 Procedures.
The Manufacturing Party has thirty (30) calendar days, after
acceptance of this Agreement, to assure the Purchasing Party, in its
sole judgment, that the Manufacturing Party's Quality Control, Process
Control, Material Control and Design and Manufacturing Documentation
Control systems, procedures and policies are in conformance with the,
QSR requirements of the U.S. Government Food and Drug Administration,
of November, 1996, effective June 1, 1997 and 1998,, as amended. The
Purchasing Party will not accept any products or spares not provided
in accordance with those requirements. The Manufacturing Party's
conformance to such QSRs shall be subjected to the review and
reasonable acceptance of the Purchasing Party prior to the acceptance
of any material for delivery to these system procedures and policies
to assure continuous product integrity and conformance to QSRs.
16.2 Source Inspection.
The Purchasing Party may, at its option, inspect on an annual basis on
thirty (30) days notice any and all products at the Manufacturing
Party's site prior to shipment by the Manufacturing Party to insure
conformity with Appendix A. The Manufacturing Party shall provide the
Purchasing Party with at least five (5) work days prior notification
as to the availability of material to be inspected. Such inspection
shall include the right of access to the Manufacturing Party's
design/manufacturing documentation, process records, inspection
records, test records, etc. The Purchasing Party's source inspection
activities shall include the right to require the Manufacturing Party
to rerun product tests using ANSI accepted sampling techniques to
demonstrate acceptability to product specifications or the
Manufacturing Party's test procedures. All products delivered in
accordance with this Agreement shall conform and be tested in
accordance with the Manufacturing Party's test documents.
Upon the Purchasing Party's source inspection acceptance of any
product, as provided above, the Purchasing Party inspector shall affix
his acceptance stamp, signature and date to the final test data
documentation and to the shipping documentation. Copies thereof shall
be given to the Purchasing Party's source inspector and the
Manufacturing Party may use its copies for invoice purposes.
If after notice as aforesaid, the Purchasing Party elects not to
conduct a source inspection at the Manufacturing Party's site, the
Manufacturing Party shall, prior to shipment and invoicing, insure
that all products conform with the Manufacturing Party's test
documents and Attachment "A". Upon certification to the Purchasing
Party of such conformance and shipment, the Manufacturing Party may
invoice the Purchasing Party for such products shipped and certified.
16.3 Form, Fit or Function
The Manufacturing Party shall make no design, test or manufacturing
changes, subsequent to acceptance of this Agreement, which affect the
form, fit or function of any deliverable product without first
notifying the Purchasing Party in writing at least ninety (90) days in
advance and receiving written approval for the implementing of such
changes.
17. Payments
The Purchasing Party shall remit payment against the Manufacturing Party's
invoices under this Agreement within thirty-five (35) days after the date
of the invoice and delivery of the product.
18. Documentation
18.1 Documentation
The Manufacturing Party, without charge, will furnish the Purchasing
Party with a complete set of drawings, documents and any revisions
thereof which are necessary for the quality control, testing and
servicing of any of the products hereto.
18.2 Service Manuals
The Purchasing Party will prepare and incorporate a section dealing
with the IMI After-market Supplies into its service, operating and
maintenance manuals at its expense. The Manufacturing Party will
provide all reasonable and necessary assistance to the Purchasing
Party to enable the Purchasing Party to prepare such manuals.
19. Force Majeure
19.1 Failure of either party to perform the terms of this Agreement in
whole or in part shall be excused if such failure is the result of
force majeure and acts of God, including, but not limited to, flood,
wind and lightning, insurrections, riots, war warlike operations,
civil commotion, fires, explosions, accidents, the acts or orders of
any governmental agency, acts of the public enemy, epidemics, and laws
or regulations or restrictions of the governmental entity or of any
agency or instrumentality thereof.
19.2 If performance of this Agreement is excused pursuant to the foregoing
section, the party thus excused shall use reasonable efforts to avoid,
remove and correct the circumstances which caused the failure to
perform, and the party excused from performance shall resume
performance with the utmost dispatch when such circumstances are
avoided, removed or corrected.
19.3 If the circumstances of force majeure last longer than sixty (60)
days, the party which has not declared the force majeure shall have
the right to cancel this Agreement upon thirty (30) days prior written
notice to the other party.
20. Disputes.
The parties covenant and agree in good faith to attempt, for a period of
sixty (60) days, to resolve any disputes which may arise in connection with
this Agreement through negotiation and settlement prior to giving notice of
termination for cause or bringing any legal action against the other party
in connection with this Agreement. The provisions of this Article shall not
apply if the other side refuses to negotiate the dispute in good faith or
if more prompt legal action is required is avoid material loss or damage.
Failure to resolve a dispute by negotiated settlement shall not prejudice
any subsequent legal action with respect thereto.
21. Termination
21.1 After the earlier of the fifth year from the first commercial
availability for sale of the Bayer manufactured and labeled version of
the HSM Instrument or the third year following the sale of 200 HSMs
manufactured by Bayer, either party may terminate this Agreement, for
any reason and without cause, on one hundred eighty (180) days written
notice to the Manufacturing Party. In the event of termination under
this Section, the Purchasing Party shall pay the Manufacturing Party
for any non-cancelable costs actually incurred by the Manufacturing
Party with respect to its manufacture and/or production of that
quantity of products which is the subject of a binding purchase order
placed pursuant to Article 5 but not yet shipped.
21.2 This Agreement may be terminated at any time by Bayer upon sixty (60)
days written notice in the event IMI is to be sold or acquired by a
party which, in Bayer's sole judgment, is unacceptable to Bayer.
21.3 Either party may terminate this Agreement for material breach of any
of its provisions upon sixty (60) days prior written notice to the
other, if during such sixty day notice period the default is not
corrected to the reasonable satisfaction of the non-defaulting party.
In addition, either party may terminate this Agreement by giving the
other party at least thirty (30) days written notice if such other
party has entered into or committed any act of liquidation,
bankruptcy, insolvency, receivership or assignment for the benefit of
creditors, to the extent such act is permitted by law.
21.4 Accrued Rights
Unless as otherwise provided elsewhere in this Agreement, termination
of this Agreement shall be without prejudice to all accrued rights and
remedies and shall not affect the continuing rights and obligations of
the parties under this Agreement. The manufacturing rights granted
under Section 4.8 and Article "8" shall continue during the seven (7)
year period following delivery of the last product or accessory under
this Agreement.
22. Waiver of Performance
A failure of a party hereto at any time to require performance by the other
party hereto of any provision hereof required to be performed by such other
party, will in no way affect the right of the first party to require such
performance at any time thereafter. The waiver of any breach of any
provision hereof will in no way be construed as a waiver of any succeeding
breach of such provision or a waiver of the provision itself.
23. Relationship of the Parties
The relationship of Bayer to IMI under this Agreement is intended to be
that of independent contractors. Nothing contained in this Agreement is
intended or is to be construed so as to constitute Bayer and IMI as
partners or as employer/employee or principal/agent, or the employees or
the agents of any other party hereto. Neither party hereto has any express
or implied right or authority under this Agreement to assume or create any
obligations on behalf of or in the name of the other party hereto or to
bind the other party hereto to any contract, agreement or undertaking with
any third party, other than the successors and permitted assigns of the
respective parties hereto.
24. New York State Law
This Agreement has been made in the State of New York and shall be governed
in all respects by the laws of that State, except to the extent to which
the laws of the United States may be applicable.
25. Assignment
Neither party may directly or indirectly assign or transfer this Agreement,
in whole or in part to any third party without the other party's prior
written consent, which consent shall not be unreasonably withheld or
delayed. Notwithstanding the above, Bayer may assign its rights and
obligations hereunder to a subsidiary or Affiliate or to a purchaser of its
business relating to the products to be manufactured by Bayer without the
prior written consent of IMI. Notwithstanding the above, IMI may assign its
rights and obligations hereunder to a subsidiary or Affiliate or, subject
to Section 21.2, to a purchaser of its business relating to the products to
be manufactured by IMI without the prior written consent of Bayer.
26. Severability
In the event any provision of this Agreement shall be invalid, void,
illegal, or unenforceable, the remaining provisions hereof nevertheless
will continue in full force and effect without being impaired or
invalidated in any way.
27. Further Assurances.
Each party hereto agrees to promptly execute, acknowledge and deliver such
other and further instruments, writings, and documents as may reasonably be
requested in writing by any other party or are necessary (i) to carry out
this Agreement and/or (ii) to its obligations under this Agreement. Each
party agrees to use its reasonable best efforts and to exercise good faith
in fulfilling its obligations under this Agreement.
28. Remedies
In the event of a breach of this Agreement by any party hereto, the
aggrieved party or parties may exercise any legal, equitable or other
rights or remedies to which it is or they are entitled including, without
limitation, the right to obtain injunctive relief or specific performance
with respect to the violation of any provision hereof
29. Notices.
Any notice or other communication required or permitted to be made or to be
given to either party under this Agreement shall be sufficiently made or
given on the date of facsimile transmission or mailing if sent to such
party by certified first class U.S. mail, postage prepaid, or courier
service, addressed to it at its address set forth below, or to such other
address as shall be designed by written notice give to the other party.
If to IMI:
Intelligent Medical Imaging, Inc.
4360 Northlake Boulevard, Suite 214
Palm Beach Gardens, Florida 33410
Attention: President
Fax: 561-627-0409
With a copy to Edwards & Angell, LLP
250 Royal Palm Way
Palm Beach, Florida 33480
Attention: John G. Igoe, P.A.
Fax: 561-655-8719
If to Bayer:
Bayer Corporation
Diagnostics Division
511 Benedict Avenue
Tarrytown, New York 10591-5097
Attention: Head, Laboratory Testing Segment
Fax: 914-524-3308,
With a copy to the Legal Department at that address
Fax: 914-524-3594
30. Compliance with Laws
In the event that compliance with the provisions of this Agreement would
result in a violation of the laws, regulations, or directives of any
country in which the products are, or are to be, made, used or sold, then
the provisions of this Agreement shall be deemed amended to the extent
necessary to comply with the provisions of such laws, regulations or
directives.
31. Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
32. Entire Agreement; Modification
This Agreement and the Appendices attached hereto constitute the full and
entire understanding and agreement of the parties hereto with regard to the
subjects hereof, and supersede all prior agreements or understandings,
written or oral, between the parties with respect to the subject hereto.
This Agreement may not be amended except by a written instrument signed by
all of the parties hereto or as provided by Article 26.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their duly authorized representatives as of the date first above
written.
BAYER CORPORATION, DIAGNOSTICS DIVISION
By: /s/ Gerald Wagner
-------------------------------------------
Its: Sr. VP, Laboratory Testing
------------------------------------------
INTELLIGENT MEDICAL IMAGING INC.
By: /s/ Tyce Fitzmorris
-------------------------------------------
Its: President
------------------------------------------
<PAGE>
LIST OF APPENDICES and EXHIBITS
<PAGE>
APPENDIX A :
A-1 List of IMI After-market Supplies
A-2 Specs for IMI After-market Supplies
<PAGE>
APPENDIX B :
Label, Part Number and Outer Design and Color Specifications
To be supplied within 60 days
<PAGE>
APPENDIX C :
Pricing Schedule
<PAGE>
APPENDIX D :
Bayer's One Year Non-Binding Forecast
<PAGE>
APPENDIX E :
Packaging Specifications
<PAGE>
APPENDIX F :
Purchase Order Forms of Bayer
IMI Warranties
Exhibit 10.32
Revision: 11/2/98
HSM INSTRUMENT SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT, effective this 17th day of November, 1998, by and between
BAYER CORPORATION, an Indiana corporation, acting through its Diagnostic
Division, having its principal place of business at 511 Benedict Avenue,
Tarrytown, New York 10591 (hereinafter referred to as "Bayer"); and INTELLIGENT
MEDICAL IMAGING INC., a Delaware corporation having its principal place of
business at 4360 North Lake Boulevard, Suite 214, Palm Beach Gardens, Florida
33410 (hereinafter referred to as "IMI").
WITNESSETH
WHEREAS, IMI possesses certain know-how, expertise and technology relating to
the design, development, construction, manufacture and operation of automated
slide maker and slide stainer instruments, accessories and after-market supplies
for use in or with automated slidemaker and slide stainer instruments
(hereinafter referred to as "IMI HSM Technology");
WHEREAS, pursuant to that certain License Agreement dated ___________ 1998 (the
"License Agreement") IMI authorized Bayer, utilizing IMI HSM Technology, to
make, have made, use, sell and service the HSM Automated Slide Maker/Stainer
with or without the IMI small sample handler incorporating certain future
modifications and improvements by IMI and/or Bayer (hereafter the "HSM
Instrument");
WHEREAS Bayer is a world wide manufacturer and supplier of hematology,
immunology and clinical chemistry analyzers, diagnostics, consumables and spare
part therefor;
WHEREAS IMI wishes to purchase on a non-exclusive basis HMS Instruments
manufactured by or for Bayer for resale under the IMI label and/or a third party
label which IMI will designate to Bayer in writing, for worldwide distribution
and Bayer wishes to supply IMI with such HSM Instruments for such purpose;
WHEREAS, Bayer wishes and has agreed to purchase, and Bayer wishes and has
agreed to offer and recommend to its customers who purchase HSM Instruments the
opportunity to purchase, from Bayer IMI's after-market supplies to be used in
connection with the use and operation of HSM Instruments, including without
limitation reagents and disposables such as slides, labels, needles, tube caps,
rinse solutions, smearing blades, wiping gauze, as set forth in the separate IMI
"After-market Supplies Agreement" to be executed between the parties on the date
hereof.
NOW THEREFORE, in consideration of the mutual undertakings contained herein and
other good and valuable consideration, as set forth below, the receipt and
sufficiency of which are hereby acknowledged, IMI and Bayer agree as follows:
1. DEFINITIONS
1.1 "Affiliate" shall mean, with respect to a party, an entity which,
directly or indirectly, majority owned by, or is under common majority
ownership with, that party. For purposes hereof, a partnership shall
be deemed an affiliate if Bayer is the managing partner or is a
general partner and has an active and significant economic interest
therein.
1.2 With respect to HSM Instruments and the Bayer Auto Sampler
manufactured by Bayer or its designees, the "Manufacturing Party"
shall mean either Bayer or its designated third party contractor who
shall be bound by the responsibilities contained herein by separate
agreement, but Bayer shall have overall responsibility for compliance
with the terms and conditions hereto applicable to any such
Manufacturing Party. With respect to the IMI Small Sample Handler
manufactured by IMI or its designees, the "Manufacturing Party" shall
mean either IMI or its designated third party contractor, who shall be
bound by the responsibilities contained herein by separate agreement,
but IMI shall have overall responsibility for compliance with the
terms and conditions hereto applicable to any such Manufacturing
Party.
1.3 The "Purchasing Party" shall mean IMI and/or its worldwide Affiliates
with respect to the HSM Instruments and the Bayer Auto Sampler
purchased under the terms of this Agreement. The "Purchasing Party"
shall mean Bayer and/or its worldwide Affiliates with respect to the
IMI Small Sample Handler purchased under the terms of this Agreement.
2. Grant of Purchasing Rights
2.1 IMI Non-Exclusive Purchasing and Marketing Rights.
2.1.1 Bayer hereby grants to IMI during the term of this Agreement (a)
non-exclusive purchasing and marketing rights to purchase from
Bayer and to use, sell, lease, rent and service the HSM
Instruments which together with the current performance
specification thereof are as described in Appendix A-1, attached
hereto and made a part hereof, and (b) non-exclusive purchasing
and marketing rights to purchase from Bayer and to use, sell,
lease, rent and service Bayer's modified auto sampler ("Auto
Sampler") with the performance specification described in
Appendix A-3 and as modified and improved by Bayer or IMI in the
future, attached hereto and made a part hereof.
2.1.2 The purchase price for the HSM Instrument to be charged by Bayer
to IMI shall be 175% of Bayer's documented "Direct Costs" per HSM
Instrument. For purposes of this Agreement and the License
Agreement, Bayer's Direct Costs shall mean direct material
(evidenced by bills of materials) and labor costs attributed to
the manufacture of each HSM Instrument, excluding overhead,
research and development and any other costs relating to the
manufacture of the HSM Instruments.
2.1.3 The purchase price for the Auto Sampler to be charged by Bayer
to IMI shall be at the initial price during the first year of
this Agreement of $10,000.00 U.S. dollars per unit for such Auto
Sampler.
2.1.4 The HSM Instruments sold to IMI will only carry either the IMI
label or an IMI designated third party label which IMI must
advise Bayer in writing at least ninety (90) days in advance of
any issued purchase orders. Notwithstanding the foregoing, all
HSM Instruments manufactured and sold by Bayer to IMI will denote
"Intelligent Medical Imaging, Inc., manufactured by Bayer or its
designee".
2.2 Bayer Non-exclusive Purchasing and Marketing Rights
2.2.1 IMI hereby grants Bayer and its worldwide Affiliates the right to
purchase and market IMI's small sample handler, the
specifications for which are set forth in Appendix A-2, attached
hereto and made a part hereof (hereafter "IMI Small Sample
Handler"). The purchase price for the Small Sample Handler shall
be at 175% of IMI's documented "Direct Costs." For purposes of
this Agreement and the License Agreement, IMI's Direct Costs
shall mean direct material (evidenced by bills of materials) and
labor costs attributed to the manufacture of each IMI Small
Sample Handler, excluding overhead, research and development and
any other costs relating to the manufacture of the IMI Small
Sample Handlers.
2.2.2 IMI has granted to Bayer a license from IMI, to manufacture or
have manufactured for it, the IMI Small Sample Handler pursuant
to the License Agreement.
2.3.Additional Bayer Purchase Rights
It is understood and agreed that purchases under this Agreement, and
in furtherance thereof, may be made directly from IMI by Bayer's
parent, Affiliate and subsidiary companies and the provisions
contained herein shall be equally applicable to said purchases.
3. Manufacturing Responsibilities
3.1 Manufactured Products.
Bayer will manufacture the HSM Instruments and Auto Sampler and IMI
will manufacture the IMI Small Sample Handler to the manufacturing
specification of IMI and Bayer, as have jointly been agreed, as set
forth in Appendix A-2 through A-3, attached hereto and made a part
hereof. Each party also agrees to have compliance with these
specifications monitored by each other's manufacturing group. The
products in each instance will be manufactured by such party or its
designee from said party's, or its designee's raw materials, and shall
include thereon either a Bayer or IMI label, respectively, part number
and outer design and color in the form to be provided by the other
party within sixty (60) days after the effective date of this
Agreement and which will then be included herein and made a part
hereof marked Appendix B.
3.2 Outer Design
All products purchased by Bayer shall bear a label, part number and
outer design and color as directed by Bayer. All products purchased by
IMI from Bayer shall bear a label, part number and outer design as
directed by IMI. However, in no event shall the size, shape, and
configuration of any product be altered unless the parties mutually
agree otherwise.
3.3 Year 2000 Issues
The Manufacturing Party represents and warrants to the Purchasing
Party that all products and services licensed or purchased hereunder
by the Purchasing Party from the Manufacturing Party, will not be
adversely affected in any way with the introduction of dates with the
year 2000. This will include on time delivery, all service requests,
date dependent data, computations, output or other functions,
including, but not limited to, calculating, comparing and sequencing,
and all supplied products will create, store, process and output
information, as required, relating to or including millennial dates
without errors or omissions. This representation and warranty
specifically includes, without limitation, any equipment purchased by
the Purchasing Party from the Manufacturing Party the functionality of
which is dependent, in whole or in part, on computer chips which may
be date dependent such that the Manufacturing Party's products sold
hereby will be Year 2000 compliant. At the Purchasing Party's request,
the Manufacturing Party will provide sufficient evidence to
demonstrate the adequate testing of its equipment, products and
services to meet the foregoing minimum requirements. Notwithstanding
the foregoing, with regard to the HSM Instrument, IMI as the developer
of the software and designer of this system shall be responsible for
Year 2000 compliance, as aforesaid, unless Bayer has modified the
software causing the system to be non-compliant.
3.4 IMI's Right to Grant Rights to Third Parties
Bayer acknowledges and agrees that IMI may, at any time, grant sale,
lease, rent, servicing and distribution rights with respect to the HSM
Instrument and IMI Small Sample Handler and, following March 31, 2000,
(or earlier if Bayer does not continue to supply HSM Instruments to
IMI pursuant to this agreement) grant non-exclusive manufacturing
rights with respect to the HSM Instrument and IMI Small Sample Handler
to any other party, including Beckman Coulter Corporation.
4. Purchase and Supply of Products
4.1 During the term of this Agreement, each party will supply to the other
and the Purchasing Party will purchase from the Manufacturing Party
the quantities of products, as applicable, as set forth in confirmed
purchase orders pursuant to Section 5, meeting the specifications set
forth in Appendix A, at prices stated in Section 2.1.
4.2 The prices listed in Appendix C reflect the unit price for orders
placed during the first year of this Agreement. Either party may
request adjustment of the price set forth in Appendix C for any
particular product at twelve (12) month intervals from the date of
this Agreement in accordance with Article 7 below, (based on variance
of Direct Costs as provided in 2.1.2 with respect to the HSM
Instrument). Either party may similarly request price reductions to
reflect economies of scale and cost reductions resulting from value
engineering and manufacturing improvements they have suggested. During
the first year only, adjustment may be made in six (6) month intervals
from the effective date of the Agreement. This six month adjustment
clause shall not apply with regard to the Bayer Auto Sampler.
4.3 Each party will provide to the Manufacturing Party one (1) year
non-binding rolling forecasts to be updated on a quarterly basis.
Attached as Appendix D-1 and D-2 is each party's forecast covering the
first year of this Agreement. Each party will use its best efforts to
meet the Purchasing Party's forecasted requirements. If a
Manufacturing Party at any time after receipt of a forecast, or of a
purchase order sent by a Purchasing Party pursuant to Section 4.4
below, becomes aware of any potential difficulties in supplying the
quantities of products stated, the Manufacturing Party will
immediately advise the Purchasing Party in writing.
4.4 Shipments
The Manufacturing Party's shipments of products to the Purchasing
Party will be based on the following:
(i) The Forecasts described in 4. 3 above;
(ii) Each Purchasing Party will submit binding purchase orders for the
products it requires in accordance with the Manufacturing Party's
stated lead time of ninety (90) days. Purchase orders faxed to a
Manufacturing Party shall promptly be confirmed by such
Manufacturing Party in accordance with Article 5 hereof.
(iii)In the event of an unforecasted increase in demand, a
Manufacturing Party will use its best efforts to meet these
increased requirements.
(iv) All products purchased by the Purchasing Party shall be shipped
by the Manufacturing Party F.O.B. the Manufacturing Party's
manufacturing facility to any Purchasing Party facility, not to
exceed four (4) worldwide locations, and in such manner as
specified by the Purchasing Party in each purchase order
4.5 Prior to any change by either Manufacturing Party in raw material
specifications, in formulating and/or in manufacturing of the
products, including any changes in the software, such Manufacturing
Party will notify the Purchasing Party in writing at least ninety (90)
days in advance, except in cases of emergency, which will be as soon
as practical, of any such changes with supporting data demonstrating
no change in the performance, reliability or safety of the products.
The Manufacturing Party reserves the right to make changes in vendors
or suppliers of raw material provided such changes do not alter
performance, reliability, or safety of the products determined by the
specification or compliance with governmental regulations including
but not limited to Ozone Depleting Chemicals (ODCs) pollutants, etc.
The Manufacturing Party will notify the Purchasing Party in writing at
least ninety (90) days in advance, except in cases of emergency, which
will be as soon as practical, of any and all such changes in vendors
or suppliers of raw materials, and will provide with such notification
written data disclosing the suggested changes and their effects on the
products or any reagents incorporating the same. The Purchasing Party
will have a maximum of forty-five (45) days, except in cases of
emergency, which will require no more than five (5) days, unless
otherwise mutually agreed to, to respond with its decision to continue
this Agreement in the face of any such changes in raw material
specification, formulation and/or manufacture and/or vendor or
suppliers, or cancel the same. The decision to continue this
Agreement, or to cancel the same, is within the Purchasing Party's
sole discretion, and the Purchasing Party's decision on this issue
shall be final. Notwithstanding the foregoing, should the Purchasing
Party decide not to accept such change because of its negative impact
on the operation of its instrument, the Manufacturing Party shall
continue to supply the product in its former configuration (prior to
the change) for a period not to exceed one year.
4.6 The Purchasing Party may conduct periodic on site Quality Assurance
audits of the Manufacturing Party's facilities normally used in the
production of the products and financial audits of applicable Direct
Costs, in each case during normal business hours, provided the
Purchasing Party gives the Manufacturing Party written advance notice
not less than forty-eight (48) hours before the beginning of any such
audit.
4.7 Packing
All products shall be packed by the Manufacturing Party in suitable
containers for protection in shipment and storage. Packaging shall
conform to the requirements of the Packaging Specification attached
hereto as Appendix E and made a part hereof. Loss or damage discovered
within twenty (20) days of delivery which is determined to be due to
non-compliance with the Packaging Specification shall be for the
Manufacturing Party's account.
4.8 Spare Parts and Accessories
(i) The Manufacturing Party represents that it has or will obtain the
production and delivery capability to supply the Purchasing Party
with appropriate kinds and amounts of spare parts and accessories
to enable the Purchasing Party to make timely repairs thereof and
permit continued operation of the instruments provided purchase
orders with reasonable delivery dates and agreed prices are
presented to the Manufacturing Party. The Purchasing Party shall
have the right to make inspections of suppliers to insure the
foregoing on reasonable notice and during reasonable business
hours.
(ii) The Manufacturing Party further agrees that spare parts or
accessories will continue to be furnished to the Purchasing Party
for a period of seven (7) years following delivery of the last
instrument product purchased under this Agreement. If at any time
during the term of this Agreement, any extension thereof or
during the seven (7) year period from the date of the delivery of
the last instrument product purchased delivered hereunder, the
Manufacturing Party fails to deliver spare parts or accessories
as agreed herein, the Purchasing Party shall automatically be
licensed to manufacture the same or have such accessories and/or
spare parts made for it for such time as the Manufacturing Party
is unable to supply such items pursuant to this Agreement. The
Manufacturing Party shall furnish the Purchasing Party pursuant
to Section 8 with all drawings, formulas, vendors' lists,
know-how and any other information and documentation required to
permit the Purchasing Party or its subcontractor to manufacture
said accessories and/or and spare parts for the period during
which the Manufacturing Party was obligated but was unable to
supply such products and spare parts hereunder.
5. Purchase Orders
The Purchasing Party may place its order for products or other spare parts
on purchase order forms which are substantially the same as the respective
purchase orders attached hereto as Appendix F. The terms and conditions
printed on the reverse of such purchase orders are incorporated herein by
reference except where they are in conflict with the terms of this
Agreement, in which case the terms of this Agreement shall prevail;
provided that if the parties agree in writing to modified terms of a
purchase order, the modified terms shall prevail. The Manufacturing Party
shall acknowledge and confirm within seven (7) days of receipt all purchase
orders in a signed writing or by facsimile transmission back to the
Purchasing Party.
6. Warranty
6.1 Title
The Manufacturing Party warrants that all products delivered hereunder
shall be free and clear of any and all liens, encumbrances or defects
in title, and the Manufacturing Party has no actual knowledge or
information indicating that any of the products to be supplied
hereunder infringes or may infringe in any respect upon patents, trade
secrets, intellectual property or other proprietary right owned by
other persons or entities. The Manufacturing Party has made a complete
disclosure to the Purchasing Party of all information relevant to this
issue and agrees, during the life of this Agreement, to bring any such
information to the Purchasing Party's attention promptly after first
becoming known to the Manufacturing Party.
6.2 Specifications, Defects and Product Recalls
The Manufacturing Party warrants that the products delivered hereunder
will (1) be free of defects in materials, design and workmanship, (2)
meet the specifications referred to in Appendix A, and (3) will comply
with all applicable warranties contained in the Appendices hereto.
Time periods of such warranties are governed by date of receipt. The
Manufacturing Party's sole responsibility shall be to repair or
replace at the Manufacturing Party's sole option.
As to any such defect, about which the Purchasing Party shall promptly
provide the Manufacturing Party with written notice, the Manufacturing
Party shall be relieved of all obligations of liability under this
warranty if the product is operated not in accordance with the
approved final specifications, or is operated with any fluid or
material not jointly approved by the Manufacturing Party and the
Purchasing Party, or is not operated or maintained in accordance with
the instructions furnished under this Agreement, or if the product is
altered or modified by an unauthorized person, provided that any of
the foregoing is the cause of the defect.
The Purchasing Party will promptly (within forty-eight (48) hours)
forward to the Manufacturing Party any and all verified complaints
received from its customers regarding the products. The Manufacturing
Party will promptly (within forty-eight (48) hours) provide the
Purchasing Party with copies of all complaints received by it
regarding the products. The Manufacturing Party will promptly provide
the Purchasing Party with copies of all complaints received by it
regarding the Products or substantially identical products the
Manufacturing Party sells. The Manufacturing Party and the Purchasing
Party will cooperate in investigating all customer complaints in
accordance with FDA regulations as prescribed in 21 CFR 820 (cGMP),
Quality System Regulations (QSRs), and with applicable international
standards such as ISO 9000 (EN 46000). The Manufacturing Party at its
expense shall cooperate fully with the Purchasing Party concerning
Product recalls and Medical Device Reporting (MDR) requirements in
accordance with this Section 6.2.
In the event of a recall products withdrawal, market withdrawal or any
such products corrective action caused by any of the products to be
delivered to the Purchasing Party hereunder, the Manufacturing Party
shall provide replacement products at its expense for those products
being recalled or withdrawn.
The Manufacturing Party shall provide the Purchasing Party with
written notice as soon as possible after the discovery by it of any
matter affecting either the products being delivered to the Purchasing
Party hereunder or a similar product that might be construed as a
safety or performance problem, might cause any FDA or similar
governmental action, or might adversely affect the marketing of any of
the products to be delivered by the Manufacturing Party to the
Purchasing Party hereunder. The Purchasing Party shall provide the
Manufacturing Party notice of any recall affecting any product to
enable the Manufacturing Party to consider any corrective actions for
any of the products being delivered to the Purchasing Party hereunder.
6.3 Service
The Purchasing Party shall perform all warranty service on the
purchased products but the Manufacturing Party shall repair or
replace, at its option, but at its sole expense, all parts required
for warranty service during the warranty period. Outbound shipping
charges in connection with said warranty service shall be paid by the
Manufacturing Party but inbound shipping charges to the Manufacturing
Party shall be paid by the Purchasing Party.
6.4 Parts
The Purchasing Party will keep records of all parts used for repairs
of a product during the warranty period and will provide the
Manufacturing Party with documentary evidence of their use. If the
Purchasing Party uses parts from its spare parts inventory to perform
warranty service on any product during the warranty period, the cost
of the parts so used shall be credited to the Purchasing Party's
account.
6.5 Post Warranty Parts Purchase
After the applicable warranty period on any purchased product has
expired, the Purchasing Party may purchase from the Manufacturing
Party such parts as the Purchasing Party desires at 175% of Direct
Costs for such parts or such other prices as mutually agreed.
6.6 Returns
During the applicable warranty period, the Purchasing Party and the
Manufacturing Party shall jointly agree to the return to the
Manufacturing Party of any product for which the Purchasing Party is
unable to effect repair in the field. The Manufacturing Party shall,
at its option, either replace or repair such unit to the Performance
Specifications as set forth in the applicable Attachment A. This shall
be the total applicable liability for material not conforming to
performance specifications.
6.7 Controlled Substances.
The Manufacturing Party warrants that none of the Products, including
spare parts provided to the Purchasing Party under this Agreement,
will contain or be manufactured with a controlled substance (i.e., a
Class I or Class II ozone-depleting substance as such terms are
defined by the Environmental Protection Agency in 40 CFR Part 82).
6.8 THE EXPRESSED WARRANTIES STATED OR PROVIDED FOR ABOVE AND ON APPENDIX
F (INCLUDING THEIR LIMITATIONS) ARE THE ONLY WARRANTIES MADE BY THE
MANUFACTURING PARTY AND ARE IN LIEU OF ANY AND ALL OTHER WARRANTIES,
EXPRESSED OR IMPLIED. THE MANUFACTURING PARTY MAKES NO OTHER EXPRESS
OF IMPLIED WARRANTIES WHATSOEVER WITH RESPECT TO THE PRODUCTS,
INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE.
7. Pricing Adjustments
7.1 Subject to Section 4.2, the prices for the HSM Instrument, other
instruments, accessories and other spare parts indicated in Attachment
C shall continue in effect for one (1) year from the effective date of
this Agreement.
7.2 Prices during the term of the Agreement and any renewals thereof shall
be those in effect as of the date of a firm purchase order from the
Purchasing Party and not the date of delivery.
7.3 Upon three (3) months advance written notice at 12 month intervals,
Bayer may increase the prices of the Auto Sampler in proportion to any
demonstrable increase in Direct Costs, employed in the manufacture of
the instruments it is manufacturing or having manufactured for it,
compared with the average cost of those Direct Costs during the
preceding Agreement year, provided that in no event will any price
increase in any year exceed the percentage change identified in the
Producer Price Index published by the United States Department of
Labor, or any such successor index.
7.4 Upon written notice of a price adjustment pursuant to Sections 2.1 or
7.3, at the Purchasing Party's election and expense, or pursuant to
Section 4.2, at the expense of the party objecting to the increase, it
may hire an independent certified accounting firm, selected by it and
approved by the Manufacturing Party (which approval will not be
unreasonably withheld or delayed), to conduct an audit of Direct Costs
associated with the production of the instrument being manufactured,
for the sole purpose of verifying the subject price adjustment. In the
event of such an audit, confidentiality agreements satisfactory to the
Manufacturing Party, and signed by the auditing firm and each
individual conducting such audit, shall be delivered in advance of
such audit. Any discrepancy uncovered shall be promptly adjusted and
paid.
8. Inability to Supply
If at anytime and for any reason the Manufacturing Party is unable for
three successive months to produce and supply products of the quantity and
quality required herein, the Purchasing Party and the Manufacturing party
will cooperate in good faith to resolve the difficulty to both parties'
mutual satisfaction or if unable; to use documentation in order to make or
have made by a third party (selected by the Manufacturing Party and
approved by the Purchasing Party) the product involved. All costs to
establish alternative manufacturing will be borne by the Manufacturing
Party.
9. Term of Agreement
This Agreement shall be effective for a term of two (2) years from the date
of availability of the first HSM Instrument manufactured by Bayer and shall
continue in effect thereafter for a maximum of five (5) successive one (1)
year terms unless terminated by either party on written notice to the other
at least one hundred and eighty (180) days prior to the expiration of the
initial term or one hundred and eighty (180) days prior to any renewal
termination date subsequent to the expiration of the initial term of this
Agreement.
10. Product Liability Insurance
IMI shall maintain, for the term of this Agreement, policies of general
liability insurance with contractual and product liability coverages, with
aggregate minimum limits of One Million Dollars ($1,000,000) per occurrence
with Bayer named as an additional insured thereunder with respect only to
those products IMI manufactures, or has manufactured for it, and sells to
Bayer under this Agreement. IMI will furnish to Bayer a certificate of
insurance, which certificate shall evidence the foregoing coverage and
limits and the insurer's agreement to notify Bayer in writing of any
proposed cancellation of such policies at least thirty (30) days before any
such cancellation is to be effective. Similarly, Bayer shall maintain under
its self-insurance program for the term of this Agreement the same coverage
and limits with IMI having a right to indemnification by Bayer thereunder
with respect only to those products Bayer manufactures, or has manufactured
for it, and sells to IMI under this Agreement.
11. Limitation of Damages
Except as provided in Article 15, "Patent Indemnification" below in no
other event, whether as a result of a breach of this Agreement, breach of
warranty, alleged negligence or otherwise, shall either party be liable for
special, indirect, incidental, punitive, or consequential damages. In the
event of a patent infringement suit, in no event shall either party be
liable for the lost profits of the other party.
12. Governmental Requirements
The Manufacturing Party shall make its reasonable best efforts (a) to
obtain in cooperation with the Purchasing Party all necessary United States
governmental approvals and (b) to meet all United States governmental
requirements in order to market the products. The Manufacturing Party will
provide the Purchasing Party with such information and performance data
concerning the products as is necessary to obtain such approvals and meet
such requirements. The Purchasing Party may audit the manufacturing and
quality control procedures and records of the Manufacturing Party
pertaining to the products at any time during normal business hours and as
often as necessary during the initial term of this Agreement, and any
extension thereof, to determine the Manufacturing Party's compliance with
provisions of the Federal Food, Drug and Cosmetic Act (FDA), Department of
Transportation (DOT), Environmental Protection Agency (EPA) and Clean Air
Act of 1990, and the regulations issued thereunder, or any future
regulations thereunder, pertaining to the product.
The Manufacturing Party will cooperate with the Purchasing Party to obtain
any necessary foreign governmental approvals needed to market the products
in foreign countries, if applicable. The expense of obtaining any and all
such approvals shall be borne by the Purchasing Party.
13. Regulatory Requirements and laboratory Certifications
The Manufacturing Party shall be in compliance with United States' current
Good Manufacturing Practices (cGMP) and the Manufacturing Party shall use
its best efforts to meet the guidelines of the United States Federal
communication Commission (FCC), the International Electrotechnical
Commission (IEC) particularly IEC 1010, and International Electromagnetic
Compatibility (EMC) standards of EMC Directive passed by the European
Community in May 1989, the IVD Directive, Waste Management Directive
(Packaging) and Recyclable Material Directive of the European Community and
will obtain CE Mark approval, and agrees to supply FDA and cGMP as
supplemental by the Quality System Regulation ("QSR") and International
Organization for Standardization (ISO) 9000 Series compliance information
to the Purchasing Party and to answer the Purchasing Party's specific
quality assurance questions as soon as reasonably possible. The
Manufacturing Party represents that it is in compliance with all applicable
current FDA, and QSR requirements and agrees to make such adjustments as
may be reasonably required to maintain such compliance. The Manufacturing
Party will also provide the Purchasing Party with any information which it
has and which is not otherwise available to the Purchasing Party that may
be reasonable required by the FDA or any other U.S. or non-U.S.
governmental regulatory agency.
The Manufacturing Party represents that its products are or will be
approved by Canadian CSA and European Community ("EC") authorities. The
Manufacturing Party, at its expense, shall maintain such approvals and will
implement such changes as necessary to meet or continue to meet the
requirements of CSA, EC, (ISO 9000 and IEC 1010) and Radio Frequency
Interference ("RFI") and Electromagnetic Interference ("EMI") and
Electromagnetic Compatibility ("EMC") standards.
The Manufacturing Party at no additional charge will reasonably assist the
Purchasing Party in obtaining Underwriters Laboratory ("UL") certification.
14. Proprietary Information
14.1 Definition
During the term of this Agreement and for three (3) years thereafter,
all technical, manufacturing, maintenance, installation, marketing or
other information of IMI or Bayer or its Affiliates which is marked
proprietary or confidential and made available by one party to the
other pursuant to this Agreement shall be held in confidence by the
other party and shall not be disclosed by it to third parties, or used
by it, except pursuant to this Agreement. The parties agree to take
all steps reasonably appropriate under the circumstances to protect
such information. The protection afforded hereunder to information
disclosed pursuant to this Agreement shall be in addition to, and
shall not act as a waiver of, the rights and protection afforded under
applicable patent, copyright and trademark laws and each party shall
continue to enjoy the protection thereunder, both during and after the
expiration of the three (3) year period provided above.
14.2 Nothing in this Article 14 shall be construed to impose a
confidentiality obligation on a party or its Affiliates in connection
with any information to the extent such information (i) is at the time
of disclosure already known to the receiving party (as clearly
established by such party's records); (ii) is at the time of
disclosure or subsequently becomes part of the public domain through
no fault or act of omission by the receiving party; is subsequently
disclosed to the receiving party by a third party whose receipt and
disclosure of such information does not constitute a violation of any
confidentiality obligation; or (iv) is independently developed by the
receiving party.
14.3 Continuing Rights for Service
In the event of expiration or termination of this Agreement by either
party for any reason, the Purchasing Party may retain and use in
perpetuity any confidential or proprietary information necessary in
order to service the products which the Purchasing Party has in
inventory or has sold, leased or rented.
15. Patent Indemnification.
15.1 The Manufacturing Party shall defend, indemnify and save wholly
harmless, the Purchasing Party, its Affiliates, along with its
successors, assigns and customers, from any losses, claims, suits,
including, but not limited to, costs, legal fees, disbursements,
reasonable out-of-pocket expenses and damages finally awarded arising
from or related to any claims alleging infringement of any claim or
claims of any United States Letters Patent of a third party, and which
suit or claim arises out of the use, sale, rental and/or leasing of
any of the products, in the form and for use in the manner originally
intended, by the Purchasing Party or any of its customers.
In the event that such suit or claim is filed by a third party against
the Purchasing Party, its Affiliates or any of its customers, as
described above, the Purchasing party shall notify the Manufacturing
Party within ten (10) days of being advised of the filing of such suit
or claim. Within ten (10) days of being advised of the filing of such
suit or claim, the Manufacturing Party will elect whether to defend
such suit or claim itself or to transfer the defense to the Purchasing
Party, and shall promptly notify the Purchasing Party of its election.
The Manufacturing Party shall have the primary responsibility, at its
costs and expenses, to defend the Purchasing Party and any of its
customers against such suit or claim. If the Manufacturing Party
elects to defend the suit or claim itself, the Purchasing Party may be
represented by advisory counsel, at its own expense, but all decisions
regarding the defense of the suit or claim shall be at the sole
discretion of the Manufacturing Party. If the Manufacturing Party
elects not to defend the suit or claim itself, the Purchasing Party
may undertake its own defense or the defense of any of its customers,
as the case may be, and all decisions regarding any such defense shall
be at the sole discretion of the Purchasing Party and, further, any
and all reasonable costs, legal fees, disbursements and expenses
incurred by the Purchasing Party shall be reimbursed by the
Manufacturing Party, who shall also be liable in any judgment or
damages levied against the Purchasing Party or any of its customers.
Furthermore, the Manufacturing Party shall provide all reasonable
assistance requested by the Purchasing Party for the defense of any
such suit or claim.
Any settlement of such suit or claim brought by a third party, whether
being defended by the Manufacturing Party or the Purchasing Party
shall be mutually agreed upon by the Manufacturing Party and the
Purchasing Party, which agreement shall not be unreasonably withheld.
The Manufacturing Party will be liable for all costs and expenses
incurred by the Purchasing Party, as well as its own costs and
expenses, in respect of any such settlement and, also, for any given
to the third party in consideration of settlement.
In the event that manufacture, use or selling of any products provided
hereunder is enjoined, or in the Manufacturing Party's opinion, is
likely to become the subject of such claim of infringement, the
Manufacturing Party will, at its sole expense, either procure for the
Purchasing Party the right to continue manufacture, if applicable, use
and marketing of the products, or will replace or modify the same so
that it is comparable and non-infringing. If the foregoing has not
been effected during the filing of any infringement suit by a third
party against the Purchasing Party or any of its customers, (i) the
obligations of either party under this Agreement may, in either
party's sole discretion, be suspended and the Agreement will be
extended for a like period following either conclusion or settlement
of the third party suit or removal of the impediments as provided
above; and (ii) in the event of a permanent injunction against the
Purchasing Party for making, using or selling and the Manufacturing
Party cannot cure such situation as provided above, the Purchasing
Party in its sole discretion, may terminate this Agreement, along with
any and all obligations it then has to purchase hereunder and may
cancel any outstanding purchase orders placed with the Manufacturing
Party.
In the event of (ii), the Manufacturing Party will repurchase from the
Purchasing Party all of the products which the Purchasing Party has in
its inventory and which were purchased from the Manufacturing Party
under this Agreement, and the Manufacturing Party shall pay to the
Purchasing Party the same purchase price as was paid by the Purchasing
Party to the Manufacturing Party for such products, plus cost of
freight.
The obligations of the Manufacturing Party under this Article shall
expire eighteen (18) months from the date of termination of this
Agreement.
15.2 The Purchasing Party will defend, indemnify and hold harmless the
Manufacturing Party, and its Affiliates from any and all claims,
liabilities, damages and out-of-pocket expenses arising out of any and
all claims, and will pay all costs or damages finally awarded in,
and/or any settlements of, any proceedings with respect to any claims
arising from the use and operation of its other products, except to
the extent that the claim arises with respect to products manufactured
by the Manufacturing Party.
16. Quality Control
16.1 Procedures
The Manufacturing Party has thirty (30) calendar days, after
acceptance of this Agreement, to assure the Purchasing Party, in its
sole judgment, that the Manufacturing Party's Quality Control, Process
Control, Material Control and Design and Manufacturing Documentation
Control systems, procedures and policies are in conformance with the ,
QSR requirements of the U.S. Government Food and Drug Administration,
as set forth in Federal Register Volume 43, No. 141 dated July 21,
1978, Part 820, pages 31508-532, as amended. The Purchasing Party will
not accept any products or spares not provided in accordance with
those requirements. The Manufacturing Party's conformance to such QSRs
shall be subjected to the review and acceptance of the Purchasing
Party prior to the acceptance of any material for delivery to these
system procedures and policies to assure continuous product integrity
and conformance to QSRs.
16.2 Source Inspection
The Purchasing Party may, at its option, inspect any and all products
at the Manufacturing Party's site prior to shipment by the
Manufacturing Party to insure conformity with Appendix A. The
Manufacturing Party shall provide the Purchasing Party with at least
five (5) work days prior notification as to the availability of
material to be inspected. Such inspection shall include the right of
access to the Manufacturing Party's design/manufacturing
documentation, process records, inspection records, test records, etc.
The Purchasing Party's source inspection activities shall include the
right to require the Manufacturing Party to rerun product tests to
demonstrate acceptability to product specifications or the
Manufacturing Party's test procedures. All products delivered in
accordance with this Agreement shall conform and be tested in
accordance with the Manufacturing Party's test documents.
Upon the Purchasing Party's source inspection acceptance of any
product, as provided above, the Purchasing Party inspector shall affix
his acceptance stamp, signature and date to the final test data
documentation and to the shipping documentation. Copies thereof shall
be given to the Purchasing Party's source inspector and the
Manufacturing Party may use its copies for invoice purposes.
If after notice as aforesaid, the Purchasing Party elects not to
conduct a source inspection at the Manufacturing Party's site, the
Manufacturing Party shall, prior to shipment and invoicing, insure
that all products conform with the Manufacturing Party's test
documents and Attachment "A". Upon certification to the Purchasing
Party of such conformance and shipment, the Manufacturing Party may
invoice the Purchasing Party for such products shipped and certified.
16.3 Form, Fit or Function
The Manufacturing Party shall make no design, test or manufacturing
changes, subsequent to acceptance of this Agreement, which affect the
form, fit or function of any deliverable product without first
notifying the Purchasing Party in writing at least ninety (90) days in
advance and receiving written approval for the implementing of such
changes.
17. Payments
The Purchasing Party shall remit payment against the Manufacturing Party's
invoices under this Agreement within thirty-five (35) days after the date
of the invoice and delivery of the product.
18. Service Manuals and Training
18.1 Documentation
The Manufacturing Party, without charge, will furnish the Purchasing
Party with a complete set of drawings, documents and any revisions
thereof which are necessary for the quality control, testing and
servicing of any of the products hereto.
18.2 Service Manuals
The Purchasing Party will prepare and incorporate a section dealing
with the product accessories into its service, operating and
maintenance manuals at its expense. The Manufacturing Party will
provide all reasonable and necessary assistance to the Purchasing
Party to enable the Purchasing Party to prepare such manuals.
18.3 Training Session
Without charge the Manufacturing Party shall provide at least a one
week training session at its facility for a reasonable number of the
Purchasing Party's personnel. The individual expenses of such
personnel shall be borne by the Purchasing Party.
19. Force Majeure
19.1 Failure of either party to perform the terms of this Agreement in
whole or in part shall be excused if such failure is the result of
force majeure and acts of God, including, but not limited to, flood,
wind and lightning, insurrections, riots, war warlike operations,
civil commotion, fires, explosions, accidents, the acts or orders of
any governmental agency, acts of the public enemy, epidemics, and laws
or regulations or restrictions of the governmental entity or of any
agency or instrumentality thereof.
19.2 If performance of this Agreement is excused pursuant to the foregoing
section, the party thus excused shall use reasonable efforts to avoid,
remove and correct the circumstances which caused the failure to
perform, and the party excused from performance shall resume
performance with the utmost dispatch when such circumstances are
avoided, removed or corrected.
19.3 If the circumstances of force majeure last longer than sixty (60)
days, the party which has not declared the force majeure shall have
the right to cancel this Agreement upon thirty (30) days prior written
notice to the other party.
20. Disputes
The parties covenant and agree in good faith to attempt, for a period of
sixty (60) days, to resolve any disputes which may arise in connection with
this Agreement through negotiation and settlement prior to giving notice of
termination for cause or bringing any legal action against the other party
in connection with this Agreement. The provisions of this Article shall not
apply if the other side refuses to negotiate the dispute in good faith or
if more prompt legal action is required is avoid material loss or damage.
Failure to resolve a dispute by negotiated settlement shall not prejudice
any subsequent legal action with respect thereto.
21. Termination
21.1 After the second year of this Agreement either party may terminate
this Agreement, for any reason and without cause, on one hundred
eighty (180) days written notice to the Manufacturing Party. In the
event of termination under this Section, the Purchasing Party shall
pay the Manufacturing Party for any non-cancelable costs actually
incurred by the Manufacturing Party with respect to its manufacture
and/or production of that quantity of products which is the subject of
a binding purchase order placed pursuant to Article 5 but not yet
shipped.
21.2 This Agreement may be terminated at any time by Bayer upon sixty (60)
days written notice in the event IMI is to be sold or acquired by a
party which, in Bayer's sole judgment, is unacceptable to Bayer.
21.3 Either party may terminate this Agreement for material breach of any
of its provisions upon ninety (90) days prior written notice to the
other, if during such ninety day notice period the default is not
corrected to the reasonable satisfaction of the non-defaulting party.
In addition, either party may terminate this Agreement by giving the
other party at least thirty (30) days written notice if such other
party has entered into or committed any act of liquidation,
bankruptcy, insolvency, receivership or assignment for the benefit of
creditors, to the extent such act is permitted by law.
21.4 Accrued Rights
Unless as otherwise provided elsewhere in this Agreement, termination
of this Agreement shall be without prejudice to all accrued rights and
remedies and shall not affect the continuing rights and obligations of
the parties under this Agreement. The manufacturing rights granted
under Section 4.8 and Article "8" shall continue during the seven (7)
year period following delivery of the last product or accessory under
this Agreement.
22. Waiver of Performance
A failure of a party hereto at any time to require performance by the other
party hereto of any provision hereof required to be performed by such other
party, will in no way affect the right of the first party to require such
performance at any time thereafter. The waiver of any breach of any
provision hereof will in no way be construed as a waiver of any succeeding
breach of such provision or a waiver of the provision itself.
23. Relationship of the Parties
The relationship of Bayer to IMI under this Agreement is intended to be
that of independent contractors. Nothing contained in this Agreement is
intended or is to be construed so as to constitute Bayer and IMI as
partners or as employer/employee or principal/agent, or the employees or
the agents of any other party hereto. Neither party hereto has any express
or implied right or authority under this Agreement to assume or create any
obligations on behalf of or in the name of the other party hereto or to
bind the other party hereto to any contract, agreement or undertaking with
any third party, other than the successors and permitted assigns of the
respective parties hereto.
24. New York State Law
This Agreement has been made in the State of New York and shall be governed
in all respects by the laws of that State, except to the extent to which
the laws of the United States may be applicable.
25. Assignment
Neither party may directly or indirectly assign or transfer this Agreement,
in whole or in part to any third party without the other party's prior
written consent, which consent shall not be unreasonably withheld or
delayed. Notwithstanding the above, Bayer may assign its rights and
obligations hereunder to a subsidiary or Affiliate or to a purchaser of its
business relating to the products to be manufactured by Bayer without the
prior written consent of IMI. Notwithstanding the above, IMI may assign its
rights and obligations hereunder to a subsidiary or Affiliate or, subject
to Section 21.2, to a purchaser of its business relating to the products to
be manufactured by IMI without the prior written consent of Bayer.
26. Severability
In the event any provision of this Agreement shall be invalid, void,
illegal, or unenforceable, the remaining provisions hereof nevertheless
will continue in full force and effect without being impaired or
invalidated in any way; provided the provisions held invalid, void,
illegal, or unenforceable will not deprive any party of the benefit of its
bargain.
27. Further Assurances.
Each party hereto agrees to promptly execute, acknowledge and deliver such
other and further instruments, writings, and documents as may reasonably be
requested in writing by any other party or are necessary (i) to carry out
this Agreement and/or (ii) to its obligations under this Agreement. Each
party agrees to use its reasonable best efforts and to exercise good faith
in fulfilling its obligations under this Agreement.
28. Remedies
In the event of a breach of this Agreement by any party hereto, the
aggrieved party or parties may exercise any legal, equitable or other
rights or remedies to which it is or they are entitled including, without
limitation, the right to obtain injunctive relief or specific performance
with respect to the violation of any provision hereof.
29. Notices.
Any notice or other communication required or permitted to be made or to be
given to either party under this Agreement shall be sufficiently made or
given on the date of facsimile transmission or mailing if sent to such
party by certified first class U.S. mail, postage prepaid, or courier
service, addressed to it at its address set forth below, or to such other
address as shall be designed by written notice give to the other party.
If to IMI:
Intelligent Medical Imaging, Inc.
4360 Northlake Boulevard, Suite 214
Palm Beach Gardens, Florida 33410
Attention: President Fax: 561-627-0409
With a copy to:
Edwards & Angell, LLP
250 Royal Palm Way Palm Beach, Florida 33480
Attention: John G. Igoe, P.A.
Fax: 561-655-8719
If to Bayer:
Bayer Corporation
Diagnostics Division
511 Benedict Avenue
Tarrytown, New York 10591-5097
Attention: Head, Laboratory Testing Segment
Fax: 914-524-3308,
With a copy to the Legal Department at that address
Fax: 914-524-3594
30. Compliance with Laws
In the event that compliance with the provisions of this Agreement would
result in a violation of the laws, regulations, or directives of any
country in which the products are, or are to be, made, used or sold, then
the provisions of this Agreement shall be deemed amended to the extent
necessary to comply with the provisions of such laws, regulations or
directives.
31. Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
32. Entire Agreement; Modification
This Agreement and the Appendices attached hereto constitute the full and
entire understanding and agreement of the parties hereto with regard to the
subjects hereof, and supersede all prior agreements or understandings,
written or oral, between the parties with respect to the subject hereto.
This Agreement may not be amended except by a written instrument signed by
all of the parties hereto or as provided by Article 26.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their duly authorized representatives as of the date first above
written.
BAYER CORPORATION, DIAGNOSTIC DIVISION
By: /s/
--------------------------------------------
Its: Senior Vice President, Laboratory Testing
-------------------------------------------
INTELLIGENT MEDICAL IMAGING INC.
By: /s/ Tyce Fitzmorris
-------------------------------------------
Its: President
------------------------------------------
<PAGE>
LIST OF APPENDICES and EXHIBITS
<PAGE>
APPENDIX A :
A-1 HSM Instrument Specifications
A-2 Bayer Modified Auto-Sampler Specifications
A-3 IMI Small Sample Handler Specifications
<PAGE>
APPENDIX B :
Label, Part Number and Outer Design and Color Specifications
<PAGE>
APPENDIX C :
Pricing Schedule
<PAGE>
APPENDIX D :
D-1 IMI's One Year Non-Binding Forecast
D-2 Bayer's One Year Non-Binding Forecast
<PAGE>
APPENDIX E :
Packaging Specifications
<PAGE>
APPENDIX F :
Purchase Order Forms of IMI and Bayer
Bayer Warranties
IMI Warranties
Exhibit 10.33
INVOICE PURCHASE AND SALE AGREEMENT
"Seller" means INTELLIGENT MEDICAL IMAGING INC. of 4360 Northlake Blvd.,
Suite 214, palm Beach Gardens, Florida 39410. "Buyer" means FINOVA CAPITAL
CORPORATION DBA PATRIOT FUNDING, of 15 West 44th Street, New York, New York
10036-6611 ("Patriot"), it being understood that United and Patriot Funding are
one and the same.
1. The Seller hereby agrees to sell to the Buyer and the Buyer hereby
agrees to purchase from the Seller such of the invoices of the Seller listed on
a schedule made with respect hereto as are accepted by the Buyer. The Buyer's
acceptance is evidenced by its failure to cross out and have a representative
place his or her initials alongside a listed invoice. The invoices so purchased
are called the "Invoices." The customers of the Seller are called "Account
Debtors." "Account," "contract rights" and "general intangibles" have the
meanings given to them by the New York Uniform Commercial Code.
2. Unless otherwise agreed, the purchase price for an Invoice is 95% of the
net amount thereof. The net amount of an Invoice shall mean the gross amount of
the Invoice less any discount and sales or use tax pertaining thereto. The
difference between the net amount of an Invoice and the purchase price is herein
called the "Fee."
3. The purchase price is payable as follows: (a) an amount equal to
approximately 80% of the underlying Invoice (the "Down Payment") at the time of
the acceptance of the Invoice by the Buyer and (b) the balance (the "Back End"),
subject to the further terms hereof, upon payment of the Invoice by the Account
Debtor, after allowing a reasonable time after the Buyer's receipt of a check
for the clearance thereof and the Buyer's administrative needs (which time in
the case of checks received on a Monday through Wednesday shall be deemed to end
on the following Friday, and in the case of checks received on a Thursday or
Friday shall be deemed to end on the Friday of the following week). Checks
received by the Buyer after 1:00 p.m. on a business day shall be deemed received
on the next business day. If more than one invoice is set forth on a schedule
and accepted by the Buyer the group of such Invoices shall be deemed an Invoice
for purposes of paragraph 2 and 3 hereof. If the payment by the Account Debtor
exceeds the Down Payment plus the sums the Buyer is entitled to hereunder, the
difference shall be paid to the Seller along with the Bank End.
4. If an Account Debtor fails to pay an Invoice within 60 days after the
purchase thereof, and such failure is due solely to the Account Debtor's
"Insolvency," then the Buyer shall pay the balance of the purchase price, over
and above the Down Payment, promptly after the expiration of such period. The
"Insolvency" of an Account Debtor is the Account Debtor's voluntary or
involuntary entry into proceedings under any Federal or State law looking to the
adjustment or discharge of the debts of an insolvent, which proceedings have not
been dismissed by the time payment from the Buyer is due. If an Account Debtor
communicates a dispute concerning the goods or services underlying the Invoice
and thereafter enters Insolvency, its failure to pay shall be deemed not due
solely to the Account Debtor's Insolvency. Anything herein contained to the
contrary notwithstanding, the Buyer may withhold payment of any Down Payment or
Back End to cover (a) any breach by the Seller of any representation or warranty
hereunder, (b) any such breach by the Seller which is reasonably anticipated by
the Buyer or (c) any obligation of the Seller to the Buyer under any other
agreement. Any amount so withheld may be applied by the Buyer to the liabilities
of the Seller to the Buyer and shall, to the extent not so applied be paid over
to the Seller when it reasonably appears to the Buyer that further retention of
the sum is unnecessary. In determining the existence of a breach of
representation or warranty hereunder, the Buyer may rely on any oral or written
advice given it which it reasonably believes to be true until the Seller
furnishes the Buyer with evidence of the falsity of such advice.
5. The Seller represents and warrants (a) the Seller is and will be the
sole and absolute owner of each Invoice, free of any lien or encumbrance, at the
time of the sale thereof to the Buyer and at all times thereafter; (b) the
amount of each Invoice is or will be correctly stated on the schedule given to
the Buyer with respect thereto at the time the schedule is delivered to the
Buyer, and at such time there shall be no contingency or condition with respect
to the payment of such Invoice; (c) each Invoice will be paid in full on its due
date or within 60 days after the Buyer's purchase thereof, whichever comes
first, free of any offset, deduction or counterclaim except for reasons of the
Account Debtor's Insolvency; and in the event the breach of such representation
and warranty results in an Account Debtor's failure to pay an invoice within the
time period set forth in Paragraph 4 hereof otherwise than by reason of the
Account Debtor's Insolvency, then the Seller shall promptly pay the Buyer the
Down Payment with respect to such Invoice and all other sums owing by it to the
Buyer hereunder or any other agreement between the parties hereto; (d) it shall
keep its business operating at a level of solvency, paying all its debts when
due, including, without limitation, suppliers, rent taxes, salaries and wages;
and (e) in the event the Seller shall receive any payments with respect to an
Account after the Buyer is entitled to receive payment on such Invoice or
Account, then the Seller shall immediately turn over such payment to the Buyer
in the original form received by the Seller, together with an identification of
the Invoice or Account to which the payment belongs. Amounts due the Buyer by
reason of a breach of any representation or warranty shall bear interest at the
rate of 24% per annum from the date of breach. The Buyer hereby appoints the
Seller as the Agent of the Buyer to grant credits and allowances on Invoices up
to 3% of the face amount of any Invoice involved, provided prompt notice of such
credit or allowance is given to the Buyer and the balance of the Invoice is paid
within 60 days of its due date.
6. From the date of the Buyer's purchase of an Invoice, the Buyer shall
have all the rights of an owner of the Invoice. As collateral for any and all
liabilities of the Seller to the Buyer, the Buyer shall have a security interest
in all of the Seller's present and future Accounts, contract rights and general
intangibles and the proceeds thereof. The Buyer shall have all the right of a
secured party as provided by law or hereunder with respect to such collateral.
Without limiting the generality of the foregoing, it is understood the Buyer
shall be entitled at any time and from time to time, and in such manner as it
deems best, by itself or through any agent, (a) to verify the accuracy of any
representation made hereunder or in connection with any transaction hereunder;
(b) to sign and file financing statements in its own name and the name of the
Seller under the Uniform Commercial Code covering the Seller's Accounts or any
of them; (c) to direct that payments be made directly to it on any Invoice or,
after a breach by Seller of the terms hereof, on any Account; (d) to endorse any
proceeds on Invoices or Accounts that may come into its possession to permit the
Buyer to collect thereon; (e) if an event of default has occurred hereunder or
in the Buyer's reasonable discretion a default appears imminent, then in the
Buyer's sole discretion, to compromise any dispute relating to an Invoice or an
Account; and (f) after a breach of any representation or warranty by Seller, to
notify postal authorities to change the address for the delivery of mail to an
address designated by Buyer, and to open and dispose of such mail. The Seller
agrees to provide Buyer all assistance deemed necessary by Buyer in connection
with the collection of any Invoices or Accounts.
7. Seller agrees to pay Buyer on demand, all fees, expenses and charges
incurred by Buyer in connection with its exercising any rights under the terms
of this Agreement, including, without limitation, filing fees, search fees, the
Buyer's then current charge for wires, check certification or like services,
uncleared checks, statements, credit checks, messengers and the reasonable fees
and expenses of Buyer's counsel in connection with the enforcement or defense of
any term of this Agreement or in enforcing payment of an Invoice or Account.
Seller shall also pay Buyer a $0 opening charge intended to cover Buyer's
expenses in initiating the transactions envisioned hereby, which charge shall
include searches and filing fees.
8. In the event of a breach by the Seller of any term of this Agreement,
then, upon the request of the Buyer, the Seller shall immediately pay to the
Buyer all unpaid amounts owing by Account Debtors on all Invoices purchased by
the Buyer from the Seller pursuant to the terms of this Agreement and the due
date of all such Invoices shall be deemed accelerated to the date of such
request. The Buyer shall promptly refund to the Seller any amount so paid in
excess of the sums that the Buyer is entitled to hereunder.
9. No failure or delay on the part of the Buyer in exercising any power or
right under this Agreement, shall operate as a waiver thereof, nor shall any
partial exercise of any such right or power or any abandonment or discontinuance
of any steps to enforce such right or power preclude any other or further
exercise thereof or the exercise of any other right or power. The rights and
remedies of Buyer hereunder are cumulative and not exclusive of any rights or
remedies which it would otherwise have. Notwithstanding the foregoing provisions
of this paragraph, it is recognized that the Buyer will not rely on any
immaterial breach of this Agreement, by itself, as the basis for terminating the
Agreement or in accelerating the due date of any obligation of the Seller to the
Buyer.
10. Seller and Buyer agree that they are subject to, and hereby irrevocably
submit to, the jurisdiction of the Courts of New York or any federal court
sitting in New York, New York in connection with any suit, action or proceeding
arising out of or relating to this Agreement.
11. The parties hereto agree that any action, dispute, proceeding, claim or
controversy between them, whether sounding in contract, tort or otherwise
hereunder ("Dispute" or "Disputes") shall, at the Buyer's election, which
election may be made at any time prior to the commencement of a judicial
proceeding by the Buyer or in the event of a judicial proceeding instituted by
the Seller, at any time prior to the last day to answer and/or respond to a
summons and/or complaint of the Seller, be resolved by arbitration in accordance
with the provisions of this paragraph and shall, at the election of the Buyer,
include all disputes arising out of or in connection with this Agreement. Any
election by the Buyer to require arbitration of any Dispute may be made without
the Buyer thereby being required to arbitrate all Disputes between the parties,
but only the specified Dispute with the effect of leaving to judicial
determination any other Disputes. Any Dispute referred for arbitration shall be
resolved by binding arbitration in accordance with Article 75 of the New York
Civil Practice Law and Rules and the Commercial Arbitration rules of the
American Arbitration Association ("AAA"). In the event of any inconsistency
between such Rules and these arbitration provisions, these provisions shall
supersede such Rules. All statutes of limitations which would otherwise be
applicable shall apply to any arbitration proceeding under this paragraph. In
any arbitration proceeding subject to this paragraph, the arbitration panel (the
"arbitrator") is specifically empowered to decide (by documents only, or with a
hearing, at the arbitrator's sole discretion) pre-hearing motions which are
substantially similar to pre-hearing motions to dismiss and motions for summary
adjudication. In any such arbitration proceeding, the arbitrator shall not have
the power or authority to award punitive damages to any party. Judgment upon the
award rendered may be entered in any court having jurisdiction. Whenever an
arbitration is required, the parties shall select an arbitrator in the manner
provided in this paragraph. No provisions of, nor the exercise of any rights
under, this paragraph shall limit the right of the Buyer (1) to foreclose
against any real or personal property collateral through judicial foreclosure,
by the exercise of the power of sale under a deed of trust, mortgage or other
security agreement or instrument, pursuant to applicable provisions of the
Uniform Commercial Code, or otherwise pursuant to applicable law, (2) to
exercise self-help remedies including but not limited to set off and
repossession, or (3) to request and obtain from a court having jurisdiction
before, during or after the pendency of any arbitration, provisional or
ancillary remedies and relief including but not limited to injunctive or
mandatory relief or the appointment of a receiver, all in accordance with the
provisions of this Agreement. The institution and maintenance of an action or
judicial proceeding for, or pursuit of, provisional or ancillary remedies or
exercise of self-help remedies shall not constitute a waiver of the right of the
Buyer, even if the Buyer is the plaintiff, to submit the Dispute to arbitration
if the Buyer would otherwise have such right. Whenever an arbitration is
required under this paragraph, the arbitrator shall be selected, except as
otherwise herein provided, in accordance with the Commercial Arbitration Rules
of the AAA. The Dispute shall be decided by a majority of three persons, at
least two of whom shall be attorneys with at least five years' experience
representing commercial banks, factors or commercial finance companies. The
arbitrator shall have the power to award recovery of all costs and fees
(including attorneys' fees, administrative fees, arbitrators' fees, and court
costs) to the prevailing party. In the event of any Dispute governed by this
paragraph, each of the parties shall, subject to the award of the arbitrator,
pay an equal share of the arbitrator's fees.
12. SELLER AND BUYER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE
ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREIN OR ARISING OUT OF, UNDER OR IN CONNECTION WITH, THIS AGREEMENT OR IN ANY
COURSE OF CONDUCT, COURSE OF DEALING, OR ACTIONS OF THE SELLER OR BUYER.
Dated: November , 1998
SELLER: INTELLIGENT MEDICAL IMAGING INC.
By:
-----------------------------------------
BUYER: FINOVA CAPITAL CORPORATION DBA PATRIOT
FUNDING
By:
------------------------------------------
<PAGE>
GUARANTY
The undersigned, jointly and severally, guaranty that (a) the Seller named
in the aforesaid Invoice Purchase and Sale Agreement is and will be the sole and
absolute owner of each purported Invoice sold to Buyer thereunder, free of any
lien or encumbrance at the time of the sale thereof to the Buyer and at all
times thereafter; (b) each such Invoice shall be bona fide, representing a sale
by the Seller or the rendition of services by the Seller for the account debtor
named therein in accordance with the underlying agreement between the account
debtor and Seller for the amount and on the terms therein set forth and at the
time of sale of the Invoices under the aforesaid agreement there shall be no
contingency or condition with respect to the payment of such Invoice unless the
Invoice involved has been designated a contingent sale on the schedule delivered
with respect thereto as envisioned by a letter agreement between the Seller and
the Buyer of even date herewith; (c) in the event the Seller shall receive any
payments or checks representing payments with respect to any Invoice, or with
respect to an account after the Buyer is entitled to receive payment on such
Invoice or account, then the Seller shall immediately turn over such check or
payment to the Buyer in the original form received by the Seller, together with
an identification of the Invoice or account to which the check or payment
belongs; and (d) in the event the Seller shall purport to grant any credit,
adjustment or allowance with respect to an Invoice, it shall promptly notify the
Buyer of the amount and reason therefor.
The undersigned, jointly and severally, shall hold the Buyer harmless
against any loss arising from a breach of the aforesaid guaranty and shall pay
the amount of any loss to the Buyer on demand. Such loss shall be, in the case
of a breach of subdivisions (a) or (b) of the aforesaid paragraph, the amount of
the Invoice or purported Invoice involved, and in the case of a breach of
subdivisions (c) or (d), the amount of the payment, check or credit, as the case
may be.
If the Buyer turns enforcement of this guaranty over to an attorney, the
undersigned shall be liable for such attorney's reasonable fees and
disbursements.
Reference herein to the "agreement" or its Invoice Purchase and Sale
Agreement shall include the aforesaid letter.
IN ANY ACTION TOUCHING UPON THIS GUARANTY, THE UNDERSIGNED AND THE BUYER
WAIVE TRIAL BY JURY.
Dated: November 1998
- - ---------------------------------
Guarantor's Signature
Gene Cochran
- - ---------------------------------
Guarantor's Name
561-624-8147 ###-##-####
- - -------------------- ----------------------
Guarantor's `phone # Guarantor's Soc.Sec. #
- - ----------------------------------
Guarantor's Address
Exhibit 23.1
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-29509) pertaining to the Amended and Restated 1990 Stock Option Plan
of Intelligent Medical Imaging, Inc. and the Registration Statement (Form S-8
No. 333-60187) pertaining to the registration of 4,596,315 shares of the common
stock of Intelligent Medical Imaging, Inc. of our report dated April 15, 1999,
with respect to the financial statements and schedule of Intelligent Medical
Imaging, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1998.
ERNST & YOUNG LLP
West Palm Beach, Florida
April 15, 1999
Preparation Date: XX/XX/XX
Prepared by: (Name)
Exhibit C
HSM FORECAST
Month/Year Forecast
Month (1)- Firm PO Dec-98
Month (2)- Firm PO Jan-99
Month (3)- Firm PO Feb-99
Month (4) Mar-99
Month (5) Apr-99
Month (6) May-99
Month (7) Jun-99
Month (8) Jul-99
Month (9) Aug-99
Month (10) Sep-99
Month (11) Oct-99
Month (12) Nov-99
Notes:
1) The Month/Year column must be updated by the originator to reflect the
forecasted months.
2) Month (1) should be the month following the preparation date. For example,
if the preparation date is 1/15/99, Month (1) will be Feb-99 and Months
(2)-(12) will be Mar-99 through Jan-00, respectively.
3) The Preparation Date and Prepared By fields will be completed by
originator.
Exhibit D
ROYALTY SCHEDULE FOR BCI MANUFACTURER OF HSM
(Refer to Contract Section 6.1)
Volume Net Royalty to be Paid Discount at
Discount to be Paid to Each Level
IMI by BCI
Base Price for 1 Unit 0.0% $10,000
From 2 to 5 Units 2.5% $9,750 $250
From 6 to 10 Units 5.0% $9,500 $1,250
From 11 to 15 Units 7.5% $9,250 $2,500
From 16 to 20 Units 10.0% $9,000 $3,750
From 21 to 25 Units 12.5% $8,750 $5,000
From 26 to 30 Units 15.0% $8,500 $6,250
From 31 to 35 Units 17.5% $8,250 $7,500
From 36 to 40 Units 20.0% $8,000 $8,750
From 41 to 50 Units 22.5% $7,750 $10,000
51 Units or Greater 25.0% $7,500 $12,500
Exhibit E
INSTALLATION AND SERVICE FEE
Scheduled
<TABLE>
<CAPTION>
HSM Seller Location of Sale Installation Cost Paid Warranty Cost Out of Warranty Cost
by IMI to BCI Paid by IMI Paid by IMI to BCI
to BCI* Preventive Service
Maintenance Call Call
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BCI Domestic $0 $3,600 $1,200 $1,200
BCI International $0 $3,600 $0 $0
IMI Domestic $2,400 $3,600 $1,200 $1,200
- - ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
* The $3,600 warranty cost is already included in the pricing schedule shown
in Exhibit B.
Assumptions:
1. $2,400 if BCI installs for IMI, assuming one day for installation and one
day for training. For additional time add $1,200 per day.
2. No reimbursement to BCI for BCI installations.
3. Cost of Service Call is based on 8 hours x $147/hr.
4. Cost of PM Call is based on 8 hours x $147/hr.
5. Warranty cost is based on 2 service calls and 1 PM call during year 1 = 24
hours at $147 per hour.
6. Any additional Warranty service calls (whether for service or Preventive
Maintenance) above the number stated in Exhibit E will be charged at a rate
of $1,200 per call. BCI will maintain a running average of the number of
service calls calculated as: Number of actual service and PM calls/Number
of instrument months
If the ratio is 2.5 ~ 3.5, the warranty cost of $3,600 will be used.
If the ratio is 3.51-4.5, the warranty costs will be based on 4 calls.
If the ratio is 4.51-5.5, the warranty costs will be based on 5 calls and so on.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000930090
<NAME> IMI
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.000
<CASH> (47,416)
<SECURITIES> 0
<RECEIVABLES> 622,780
<ALLOWANCES> 40,000
<INVENTORY> 4,173,269
<CURRENT-ASSETS> 4,962,725
<PP&E> 5,187,763
<DEPRECIATION> 2,362,084
<TOTAL-ASSETS> 8,158,299
<CURRENT-LIABILITIES> 2,280,546
<BONDS> 0
0
0
<COMMON> 116,315
<OTHER-SE> 2,604,521
<TOTAL-LIABILITY-AND-EQUITY> 8,158,299
<SALES> 3,831,980
<TOTAL-REVENUES> 3,831,980
<CGS> 2,781,780
<TOTAL-COSTS> 2,781,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (963,048)
<INCOME-PRETAX> (13,823,809)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,823,809)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,823,809)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> 0.00
</TABLE>
