SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[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/A 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 will 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 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.
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 also 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. 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(TM) ("USM"), an automated slide maker which will prepare
urine samples for examination by a technologist or by the MICRO21; and
o CoreLab(TM), 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.
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, less net proceeds realized from the resale of the
returned units, and its attorneys' fees. 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 accrued
$10,000 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 and other 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 8,745,353
Total debt and non-current
obligations 3,860,379 2,182,160 -- -- 4,157,582
Accumulated deficit (4,560,996) (8,548,387) (15,346,088) (27,102,275) (42,300,613)
Total shareholders' equity
(net capital deficiency) (2,480,816) (1,225,022) 26,866,695 15,317,345 1,746,410
</TABLE>
All loss per share amounts have been presented to conform to Statement of
Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE. Due to the
issuance of SFAS No. 128, the SEC revised its Staff Accounting Bulletin No. 83
relative to cheap stock. Consequently, net loss per share for the year ended
December 31, 1994 has been restated.
<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 will 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. These promissory notes were executed to provide
for the payment of past due legal fees 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. RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Product sales for 1998 were $3,162,035 as compared to $3,770,489 in 1997, a
decrease of 16%. The decrease in product sales for 1998 was primarily due to a
decrease in sales of the MICRO21 in the international market and fewer 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, an
increase of 12%. 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, an increase of 10%. 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, an increase of 6%. Research and development expenses
increased in 1998 primarily due to resources being utilized in the development
of the recently released HSM and the USM-which is still in the development
stage.
Interest income was $155,914 in 1998, a 85% 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Product sales for 1997 of $3,770,489 increased 158% over 1996, from $1,460,675.
The increase in product sales for 1997 was primarily due to sales of MICRO21
systems to hospitals and laboratories. In connection with the Settlement
Agreement, the Company recorded, as of December 31, 1996, a sales allowance of
$1,938,000 representing the portion of the settlement amount estimated to
represent a credit for the return of 26 MICRO21 systems and certain spare parts
and equipment.
Cost of sales for 1997 of $3,328,394 increased 172% over 1996, from $1,227,216.
The increase in cost of sales for 1997 is attributable to increased sales and
the write down of the MICRO21 systems that remain in inventory.
Selling, general and administrative expenses were $8,183,800 in 1997, compared
with $3,960,625 in 1996, an increase of 107%. Selling, general and
administrative expenses increased in 1997 primarily due to the continued growth
of the Company and the need for additional personnel following the Company's
termination of the Coulter Agreement. In 1997, selling, general and
administrative expenses included consulting fees of $196,728 and the
amortization of deferred compensation of $93,252 associated with common stock
issued to a member of the Board of Directors.
Research and development expenses were $5,022,670 in 1997, a 138% increase over
$2,113,565 in 1996. Research and development expenses increased in 1997
primarily due to resources being utilized in the development of upgrades,
procedures, technologies and new products for the MICRO21 system.
In 1996, the Company recorded a provision for contract settlement of $2,062,000.
In 1997, under the Settlement Agreement, the Company paid Coulter approximately
$1,800,000 fulfilling this obligation, which represented the return of 26 of
Coulter's used inventory of MICRO21 systems and certain equipment; the
assignment to the Company of four (4) of Coulter's customer contracts;
reimbursement to Coulter for certain costs and expenses incurred in its sale and
marketing of the MICRO21 systems; and an offset in the Company's favor for
damage to units returned by Coulter.
Interest income was $1,035,210 in 1997, a 7% decrease from $1,112,227 in 1996.
The decrease in 1997 was primarily due to a decrease in investment funds.
Investments decreased because the funds were used for operations.
Interest expense was $0 in 1997 and $141,699 in 1996, a decrease of $141,699. In
1997, the decrease in interest expense was due to the Company's lack of debt.
C. LIQUIDITY AND CAPITAL RESOURCES
In March 1996, the Company completed its initial public offering, selling
3,450,000 shares of common stock at $11.00 per share, resulting in approximately
$34,000,000 in net proceeds to the Company. In 1996, the Company paid all
long-term notes payable, indebtedness and amounts due to related parties
totaling approximately $4,300,000. For the year ended December 31, 1996, cash,
cash equivalents and investments increased approximately $25,000,000, primarily
due to net cash provided by proceeds from the initial public offering.
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.
Cash was used in 1998 and 1996 primarily to fund operating losses. Cash was used
in 1997 to fund operating losses, to settle the Coulter matter and to purchase
inventory raw materials.
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 investments, offset by
purchases of property and equipment. 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 and advances from a factor. 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. In 1996, such proceeds
were derived from the Company's initial public offering of common stock.
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, 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 HSM in 1998 and curtailed the development of
the USM which will result in decreased 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 HSM 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 HSM 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. As of April 9, 1999, the Company has received the
entire $1,100,000 license fee under this Agreement.
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 or on the New
York Stock Exchange or American Stock Exchange.
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 23, 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 $1,449,000 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 of 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 agreements 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.
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 obtain additional debt or
equity financing, it will have to cease operation. 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.
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 and is in default on
two notes payable in the aggregate amount of $235,493. If the Company's common
stock is delisted from Nasdaq the Debentures will be in default. At December 31,
1998, the Company had cash of $31,923 as compared to $853,164 at December 31,
1997. It will be necessary for the Company to raise significant capital 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 financial statements for the years ended December 31, 1998 and
1997 have been prepared assuming that the Company will continue as a going
concern. However, the substantial losses from operations, significant reliance
on obtaining capital to satisfy liquidity requirements, the default on the notes
payable referenced above and the potential violation of one of the 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 1999 and beyond. However, there can be no guarantee
or assurance that increased pricing flexibility and direct selling efforts by
the Company will result in an increase in the number of potential end users, an
increase in sales, or greater margins or gross or net revenues. In addition,
while the Company intends to focus its marketing and sales efforts on direct
sales, the Company may continue to sell MICRO21 systems to Coulter pursuant to
the Settlement Agreement and to other distributors for resale to customers, and
substantial sales to distributors may be possible only at transfer prices
substantially lower than projected prices for direct sales.
In addition to the foregoing considerations, during the fourth quarter of 1997
the Company began to offer a short-term rental program which provides for
monthly or annual rentals of the MICRO21 system. The Company believes that this
program will augment its sales and long-term lease programs by giving potential
customers the ability to fund a MICRO21 with operating funds, thereby overcoming
potential cost barriers associated with limited or non-existent capital
expenditure funds. Expansion of the short-term rental program will 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. 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, 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, accounts payable and notes payable
obligations and to 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 possible acceleration of the Debentures due to a default in the event
the Company's common stock is delisted from 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 Item 14. 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 generally 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 1,002,781 671,905
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 497,000 222,213
Accrued interest receivable - 13,151
------------- -------------
Total current assets 4,843,333 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 $19,400 297,000 -
------------- -------------
$ 8,745,353 $ 17,406,409
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable in default $ 335,493 $ -
Accounts payable 1,159,737 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 497,000 -
companies
Current portion of capital lease obligation 30,562 -
Current portion of deferred revenue 318,381 74,673
------------- -------------
Total current liabilities 3,291,993 1,869,490
Deferred revenue 412,423 219,574
Amount due to financing companies 451,808 -
Capital lease obligation 54,719 -
Convertible debentures, net of unamortized discount -
of $187,000 2,788,000
Shareholders' equity:
Common Stock, $.01 par value-authorized 35,000,000
shares; issued and outstanding, 11,631,486 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)
Accumulated deficit (42,300,613) (27,102,275)
----------- -----------
Total shareholders' equity 1,746,410 15,317,345
----------- ------------
$8,745,353 $17,406,409
============= ============
</TABLE>
SEE ACCOMPANYING NOTES
<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 (expense) income:
Investment and interest income 155,914 1,035,210 1,112,227
Other income 42,211 - -
Interest expense (1,051,711) - (141,699)
------------------ ----------------- ------------------
Other (expense) income (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 - - 0.01
----------------- ---------------- ------------------
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>
TOTAL
SHAREHOLDERS'
ADDITIONAL EQUITY
COMMON STOCK PAID-IN DEFERRED ACCUMULATED (NET CAPITAL
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIENCY)
------------------------------------------------------------------------------------------
<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 11,023,938 110,239 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 stock purchase warrants 93,456 935 (935) - - -
Conversion of convertible
debentures and accrued interest
to common stock 48,152 482 25,169 - - 25,651
Common stock issued for services 25,000 250 82,563 - - 82,813
Issuance of stock options to purchase
279,228 shares of common stock - - 443,000 (443,000) - -
Amortization of deferred - - - 185,252 - 185,252
compensation
Discount on convertible debentures - - 1,130,650 - - 1,130,650
Issuance of stock purchase warrants in
connection with convertible
debentures 116,400 116,400
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 11,631,486 $ 116,315 $44,416,708 (486,000) $ (42,300,613) $ 1,746,410
==========================================================================================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (15,167,333) $ (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 of discount on convertible
debentures 963,050 - -
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 435,493 - -
Provision for contract settlement - - 2,062,000
Changes in operating assets and
liabilities:
Accounts receivable (330,876) (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 (154,074) 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 542,251 294,247 -
Contingent settlement liability - (2,062,000) (105,000)
Customer advance - - (150,000)
------------------- ------------------ ---------------------
Net cash used in operating activities (9,769,902) (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 (114,851) - (773,839)
Advances from factor 320,000 - 2,216,614
Repayments to factor - - (2,216,614)
Proceeds from advances from or notes payable
to related parties 50,000 - 74,784
Repayment of advances from or notes payable
to related parties (50,000) - (1,176,639)
Proceeds from convertible debentures, net
of deferred financing costs of $200,000 2,800,000 - -
------------------ ------------------- ---------------------
Net cash provided by financing activities 3,091,786 113,585 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
================= ================ ===================
Property and equipment acquired
under capital lease obligations $ 100,132 $ - $ -
================= ================ =================
Convertible debentures and accrued interest
converted to stock $ 25,651 $ - $ -
================= ================ ===================
Interest paid $ - $ - $ 319,073
================ =============== ==================
Notes payable and notes payable to related
parties converted to common stock $ - $ - $ 300,000
================= =============== ===================
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Intelligent Medical Imaging, Inc. (IMI Florida), a Florida corporation, was
incorporated on June 5, 1989, for the purpose of developing and marketing
analytical instruments which provide intelligent review capabilities in
automating critical medical visual processes, including microscopic imaging.
On January 16, 1996, Intelligent Medical Imaging, Inc. (IMI Delaware) was formed
for the purpose of changing the company's state of incorporation from Florida to
Delaware. Also on January 16, 1996, the Board of Directors declared a
three-for-one stock split, effective upon the merger described below, on IMI
Delaware's common stock in the form of a 200% stock dividend, payable January
18, 1996, to shareholders of record on January 18, 1996. Effective January 17,
1996, IMI Florida was merged into IMI Delaware. IMI Delaware has 30,000,000
shares of $.01 par value common stock and 2,000,000 shares of $.01 par value
preferred stock authorized for issuance. IMI Delaware and its predecessor, IMI
Florida, are hereinafter referred to as the Company.
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 AICPA
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(TM) ("HSM") 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 17, 1998 the
Company entered into two other agreements with Bayer involving the HSM. 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. 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 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 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.
RECLASSIFICATIONS
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
2. INVENTORY
The components of inventory are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
----------------- --------------------
<S> <C> <C>
Raw materials $ 1,668,362 $ 3,773,526
Work in process 1,087,928 407,821
Finished goods 401,247 1,752,468
================= ====================
$ 3,157,537 $ 5,933,815
================= ====================
</TABLE>
<PAGE>
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 consisted 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 3,456 3,683,412
mortgages
Mortgages and asset backed securities 2,356,350 25,539 2,381,889
========================================
$ 6,199,004 $ 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 SFAS 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 $949,000 is reflected as investments in sales-type
leases and a corresponding liability (amount due to financing company) 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. In February 1999 the Board of Directors authorized the Company to enter
into a new consulting arrangement with the former member of the Board of
Directors whereby he will assist the Company in raising capital. The Company
will pay $10,000 per month for eight months. The arrangement is not documented
in a formal consulting agreement.
On November 12, 1998, the Company's President and Chief Executive Officer (the
"President") advanced $50,000 to the Company which was repaid on November 30,
1998. The advance was non-interest bearing. On February 12, 1999, the President
loaned $40,000 and on April 5, 1999 the President loaned $30,000 to the Company.
The Board of Directors approved the terms of these loans in principle, including
repayment out of the proceeds of sales of MICRO21 systems, a maturity date of 18
months, interest at the Prime Rate (as published in the Wall Street Journal)
plus 4.25%, a security interest in all assets of the Company, and compensation
in the form of 7,000 shares of common stock of the Company; however, the
transactions have not yet been documented and the terms are being discussed and
negotiated between the President and the Board of Directors.
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 $316,400 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. NOTES PAYABLE IN DEFAULT
At December 31, 1998, notes payable in default consist of two secured promissory
notes totaling $335,493, issued to the same creditor. The notes bear interest at
an annual rate of 10% and each note is payable in monthly installments of
$50,000, plus accrued interest until each note is paid in full. 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 notes are secured by
all of the Company's personal property. Subsequent to December 31, 1998, the
Company has made payments of $100,000 on these notes, however, additional
payments were due in 1999 and therefore the Company was in default on the
payment of these notes. Consequently, the balance outstanding at December 31,
1998, is 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 obligations 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 obligations $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 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 $1,100,00. 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(TM) ("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 Corporation (DiaSys) 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 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,
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. The arbitration panel additionally determined that the
Company libeled Diasys and awarded damages of $10,000 to Diasys on this claim.
The panel will hear additional evidence on the calculation of these damages and
a reasonable estimate of a potential range of loss cannot be determined. The
Company has accrued $10,000 in connection with this arbitration. 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 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 will 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. 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.
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.
In February 1999, the Company entered into an agreement with a consultant to
provide services related to investor and public relations. The agreement expires
in August 1999. The consultant will receive compensation, as follows: (i)
125,000 free-trading shares of the Company's common stock at the execution of
the agreement; (ii) on or before May 22, 1999, $75,000 in cash or free-trading
common stock valued at a 20% discount to the bid price on the date the shares
are delivered; (iii) 150,000 options at exercise prices ranging from $1.09 to
$3.00 per share, expiring 12 months from the date the shares underlying the
options are registered; and (iv) the consultant's costs and expenses incurred in
carrying out its duties under the agreement. The Company reserves the right to
cancel the agreement without cause on or before May 22, 1999. In the event the
Company exercises the right of cancellation, the consultant will be entitled to
retain the 125,000 shares of common stock issued at the execution of the
agreement. If the agreement is not canceled prior to May 22, 1999, the
consultant is entitled to all compensation described above. In March 1999, the
Company paid the consultant $55,000 in connection with this agreement. At April
9, 1999, no shares or options have been issued under this agreement.
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 1998 and 1997,
options to purchase 23,100 and 19,800, respectively, 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
SHARES PRICE
------ -----
<S> <C> <C>
Options outstanding at January 1, 1996 1,318,035 $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 (102,812) $0.96
----------
Options outstanding at December 31, 1997 1,798,075
Granted 831,728 $1.23
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 395,326
==========
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>
<PAGE>
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 - -
Is less than market
price 1.60 2.72
The weighted average remaining contractual life of options outstanding at
December 31, 1998 is 8.71 years.
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 $2.49 805,420
</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 2,975,000
Options 2,178,377
Warrants 673,334
----------
5,826,711
==========
13. INCOME TAXES
At December 31, 1998, the Company had tax 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 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 is 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 debentures. In addition, as a
result of the liquidity issues discussed in Note 15, the Company believes that
the fair value of these securities has been impaired.
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 $42,301,000, and reported negative cash flows
from operations for the year ended December 31, 1998, of approximately
$9,770,000. In addition, the Company is in default on notes payable totalling
$335,000 due to the Company's failure to make payments subsequent to December
31, 1998 in accordance with the terms of the notes. At December 31, 1998, the
Company has working capital of approximately $1,551,000 and shareholders' equity
of approximately $1,746,000. 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 HSM
in 1998 and curtailed the development of the USM 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 HSM 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 HSM 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 $535,000 (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 $1,449,000 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.
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 $17,084,000
=========== ========== ===========
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>
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 25,000 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 has been unable to pay the foregoing compensation to its
directors since October 1, 1998.
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 ten 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 Obtain working capital to sustain operations in 1999.
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 Maker, 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.
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.
[PERFORMANCE GRAPH APPEARS HERE]
<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, $102,000 in each of 1997 and 1998 and
$44,000 in 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 $44,000 in consulting fees due to Mr. Fritzsche in 1998
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
1.1 Convertible Debenture Purchase Agreement dated June 30, 1998 between
Intelligent Medical Imaging Inc. and JNC Opportunity Fund Ltd.(3)
1.2 Registration Rights Agreement dated June 30, 1998 between Intelligent
Medical Imaging, Inc. and JNC Opportunity Fund Ltd.(3)
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)
4.2 Form of Debenture dated June 30, 1998(3)
4.3 Form of Warrant dated June 30, 1998(3)
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. (4)
10.30 License Agreement dated as of November 17, 1998 between the Company
and Bayer Corporation (4)
10.31 HSM After-Market Supply Agreement dated November 17, 1998 between the
Company and Bayer Corporation (4)
10.32 HSM Instrument Supply Agreement dated November 17, 1998 between the
Company and Bayer Corporation (4)
10.33 Invoice Purchase and Sale Agreement dated November 23, 1998 between
the Company and Finova Capital Corporation (4)
23.1 Consent of Ernst & Young LLP, Independent Certified Public Accountants
(4)
23.2 Consent of Ernst & Young LLP Independent Certified Public Accountant
(5)
27.1 Financial Data Schedule (5)
* 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) Incorporated by reference to the same exhibit number in the Company's
Registration Statement on Form S-3 (File No. 333-60187) as filed with
Securities and Exchange Commission
(4) Incorporated by reference to the same exhibit number in the Company's
Form 10-K for the fiscal year ended December 31, 1998
(5) 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 21st 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 21, 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 23.2
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-3
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 9, 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 19, 1999
<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> 31,923
<SECURITIES> 0
<RECEIVABLES> 1,042,780
<ALLOWANCES> 40,000
<INVENTORY> 3,157,537
<CURRENT-ASSETS> 4,843,333
<PP&E> 5,287,325
<DEPRECIATION> 2,730,978
<TOTAL-ASSETS> 8,745,353
<CURRENT-LIABILITIES> 3,291,993
<BONDS> 3,294,527
0
0
<COMMON> 116,315
<OTHER-SE> 1,630,095
<TOTAL-LIABILITY-AND-EQUITY> 8,745,353
<SALES> 3,762,035
<TOTAL-REVENUES> 3,762,035
<CGS> 3,731,709
<TOTAL-COSTS> 3,731,709
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,051,711
<INCOME-PRETAX> (15,167,333)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,167,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,167,333)
<EPS-PRIMARY> (1.33)
<EPS-DILUTED> (1.33)
</TABLE>
