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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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IMAGE TECHNOLOGY LABORATORIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3531373
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
602 ENTERPRISE DRIVE, KINGSTON, NEW YORK 12401
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (845) 338-3366
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
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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 .
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Indicate by 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 the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The issuer's revenues for the most recent fiscal year was $429,733.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the $.26 last sales price reported by NASDAQ/NMS on 3/26/03
(within last 60 days), was $1,086,985
As of December 31, 2002, the registrant had issued and outstanding 12,232,462
shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Registration Statement Form SB-2/A filed
are incorporated by reference in Part III of this Report.
PART I
Item 1. Description of Business
Image Technology Laboratories, Inc. ("ITL") is a medical image management
company in the healthcare information systems market. We were incorporated in
Delaware on December 5, 1997. ITL has developed a fully integrated "radiology
information system/picture archiving and communications", known as RIS/PACS for
use in the management of medical diagnostic images and patient information by
hospitals. The PACS portion of the system inputs and stores diagnostic images in
digital format from original imaging sources such as:
Computerized tomography, or CT scans
Magnetic resonance imaging, or MRIs
Ultrasound, nuclear imaging
Digital fluoroscopy
The RIS portion of the system inputs and stores patient demographics, along with
the appropriate insurance, billing and scheduling information required to
complete the patient visit. Also, included in the RIS system are the reports
generated by the radiologist from the patient's image data. All of the data is
retained in standard formats, including the DICOM and HL-7 standards.
Dr. Ryon initially conceived Image Technology's picture archiving and
communications, which has the trademark "WarpSpeed PACS/RIS system". His goal
was to implement an all digital radiology business management system. Dr. Ryon
assembled a team of engineers to design and implement a medical information
system tailored to the need of the radiology community. Dr. Ryon joined forces
with Lewis Edwards, an expert in networking and image management. After more
than a year of intensive research, the development team had completed the
specifications for the prototype WarpSpeed system. ITL was formed to
commercialize their state of the art system design. An initial command decision
was made to totally integrate all radiology information into the system.
ITL installed a beta-version of the system at the Kingston Diagnostic Center
during May 2001. The entire process of patient scheduling, registration, image
acquisition, image display, and radiographic report generation was totally
automated in a way yet to be demonstrated in the industry. At the heart of the
system is a software module referred to as the workflow manager. This software
determines what resources are available on the enterprise and distributes the
various pieces of work as applicable. For example, if multiple radiologists are
logged on to the system, unread studies are distributed based upon their
preference and skills. Once the study has been read, the dictation is
distributed to an available stenographer. After transcription, the report
returns to the reporting radiologist, wherever he is logged on, for proof
reading and final signature.
Products
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ITL's lead product is the WarpSpeed PACS/RIS system, a proprietary multi-monitor
touch-screen controlled workstation. Through its unique modular architecture ITL
has created a total radiology business solution that is readily scaled and
easily upgraded. These features will allow the Company to provide products
tailored to the size of its customers and to keep its customers at the forefront
of future technological advances by enabling the Company to easily update
existing systems.
The main special features of the WarpSpeed PACS/RIS include:
o Automation of the total workflow,
o Integration of patient data with digital images,
o A unique, radiologist designed user interface,
o Quality review programs, which analyze productivity and diagnostic
accuracy of individual radiologists or entire Radiology
centers, and
o Use of Windows 2000 as the network operating system.
ITL has also designed a proprietary display workstation that permits the
simultaneous viewing of multiple diagnostic images together with relevant
patient data. The display of information emulates the current film based
paradigm that uses traditional X-Ray view boxes for the display of multiple
images. Research has shown that simultaneous image display improves the speed
and accuracy of diagnostic interpretation. The display workstation consists of
proprietary software developed by ITL and commercially available hardware. The
unique feature of the display station is its ability to present an unlimited
number of diagnostic images on multiple display surfaces. The software blends
together an unlimited number of monitors, of arbitrary resolution, into one
large virtual display.
The WarpSpeed PACS/RIS system can be used to create, store, reproduce and
transmit digitized images generated by current diagnostic imaging modalities,
including digital radiography, ultrasound, nuclear medicine, digital
fluoroscopy, computed tomography, and MRI. Using WarpSpeed PACS/RIS,
radiologists can read and interpret digital images from any workstation that is
logged on to the network. This includes remote locations connected via encrypted
tunnels over the Internet. This facilitates time-critical transfer of patient
information between hospital departments, as well as rapid off-site
consultations by specialists at remote locations. The system also affords
convenient home viewing by radiologists.
-2-
Hospitals and other health organizations can utilize the WarpSpeed PACS/RIS
system to permanently replace film. The solution has been designed to interface
with hospital information systems so that a patient's clinical data can be
integrated with diagnostic images for increased accuracy of image interpretation
and diagnosis.
The architecture used in the WarpSpeed PACS/RIS system is built upon the
foundation of innovative intelligent algorithms. These algorithms reduce the
network bandwidth and on-line storage requirements of the system; the two most
important factors in the cost associated with building a PACS/RIS system.
By making full use of the networking and database management infrastructure of
Windows 2000, ITL has leveraged recent advances in operating system design,
software development, and networking tools to produce a product, which offers
greater functional capability at lower costs through scalable system
architecture. Its truly modular architecture permits capability to be
distributed incrementally, allowing a client to begin with one piece of
hardware, which operates as a server, viewer and archive, and then expand the
system by distributing those capabilities among multiple PCs. Hardware and
software can be sized exactly to client needs, thus enabling ITL to offer the
lowest possible entry point purchase price for a PACS/RIS system.
In addition, WarpSpeed PACS/RIS offers capabilities not found on even the most
expensive PACS, including:
o Unique graphical interface.
o Transfers the controls of the viewing surface to a separate
touch-screen control display.
o Utilizes infinite screen "real estate".
o It is a true "Information Appliance" which has a responsive user
interactive interface with intuitive navigation that eliminates the
need for training.
o Supports the Application System Provider model.
o Fully supports DICOM, HL7 and the IHE initiative.
Marketing Plan
ITL is marketing its WarpSpeed PACS/RIS system in the North Eastern United
States where the reputations of its founders and the product demonstration sites
are expected to generate interest in the product and sales leads. After
penetrating the regional markets, the Company intends to expand throughout the
United States.
ITL plans to distribute its products via three channels:
Relationships with original equipment manufacturers,
Partnerships,
Direct distribution through its own sales representatives.
ITL will initially target hospitals with less than 200 beds and freestanding
radiology clinics. According to the American Hospital Association, there are
5,801 hospitals in the U.S. Approximately one-third have less than 200 beds.
According to the American Medical Information, Inc. there are 2,795 major
diagnostic imaging centers and more than 5000 smaller imaging centers in the
U.S. The overall diagnostic imaging market in the United States was $4.43
billion 2001.
According to the latest market research by Frost & Sullivan the U.S. market for
PACS/RIS in 2004 will be approximately $300 to $450 million annually. In the
same research report it is stated that only 12% of radiology centers are
currently using a PACS/RIS system.
ITL markets a fourth generation medical information management system that we
believe is more open, usable and scalable than any currently available product.
We plan to market ITL's WarpSpeed PACS/RIS through an in-house sales force
supported by product advertising and promotion at industry trade shows. We offer
the product at a price point, which is well within the reach of even the
smallest hospital or imaging facility. We believe that we can offer systems with
superior price/performance characteristics.
ITL has identified several companies whose interests complement our goals. Image
Technology will pursue mutually advantageous partnerships with firms that can
provide access to markets, technology or service and support. The Company has an
OEM sales arrangement with Alpha Medical, Yonkers N.Y. Alpha Medical will sell
and install and service our systems on a non-exclusive basis. We feel that such
an arrangement gives ITL immediate access to a large customer base.
We are developing an in-house sales and marketing staff to provide direct sales
locally and nationally. To that end, we have recently hired a Director of
Marketing and Sales. Currently, ITL advertises its family of products through
trade shows and print advertising.
ITL is a systems integrator that provides a total solution of hardware and
software to the customer. There are two pricing models. The first is an outright
capital purchase and the second is on a fee per usage basis. The latter plan is
an attractive approach for the smaller client as there is no capital outlay, and
the cost is expensed.
-3-
Competition and Competitive Advantage
ITL is unique among the 50 companies in the U.S. that are marketing or
developing RIS/PACS solutions for the radiology community. We believe we are the
only company that has implemented a totally integrated product that encompasses
all aspects of the radiology business. To date no single company has captured a
predominant market share. Currently the top eight vendors are Philips, DR
Systems, GE Medical Systems, ALI, Agfa, Siemens Medical Solutions, Kodak Health
Imaging and Canon Medical Systems.
The superiority of ITL's system has been demonstrated in many areas. Its user
interfaces are intuitive thereby minimizing training time and operator error.
The unique touch screen interface increases speed of operation and productivity
of the radiologist. Radiology report turn around is typically less than two
hours, which is far superior to any other system currently in production. The
underlying architecture and design characteristics have been shown to be highly
scalable. These features alone set ITL apart from all competition.
We believe that most available RIS/PACS systems have significant drawbacks such
as:
Poor user interfaces,
Lack of scalability, and
Prohibitive entry point purchase prices.
We believe that such drawbacks account in part for the fact that none of our
competitors have been able to capture more than 30% of the market in recent
years. ITL intends to capitalize on these inherent weaknesses in the
competition.
Product Approval Process
ITL is a registered medical device manufacturer by the Food and Drug
Administration, FDA. The WarpSpeed PACS/RIS solution is exempt from the
pre-market authorization process by the FDA. Our products have been declared
substantially equivalent to already approved products.
Although ITL is aware that there is an international market for products such as
the ITL WarpSpeed PACS/RIS, we have no present plans to market our products in
other countries, largely due to limited resources. However, should we decide to
market the ITL WarpSpeed PACS/RIS in other countries, we would have to comply
with the laws of, and meet the applicable regulatory procedures and standards in
each jurisdiction in which we sought to market our products. Approval in one
jurisdiction does not assure approval in another as the various federal, state,
and local regulatory authorities are independent of each other.
Insurance
ITL has obtained both corporate, product, and computer omissions and errors
liability insurance. We are at risk to product liability claims if the use of
our products is alleged to have caused harm to a patient. There is no direct
contact between the ITL product and the patient.
Under the terms of our executive employment agreements we are obligated to
maintain term life insurance for the benefit of Drs. Ryon and Mr. Edwards each
in the amount of $300,000 if this can be obtained on commercially reasonable
terms.
Material Contracts
On August 19, 2002 the Company closed on an initial contract with Radiologix,
Inc. for the sale of its WarpSpeed PACS/RIS system. In addition, recurring
monthly revenue in the form of a two year services agreement are being realized
at the rate of approximately $50,000 per month.
In September 2002, the Company received a $75,000 line of credit from the M&T
Bank. To date, none of the proceeds have been used.
The company recently executed a five-year lease (at $700 per month) for office
space at TechCity, Kingston, NY. TechCity has become the home of many technology
firms in the Hudson Valley. The space is sufficient for both our growing R&D
team and our marketing/sales department.
Item 2. Description of Property
Image Technology's principal executive office currently occupies leased space at
602 Enterprise Drive, Kingston, NY. Image Technology's telephone number is (845)
338-3366 and its facsimile number is (845) 338-8880.
Image Technology believes that its current facilities will meet ITL needs for
the foreseeable future.
Item 3. Legal Proceedings
We are aware of no legal proceedings against Image Technology.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 2002.
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Item 5. Market For Common Equity and Related Stockholder Matters
Image Technology's Common Stock and Warrants currently trade on the
Over-the-Counter Bulletin Board ("OTCBB") under the symbols "IMTL", "IMTLW" and
"IMTLZ", respectively. These securities commenced trading on December 15, 2000.
Between December 15, 2000 and March 26, 2003, Image Technology's common stock
closed highest on May 11, 2001, at $0.94 and closed lowest on December 30, 2002
at $.11. Between December 15, 2000 and March 26, 2003, the IMTLW (.40 wt.)
closed at the highest on October 1, 2001, at $0.25 and closed the lowest on
October 1, 2001, at $0.05. Between December 15, 2000 and March 26, 2003, the
IMTLZ (.50 wt.) closed at the highest on May 14, 2001, at $0.25 and closed the
lowest on September 17, 2001, at $0.05.
As of December 31, 2002, the number of holders of record of Common Stock,
Warrant IMTLW and Warrant IMTLZ was approximately 200, 23, and 167 respectively.
Dividend Policy
The Company does not anticipate paying any cash dividends on its common stock in
the foreseeable future because it intends to retain its earnings to finance the
expansion of its business. Thereafter, the Board of Directors in light of
conditions then existing, including, without limitation, the Company's financial
condition, capital requirements and business condition will determine the
declaration of dividends.
During the past three years, the Registrant has sold the securities listed below
pursuant to exemptions from registration under the Securities Act. The
information below is presented on a post-stock split basis.
In January 2000, Image Technology issued 500,000 shares of preferred stock to
each of its three founders in conjunction with the commencement of their
employment agreements. The preferred shares were valued at $.30 per share based
on the price of units that the Company was offering for sale through a private
placement. The aggregate fair value of the preferred shares of $450,000 will be
charged to the Company's results of operations over the terms of the respective
employment contracts.
During March 2000, Image Technology completed an offering of units for a total
consideration of approximately $240,000 before offering expenses of
approximately $60,000. Each unit consisted of one share of common stock and one,
one-year warrant to purchase one share of common stock at an exercise price of
$0.40 per share, for an aggregate of 799,729 units, to a limited number of
accredited investors. The sales were made in reliance upon exemptions from
registration provided under Section 4(2) of the 1933 Act and Rule 506 of
Regulation D. The purchasers of these units acquired these securities for their
own account and not with a view to any distribution thereof to the public.
During February 2000, Image Technology issued one-year warrants to purchase
250,000 shares of common stock at an exercise price of $0.40 per share to Robert
Oakes in consideration for services rendered, valued at $60,000, in reliance
upon the exemptions from registration provided under Section 4(2) of the 1933
Act. During March 2000, Image Technology issued 250,000 shares of common stock
to Bondy & Schloss LLP in consideration for services rendered, valued at
$75,000, in reliance upon the exemptions from registration provided under
Section 4(2) of the 1933 Act.
During January 2002, the Company completed a private placement pursuant to which
it sold 400,000 shares of common stock to its principal stockholder at $.25 per
share (the approximate fair value of the shares at the time of sale) and
received proceeds of $100,000.
During September 2002, the Company completed another private placement pursuant
to which it sold 75,000 shares of common stock to its principal stockholder at
$.28 per share (the approximate fair value of the shares at the time of sale)
and received proceeds of $21,000.
The issuances described above were made in reliance upon the exemptions from
registration set forth in Section 4(2) of the Securities Act relating to sales
by an issuer not involving any public offering. None of the foregoing
transactions involved a distribution or public offering. No underwriters were
engaged in connection with the foregoing issuances of securities, and no
underwriting commissions or discounts were paid.
Item 6. Management's Discussion and Analysis or Plan of Operations
Overview
The following is a discussion of certain factors affecting Image Technology's
results of operations, liquidity and capital resources. You should read the
following discussion and analysis in conjunction with Image Technology's audited
and related notes, which are included elsewhere in this Annual Report on Form
10-KSB.
Business and Summary of Significant Accounting Policies:
Image Technology Laboratories, Inc. ("ITL") is a medical image management
company in the healthcare information systems market. We were incorporated in
Delaware on December 5, 1997. ITL has developed a fully integrated "radiology
information system/picture archiving and communications", known as RIS/PACS for
use in the management of medical diagnostic images and patient information by
hospitals. The PACS portion of the system inputs and stores diagnostic images in
digital format from original imaging sources such as:
-5-
Computerized tomography, or CT scans
Magnetic resonance imaging, or MRIs
Ultrasound, nuclear imaging
Digital fluoroscopy
The RIS portion of the system inputs and stores patient demographics, along with
the appropriate insurance, billing and scheduling information required to
complete the patient visit. Also, included in the RIS system are the reports
generated by the radiologist from the patient's image data. All of the data is
retained in standard formats, including the DICOM and HL-7 standards.
We were in the development stage for accounting purposes and were required to
make certain related disclosures from January 1, 1998 (date of inception)
through April 2002; at which time our PACS software product became available for
sale. From time to time, we have and will continue to derive revenues from the
provision of radiology and imaging services to affiliate and nonaffiliated
companies. However, we expect that we will derive our revenues in the future
primarily from sales of our software products. We obtained our first contract
for the sale of our software product and related hardware and maintenance
services in August 2002. Accordingly, we are no longer in the development stage.
Although we have incurred recurring losses and negative cash flows from
operating activities since inception, we had cash and cash equivalents of
approximately $132,000 and working capital of approximately $102,000 as of
December 31, 2002. Management expects a reduction in the level of such losses
now that sales of the software products have commenced. A substantial portion of
our losses have been attributable to noncash charges. As of December 31, 2002,
certain of our stockholders had agreed to defer approximately $550,000 of
compensation due them under their employment agreements as of that date until
December 31, 2003 and to defer certain additional amounts that will accrue after
December 31, 2002 which has and will continue to preserve our liquidity. During
September 2002, we obtained a $75,000 working capital loan from a financial
institution that we had not used as of December 31, 2002. We believe that as a
result of the additional cash flows from the software product sales and our
ability to draw on the working loan and defer payments to certain stockholders,
we will be able to continue to meet our obligations as they become due through
at least December 31, 2003. We also believe, but cannot assure, that if needed,
we will be able to obtain additional capital resources from financing through
financial institutions and other unrelated sources and/or through additional
related party loans.
Critical Accounting Policies
The Securities and Exchange Commission recently issued disclosure guidance for "
critical accounting policies." The Securities and Exchange Commission defines
"critical accounting policies" as those that require the application of
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 1 to our financial
statements, contained elsewhere in this report. We believe that the following
accounting policies or estimates require the application of management's most
difficult, subjective or complex judgments.
Revenue Recognition:
Revenues from the provision of radiology and imaging services are recognized
over the estimated period during which the applicable services are performed
provided that the fees are fixed and determinable and collection is probable.
Contracts for the sale of our imaging systems involve multiple elements
including the delivery and installation of software and hardware products,
training and system maintenance. However, we cannot allocate the revenues from
such contracts to each element based on the relative fair value of each element.
Accordingly, we will recognize the revenues from a system contract ratably over
the period during which we are required to provide maintenance or any other
service provided that the fees are fixed and determinable and collection is
probable. Unearned revenues are included in deferred revenues in our balance
sheet.
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Valuation of Deferred tax Assets:
We regularly evaluate our ability to recover the reported amount of our deferred
income taxes considering several factors, including our estimate of the
likelihood that we will generate sufficient taxable income in future years in
which temporary differences reverse. Presently we believe that is more likely
than not that we will not realize a substantial portion of the benefit of our
deferred tax assets based primarily on our projected operating results and,
accordingly, have recorded a valuation allowance of $987,000. In the event that
actual results differ from our estimates or we adjust these estimates in future
periods, we may need to adjust this valuation allowance, which could materially
impact our financial position or results of operations.
Valuation Of Long-Lived Assets:
We assess the recoverability of long-lived assets, such as equipment and
improvements and capitalized software costs, whenever we determine that events
or changes in circumstances indicate that their carrying amount may not be
recoverable. Our assessment is primarily based upon our estimate of future cash
flows associated with these assets. We have determined that there has not been
an impairment of any of our long-lived assets at December 31, 2002. However,
should our operating results deteriorate, we may determine that some portions of
our long-lived assets are impaired. Such determination could result in non-cash
charges to income that could materially affect our financial position or results
of operations for that period.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2001
Revenues:
We were a development stage company from January 1, 1998 (date of inception)
through April 2002, at which time our software was available for sale. During
the year ended December 31, 2002, we derived service revenue of approximately
$383,000. In addition, during the year ended December 31, 2002, we earned
approximately $47,000 from the sale of our initial unit, as well as deferring
approximately $93,000 of revenue relating to the sale which will be recognized
ratably over the period in which we are required to provide maintenance and
other services.
Research and Development Expenses:
During the year ended December 31, 2002, we incurred research and development
expenses of approximately $450,000 as compared with approximately $636,000 in
the preceding year. These expenses consisted primarily of compensation to our
three founders under their employment contracts. In addition, $150,000 of these
expenses in both periods was attributable to compensation associated with the
issuance of the shares of preferred stock to the founders, a non-cash charge.
During the first quarter of 2002, one of our founders was terminated for cause
for breach of his employment agreement, as a result, our research and
development expenses were reduced in 2002 and should remain at this reduced
level for the foreseeable future.
General and Administrative Expenses:
During the year ended December 31, 2002, we incurred general and administrative
expenses of approximately $488,000 as compared to approximately $355,000 in the
prior year. The increase of $133,000 is primarily attributable to an increase in
payroll and other overhead items as well as additional costs incurred as we
built up our infrastructure.
Sales and Marketing Expenses:
During the year ended December 31, 2002, we began to incur marketing expenses as
we introduced our product for sale. During this period, we incurred
approximately $125,000 of such costs, of which $112,500 was associated with the
issuance of common stock to an investor relations firm (see Note 5 to our
financial statements), a non-cash charge.
Net Loss:
As a result of the aforementioned, we incurred a loss of approximately $633,000
($.05 per share) for the year ended December 31, 2002 as compared to a loss of
approximately $969,000 ($.08 per share) for the year ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES:
As of December 31, 2002, we had cash and cash equivalents and working capital of
approximately $132,000 and $102,000, respectively. To date, the principal
sources of capital resources include proceeds from issuance of shares of common
stock to our founders of $21,250 and the net proceeds from private placements of
units of common stock and warrants during 2000 of approximately $180,000. Then
on October 15, 2000, we completed an initial public offering whereby we sold
2,591,050 units at $.40 per unit and received net proceeds of approximately
$840,000. Each unit consisted of one share of common stock and one warrant. The
proceeds from this offering were used for working capital and general corporate
purposes. To date, we received approximately $166,000 upon the exercise of
warrants and the issuance of shares of common stock. In addition, in January
2002, we sold 400,000 shares of our common stock to our principal stockholder
for $100,000 or $.25 per share, which approximated fair value. In September
2002, we sold an additional 75,000 shares of our common stock to the same
stockholder for $21,000 or $.28 per share, the approximate fair value.
-7-
During January 2002, we entered into an agreement with an investor relations
firm. In exchange for marketing services, we granted 450,000 shares of common
stock and 100,000 two-year warrants with a $3.00 exercise price. The services,
which were to be provided over a six- month period, were valued at approximately
$112,500 based on the fair market value of the shares of common stock on the
date the agreement was entered into. The services were to commence upon the
issuance of shares of common stock. On December 31, 2002, by mutual consent, the
agreement was terminated. The investor relations firm has returned 200,000
shares of common stock and the warrants were cancelled.
In addition to the aforementioned equity transactions, we have funded a part of
our accumulated loss of approximately $2,467,000 by having our founders defer
approximately $550,000 of compensation due them under their employment
agreements.
In September 2002, we applied for, and received, a line of credit from M & T
Bank for one year in the amount of $75,000. Management believes the terms of the
agreement are favorable to the Company.
We have recently executed a five-year lease (at $700 per month) for office space
at "Tech City", formally the IBM facility in Kingston, NY. Tech City has become
the home of many high technology firms in the Hudson Valley. The space is
sufficient for both our growing research and development team and a
sales/marketing force.
On February 11, 2003, we reduced the exercise price of our Class A $.40 warrants
and our Class B $.50 warrants to $.20 during the period commencing February 18,
2003 and ending July 1, 2003. Thereafter, the exercise price will revert to $.40
and $.50, respectively. As a result of the modification to the exercise price,
we will account for these warrants as variable from the date of the modification
to the date the award is exercised, forfeited or expires unexercised.
In February 2003, we went to contract for the installation of one of our systems
at St. Anthony's Hospital, Warwick, NY. The system is being installed as an ASP,
whereby payment is made on a per procedure basis. ITL will retain ownership of
the assets for tax purposes, and St. Anthony's Hospital will pay for usage as an
expense item.
Item 7. Financial Statements
See Item 13, Exhibits, Financial Statement Schedules, and Reports on
Form 8K.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
Executive Officers and Directors
Our executive officers and directors and their ages as of March 31,
2003 are as follows:
Name Age Title
- ---- --- -----
David Ryon 58 Director and Chairman of the Board of
Directors, President, Chief Executive
Officer and Principal Accounting Officer
Lewis M. Edwards 47 Director, Vice President of Research and
Development, Chief Technical Officer
Richard V. Norell 57 Director
Robert G. Carpenter 65 Director
John J. Naccarato 70 Director
All directors of Image Technology hold office until the next annual meeting of
shareholders or until their successors are elected and qualified. At present,
Image Technology's Bylaws provide for not less than one director nor more than
fifteen. Currently, there are five directors of Image Technology. The Bylaws
permit the Board of Directors to fill any vacancy and such director may serve
until the next annual meting of shareholders or until his successor is elected
and qualified. Officers serve at the discretion of the Board of Directors. There
are no family relationships among any officers or directors of Image Technology.
-8-
DAVID RYON, MD, is a founder and principal stockholder of Image Technology and a
co-developer of the ITL WarpSpeed PACS/RIS. He was appointed to the Board of
Directors and appointed to serve as Image Technology's President and Chief
Executive Officer in December 1997. Dr. Ryon is the founder of the Kingston
Diagnostic Center in Kingston, New York. Dr. Ryon operated the Kingston
Diagnostic Center as a sole proprietor from its inception in 1992 until the sale
of the business to Mid Rockland in 1997. Dr. Ryon worked as a radiologist at the
Kingston Hospital for five years before founding the Center. Dr. Ryon graduated
as an M.D. cum laude from Albany Medical College in 1975 and served residencies
in surgery and radiology at Albany Center Hospital. Among other post-graduate
specialties, Dr. Ryon also trained as an Emergency Physician. Prior to becoming
a physician, Dr. Ryon earned a B.S. in physics with high honors and an M.S. in
engineering at the University of Rochester. He worked as an engineer at General
Electric in the medical systems division after graduation where he gained
experience in the patent process.
LEWIS M. EDWARDS is a founder and principal stockholder of Image Technology and
a co-developer of the ITL WarpSpeed PACS/RIS. He was appointed to the Board of
Directors and elected by the Board to serve as Image Technology's Vice President
of Research and Development and Chief Technical Officer in December 1997. Mr.
Edwards has served as a senior technical staff member at IBM since 1993. He is
currently an architect and lead software designer for IBM's RS/6000 SP, a
massive parallel processor. From 1982 to 1993 he served as the head of
engineering for Graphic Systems Labs, a CAD/CAM Independent Business Unit
start-up company within IBM. He is a member of the IEEE and ACM professional
societies and a charter member of the Microsoft Developer Network. He has
provided computer-consulting services to Boeing, General Motors, Chrysler, Ford
and the Federal government's FAA and ATC teams. He holds a BSEE magna cum laude
from Princeton University and an MSCE from Syracuse University.
RICHARD V. NORELL was appointed to our Board of Directors in April 2002. Since
1995 he has served as a consultant in securities law compliance matters, after
being employed 26 years with the U.S. Securities and Exchange Commission,
Washington, D.C. in the Division of Enforcement, from 1972 to 1995. Mr. Norell
acted as the Division's Chief of Market Surveillance overseeing the Division's
investigators and financial analysts. In addition to implementing programs for
detecting securities fraud and improper conduct, Mr. Norell advised the Director
of the Division concerning policy issues and emerging problems in the securities
industry. Mr. Norell graduated American University, Washington, D.C. with an MBA
in Investment Analysis, University of Rochester, Rochester, N.Y. Bachelor of
Arts, in Economics. Mr. Norell currently resides in Great Falls, VA.
ROBERT G. CARPENTER was appointed to our Board of Directors in April 2002. Mr.
Carpenter brings extensive business experience from a career spanning over 30
years in a succession of executive management positions overseeing technology,
engineering, marketing and business development at Bell Research Labs in NJ, IBM
Yorktown Heights Research Center, and IBM Development Labs in Kingston and
Poughkeepsie, NY. Retired from IBM in 1991, Mr. Carpenter currently serves as
Chief Engineering Liaison on a $6.7 million water facilities project in the
County of Ulster, NY. Mr. Carpenter resides in Saugerties, NY.
JOHN J. NACCARATO was appointed to our Board of Directors in April 2002. He
served for 26 years as District Representative to the late United States
Congressman Hamilton Fish, Jr., with oversight responsibility for three District
offices, under the direct supervision of Congressman Fish. From 1988 to the
present, Mr. Naccarato has held the office of Ulster County Legislator, serving
on Mental Health and Ways and Means committees, and chairing the Criminal
Justice / Public Safety Committee. A former President of the Central
Businessmen's Association, Mr. Naccarato serves on the Ulster County Community
Action Board, United Way Board, City of Kingston Board of Assessment, and the
board of the Catskill Regional OTB Corporation. Mr. Naccarato currently resides
in Kingston, NY.
In the first quarter of 2002, Carlton T. Phelps was terminated for cause
pursuant to the terms of his employment agreement as Vice President of Finance
and Administration, Chief Financial Officer, Secretary and Treasurer of Image
Technology and resigned from the Board of Directors. The terms and circumstances
of Carlton Phelps' departure are currently in dispute. Dr. David Ryon has been
appointed our acting principal accounting officer as of March 5, 2002.
Limitation on Liability of Directors
As permitted by Delaware law, Image Technology's Certificate of Incorporation
includes a provision which provides that a director of Image Technology shall
not be personally liable to Image Technology or its stockholders for monetary
damages for a breach of fiduciary duty as a director, except (i) for any breach
of the director's duty of loyalty to Image Technology or its stockholders, (ii)
under Section 174 of the General Corporation Law of the State of Delaware, which
prohibits the unlawful payment of dividends or the unlawful repurchase or
redemption of stock, or (iii) for any transaction from which the director
derives an improper personal benefit. This provision is intended to afford
directors protection against and to limit their potential liability for monetary
damages resulting from suits alleging a breach of duty of care by a director. As
a consequence of this provision, stockholders of Image Technology will be unable
to recover monetary damages against directors for action taken by them which may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within one of the foregoing exceptions. The provision,
however, does not alter the applicable standards governing a director's
fiduciary duty and does not eliminate or limit the right of Image Technology or
any stockholder to obtain an injunction or any other type of non-monetary relief
in the event of a breach of fiduciary duty. Image Technology believes this
provision will assist in securing and retaining qualified persons to serve as
directors.
-9-
Section 16(a) Beneficial Ownership Reporting Compliance. Based solely on a
review of Forms 3 and 4, and amendments thereto furnished to the Registrant
under Rule 16a-3(e) promulgated under the Securities Exchange Act of 1934 during
the most recent fiscal year, and Form 5 and amendments thereto furnished to the
Registrant with respect to its most recent fiscal year, all reports required
under Section 16(a) of the Securities Exchange Act of 1934 were timely filed.
Item 10. Executive Compensation
The following table sets forth information for each of the Company's Fiscal
years ended December 31, 2002, 2001, and 2000 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the Fiscal
year ended December 31, 2002 and (ii) each other executive officer of the
Company whose total annual salary and bonus equaled or exceeded $100,000 in the
Fiscal year ended December 31, 2002:
Annual Compensation
--------------------
Other All Other
Name and Principal Position Year Salary ($) Bonus ($)(2) ($) Annual Compensation ($)
- --------------------------- ---- --------- ----------- -------- ---------------
David Ryon(1) 2002 $150,000 $150,000 0 0
Chairman, President and Chief 2001 150,000 150,000 0 (3)
Executive Officer 2000 150,000 150,000 0 0
Lewis Edwards(1) 2002 150,000 150,000 0 0
Vice President, Chief Technical 2001 150,000 150,000 0 (3)
Officer and Director 2000 150,000 150,000 0 0
(1) Messrs. Ryon and Edwards waived their salaries from Image Technology for the
years ended December 31, 1999 and 1998. These salaries were not deemed material
during this period.
(2) Messrs. Ryon and Edwards were each issued 500,000 shares of preferred stock
in conjunction with the commencement of their employment agreements. The
preferred shares were valued at $.30 per share based on the price of units that
we were offering for sale through a private placement.
(3) See "Option Grants in Last Fiscal Year" below
Employment Agreements
- ---------------------
David Ryon is engaged as President, Chief Executive Officer and Principal
Accounting Officer of Image Technology and Lewis M. Edwards is engaged as Vice
President and Chief Technical Officer. Each has been signed to a three-year
contract which provides them with the following:
o a minimum annual base salary of $150,000 payable in regular equal
installments in accordance with our general payroll practices.
o an annual performance bonus at the end of each calendar year as determined
in good faith by the Board based upon its annually established goals.
o participation in all retirement plans, health and other group insurance
programs, stock option plans and other fringe benefit plans which we may
now or hereafter in the Board of Directors' discretion make available
generally to its executives or employees.
o term life insurance in the amount of $300,000, short-term and long-term
disability insurance in the amount of not less than 60% of base salary,
unless such insurance is not available at commercially reasonable rates.
o an automobile for business use in accordance with Image Technology's
standard policy for senior executive officers.
-10-
Stock Option Plan
- -----------------
In January 1998, Image Technology's stockholders ratified Image Technology's
Stock Option Plan (the "Plan") whereby options for the purchase of up to
5,000,000 shares of Image Technology's common stock may be granted to key
personnel in the form of incentive stock options and nonstatutory stock options,
as defined under the Internal Revenue Code. Key personnel eligible for these
awards include our employees, consultants and nonemployee directors. Under the
Plan, the exercise price of all options must be at least 100% of the fair market
value of our common shares on the date of grant. The exercise price of an
incentive stock option granted to an optionee which holds more than ten percent
of the combined voting power of all classes of stock of Image Technology must be
at least 110% of the fair market value on the date of grant. The maximum term of
any stock option granted may not exceed ten years from the date of grant and
generally vest over three years.
On January 1, 2000, we granted options under the plan to David Ryon, Carlton T.
Phelps and Lewis M. Edwards, our three founders, for the purchase of a total of
3,000,000 shares of its common stock at $.33 per share, approximately 110% of
the fair market value on the date of grant, which are exercisable through
December 31, 2009.
No options were granted or exercised prior to January 1, 2000.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 2002, the number of shares of
the Company's common stock (the "Common Stock") beneficially owned by all
persons known to be holders of more than five percent (5%) of the Common Stock
and by all executive officers and directors of the Company individually and as a
group.
Security Ownership of Management
Name, Title
and Address Title of Class Shares Beneficially Owned of beneficial owners
Number Percent
- -------------------------------------------------------------------------------
David Ryon, M.D. Common Stock 2,914,584 24.24%
CEO, President
and Director Preferred Stock 500,000 33.33%
602 Enterprise Dr.
Kingston, New York
12401
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Lewis M. Edward Common Stock 2,429,583 20.81%
Chief Technical Officer
and Director Preferred Stock 500,000 33.33%
602 Enterprise Dr.
Kingston, New York
12401
- -------------------------------------------------------------------------------
Carlton T. Phelps, Common Stock 2,429,583 20.81%
602 Enterprise Dr.
Kingston, New York Preferred Stock 500,000 33.33%
12401
All officers and directors Common Stock 8,051,750 66%
as a group Preferred Stock 1,500,000 100%
-11-
Item 12. Certain Relationships and Related Transactions
None Requiring Reporting
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Refer to the list of Exhibits which are being filed as a part of this
report.
Item 14. Controls and Procedures
It is the Chief Executive Officer's responsibility to ensure the
Company maintains disclosure controls and procedures designed to provide
reasonable assurance that material information, both financial and
non-financial, and other information required under the securities laws to be
disclosed, is identified and communicated to senior management on a timely
basis. Our disclosure controls and procedures included mandatory communication
of material events, management review of monthly and quarterly results and an
established system of internal controls.
During the fourth quarter, management, including the Chief Executive
Officer, conducted an evaluation of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on the evaluation, the Chief Executive
Officer concluded that the disclosure controls and procedures currently in
place, for a company its size, are adequate to ensure material information and
other information requiring disclosure are identified and communicated in a
timely fashion. There have been no significant changes in internal controls, or
in factors that could significantly affect internal controls, subsequent to the
date the Chief Executive Officer completed his evaluation.
Exhibits
EXHIBIT NO. DESCRIPTION
----------- ---------------------------------------------------
3.1* Certificate of Incorporation of Image Technology
3.2* Certificate of Amendment to Certificate of Incorporation of Image
Technology dated December 23, 1999
3.3* By-Laws of Image Technology
4.1* Specimen certificate for common stock of Image Technology
4.2* Specimen certificate for preferred stock of Image Technology
4.3* Form of Private Placement Warrant
4.4* Form of Investor Warrant
4.5* Form of Oakes Warrant
4.6** Form of Subscription Agreement
10.1* Image Technology 1998 Stock Option Plan
10.2* Stockholders Agreement dated January 16, 1998 among certain
investors and Image Technology
10.3* Form of Registration Rights Agreement dated February 2000 among
certain stockholders of Image Technology and Image Technology
10.4* Assignment of Intellectual Property Agreement dated as of
December 18, 1997 between Image Technology and David Ryon, M. D.,
Carlton T. Phelps, M. D. and Lewis M. Edwards.
10.5* Form of Facility Usage and Equipment Lease Agreement by and
between Mid Rockland Imaging and Image Technology dated January
12, 1998
10.6* Form of Employment Agreement dated December 21, 1999 between
Image Technology and David Ryon, M. D.
10.7* Form of Employment Agreement dated December 21, 1999 between
Image Technology and Carlton T. Phelps, M. D.
10.8* Form of Employment Agreement dated December 21, 1999 between
Image Technology and Lewis M. Edwards
99 Certification
* Filed with amendment no. 1 to registration statement (No.333-336787) on
June 6, 2000.
** Filed with amendment no. 2 to registration statement (No. 333-336787) on
July 27, 2000.
No reports were filed on Form 8-K during the last quarter of the period
covered by this report.
-12-
S I G N A T U R E S
-------------------
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.
Image Technology Laboratories, Inc.
By: /s/ DAVID RYON
------------------
David Ryon
Chief Executive Officer and
Principal Accounting Officer
Date: March 28, 2003
Pursuant to the requirements of the securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/S/ DAVID RYON Director March 28, 2003
- --------------
David Ryon
/S/ LEWIS M. EDWARDS Director March 28, 2003
- --------------------
Lewis M. Edwards
-13-
Image Technology Laboratories, Inc.
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
Report of Independent Public Accountants F-2
Balance Sheet
December 31, 2002 F-3
Statements of Operations
Years Ended December 31, 2002 and 2001 F-4
Statements of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 2002 and 2001 F-5
Statements of Cash Flows
Years Ended December 31, 2002 and 2001 F-6
Notes to Financial Statements F-7/14
* * *
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Image Technology Laboratories, Inc.
We have audited the accompanying balance sheet of Image Technology Laboratories,
Inc. as of December 31, 2002, and the related statements of operations, changes
in stockholders' equity (deficiency) and cash flows for the years ended December
31, 2002 and 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Image Technology Laboratories,
Inc. as of December 31, 2002, and its results of operations and cash flows for
the years ended December 31, 2002 and 2001, in conformity with accounting
principles generally accepted in the United States of America.
J.H. COHN LLP
Roseland, New Jersey
March 11, 2003
F-2
Image Technology Laboratories, Inc.
Balance Sheet
December 31, 2002
ASSETS
------
Current assets:
Cash and cash equivalents $ 132,454
Prepaid expenses and other current assets 9,996
-----------
Total current assets 142,450
Equipment and improvements, net of accumulated depreciation
and amortization of $14,331 39,331
-----------
Total $ 181,781
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
----------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 35,247
Notes payable to stockholders 5,200
-----------
Total current liabilities 40,447
Deferred revenues 93,333
Accrued compensation payable to stockholders 550,042
-----------
Total liabilities 683,822
-----------
Stockholders' deficiency:
Preferred stock, par value $.01 per share; 5,000,000 shares
authorized; 1,500,000 shares issued and outstanding 15,000
Common stock, par value $.01 per share; 50,000,000 shares
authorized; 12,232,462 shares issued and outstanding 122,325
Additional paid-in capital 1,827,395
Accumulated deficit (2,466,761)
-----------
Total stockholders' deficiency (502,041)
-----------
Total $ 181,781
===========
See Notes to Financial Statements.
F-3
Image Technology Laboratories, Inc.
Statements of Operations
Years Ended December 31, 2002 and 2001
2002 2001
---- ----
Revenues:
Service income $ 382,870 $ 21,375
Software license fees 46,863 _
------------ ------------
Totals 429,733 21,375
------------ ------------
Costs and expenses:
Research and development 450,000 635,694
Sales and marketing 124,721
General and administrative 487,954 354,765
------------ ------------
Totals 1,062,675 990,459
------------ ------------
Net loss $ (632,942) $ (969,084)
============ ============
Basic net loss per share $ (.05) $ (.08)
============ ============
Basic weighted average common shares outstanding 13,400,958 12,589,041
============ ============
See Notes to Financial Statements.
F-4
Image Technology Laboratories, Inc.
Statement of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 2002 and 2001
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
--------------- ------------ PAID-IN STOCK
NUMBER OF NUMBER OF CAPITAL SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
--------------------------------------------------------------------------------------
Balance, January 1, 2001 1,500,000 $ 15,000 10,962,862 $ 109,628 $ 1,451,404 $ (10,000)
Issuance of common stock upon
exercise of warrants 309,850 3,099 135,714
Amortization of unearned
compensation
Proceeds from subscription
receivable 10,000
Net loss
--------- ----------- ---------- ----------- ----------- -----------
Balance, December 31, 2001 1,500,000 15,000 11,272,712 112,727 1,587,118 --
Sales of common stock through
private placement 475,000 4,750 116,250
Issuance of common stock upon
exercise of warrants 34,750 348 16,027
Issuance of common stock for
services 450,000 4,500 108,000
Amortization of unearned
compensation and marketing
expenses
Net loss
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 1,500,000 $ 15,000 12,232,462 $ 122,325 $ 1,827,395 $ --
=========== =========== =========== =========== =========== ===========
TOTAL
STOCKHOLDERS'
UNEARNED UNEARNED ACCUMULATED EQUITY
COMPENSATION MARKETING DEFICIT (DEFICIENCY)
EXPENSES
---------------------------------------------------------------
Balance, January 1, 2001 $ (300,000) $ (864,735) $ 401,297
Issuance of common stock upon
exercise of warrants 138,813
Amortization of unearned
compensation 150,000 150,000
Proceeds from subscription
receivable 10,000
Net loss (969,084) (969,084)
----------- ----------- ------------ -----------
Balance, December 31, 2001 (150,000) (1,833,819) (268,974)
Sales of common stock through
private placement 121,000
Issuance of common stock upon
exercise of warrants 16,375
Issuance of common stock for
services $ (112,500)
Amortization of unearned
compensation and marketing
expenses 150,000 112,500 262,500
Net loss (632,942) (632,942)
----------- ----------- ----------- -----------
Balance, December 31, 2002 $ -- $ -- $(2,466,761) $ (502,041)
=========== =========== =========== ===========
See Notes to Financial Statements.
F-5
Image Technology Laboratories, Inc.
Statements of Cash Flows
Years Ended December 31, 2002 and 2001
2002 2001
---- ----
Operating activities:
Net loss $(632,942) $(969,084)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of equipment and
improvements 9,733 4,598
Amortization of unearned compensation 150,000 150,000
Amortization of unearned marketing expenses 112,500
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (9,996)
Accounts payable and accrued expenses (2,664) 17,248
Deferred revenues 93,333
Accrued compensation payable to stockholders 129,501 122,596
--------- ---------
Net cash used in operating activities (150,535) (674,642)
--------- ---------
Investing activities - purchase of equipment and improvements (6,116) (47,546)
--------- ---------
Financing activities:
Proceeds from exercise of warrants 16,375 138,813
Proceeds from private placement of common stock 121,000
Proceeds from subscription receivable 10,000
--------- ---------
Net cash provided by financing activities 137,375 148,813
--------- ---------
Net decrease in cash and cash equivalents (19,276) (573,375)
Cash and cash equivalents, beginning of year 151,730 725,105
--------- ---------
Cash and cash equivalents, end of year $ 132,454 $ 151,730
========= =========
See Notes to Financial Statements.
F-6
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 1 - Business:
Image Technology Laboratories, Inc. (the "Company") was incorporated
on December 5, 1997 and commenced operations on January 1, 1998. The
Company has developed software for a fully integrated "radiology
information system/picture archiving and communications," known as
"RIS/PACS," for use in the management of medical diagnostic images
and patient information by hospitals. The "PACS" portion of the
system inputs and stores diagnostic images in digital format from
original imaging sources such as:
Computerized tomography, or CT scans,
Magnetic resonance imaging, or MRIs,
Ultrasound, nuclear imaging and Digital fluoroscopy
The "RIS" portion of the system inputs and stores patient
demographics, along with the appropriate insurance, billing and
scheduling information required to complete the patient's visit. All
of the data is retained in standard formats, including the DICOM and
HL-7 standards.
The Company was a development stage company for accounting purposes,
and was required to make certain related disclosures from January 1,
1998 (date of inception) through April 2002, at which time its PACS
software product became available for sale (see Note 2). From time to
time, the Company has and will continue to derive revenues from the
provision of radiology and imaging services to affiliated and
nonaffiliated companies. However, management expects that the Company
will derive its revenues in the future primarily from sales of its
software products. The Company obtained its first contract for the
sale of its software product and related hardware and maintenance
services in August 2002. Accordingly, the Company is no longer in the
development stage.
Although the Company has incurred recurring losses and negative cash
flows from operating activities since inception, the Company had cash
and cash equivalents of approximately $132,000 and working capital of
approximately $102,000 as of December 31, 2002. Management expects a
reduction in the level of such losses now that sales of the software
products have commenced. A substantial portion of our losses have
been attributable to noncash charges. As of December 31, 2002,
certain stockholders of the Company had agreed to defer approximately
$550,000 of compensation due them under their employment agreements
as of that date until December 31, 2003 and to defer certain
additional amounts that will accrue after December 31, 2002 which has
and will continue to preserve our liquidity. During September 2002,
the Company obtained a $75,000 working capital loan from a financial
institution that it had not used as of December 31, 2002. Management
believes that as a result of the additional cash flows from the
software product sales and the Company's ability to draw on the
working loan and defer payments to certain stockholders, the Company
will be able to continue to meet it's obligations as they become due
through at least December 31, 2003. Management also believes, but
cannot assure, that if needed, the Company will be able to obtain
additional capital resources from financing through financial
institutions and other unrelated sources and/or through additional
related party loans.
Note 2 - Summary of significant accounting policies:
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
Cash equivalents:
Cash equivalents include all highly liquid investments with an
original maturity of three months or less when acquired.
Revenue recognition:
Revenues from the provision of radiology and imaging services are
recognized over the estimated period during which the applicable
services are performed provided that the fees are fixed and
determinable and collection is probable.
Contracts for the sale of the Company's imaging systems involve
multiple elements including the delivery and installation of software
and hardware products, training and system maintenance. However, the
Company cannot allocate the revenues from such contracts to each
element based on the relative fair value of each element.
Accordingly, it will recognize the revenues from a systems contract
ratably over the period during which it is required to provide
maintenance or any other services provided that the fees are fixed
and determinable and collection is probable.
F-7
Unearned revenues are included in deferred revenues in the
accompanying balance sheet.
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 2 - Summary of significant accounting policies (continued):
Revenue recognition (concluded):
During August 2002, the Company entered into a contract for
the provision of radiology and imaging services and the
sale of an imaging system. The radiology and imaging
services agreement is for two years (although it is
cancelable by either party at any time) and provides for
fees of approximately $50,000 per month. Management
anticipates that fees for the imaging system, which was
installed in 2002, and the related three-year maintenance
contract will exceed $400,000.
Concentrations of credit risk:
Financial instruments which potentially subject the Company
to concentrations of credit risk consist primarily of cash
and cash equivalents. The Company places its cash and cash
equivalents with high-quality financial institutions. At
times, the Company's cash and cash equivalent balances
exceed the insured amount under the Federal Deposit
Insurance Corporation of $100,000. At December 31, 2002,
the Company had cash and cash equivalents with one bank
that exceeded Federally insured limits by approximately
$32,000.
Software development costs:
Pursuant to Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," the Company is
required to charge the costs of creating a computer
software product to research and development expense as
incurred until the technological feasibility of the product
has been established; thereafter, all related software
development and production costs are required to be
capitalized.
Commencing upon the initial release of a product,
capitalized software development costs and any costs of
related purchased software are generally required to be
amortized over the estimated economic life of the product
or based on current and estimated future revenues.
Thereafter, capitalized software development costs and
costs of purchased software are reported at the lower of
unamortized cost or estimated net realizable value. Due to
the inherent technological changes in the software
development industry, estimated net realizable values or
economic lives may decline and, accordingly, the
amortization period may have to be accelerated.
Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost.
Depreciation of equipment is provided using accelerated
methods over the estimated useful lives of the assets,
which range from five to seven years. Leasehold
improvements are amortized over the lesser of the estimated
useful life of the asset or the term of the lease.
F-8
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 2 - Summary of significant accounting policies (continued):
Impairment of long-lived assets:
Impairment losses on long-lived assets, such as equipment
and improvements and capitalized software costs, are
recognized when events or changes in circumstances indicate
that the undiscounted cash flows estimated to be generated
by such assets are less than their carrying value and,
accordingly, all or a portion of such carrying value may
not be recoverable. Impairment losses are then measured by
comparing the fair value of assets to their carrying
amounts.
Income taxes:
The Company accounts for income taxes pursuant to the asset
and liability method which requires deferred income tax
assets and liabilities to be computed for temporary
differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws
and rates applicable to the periods in which the
differences are expected to affect taxable income.
Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized. The income tax provision or credit is the tax
payable or refundable for the period plus or minus the
change during the period in deferred tax assets and
liabilities.
Net earnings (loss) per common share:
The Company presents "basic" earnings (loss) per common
share and, if applicable, "diluted" earnings per common
share pursuant to the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). Basic earnings (loss) per common share are
calculated by dividing net income or loss applicable to
common stock by the weighted average number of common
shares outstanding during each period. The calculation of
diluted earnings per common share is similar to that of
basic earnings per common share, except that the
denominator is increased to include the number of
additional common shares that would have been outstanding
if all potentially dilutive common shares, such as those
issuable upon the exercise of stock options and warrants,
were issued during the period. The rights of the Company's
preferred and common stockholders are substantially
equivalent. The Company has included the 1,500,000
preferred shares from the date of their issuance in the
weighted average number of shares outstanding in the
computation of basic loss per share for the years ended
December 31, 2002 and 2001 in accordance with the "two
class" method of computing earnings (loss) per share set
forth in SFAS 128.
Since the Company had net losses in 2002 and 2001, the
assumed effects of the exercise of 3,000,000 options
outstanding at December 31, 2002 and 2001 and 3,329,512 and
3,364,262 warrants outstanding at December 31, 2002 and
2001, respectively, would have been anti-dilutive.
F-9
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 2 - Summary of significant accounting policies (concluded):
Stock options:
In accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), the Company will recognize
compensation costs as a result of the issuance of stock
options to employees based on the excess, if any, of the
fair value of the underlying stock at the date of grant or
award (or at an appropriate subsequent measurement date)
over the amount the employee must pay to acquire the stock.
Therefore, the Company will not be required to recognize
compensation expense as a result of any grants of stock
options at an exercise price that is equivalent to or
greater than fair value. The Company will also make pro
forma disclosures, as required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), of net income or loss as if a
fair value based method of accounting for stock options had
been applied.
Note 3 - Equipment and improvements:
Equipment and improvements consist of the following at
December 31, 2002:
Equipment $42,046
Furniture 8,111
Leasehold improvements 3,505
-------
Total 53,662
Less accumulated depreciation 14,331
-------
Total $39,331
=======
Depreciation and amortization expense amounted to $9,733 and
$4,598 during 2002 and 2001, respectively.
Note 4 - Notes payable to stockholders:
Notes payable to stockholders with a principal balance of
$5,200 at December 31, 2002 and 2001 are noninterest bearing
and are due on demand.
Note 5 - Stockholders' equity (deficiency):
Preferred stock:
As of December 31, 2002, the Company was authorized to
issue up to 5,000,000 shares of preferred stock with a par
value of $.01 per share. Under the Company's Articles of
Incorporation, the Board of Directors, within certain
limitations and restrictions, can fix or alter preferred
stock dividend rights, dividend rates, conversion rights,
voting rights and terms of redemption including price and
liquidation preferences.
F-10
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 5 - Stockholders' equity (deficiency) (continued):
Issuance of preferred stock to founders:
On January 7, 2000, the Board of Directors authorized the
issuance of a total of 1,500,000 shares of preferred stock
to the three founders of the Company in conjunction with
the commencement of their employment agreements on January
1, 2000. The preferred shares will have rights to
dividends, rights with respect to liquidation and other
rights equivalent to those of holders of the Company's
common stock including one vote for each share held on all
matters to be voted on by the Company's stockholders.
Since the rights of the Company's preferred and common
stockholders are substantially equivalent, the preferred
shares were valued at $.30 per share based on the price of
units of common stock and warrants that the Company sold
through a private placement that was completed on February
4, 2000. The aggregate fair value of the preferred shares
of $450,000 had been recorded as unearned compensation in
2000 and reflected as a reduction of stockholders' equity.
The unearned compensation was amortized primarily to
research and development expenses over the terms of the
respective employment agreements which expired on December
31, 2002.
Stock subscription receivable:
In connection with the private placement that was completed
on February 4, 2000, an investor subscribed to purchase
33,333 units, at $.30 per unit, for a total subscription
price of $10,000. Each unit was comprised of one share of
common stock and one warrant. Each warrant gives the holder
the right to purchase one share of common stock at the
initial exercise price of $.40 per share and expires on
April 15, 2003 (see Note 11). During 2001, the Company
received the proceeds of the subscription receivable.
Private placement of common shares:
During January 2002, the Company completed a private
placement pursuant to which it sold 400,000 shares of
common stock to a company wholly-owned by its principal
stockholder at $.25 per share (the approximate fair value
of the shares at the time of sale) and received proceeds of
$100,000.
During September 2002, the Company completed another
private placement pursuant to which it sold 75,000 shares
of common stock to a company wholly-owned by its principal
stockholder at $.28 per share (the approximate fair value
of the shares at the time of sale) and received proceeds of
$21,000.
Shares for services:
During January 2002, the Company agreed to issue 450,000
shares of common stock and warrants to purchase 100,000
shares of common stock in exchange for the provision of
marketing services by an investor relations firm. The
Company recorded the fair value of the shares of $112,500
on the date of the agreement as unearned marketing expense.
The shares and warrants became issuable and were issued in
June 2002. The warrants are exercisable at $3.00 per share
during the two-year period subsequent to the date of
issuance.
F-11
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 5 - Stockholders' equity (deficiency) (concluded):
Shares for services (concluded):
Under the agreement, the investor relations firm was
required to provide the marketing services over the
six-month period that commenced in July 2002, and the
Company amortized the unearned marketing expense over that
period. However, during that period, disputes arose related
to those services. On December 31, 2002, the disputes were
resolved and the investor relations firm agreed to return
200,000 shares of common stock and allow the Company to
cancel the warrants it had issued for the purchase of
100,000 shares.
The following table summarizes information about the
Company's outstanding warrants at December 31, 2002:
SHARES
SUBJECT
EXERCISE TO
WARRANTS PRICE
----------- -----
Class A 937,062 $.40
Class B 2,392,450 .50
---------
Total 3,329,512
All of the warrants were exercisable at December 31, 2002
and were scheduled to expire on October 15, 2003 (see Note
11).
Note 6 - Income taxes:
As of December 31, 2002, the Company had net operating loss
carry forwards of approximately $1,917,000 available to reduce
future Federal and state taxable income which will expire at
various dates through 2022. The Company's only other material
temporary difference as of that date was approximately
$550,000 attributable to accrued officers' compensation. Due
to the uncertainties related to, among other things, the
future changes in the ownership of the Company, which could
subject those loss carry forwards to substantial annual
limitations, and the extent and timing of its future taxable
income, the Company offset the potential benefits of its
deferred tax assets of approximately $987,000 (of which
$767,000 was attributable to the net operating loss carry
forwards and $220,000 was attributable to the future
deductibility of the officers' compensation) by an equivalent
valuation allowance as of December 31, 2002.
The Company had also offset the potential benefits of its
deferred tax assets of approximately $734,000 (of which
$565,000 was attributable to the net operating loss carry
forwards and $169,000 was attributable to the future
deductibility of the officers' compensation) and $346,000 (of
which $227,000 was attributable to the net operating loss
carry forwards and $119,000 was attributable to the future
deductibility of the officers' compensation) by equivalent
valuation allowances as of December 31, 2001 and 2000,
respectively. As a result of the increases in the valuation
allowance of $253,000 and $388,000 in 2002 and 2001,
respectively, there are no credits for income taxes reflected
in the accompanying statements of operations to offset pre-tax
losses.
F-12
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 7 - Fair value of financial statements:
The Company's financial instruments at December 31, 2002 for
which disclosure of estimated fair value is required by
certain accounting standards consisted of cash and cash
equivalents, accounts payable and accrued expenses, notes
payable to stockholders, deferred revenues and accrued
compensation payable to stockholders. In the opinion of
management, cash and cash equivalents, accounts payable and
accrued expenses and deferred revenues were carried at fair
value because of their liquidity and short-term maturities.
Because of the relationship of the Company and its
stockholders, there is no practical method that can be used to
determine the fair value of the notes payable to stockholders
and accrued compensation payable to stockholders.
Note 8 - Stock option plan:
In January 1998, the Company's stockholders ratified the
Company's Stock Option Plan (the "Plan") whereby options for
the purchase of up to 5,000,000 shares of the Company's common
stock may be granted to key personnel in the form of incentive
stock options and nonqualified stock options, as defined under
the Internal Revenue Code. Key personnel eligible for these
awards include employees of the Company, consultants to the
Company and nonemployee directors of the Company. Under the
Plan, the exercise price of all options must be at least 100%
of the fair market value of the Company's common shares on the
date of grant (the exercise price of an incentive stock option
granted to an optionee that holds more than ten percent of the
combined voting power of all classes of stock of the Company
must be at least 110% of the fair market value on the date of
grant). The maximum term of any stock option granted may not
exceed ten years from the date of grant and options generally
vest over three years.
Since the Company has elected to use the provisions of APB 25
in accounting for stock options, no earned or unearned
compensation cost will be recognized in the financial
statements for stock options granted to employees at exercise
prices that are equal to or greater than the fair market value
of the Company's common stock on the date of grant. Instead,
the Company makes the pro forma disclosures required by SFAS
123 of net loss as if a fair value based method of accounting
for stock options had been applied.
On January 1, 2000, the Company granted options to its
founders for the purchase of a total of 3,000,000 shares of
its common stock at $.33 per share (approximately 110% of the
fair market value on the date of grant) that are exercisable
through December 31, 2009.
F-13
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 8 - Stock option plan (concluded):
The pro forma amounts computed as if the Company had elected
to recognize compensation cost for all stock options granted
to employees based on the fair value of the options at the
date of grant as prescribed by SFAS 123 and the related
historical amounts reported in the accompanying statements of
operations are set forth below:
2002 2001
------- -------
Net loss - as reported $(632,942) $ (969,084)
Net loss - pro forma (792,942) (1,129,084)
Basic loss per share - as reported $(.05) $(.08)
Basic loss per share - pro forma $(.06) $(.09)
The fair value of each option granted was estimates as of the
date of grant using the Black-Scholes Option-Pricing-Model
with the following weighted average assumptions:
Expected volatility 29%
Risk-free interest rate 6%
Expected years of option term 10
Expected dividends 0%
Note 9 - Related party transactions:
Service income includes approximately $20,000 and $21,000 in
2002 and 2001, respectively, attributable to a company
wholly-owned by the Company's principal stockholder.
As of December 31, 2002, two of the founders of the Company
have employment contracts that have been renewed and provide
for aggregate annual compensation of $300,000 through December
31, 2003.
Note 10- Working capital loan agreement:
During September 2002, the Company entered into a one-year
working capital loan agreement with a financial institution
for borrowings of up to $75,000. Outstanding borrowings will
bear interest payable monthly at 1% above the prime rate, and
will be guaranteed by the Company's principal stockholder. At
December 31, 2002, there were no outstanding borrowings under
the agreement.
Note 11- Subsequent event:
On February 11, 2003, the Company reduced the exercise prices
for its outstanding Class A and Class B warrants from $.40 and
$.50 per share, respectively, to $.20 per share during the
period from February 18, 2003 through July 1, 2003. As a
result of the changes in the exercise prices, the warrants
will be accounted for as the equivalent of variable stock
options from the date of the modifications to the date the
warrants are exercised, forfeited or expire and, accordingly,
the Company will be required to record charges or credits to
its results of operations based on changes in the fair values
of the warrants.
* * *
F-14