U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C.
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
[ ] 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 001-12189
IMAGE GUIDED TECHNOLOGIES, INC.
-------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1139082
-------- ----------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
5710-B FLATIRON PARKWAY, BOULDER, COLORADO
------------------------------------------
80301 (Address of principal executive
offices)
(303) 447-0248
--------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
The number of shares outstanding of the registrant's common stock as of
October 31, 1999 was 3,997,786.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
IMAGE GUIDED TECHNOLOGIES
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Part I Financial Information Page
----
Item 1. Balance Sheets as of September 30, 1999 and December 31, 1998 3
Statements of Operations for the three and nine months ended
September 30, 1999 and 1998 4
Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 7
Part II Other Information and Signatures 13
2
IMAGE GUIDED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
-------------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 25,000 $ 23,000
Accounts receivable, net of allowance for doubtful
accounts of $98,000 and $76,000, respectively 999,000 1,710,000
Inventories, net 755,000 921,000
Investment--Discontinued operations ----------- 1,187,000
Other current assets 153,000 174,000
-------------------- -----------------
Total current assets 1,932,000 4,015,000
Property and equipment, net of accumulated depreciation of
$779,000 and $602,000, respectively 656,000 650,000
Goodwill, net of accumulated amortization of $52,000 and
$31,000, respectively 528,000 550,000
Patents and Trademarks net of accumulated amortization
$52,000 and $21,000, respectively 79,000 57,000
Investment--Discontinued operations ----------- 4,076,000
Other assets 141,000 165,000
-------------------- -----------------
Total assets $ 3,336,000 $ 9,513,000
==================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 977,000 $ 860,000
Accrued liabilities 377,000 403,000
Line of credit 271,000 2,524,000
Current portion of capital lease obligations 87,000 1,332,000
Current portion of notes payable 495,000 2,986,000
-------------------- -----------------
Total current liabilities 2,207,000 8,105,000
Capital lease obligations 275,000 38,000
-------------------- -----------------
Total liabilities $ 2,482,000 $ 8,143,000
-------------------- -----------------
Shareholders' equity:
Common stock, no par value, 10,000,000 shares
authorized; 3,803,020 and 3,705,222 shares issued and 10,527,000 10,456,000
outstanding; respectively
Accumulated deficit (9,673,000) (9,086,000)
-------------------- -----------------
Total shareholders' equity $ 854,000 $ 1,370,000
-------------------- -----------------
Total liabilities and shareholders' equity $ 3,336,000 $ 9,513,000
==================== =================
The accompanying notes are an integral part of these balance sheets.
3
IMAGE GUIDED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30
---------------------------------- --------------------------------
1999 1998 1999 1998
-------------- ---------------- ------------- ---------------
Revenue $ 1,751,000 $ 2,122,000 $ 4,943,000 $ 5,094,000
Cost of goods sold 953,000 1,278,000 2,846,000 3,273,000
-------------- ---------------- ------------- ---------------
Gross profit 798,000 844,000 2,097,000 1,821,000
-------------- ---------------- ------------- ---------------
Operating expenses:
Research and development 326,000 334,000 1,028,000 1,070,000
Selling and marketing 227,000 276,000 840,000 669,000
General and administrative 334,000 533,000 1,375,000 1,392,000
-------------- ---------------- ------------- ---------------
Total operating expenses 887,000 1,143,000 3,243,000 3,131,000
-------------- ---------------- ------------- ---------------
Operating loss (89,000) (299,000) (1,146,000) (1,310,000)
Other expense (59,000) (107,000) (270,000) (412,000)
-------------- ---------------- ------------- ---------------
Loss from continuing operations (148,000) (406,000) (1,416,000) (1,722,000)
Discontinued operations:
Income (loss)-discontinued operations -- 90,000 162,000 193,000
Loss on disposal-discontinued operations -- (4,411,000) 668,000 (4,411,000)
Extraordinary item--loss on early -- -- -- (253,000)
pay off of debt-net of taxes
-------------- ---------------- ------------- ---------------
Net loss $ (148,000) $ (4,727,000) $ (586,000) $ (6,193,000)
============== ================ ============= ===============
Loss per share (basic and diluted):
Continuing operations $ (0.04) $ (0.11) $ (0.37) $ (0.46)
============== ================ ============= ===============
Discontinued operations $ 0.00 $ (1.17) $ 0.22 $ (1.14)
============== ================ ============= ===============
Extraordinary item $ 0.00 $ 0.00 $ 0.00 $ (0.07)
============== ================ ============= ===============
Net income $ (0.04) $ (1.28) $ (0.15) $ (1.67)
============== ================ ============= ===============
Weighted average common shares
outstanding (basic and diluted) 3,882,864 3,705,222 3,797,035 3,705,222
============== ================ ============= ===============
The accompanying notes are an integral part of these financial statements.
4
IMAGE GUIDED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
1999 1998
--------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (586,000) $ (6,193,000)
Net gain, (loss) from discontinued operations 830,000 (4,218,000)
-------------------- ----------------
Loss from continuing operations $ (1,416,000) $ (1,975,000)
Adjustments to reconcile net loss from continuing operations
to net cash used in continuing operating activities:
Depreciation and amortization 229,000 505,000
Extradinary loss, net of tax ------- 253,000
Provision for inventory obsolescence 91,000 37,000
Provision for doubtful accounts 22,000 20,000
Changes in operating assets and liabilities:
Accounts receivable 689,000 275,000
Inventories 75,000 93,000
Other assets 45,000 (183,000)
Accounts payable 117,000 (59,000)
Accrued liabilities (26,000) 6,000
-------------------- ----------------
Net cash used in continuing operating activities $ (174,000) $ (1,028,000)
-------------------- ----------------
Net cash provided by discontinued operations 109,000 987,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (183,000) (269,000)
Proceeds from sales/lease back arrangements 325,000 --
Proceeds from sale of discontinued operations 5,931,000 --
-------------------- ----------------
Net cash provided by investing activities $ 6,073,000 $ (269,000)
-------------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock, options exercise 71,000 14,000
Proceeds from lines of credit 271,000 --
Proceeds from debt ------- 2,700,000
Principal payments on term loans (2,491,000) (452,000)
Payments on line of credit (2,524,000) 2,121,000
Principal payments to extinguish term loan ------- (5,028,000)
Payments on capital lease obligations (1,333,000) (241,000)
--------------------- -----------------
Net cash used in financing activities $ (6,006,000) $ (886,000)
--------------------- -----------------
Net increase (decrease) in cash and cash equivalents 2,000 (1,196,000)
CASH AND CASH EQUIVALENTS, beginning of period 23,000 1,216,000
-------------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 25,000 $ 20,000
==================== ================
Supplemental Cash Flow Disclosures:
Interest paid $ 269,000 $ 515,000
Equipment acquired under capital lease $ 325,000 --
Warrants issued in connection with debt $ ------- $ 169,000
The accompanying notes are an integral part of these financial statements.
5
IMAGE GUIDED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1--BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Springfield Surgical Instruments, Inc.
(Springfield), f/k/a Brimfield Precision, Inc. The consolidated financial
statements have been adjusted and restated to reflect the results of
operations and net assets of the general instrument and implant business
units of Springfield as discontinued operations for the three months ended
September 30, 1998 and nine months ended September 30, 1999 and 1998. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. The
financial statements reflect all adjustments which, in the opinion of
management, are necessary to present fairly the financial position of the
Company as of September 30, 1999 and its results of operations and cash flows
for the three and nine month periods then ended. The unaudited financial
statements should be read with the financial statements and footnotes thereto
included in the Company's Form 10-KSB for the year ended December 31, 1998
previously filed with the Securities and Exchange Commission.
Certain 1998 balances have been reclassified to conform to the 1999
presentation.
NOTE 2--SALE OF SPRINGFIELD SURGICAL INSTRUMENTS, INC. ASSETS
On March 30, 1999, Springfield sold substantially all the assets of its
general surgical instruments, orthopedic implants and orthopedic
instrumentation business located at Brimfield, Massachusetts. Total
consideration from the sale was $6,158,000 in cash plus assumption by the
purchaser of certain trade payables and accrued liabilities totaling $449,000.
The funds received from the asset sale were used to repay amounts outstanding
under equipment leases and the Company's term loan with BankBoston and to pay
down the Company's revolving loan with BankBoston.
NOTE 3--LINE OF CREDIT
On April 9, 1999, BankBoston assigned its loan to Silicon Valley Financial
Services ("Silicon"), a division of Silicon Valley Bank. After the
assignment, Silicon and the Company amended and restated the loan to provide
for a loan facility under which Silicon would purchase certain of the
Company's receivables, initially at the rates of 90% and decreasing to 75% of
the face amount of the receivables by July 1, 1999. Under the facility, the
Company will repurchase from Silicon any uncollected receivables which are
over 90 days old from the date of the invoice and pay Silicon a finance
charge equal to 2% per month on the face amount of all purchased receivables
and an administrative fee of 1.5% of the face amount of each purchased
receivable. Silicon has no obligation to purchase any receivable under the
facility.
On July 2, 1999 Silicon and the Company amended the loan to provide for a
loan facility under which Silicon would purchase certain of the Company's
receivables at 75% of the face amount of the receivables up to a total amount
of receivables purchased at any one time of $650,000. As of November 1, 1999,
approximately $178,000 of the Company's account receivables had been
purchased by Silicon.
6
NOTE 4 - SEGMENT INFORMATION
The Company has two business segments--optical localizers and surgical
instruments. The optical localizer segment typically sells a system which
consists of the following: a number of light-emitting diodes ("LED's") used
as markers mounted on a pointer device or surgical instrument, a relative
position dynamic reference device connected to a patient or industrial part,
a multi-camera array for detecting positions of the LED's in three
dimensional space, a proprietary microprocessor-based control system and a
proprietary software package. The surgical instrument segment sells stainless
steel surgical instruments used for minimally invasive surgery and other
surgical procedures including the newly emerging image guided surgical
instrument market segment.
The Company does not have a significant amount of inter-segment revenue and
evaluates segment performance based upon revenue and gross profit. The
combined segment gross profit equals consolidated gross profit. The Company
does not allocate research and product development costs, selling, general
and administrative expenses, other income and expense or income taxes to the
two segments. The revenue and gross profit by segment for the first nine
months of the year are as follows.
1999 1998
------------ ------------
Revenue: Optical localizers $ 4,089,000 $ 2,850,000
Surgical instruments 854,000 2,244,000
------------ ------------
Total revenue $ 4,943,000 $ 5,094,000
============ ============
Gross profit: Optical localizers $ 2,248,000 $ 1,313,000
Surgical instruments (151,000) 508,000
------------ ------------
Total gross profit $ 2,097,000 $ 1,821,000
============ ============
NOTE 5 - CONTINGENCIES
The Company is a party to one lawsuit and one threatened lawsuit, which,
while the outcome cannot be predicted with certainty, management expects they
will not have a material adverse effect on the consolidated financial
position or results of operations of the Company.
NOTE 6 - DEFAULT ON NOTE PAYABLE
The Company is currently in default under its $500,000 12% subordinated
promissory note payable to Cruttenden Roth, Inc. While interest has been paid
to date, the Company owes the $500,000 principal amount in full. The note is
subordinated to the Company's bank debt and the holders of the note are not
permitted under the terms of the subordination agreement with the bank to sue
upon or collect, nor to make demand for, nor to exercise any rights or
remedies to enforce, the note, so long as any bank obligation remains
outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
REVENUE. Revenue decreased $371,000 or 17.5% from $2,122,000 in the third
quarter 1998 to $1,751,000 in the third quarter 1999. Optical localizer revenue
increased $294,000 (24%) during this quarter primarily due to the receipt of
7
$396,000 for technology license and non-recurring engineering fees. More than
offsetting was a $664,000 (73%) decrease in minimally invasive surgical
instruments sales due to a sharp reduction in orders from one customer.
COST OF GOODS SOLD AND GROSS MARGIN. The Company's gross margin increased
from 39.8% in the third quarter 1998 to 45.6% in the third quarter 1999. This
increase is due to a favorable revenue and product mix related to the
recognition of technology license and non-recurring engineering fees and the
impact of cost reduction efforts partially offset by a decrease in surgical
instruments margins related to lower revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses remained
approximately the same during 1998 and 1999. The impact of the reduction in
engineering personnel in the third quarter of 1998 was offset by additional
spending for base technology enhancement and customization to meet customer
requirements.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
$49,000 or 17.8% from $276,000 for the third quarter 1998 versus $227,000 for
the third quarter 1999. This decrease is due to 1998 reclassification which
is more than offset by the addition of two additional sales personnel in 1999
plus increased expenses related to broadening the customer base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $199,000 or 37.3% from $533,000 in the third quarter 1998 to
$334,000 in the third quarter 1999. This decrease is due a reduction in the
number of personnel supporting this functional area.
OTHER EXPENSE. Other expense decreased $49,000 from the $107,000 of expense
recognized in the third quarter of 1998 to $59,000 of expense for the third
quarter of 1999 primarily due to a decrease in required interest expense to
support the debt associated with continuing operations.
DISCONTINUED OPERATIONS. Income (loss) from discontinued operations
represents the results of operations and loss on disposal of the general
surgical instruments, orthopedic implants and orthopedic instrumentation
business which the Company sold in March 1999. No additional loss was
recognized on the disposal of these operations.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 1998
REVENUE. Revenue decreased $151,000 or 3.0% from $5,094,000 in the first nine
months of 1998 to $4,943,000 in the first nine months of 1999. Increases in
revenue associated with increased sales in the industrial market and the
recognition during the third quarter of technology license and non-recurring
engineering fees were more than offset by the impact of delayed shipments of
the Company's new wireless systems and a decrease in surgical instruments
sales due to the loss of a major customer.
COST OF GOODS SOLD AND GROSS MARGIN. The Company's gross margin increased
from 35.7% in the first nine months of 1998 to 42.4% in the first nine months
of 1999. This increase is due to higher margins associated with a favorable
revenue and product mix related to the recognition of technology license and
non-recurring engineering fees and the impact of cost reduction efforts
partially offset by a decrease in surgical instruments margins related to
lower revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased $42,000 or 3.9% from $1,070,000 in the first nine months of 1998 to
$1,028,000 in the first nine months of 1999. The net decrease is due to a
reduction in engineering personnel in the third quarter of 1998. Partially
offsetting was an increase in quality assurance expenses in the first quarter
of 1999 related to the Company obtaining ISO 9001 certification and
additional spending during the third quarter for base technology enhancement
and customization to meet customer requirements. .
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$171,000 or 25.6% from $669,000 in the first nine months of 1998 to $840,000
in the nine months of 1999. This increase is due to two additional sales
personnel in 1999 plus increased expenses related to trade shows and expenses
associated with broadening the customer base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $17,000 or 1.2% from $1,392,000 in the first nine months of 1998 to
$1,375,000 in the first nine months of 1999. This decrease relates primarily
to lower salary costs due to a reduction in the number of personnel
supporting this functional area.
8
OTHER INCOME (EXPENSE). Other expense decreased by $142,000 or 34.5% from the
first nine months of 1998 versus the first nine months of 1999. The decrease
was primarily due to lower required interest costs to support the debt
associated with continuing operations.
DISCONTINUED OPERATIONS. Income (loss) from discontinued operations
represents the results of operations and loss on disposal of the general
surgical instruments, orthopedic implants and orthopedic instrumentation
business which the Company sold in March 1999. The gain for 1999, recognized
in the first quarter of 1999, resulted due to a reduction of the loss on
disposal of assets compared to the previously recognized estimated loss. The
reduction of the loss ultimately realized on the sale was due to additional
purchase consideration and higher than estimated net asset balances at
closing.
LIQUIDITY AND CAPITAL RESOURCES. Working capital decreased in the third
quarter, 1999 to a deficit of $275,000 versus a deficit of $231,000 at the
end of the second quarter, 1999. For the third quarter, the cash provided by
reductions of $110,000 in accounts receivable and $148,000 in the inventory
balance coupled with a $98,000 increase in the line of credit was utilized to
reduce accounts payables and accrued liabilities by $368,000 and to fund the
operating loss.
FUNDING OF FUTURE OPERATIONS. The Company is pursuing various alternatives to
raise cash to fund operations supporting an increase in customer orders, pay
down obligations to suppliers and for other corporate purposes.
Effective June 14, 1999 for a cash receipt of $200,000, the Company sold
certain of its equipment pursuant to a sale and leaseback agreement. On June
17 and June 24, 1999 the Company entered into lease based financing
agreements for the purchase of equipment for approximately $125,000. Pursuant
to these lease based financing agreements, the Company committed to make
monthly lease payments of approximately $8,400 for a period of 60 months. At
the conclusion of the lease period, the ownership of the leased equipment
will revert to the Company for a nominal charge.
In July 1999, the Company signed an exclusive licensing agreement for its
localizer technology for use in the automotive, truck and golf cart market
with a customer. Under the terms of the agreement, the Company will receive
three equal payments totaling $500,000 as a license fee (one payment of
$166,000 was received upon agreement completion in July and a second payment
of approximately $167,000 was received on November 8th). The payments are
based upon the successful transfer of certain intellectual property and
proprietary information to the customer.
In the third quarter of 1999, the Company entered into a development and
supply agreement with a customer pursuant to which the customer funded the
customization required to incorporate the Company's optical localizer into
the customer's product. During the 4th quarter of 1999, the Company intends
to continue to purse this program with selected customers who request unique
customization of the Company's core technology. All resource requirements
will be funded directly by the customer. It is anticipated that the ownership
of the unique technology adaptation/customization will be transferred to the
customer with the ownership of the core technology retained by the Company.
YEAR 2000 ISSUES. Pursuant to the Company's readiness programs, all major
categories of information technology systems and non-information technology
systems (i.e., equipment with embedded microprocessors) in use by the
Company, including manufacturing, sales, financial and human resources, are
being inventoried and assessed. In addition, plans are being developed for
the required systems modifications or replacements. With respect to its
information technology systems, the Company has completed the entire
assessment phase and has completed 95% of the remediation phase as of October
31, 1999. The Company plans to complete the final 5% of the remediation phase
for its information technology during the fourth quarter 1999. With respect
to its non-information technology systems, the Company has completed
approximately 95% of the assessment phase and has initiated its remediation
phase activities. The remainder of the assessment for non-technology systems
will be completed by mid-November, 1999 and remediation will be complete by
December 1, 1999. Selected areas, both internal and external, have been
tested to assure the integrity of the Company's remediation programs. The
company plans to have all internal mission-critical information technology
and non-information technology systems Year 2000 compliant by December 1,
1999.
The Company is in the process of communicating with its major customers,
suppliers and financial institutions to assess the potential impact on the
Company's operations if those third parties fail to become Year 2000
compliant in a timely manner. A formal survey of major customers and
suppliers began in April 1999. Risk assessment, readiness evaluation, action
plans and contingency plans related to the Company's significant customers
and suppliers are expected to be completed by November 30, 1999. The
Company's key financial institutions have been surveyed and it is the
Company's understanding that they are or will be Year 2000 compliant on or
before December 31, 1999.
9
The costs incurred to date related to its Year 2000 activities have not been
material to the Company, and, based upon current estimates, the Company does
not believe that the total cost of its Year 2000 readiness programs will have
a material adverse impact on the Company's result of operations or financial
condition.
The Company's readiness programs have included the development of contingency
plans to protect its business and operations from Year 2000-related
interruptions. These plans include back-up procedures and identification of
alternate suppliers, where possible. There can be no assurances, however,
that any of the Company's contingency plans will be sufficient to handle all
problems or issues, which may arise.
The Company believes that it is taking reasonable steps to identify and
address those matters that could cause serious interruptions in its business
and operations due to Year 2000 issues. However, delays in the implementation
of new systems, a failure to fully identify all Year 2000 dependencies in the
Company's systems and in the systems of its suppliers, customers and
financial institutions, a failure of such third parties to adequately address
their respective Year 2000 issues, or a failure of a contingency plan could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The statements set forth herein concerning Year 2000 issues which are not
historical facts are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
in the forward-looking statements. In particular, the costs associated with
the Company's Year 2000 programs and the time-frame in which the Company
plans to complete Year 2000 modifications are based upon management's best
estimate. These estimates were derived from internal assessments and
assumptions of future events. These estimates may be adversely affected by
the continued availability of personnel and system resources, and by the
failure of significant third parties to properly address Year 2000 issues.
Therefore, there can by no guarantee that any estimates, or other
forward-looking statements will be achieved, and actual results could differ
significantly from those contemplated.
FORWARD-LOOKING STATEMENTS
The Company may, in discussions of its future plans, objectives and expected
performance in periodic reports filed by the Company with the Securities and
Exchange Commission (or documents incorporated by reference therein) and in
written and oral presentations made by the Company, include projections or
other forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934,
as amended. Such projections and forward-looking statements are based on
assumptions which the Company believes are reasonable, but are by their
nature inherently uncertain. In all cases, there can be no assurance that
such assumptions will prove correct or that projected events will occur, and
actual results could differ materially from those projected. Some of the
important factors that could cause actual results to differ from any such
projections or other forward-looking statements follow.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
LOSSES DURING 1998 AND 1999; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS.
During the first nine months of the year, the Company lost $1,722,000 in 1998
and $1,416,000 in 1999 from continuing operations. There can be no assurance
the Company will generate sufficient revenue to attain profitability. In
addition, because the Company generally ships its products on the basis of
purchase orders, operating results in any quarter are highly dependent on
orders booked and shipped in that quarter and, accordingly, may fluctuate
materially from quarter to quarter. The Company's operating expense levels
are based on the Company's internal forecasts of future demand and partially
on firm customer orders. Failure by the Company to achieve these internal
forecasts could result in expense levels which are inconsistent with actual
revenues. Moreover, the Company's results may also be affected by fluctuating
demand for the Company's products, declines in the average selling prices for
its products, by changes in product mix sold, by increases in the costs of
the components and subassemblies acquired by the Company from vendors, and by
availability of such component and subassemblies from vendors.
BANK DEBT. The Company is currently borrowing money from Silicon Valley
Financial Services, a division of Silicon Valley Bank through an arrangement,
which involves transfer of outstanding accounts receivable to Silicon. The
arrangement is expensive and Silicon has no obligation to purchase any
receivable. While the Company hopes to be able to obtain a more favorable
banking arrangement, there can be no assurance that it will be successful.
10
NEED FOR ADDITIONAL CAPITAL. The Company will need additional capital to
satisfy its obligations to Cruttenden Roth, Inc. and to meet its other
capital requirements. There can be no assurance that such capital will be
available on reasonable terms, or at all.
DEPENDENCE ON FEW CUSTOMERS. The Company realizes a majority of its revenues
by sales to relatively few customers. Purchases by its customers are
generally by purchase order and do not involve long-term commitments. The
loss of, or substantial diminution of purchases from the Company by, any of
these customers could have a material adverse effect on the Company.
TECHNOLOGICAL CHANGE IN THE MEDICAL INDUSTRY AND IN THE COMPANY'S PRODUCT.
There can be no assurance that the Company's competitors will not succeed in
developing or marketing products or technologies that are more effective
and/or less costly and which render the Company's products obsolete or
non-competitive. In addition, new technologies and procedures could be
developed for medical and other industries that replace or reduce the value
of the Company's products. The Company's success will depend in part on its
ability to respond quickly to technological changes through the development
and improvement of its products. The Company believes that a substantial
amount of capital will be required to be allocated to such activities in the
future.
PROPERTY RIGHTS. The Company does not have any patents which directly cover
its FlashPoint or Pixsys optical localizers. The Company primarily relies on
a combination of trade secret and copyright laws, together with nondisclosure
agreements to protect its know-how and proprietary rights. There can be no
assurance that such measures will provide adequate protection for the
Company's intellectual property rights, that disputes with respect to
ownership of its intellectual property rights will not arise, that the
Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors or that the Company can
otherwise meaningfully protect its intellectual property rights. Furthermore,
there can be no assurance that others will not develop similar products or
software, duplicate the Company's products or software or that third parties
will not assert intellectual property infringement claims against the
Company. Moreover, there can be no assurance that any patent owned by, or
issued to, the Company will not be invalidated, circumvented or challenged,
or that the rights granted thereunder will provide meaningful competitive
advantages to the Company.
A patent granted to St. Louis University ("SLU Patent"), and subsequently
licensed to a company acquired by Sofamor Danek, one of the Company's major
customers, covers, in general, a particular technique for determining the
position of a surgical probe within a patient's body on a historical image of
that body. Sofamor Danek has sued BrainLab GmbH for infringement of this
patent. The Company's documents have been subpoenaed and Waldean Schulz, PhD.
Vice President-Technology of the Company, has had his deposition taken in
connection with such lawsuit. In 1995, the Company assigned to St. Louis
University all right, title and interest it had in the SLU Patent. There can
be no assurance that Sofamor Danek may not challenge the Company's ownership
of certain of its patents based on such assignment. The Company is not in a
position to evaluate what effect this lawsuit, or any further lawsuits, will
have on its customers or whether it will become a defendant in any lawsuit
involving this patent or any of the Company's patents.
Litigation may be necessary to protect the Company's intellectual property
rights and trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion
of resources, regardless of the outcome of the litigation. If any claims are
asserted against the Company, the Company may be required to obtain a license
under a third party's intellectual property rights. However, such a license
may not be available on reasonable terms or at all.
COMPETITION BY EXISTING COMPETITORS AND POTENTIAL NEW ENTRANTS INTO THE
MARKETPLACE. Companies with substantially greater financial, technical,
marketing, manufacturing and human resources, as well as name recognition,
than the Company may enter markets currently serviced by the Company.
Additionally, competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements and to devote
substantially greater resources to the development, marketing and sale of
their products than the Company. The Company's customers may develop their
own products to be able to differentiate their product or for other reasons.
Furthermore, such competitors may develop technologies and/or products other
than that currently offered by the Company that are more effective or
economical.
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REGULATION BY THE FDA. Noncompliance with applicable requirements of FDA can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of
the government to grant premarket clearance or premarket approval for medical
devices, withdrawal of marketing approvals and criminal prosecution. The FDA
also has the authority to request repair, replacement or refund of the cost
of any medical device. In addition, international sales of medical devices
are subject to foreign regulatory requirements, which vary from country to
country.
RISK OF PRODUCT LIABILITY CLAIMS. The Company faces an inherent business risk
of exposure to product liability claims in the event that the use of its
products is alleged to have resulted in adverse effects. To date, no product
liability claims have been asserted against the Company. The Company
maintains a product liability and commercial general liability insurance
policy. The Company's product liability and general liability policy is
provided on an occurrence basis and is subject to annual renewal. There can
be no assurance that liability claims will not exceed the coverage limits of
such policy or that such insurance will continue to be available on
commercially reasonable terms or at all. If the Company does not or cannot
maintain sufficient liability insurance, its ability to market its products
could be significantly impaired.
COMPANY'S DEPENDENCE ON KEY MANAGEMENT AND TECHNICAL PERSONNEL AND ITS
ABILITY TO ATTRACT NEW PERSONNEL. The Company's success depends in
significant part on the continued contribution of certain key management and
technical personnel. The loss of services of any of these individuals could
have a material adverse effect on the Company. The Company's growth and
profitability also depend on its ability to attract and retain other
management and technical personnel.
CLAIM BY DANIEL HANNIFY. The Company and Springfield have received a notice
of claim pursuant to the December 1, 1997 Employment Agreement between
Brimfield Precision, Inc. and Daniel T. Hannify. Mr. Hannify is claiming that
he is entitled to payment of $200,000 per year plus benefits for two years
and eight months.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to one lawsuit, which, while the outcome cannot
be predicted with certainty, management expects will not have a
material adverse affect on the consolidated financial position or
results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
On September 22, 1999, the Company sold to Paul L Ray, its President,
Chief Executive Officer and Chief Financial Officer, 150,000 shares of
its common stock pursuant to a private placement at 85% of the average
last trading price for such stock during the 30 calendar days preceding
Board of Directors approval in which there was a trade ($0.2702 per
share or $40,530 in total). Such shares were sold in reliance on
Section 4(2) of the Securities Act of 1933. The purpose of the sale was
to provide an incentive to Mr. Ray and tie him to the Company for the
long-term. Mr. Ray simultaneously returned 150,000 options to the
Company and thus reduced the number of outstanding Company options.
Item 3. Defaults Upon Senior Securities
The Company is currently in default under its $500,000 12% subordinated
promissory note payable to Cruttenden Roth, Inc. See "Liquidity and
Capital Resources."
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Title
----------- -----
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Image Guided Technologies, Inc.
By: /s/ Paul L. Ray
- ---------------------------------- Date:
Paul L. Ray
President, Chief Executive Officer
and Chief Financial Officer
By: /s/ Francis E. Lefler
- ---------------------------------- Date:
Francis E. Lefler
Principal Accounting Officer
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