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 JUNE 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 July
31, 1999 was 3,803,020.
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
IMAGE GUIDED TECHNOLOGIES
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
Part I Financial Information Page
Item 1. Balance Sheets as of June 30, 1999 and December 31, 1998 3
Statements of Operations for the three and six months
ended June 30, 1999 and 1998 4
Statements of Cash Flows for the six months ended
June 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.
BALANCE SHEETS
June 30, December 31,
1999 1998
---------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 84,000 $ 23,000
Accounts receivable, net of allowance for doubtful
accounts of $90,000 and $76,000, respectively 1,109,000 1,710,000
Inventories, net 903,000 921,000
Investment--Discontinued operations -- 1,437,000
Other current assets 141,000 174,000
--------------- ----------------
Total current assets 2,237,000 4,265,000
Property and equipment, net of accumulated depreciation of
$722,000 and $602,000, respectively 732,000 650,000
Goodwill, net of accumulated amortization of $44,000 and
$31,000, respectively 537,000 550,000
Patents and Trademarks net of accumulated amortization
$22,000 and $21,000, respectively 56,000 57,000
Investment--Discontinued operations -- 5,184,000
Other assets 149,000 165,000
--------------- ----------------
Total assets $ 3,711,000 $ 10,871,000
--------------- ----------------
--------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,322,000 $ 860,000
Accrued liabilities 400,000 403,000
Line of credit 173,000 2,524,000
Current portion of capital lease obligations 86,000 1,332,000
Current portion of notes payable 487,000 2,986,000
--------------- ----------------
Total current liabilities 2,468,000 8,105,000
Capital lease obligations 292,000 38,000
--------------- ----------------
Total liabilities $ 2,760,000 $ 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 10,475,000 10,456,000
outstanding; respectively
Accumulated deficit (9,524,000) (7,728,000)
--------------- ----------------
Total shareholders' equity $ 951,000 $ 2,728,000
--------------- ----------------
Total liabilities and shareholders' equity $ 3,711,000 $ 10,871,000
--------------- ----------------
--------------- ----------------
The accompanying notes are an integral part of these balance sheets.
3
IMAGE GUIDED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30
(Unaudited)
Three Months Ended June 30 Six Months Ended June 30
------------------------------ --------------------------------
1999 1998 1999 1998
------------ -------------- -------------- -------------
Revenue $ 1,338,000 $ 1,252,000 $ 3,192,000 $ 2,972,000
Cost of goods sold 862,000 939,000 1,893,000 1,995,000
----------- ------------- ------------- ------------
Gross profit 476,000 313,000 1,299,000 977,000
----------- ------------- ------------- ------------
Operating expenses:
Research and development 357,000 357,000 702,000 736,000
Selling and marketing 306,000 185,000 613,000 393,000
General and administrative 510,000 543,000 1,041,000 859,000
----------- ------------- ------------- ------------
Total operating expenses 1,173,000 1,085,000 2,356,000 1,988,000
----------- ------------- ------------- ------------
Operating loss (697,000) (772,000) (1,057,000) (1,011,000)
Other income (expense) (77,000) 1,000 (79,000) (37,000)
----------- ------------- ------------- ------------
Loss from continuing operations (774,000) (771,000) (1,136,000) (1,048,000)
Discontinued operations:
Income (loss) from
discontinued operations (115,000) 30,000 (164,000)
Loss on disposal of
discontinued operations -- -- (690,000) --
Extraordinary item--loss on early -- (253,000) -- (253,000)
pay off of debt-net of taxes
----------- ------------- ------------- ------------
Net loss $ (774,000) $ (1,139,000) $ (1,796,000) $ (1,465,000)
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Loss per share (basic and diluted):
Continuing operations $ (0.20) $ (0.21) $ (0.30) $ (0.28)
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Discontinued operations $ 0.00 $ (0.03) $ (0.18) $ (0.05)
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Extraordinary item $ 0.00 $ (0.07) $ 0.00 $ (0.07)
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Net income $ (0.20) $ (0.31) $ (0.48) $ (0.40)
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
Weighted average common shares
outstanding (basic and diluted) 3,803,020 3,697,822 3,754,121 3,697,822
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
The accompanying notes are an integral part of these financial statements.
4
IMAGE GUIDED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(Unaudited)
1999 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,796,000) $ (1,465,000)
Net loss from discontinued operations (660,000) (164,000)
------------ ------------
Loss from continuing operations $ (1,136,000) $ (1,301,000)
Adjustments to reconcile net loss from continuing operations
to net cash used in continuing operating activities:
Extraordinary loss net of tax -- 253,000
Depreciation and amortization 134,000 410,000
Gain on disposition of assets -- 33,000
Provision for inventory obsolescence 42,000 10,000
Provision for doubtful accounts 14,000 16,000
Changes in operating assets and liabilities:
Accounts receivable 587,000 216,000
Inventories (24,000) (123,000)
Other assets 49,000 163,000
Accounts payable 462,000 103,000
Accrued liabilities (3,000) 79,000
------------ ------------
Net cash used in continuing operating activities $ 125,000 $ (141,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (202,000) --
Proceeds from sales/lease back arrangements 325,000 --
Proceeds from sale of discontinued operations 5,961,000 --
------------ ------------
Net cash provided by investing activities $ 6,084,000 $ --
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock 19,000 4,000
Proceeds from lines of credit 173,000 5,187,000
Principal payments on term loans (2,499,000) (5,346,000)
Payments on line of credit (2,524,000) (577,000)
Payments on capital lease obligations (1,317,000) (175,000)
------------ ------------
Net cash used in financing activities $ (6,148,000) $ (907,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 61,000 (1,048,000)
CASH AND CASH EQUIVALENTS, beginning of period 23,000 1,216,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 84,000 $ 168,000
------------ ------------
------------ ------------
Supplemental Cash Flow Disclosures:
Interest paid $ 210,000 $ 361,000
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
JUNE 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
June 30, 1998 and six months ended June 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 June 30, 1999 and its results of operations and cash flows for
the three and six 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.
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. Also, the total
amount of receivables purchased at any one time cannot exceed $650,000. As
of August 1, 1999, approximately $167,000 of the Company's accounts
receivable 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 any intersegment 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 six months of the year are
as follows.
1999 1998
------------ ------------
Revenue: Optical localizers $ 2,583,000 $ 1,637,000
Surgical instruments 609,000 1,335,000
------------ ------------
Total revenue $ 3,192,000 $ 2,972,000
------------ ------------
------------ ------------
Gross profit: Optical localizers $ 1,344,000 $ 648,000
Surgical instruments (45,000) 329,000
------------ ------------
Total gross profit $ 1,299,000 $ 977,000
------------ ------------
------------ ------------
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 JUNE 30, 1999 COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 1998
REVENUE. Revenue increased $86,000 or 6.9% from $1,252,000 in the second
quarter 1998 to $1,338,000 in the second quarter 1999. The increase is due
to higher optical localizer business from existing and new customers
primarily related to increased sales of wireless systems and an increase in
sales in the industrial market, partially offset by a decrease in minimally
invasive surgical instruments sales spread across the Company's customer
base.
7
COST OF GOODS SOLD AND GROSS MARGIN. The Company's gross margin increased
from 25.0% in the second quarter 1998 to 35.6% in the second quarter 1999.
This increase is due to a favorable product mix 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 the same for 1998 and 1999 at $357,000. 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 increased
$121,000 or 65.4% from $185,000 in the second quarter 1998 to $306,000 in the
second quarter 1999. This increase is due to two additional sales personnel
in 1999 plus increased expenses related to broadening the customer base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $33,000 or 6.1% from $543,000 in the second quarter 1998 to
$510,000 in the second quarter 1999. This decrease is due a reduction in the
number of personnel supporting this function.
OTHER INCOME (EXPENSE). Other income and expense increased $78,000 from the
$1,000 income recognized in the second quarter of 1998 to $77,000 of expense
for the second quarter of 1999 primarily due to increased 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 that the Company sold in March, 1999. No additional loss was
recognized on the disposal of these operations, which occurred during the
first quarter of 1999.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 1998
REVENUE. Revenue increased $220,000 or 7.4% from $2,972,000 in the first
half of 1998 to $3,192,000 in the first half of 1999. The increase is due to
higher optical localizer business from existing and new customers related to
increased sales of the Company's wireless systems and an increase in sales in
the industrial market, partially offset by 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 32.9% in the first half 1998 to 40.7% in the first half 1999. This
increase is due to higher optical localizer margins related to a favorable
product mix and the impact of cost reduction efforts, partially offset by a
decrease in surgical instruments margins.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased $34,000 or 4.6% from $736,000 in the first quarter 1998 to $702,000
in the first half 1999. The net decrease is due to a reduction in
engineering personnel in the third quarter of 1998 offset by an increase in
quality assurance expenses in the first quarter of 1999 related to the
Company's obtaining ISO 9001 certification.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
$220,000 or 56.0% from $393,000 in the first half 1998 to $613,000 in the
first half 1999. This increase is due to two additional sales personnel in
1999 plus increased expenses related to trade shows and an attempt to broaden
the customer base.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $182,000 or 21.2% from $859,000 in the first half 1998 to
$1,041,000 in the first half 1999. This increase is due to salary costs in
the first quarter of 1999 for a former officer, increases in legal fees, and
utilization of temporary and contract personnel during the period of
recruitment activity to replace key employees no longer with the Company.
OTHER INCOME (EXPENSE). Other expense increased by $42,000 or 113% from the
first half 1998 to the first half 1999. The increase was primarily due to
increased interest costs associated with the debt associated with continuing
operations.
8
DISCONTINUED OPERATIONS. Income (loss) from discontinued operations
represents the results of operations and loss on the disposal of the general
surgical instruments, orthopedic implants and orthopedic instrumentation
business, which the Company sold in March 1999. The loss for 1999 represents
a loss recognized in the first quarter of 1999 due to a change in the
estimated sale price primarily due to the valuation of net assets sold and
the costs associated with finalizing the sale.
LIQUIDITY AND CAPITAL RESOURCES. Working capital decreased in the second
quarter, 1999 to a deficit of $231,000 versus a surplus of $327,000 at the
end of the first quarter, 1999. Cash provided by a $713,000 reduction in
accounts receivable, $325,000 capital lease financing, and a $173,000
increase in accounts payable and accrued liabilities was primarily used to
fund the $774,000 operating loss for the quarter and to reduce the line of
credit by $414,000.
As of August 1, 1999, approximately $167,000 of the Company's outstanding
accounts receivable had been purchased by Silicon Financial Services. The
Company is pursuing various alternatives to raise cash to fund its
operations, pay down its obligations to its 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 in the amount of $125,285. 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 such payment of
$167,000 has already been received). The payments are based upon the
successful transfer of certain intellectual property and proprietary
information to the customer.
During the 3rd and 4th quarters of 1999, the Company intends to purse a
program with selected customers where unique customizations of the Company's
core technology requested by the customer 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 July
31, 1999. The Company plans to complete the final 5% of the remediation
phase for its information technology by September 30, 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 September 30, 1999 and remediation will be complete by
the end of October, 1999. Selected areas, both internal and external, will
be tested to assure the integrity of the Company's remediation programs. The
testing is expected to be completed by October 31, 1999. The company plans
to have all internal mission-critical information technology and
non-information technology systems Year 2000 compliant by October 31, 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 October 31, 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.
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.
9
The Company's readiness programs will also include the development of
contingency plans to protect its business and operations from Year
2000-related interruptions. These plans should be complete by October 31,
1999 and, by way of examples, will include back-up procedures, identification
of alternate suppliers, where possible, and increases in safety inventory
levels. 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, OPERATION RESULTS AND FINANCIAL
CONDITION
LOSS DURING 1998 AND 1999; POTENTIAL FLUCTUATIONS IN OPERATING RESULTS.
During the first half of the year, the Company lost $1,301,000 in 1998 and
$1,136,000 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
by 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 recently 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.
11
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
None
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
----------- -----
10.32 Employment Agreement dated 3/1/98 between the Company
and William O'Connor.
10.35 Stock Option Agreement for Paul L. Ray
10.36 Second Amended and Restated Loan Agreement, dated as of
April 3, 1998, with Silicon Valley Financial Services.
10.37 July, 1999 Modification to Second Amended and Restated
Loan Agreement with Silicon Valley Financial Services
27 Financial Data Schedule
(b) Reports on Form 8-K
Filed April 4, 1999--The Company announced the sale of the
orthopedic and general instrument business units of the Company's
subsidiary, Brimfield Precision Inc. to an entity controlled by
MedSource Technologies, Inc. This 8-K was subsequently amended
by a filing on August 4, 1999.
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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.
/s/ Paul L. Ray
- ----------------------------- Date: August 13, 1999
Paul L. Ray
President, Chief Executive Officer and
Chief Financial Officer
14