AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 2003
REGISTRATION NO. 333-336787
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 2 TO
FORM SB-2A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
IMAGE TECHNOLOGY LABORATORIES, INC.
DELAWARE 8011 22-3531373
-------- ---- ----------
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
IDENTIFICATION OF INCORPORATION) CLASSIFICATION CODE NUMBER) OR ORGANIZATION
NUMBER)
602 ENTERPRISE DR1VE, KINGSTON, NEW YORK 12401 (845) 338-3366
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
DAVID RYON, MD
CEO, PRESIDENT, CHAIRMAN OF THE BOARD
602 ENTERPRISE DRIVE, KINGSTON, NEW YORK 12401
(845) 338-3366
(NAME, ADDRESS AND TELEPHONE NUMBER FOR AGENT FOR SERVICE)
COPIES TO:
JAMES J. QUINLAN, ESQ.
GENERAL COUNSEL
602 ENTERPRISE DRIVE, KINGSTON, NEW YORK 12401
(845) 338-3366
IF THIS FORM IS FILED TO REGISTER ADDITIONAL
SECURITIES FOR AN OFFERING PURSUANT TO RULE 462(B)
UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX
AND LIST THE SECURITIES ACT REGISTRATION STATEMENT
NUMBER OF THE EARLIER EFFECTIVE
REGISTRATION STATEMENT FOR THE SAME OFFERING. / /
IF THIS FORM IS A POST-EFFECTIVE AMENDMENT
FILED PURSUANT TO RULE 462(C) UNDER THE SECURITIES
ACT, CHECK THE FOLLOWING BOX AND LIST THE
SECURITIES ACT REGISTRATION STATEMENT NUMBER OF
THE EARLIER EFFECTIVE REGISTRATION STATEMENT
FOR THE SAME OFFERING.
/ /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
Cover continued on next page
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8 (A), MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
==================================== ====================== ======================== =================== =================
Proposed
Maximum
Aggregate Amount of
Title of Each Class of Amount to be Proposed Maximum Offering Registration
Securities to be Registered Registered Offering Price(1) Price(1) Fee
----------------------------------- ---------------------- ------------------------ ------------------- -----------------
Class B $.50 Warrants 2,417,450 $.50 $1,208,725
behalf of certain shareholders -- --
----------------------------------- ---------------------- ------------------------ ------------------- -----------------
Common Stock issuable on exercise 2,417,450 Shares
of Class A selling shareholder
warrants
----------------------------------- ---------------------- ------------------------ ------------------- -----------------
Class A $.40 Warrants registered on 662,062 $.40 $264,825
behalf of certain shareholders -- --
----------------------------------- ---------------------- ------------------------ ------------------- -----------------
Common Stock issuable on exercise 662,062 Shares
of Class B selling shareholder
warrants
----------------------------------------------------------------------------------- ------------------- -----------------
Total $1,473,550 $369.00(2)
=================================== ====================== ======================== =================== =================
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457.
(2) Fee paid with original filing on August 8, 2000.
Prospectus
IMAGE TECHNOLOGY LABORATORIES, INC.
3,079,512 warrants previously issued and 3,079,512 shares of common stock
underlying such warrants to be sold separately by selling shareholders
Net Proceeds to Image Technology Laboratories, Inc....................$1,473,550
On February 11, 2003, our Board of Directors authorized the reduction of the
exercise price of our Class A $.40 warrants and our Class B $.50 warrants to
$.20 during this period commencing upon February 18, 2003 and ending on July 1,
2003. Thereafter the exercise price will revert to $.40 and $.50 respectively.
This Prospectus is being delivered to existing warrant holders in connection
with the reduction of the exercise price. The Company will not extend either
Class of warrants beyond October 15, 2003.
We trade on the OTC Bulletin Board under the symbol "IMTL" with respect to our
common stock and under the symbol "IMTLW" and "IMTLZ" with respect to two
classes of warrants which are detachable from the shares.
Look carefully at the risk factors beginning on page 5 of this
prospectus.
This preliminary prospectus is not an offer to sell nor does it seek an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted.
Neither the SEC nor any other regulatory body has approved these shares or
determined that this prospectus is accurate or complete. It is illegal for
anyone to tell you otherwise.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 14, 2003
-1-
TABLE OF CONTENTS
Prospectus Summary........................................................... 3
Risk Factors................................................................. 5
Dividend Policy.............................................................. 12
Management's Discussion and Analysis or Plan of Operation.................... 13
Description of Business...................................................... 16
Management................................................................... 24
Executive Compensation....................................................... 26
Principal and Selling Security holders....................................... 29
Certain Relationships and Related Transactions............................... 30
Market for Our Securities.................................................... 30
Description of Securities.................................................... 31
Transfer Agent and Registrar................................................. 35
Plan of Distribution......................................................... 35
Shares Eligible for Future Sale.............................................. 36
Legal Matters................................................................ 37
Experts...................................................................... 37
Where You Can Find More Information.......................................... 38
Index to Financial Statements ...............................................F-1
-2-
PROSPECTUS SUMMARY
The following summary highlights information which we present more fully
elsewhere in this prospectus. You should read this entire prospectus carefully.
Introduction
Image Technology Laboratories, Inc. ("ITL") is a hardware/software company which
has entered the medical image management segment of the healthcare information
systems market. We were incorporated in Delaware on December 5, 1997. Our
principal executive offices are located at 602 Enterprise Drive, Kingston, New
York 12401. Our phone number is (845) 338-3366.
Our Founders
Presently we have six employees including two of our founders, Dr. David Ryon,
and Mr. Lewis Edwards. They along with Dr. Carlton Phelps, the third founder and
a former officer and director of ITL, own 7,773,750 shares of common stock,
representing 65% of our outstanding 12,232,462 shares of common stock. In
addition, they also own 1,500,000 shares of preferred stock, or 100% of the
outstanding shares.
Dr. Ryon is the founder of the Kingston Diagnostic Center in Kingston, New York
and operated the Kingston Diagnostic Center as a sole proprietor from its
inception in 1992 until the sale of the business to Rockland Radiological Group,
P.C., now known as Mid Rockland Imaging Partners or, Mid Rockland, in 1997. Mr.
Edwards has served as a senior technical staff member at IBM since 1993. He was
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.
Our Company
Through our founders, we have designed a proprietary radiology information
system and picture archiving and communications software system, or RIS/PACS,
for use in the management of medical diagnostic images by hospitals and medical
centers. RIS/PACS inputs and stores diagnostic images in digital format from
original imaging sources such as CT scans, MRIs, ultrasound, nuclear imaging and
digital fluoroscopy.
We have developed software to manage the entire practice of radiology, including
the scheduling of patient examinations, display of images on workstations,
generation of worklists for all members of the enterprise, production and
distribution of illustrated radiologic reports, and billing for the services
provided.
-3-
At the heart of the system are software modules referred to as the
WorkLoadExecutive and WorkLoadRouter. This software equitably distributes the
work to be done, and ensures its timely completion. Images are displayed for the
radiologist on a proprietary, multimonitor workstation controlled with a unique
touchscreen interface. The combination of the back office software and the
versatile workstation increase the accuracy and efficiency of diagnosis. Such
software is applicable to any setting of a radiology practice, including
hospitals and free standing imaging centers.
This facilitates:
- time-critical transfer of patient information between
hospital departments, such as from radiology to emergency
room,
- rapid off-site consultations by specialists at remote
locations, or
- convenient home viewing by individual radiologists.
Hospitals and other health organizations can use ITL's WarpSpeed PACS/RIS
permanently to replace more costly and cumbersome image storage mediums such as
film. ITL provides all support services, including:
- remote system,
- network, and
- database administration and management.
We have also developed a unique display station which allows radiologists to
simultaneously view multiple digitized images. ITL's WarpSpeed PACS/RIS has been
designed to run under the Windows 2000 operating system and includes no-cost
remote access to the imaging database via the Internet for on-call remote
diagnosis or referring physician consultations.
We anticipate that our customers will include hospitals, medical centers and
imaging centers in the northeastern United States. ITL plans to distribute ITL's
WarpSpeed PACS/RIS through three channels:
- original equipment manufacturer relationships,
- partnerships, and
- direct distribution through its own sales
representatives.
Since inception, we have incurred losses, resulting in an accumulated deficit of
$2,375,038 at September 30, 2002. The Company obtained its first contract for
the sale of its software product and related hardware and maintenance services
in August 2002. Although the Company has been deriving revenues from the
provision of radiology and imaging services to affiliated and nonaffiliated
companies, management expects that the Company will derive its revenue in the
future primarily from the sales of the software product.
-4-
The Offering
On February 11, 2003, our Board of Directors authorized the change of the
exercise price of our Class A $.40 warrants and our Class B $.50 warrants to
$.20 during the period commencing upon February 18, 2003 and ending on July 1,
2003. Thereafter the exercise price will revert to $.40 and $.50 respectively.
The warrants are redeemable by ITL at $.05 per warrant if the common stock
closing bid price exceeds $1.00 for 10 consecutive trading days.
RISK FACTORS
Please consider the following risk factors together with the other information
presented in this prospectus including the financial statements and the notes
thereto before investing in our common stock. The trading price of our common
stock and warrants could decline due to any of the following risks, and you
might lose all or part of your investment.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR PROSPECTS. We
incorporated on December 5, 1997, and commenced operations January 1, 1998.
Accordingly, we have only a limited operating history on which to evaluate our
business. As a result of our limited operating history we may be unable to
accurately forecast our revenues. Our relative lack of experience means that our
business will have numerous personnel, operational, financial, regulatory and
other risks not faced by more experienced competitors. As an investor, you
should be aware of the difficulties, delays and expenses normally encountered by
an enterprise in its initial stage, many of which are beyond our control,
including:
- unanticipated developmental expenses,
- inventory costs,
- employment costs, and
- advertising and marketing expenses.
Our inability to manage these difficulties, delays and expenses adequately could
result in a loss of your investment or even of our entire business.
IF WE CANNOT OPERATE PROFITABLY, YOU COULD LOSE YOUR ENTIRE INVESTMENT. We
cannot assure our investors that our proposed business plans as described in
this prospectus will materialize or prove successful, or that we will ever be
able to operate profitably. Failure of our business plan to materialize or yield
a profit could result in a loss of your entire investment. Accordingly, a
failure to meet our revenue projections will have an immediate and negative
impact on profitability. In addition, we cannot be certain that our evolving
business model will be successful, particularly in light of our limited
operating history. Initially, the business model will depend primarily on the
sales of software preinstalled on appropriate hardware. Such a sale will
comprise the complete, preconfigured system installation. In a small number of
instances, the complete system will be installed, and a per use fee will be
collected by ITL. Under this arrangement, the system will be the property of
ITL, and the per use fee will be an expense item to the contracting
organization. This type of arrangement will benefit the smaller user, not in a
position for a large capital outlay. The relative proportion of the two sales
strategies will depend, in large part, on the economic climate and interest
rates. Under either arrangement, we will sustain substantial expenses, and, if
we are unable to generate revenues for a sustained period, we could lose our
entire business.
IF WE DO NOT SURVIVE IN THIS MARKET, WE WILL EITHER HAVE TO CHANGE OUR BUSINESS
PLAN DRAMATICALLY OR FACE LOSING OUR ENTIRE BUSINESS. There can be no assurance
that we will be able to successfully remain in the medical image management
market as currently planned. Our survival in the medical image management
industry will depend upon our ability to:
- successfully develop and enhance our current product,
- to develop or obtain from third-party suppliers new products
which keep pace with technological developments,
- respond to evolving end-user requirements, and
- achieve market acceptance.
-5-
IF WE ARE UNABLE TO ANTICIPATE OR RESPOND ADEQUATELY TO TECHNOLOGICAL
DEVELOPMENTS OR END-USER REQUIREMENTS OR ANY DELAYS IN PRODUCT DEVELOPMENT,
ACQUISITION OR INTRODUCTION, WE WILL BE UNABLE TO BECOME OR REMAIN PROFITABLE
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE AND CAUSE YOU TO LOSE YOUR
INVESTMENT.
WE CANNOT BE CERTAIN WHETHER ITL WILL EVER GENERATE A SIGNIFICANT AMOUNT OF
REVENUES OR PROFIT, OR, IF IT DOES, THAT IT WILL BE ABLE TO CONTINUE GENERATING
SUCH REVENUES OR PROFIT. We have a history of losses and an accumulated deficit
and we expect future losses. ITL has incurred losses of $2,375,038 from its
inception through September 30, 2002 primarily as a result of legal and
accounting expenses incurred in connection with business formation, and after
January 1, 2000, research and developmental expenses consisting principally of
cash and non-cash compensation of our founders. We may not be able to generate
revenue or achieve or sustain profitability in the future. Our revenue
assumptions may be inaccurate since we have no historical data on which to rely
in estimating future revenue or expenses. We expect to lose more money as we
spend additional capital to develop our systems, market our products and
establish our infrastructure and organization to support anticipated operations.
If we are unable to generate adequate revenues or raise additional funds through
debt or equity offerings sufficient to cover our expenses for a sustained period
of time, we could loss our entire business.
ITL IS SUBJECT TO NUMEROUS ENVIRONMENTAL, HEALTH, AND WORKPLACE SAFETY LAWS AND
REGULATIONS WHICH MIGHT ADVERSELY AFFECT OUR FINANCIAL CONDITION OR ABILITY TO
CARRY ON OUR BUSINESS. Later discovery of previously unknown problems with a
product or manufacturer, or an increase in the incidence of previously unknown
problems may result in restrictions on the product and the manufacturer. The
restrictions could include withdrawal of the product from the market. Any
disruptions, delays and expenses caused by our compliance with these regulations
could increase our expenses and, correspondingly decrease our profitability.
WE WILL NEED ADDITIONAL FINANCING TO FUND OUR PLANNED OPERATIONS BEYOND THEIR
CURRENT LEVEL OVER THE NEXT TWELVE MONTHS OR WE MAY NOT BE ABLE TO CONTINUE OUR
BUSINESS AS PLANNED. ITL intends to fund its operations by raising additional
funds through equity or debt financing. We estimate that we will need
approximately $80,000 of such financing over the next twelve months. During
September 2002, the Company obtained a $75,000 working capital loan. At present,
we have no commitments for additional or alternative financing, except for the
commitment of our principal stockholder to fund the $80,000, and there is no
assurance that we will be able to obtain such financing on satisfactory terms,
if at all. ITL's inability to secure additional funds from such financing within
twelve to eighteen months could adversely affect ITL's ability to implement its
business plan. In addition, any subsequent offering of securities would, in all
likelihood dilute existing stockholders' percentage of ownership in ITL.
ALTHOUGH WE BELIEVE ITL'S WarpSpeed PACS/RIS OFFERS UNIQUE FEATURES WHICH WILL
DISTINGUISH IT IN THE MARKET, LARGER OR MORE ESTABLISHED PACS/RIS SUPPLIERS HAVE
SUBSTANTIALLY GREATER RESOURCES THAN WE DO. THERE CAN BE NO ASSURANCE ITL WILL
BE ABLE TO COMPETE SUCCESSFULLY AGAINST THEM IN THE MARKET FOR PACS/RIS. At
present, PACS/RIS are produced by a number of highly competitive, small
companies specializing in image management software and equipment and a smaller
number of substantially larger medical equipment and imaging software suppliers,
each of which has captured only a relatively small share of the current market
for PACS/RIS to date. In addition, a number of large hospital radiology centers
are presently developing their own proprietary PACS/RIS for internal use. This
trend may reduce
-6-
the market for ITL's WarpSpeed PACS/RIS among larger institutions. It may also
result in the introduction of additional competitive products in the market to
the extent that such proprietary systems are being developed in collaboration
with computer software and hardware vendors who may be given the opportunity to
commercialize these products upon completion. Although we believe that ITL's
WarpSpeed PACS/RIS offer significant advantages over such older imaging systems
and the market for PACS/RIS is expected to grow quickly, there can be no
assurance that hospitals, HMOs and others will continue to invest in the newer
PACS/RIS technology at forecasted rates. If they do not do so, or they do not
perceive the advantages of our PACS/RIS, we will lose some of our anticipated
revenue and could lose our entire business.
WE MAY NOT HAVE THE FUNDS OR THE ABILITY TO DEVELOP OR ACQUIRE ANY NEW OR
IMPROVED HARDWARE OR SOFTWARE WHICH WE MAY NEED IN ORDER TO REMAIN COMPETITIVE
WHICH COULD CAUSE US TO BE UNABLE TO CONTINUE OUR BUSINESS. We may face
competition from newer technologies based on different imaging techniques. ITL's
WarpSpeed PACS/RIS has been designed to work with the Windows 2000 operating
system to permit easy upgrading and avoid product obsolescence. There can be no
assurance, however, that the basic technology of all PACS/RIS, and therefore the
market for such systems, will not be superceded by an altogether new form of
imaging technology or that the hardware and operating system components of ITL's
WarpSpeed PACS/RIS will not become obsolete in some other manner. Although we
are not aware of any new technologies currently under development which might
replace PACS/RIS technology, new technologies may be developed, or existing
technologies refined, which could render ITL's WarpSpeed PACS/RIS
technologically or economically obsolete.
THERE CAN BE NO ASSURANCE WE WILL DEVELOP ADDITIONAL PRODUCTS WHICH WILL BE
COMMERCIALLY VIABLE. We are solely relying on one product to generate all of our
initial revenue. We have no product or service other than ITL's WarpSpeed
PACS/RIS on which we may rely for future revenue. Our failure to develop new
products could limit our future revenue and revenue growth which, in turn, could
negatively affect our stock price.
FAILURE TO MARKET OUR PRODUCTS PROPERLY COULD SEVERELY LIMIT OUR ABILITY TO EARN
REVENUES OR PROFITS, AND IN TURN CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
We have limited marketing experience. ITL intends to market ITL's WarpSpeed
PACS/RIS to hospitals, HMOs, individual radiologists and group practices.
Although we intend to add management members who have experience in marketing
medical devices, ITL has no experience marketing its proposed products. We have
only very limited sales, marketing and distribution capabilities at this time.
To market any of our products directly, we must develop a marketing and sales
force with technical expertise and supporting product distribution capability.
Significant additional expenditures will be required for us to develop a sales
force or penetrate the markets for our products, assuming we are able to make
those expenditures. We may not be able to obtain enough capital to establish an
adequate in-house marketing and distribution capability in which case we would
have to establish marketing arrangements with third parties. We will not be able
to operate profitably if either:
-7-
- we fail to establish in-house sales and distribution
capabilities, or
- we are unable to enter into marketing arrangements with
third parties on favorable terms, or
- we experience a delay in developing such capabilities or
arrangements.
Even if we enter into marketing distribution or other arrangements with third
parties, our business may be adversely affected if any such marketing partner
does not market a product successfully.
THE IMPACT OF FEDERAL RESTRICTIONS ON REIMBURSEMENT FOR THE USE OF PACS/RIS MAY
ADVERSELY INFLUENCE THE MEDICAL DEVICE PURCHASE DECISIONS MADE BY HOSPITALS AND
OTHER POTENTIAL CUSTOMERS. ANY SUCH ADVERSE IMPACT ON OUR INTENDED MARKET WOULD
SEVERELY LIMIT OUR ABILITY TO EARN REVENUES OR PROFITS, AND IN TURN CAUSE THE
PRICE OF OUR COMMON STOCK TO DECLINE. Federal regulations implemented by the
Health Care Financing Administration, or HCFA currently permit only limited
reimbursement for telepathology and teleradiology services under the Medicare
program. Medicare payments for emergency room x-rays are limited to the first
physician who interprets them. HCFA has refused to pay for other telemedicine
consultations because the health care provider and the patient are not, by
definition, face-to-face. Consequently, the use of ITL's WarpSpeed PACS/RIS to
distribute diagnostic images to remote locations for consultations or second
reading by specialists may not be reimbursable. A significant portion of the
potential purchasers of ITL's WarpSpeed PACS/RIS are hospitals and other health
care organizations which provide services to Medicare recipients. They may
decide not to purchase ITL's WarpSpeed PACS/RIS if they are unable to be
reimbursed for the use of the teleradiology services which PACS/RIS support.
Many private group practices which might otherwise consider purchasing ITL's
WarpSpeed PACS/RIS may face similar financial disincentives to invest in newer
PACS/RIS technology.
DEVELOPMENT, ACQUISITION OR MISAPPROPRIATION BY OTHERS OF TECHNOLOGY SIMILAR TO
OURS COULD INCREASE COMPETITION IN OUR INDUSTRY, SUBJECT US TO PRICING PRESSURE,
AND CAUSE OUR REVENUES TO DECLINE SIGNIFICANTLY. THIS, IN TURN, WOULD CAUSE THE
PRICE OF OUR COMMON STOCK TO DECLINE. Our ability to compete successfully may
depend on our ability to protect our intellectual property and proprietary
technology. ITL's ability to market a competitive PACS/RIS product depends in
part on its success in protecting its proprietary interests in ITL's WarpSpeed
PACS/RIS unique software so that competitors cannot duplicate its innovations
and design. We have secured from our three founders an assignment of all their
rights to and interest in ITL's WarpSpeed PACS/RIS software developed prior to
ITL's incorporation. By licensing rather than selling our software we hope to
retain maximum trade secret protection for our product technology. However,
there can be no assurance that all elements of ITL's software are sufficiently
original to qualify for copyright protection or that ITL will be successful in
preventing the unauthorized disclosure of its trade secrets. ITL currently plans
to pursue patent protection to the limited extent that patent protection is
available for any aspect of ITL's product. Others may independently develop or
acquire substantially equivalent proprietary technology or we may not be able to
protect our non-patented technology and trade secrets from misappropriation.
-8-
THE CONTINUED SERVICES AND LEADERSHIP OF OUR FOUNDERS ARE CRITICAL TO OUR
SUCCESS AND ANY LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS. We
are heavily dependent on the personal efforts and abilities of David Ryon, M.D.,
our President, Chief Executive Officer, Principal Accounting Officer and
Chairman of the Board of Directors and Mr. Lewis M. Edwards, our Vice President
for Research and Development and Chief Technical Officer. Each is a founder,
director and principal stockholder of ITL and a co-developer of ITL's WarpSpeed
PACS/RIS product. If we were to lose the services of either of them before a
qualified replacement could be obtained, our business, financial condition or
results of operations could suffer significantly. We do not consider the recent
termination for cause pursuant to the terms of his employment agreement of
Carlton T. Phelps, M.D., formerly our vice president - finance and
administration, chief financial officer, secretary and treasurer, to be
detrimental to our operations going forward. Rather it is our belief that Dr.
Phelps' recent performance had a negative impact on our operations and his
absence should provide an immediate and ongoing benefit to ITL.
SINCE DR. PHELPS IS A PRINCIPAL STOCKHOLDER OF ITL, WE RUN THE RISK THAT HE MAY
DISPOSE OF HIS HOLDINGS IN A MANNER WHICH COULD ADVERSELY AFFECT THE PRICE OF
OUR STOCK. We do not have any control over the timing or amount of Dr. Phelps'
stock dispositions. We do intend, however, to carefully monitor the situation
and take any legal action which is available to us and which we deem appropriate
to protect ITL and the interests of our shareholders.
AN INABILITY TO ATTRACT AND RETAIN STAFF COULD LIMIT OUR ABILITY TO IMPLEMENT
OUR BUSINESS PLAN AND BECOME PROFITABLE, WHICH, IN TURN, COULD HURT THE PRICE OF
OUR STOCK. We must attract and retain highly qualified marketing, scientific,
technical, and business personnel experienced in the medical device industry to
complete product development and implement the marketing and business strategy
we have planned. The success of our business depends in part upon our ability to
attract, motivate and retain sales marketing staff that possess the skills,
knowledge and attributes necessary to service the needs of our clients and grow
the business. ITL competes with other companies who are able to attract and
retain staff as a result of reputation, performance based compensation systems
and infrastructure support. Because we have been in operation for only a short
time, we have not had sufficient time to establish our reputation in the
industry. Also, our inability to offer substantial compensation packages and/or
comparable infrastructure support for our staff could impair our ability to
attract and retain staff. There is no guarantee, particularly in the current
competitive market for such skilled employees, that we will be able to secure or
retain the personnel necessary to implement our business plan.
OUR SOFTWARE PRODUCTS MAY CONTAIN UNDETECTED DEFECTS. SOFTWARE
DEVELOPED BY US OR DEVELOPED BY OTHERS AND INCORPORATED BY US INTO OUR PRODUCTS
MAY CONTAIN SIGNIFICANT UNDETECTED ERRORS WHEN FIRST RELEASED OR AS NEW VERSIONS
ARE RELEASED. Although we test our software products before commercial release,
we cannot be certain that errors in the products will not be found after
customers begin to use the software. Any defects in ITL's WarpSpeed PACS/RIS, or
any future products, may result in significant decreases in revenue or increases
in expenses because of:
- adverse publicity,
- reduced orders,
- product returns,
- uncollectible accounts receivable,
- delays in collecting accounts receivable, and
- additional and unexpected costs of further product
development to correct the defects.
-9-
WE FACE EXPOSURE TO PRODUCT LIABILITY CLAIMS IF THE USE OF OUR PRODUCTS IS
ALLEGED TO HAVE CAUSED HARM TO A PATIENT WHICH INDIVIDUALLY OR IN THE AGGREGATE
COULD EXCEED OUR REVENUES AND SERIOUSLY LIMIT OR PRECLUDE OUR PROFITABILITY. The
claims might be made directly by patients or by medical organizations and
medical personnel who face liability for care rendered in conjunction with the
use of ITL's products. There can be no assurance that such claims, if made,
would not result in monetary liability for damages or a recall of ITL's products
or a change in the diagnostic purposes for which they may be used. Prior to
product launch, ITL has obtained product liability insurance coverage for claims
arising from the use of ITL's WarpSpeed PACS/RIS. There can be no assurance that
this coverage will be adequate to cover claims. Product liability insurance is
becoming increasingly expensive. We might not be able to maintain such
insurance, obtain additional insurance, or obtain insurance at a reasonable cost
or in sufficient amounts to protect us against losses due to any such
liabilities.
ITL'S FOUNDERS, DR. RYON, DR. PHELPS AND MR. EDWARDS, OWN AND CONTROL AN
AGGREGATE OF 7,773,750 SHARES OF OUR OUTSTANDING COMMON STOCK REPRESENTING
APPROXIMATELY 65% OF OUR OUTSTANDING COMMON STOCK AND 70% OF OUR OUTSTANDING
VOTING STOCK WHICH INCLUDES 1,500,000 SHARES OF PREFERRED STOCK OWNED BY THEM.
This concentration of stock ownership in a few persons together with the
existence of the restrictions on transfers makes it unlikely that any other
holder of voting Common Stock will be able to affect the management or direction
of ITL.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER AND INDEMNIFICATION
PROVISIONS WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR STOCK. Section 203
of the Delaware General Corporation Laws and our charter and by-laws contain
provisions which might enable our management to resist a takeover of our
company. These provisions might discourage, delay or prevent a change in the
control of our company or a change in our management. These provisions could
also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and take other corporate actions. The existence
of these provisions could limit the price which investors might be willing to
pay in the future for shares of our common stock.
OUR DIRECTORS HAVE THE AUTHORITY TO DESIGNATE ONE OR MORE CLASSES OF PREFERRED
STOCK HAVING RIGHTS GREATER THAN OUR COMMON STOCK. Our Certificate of
Incorporation authorizes us to issue up to 5,000,000 shares of preferred stock
in one or more classes or series. Immediately prior to this offering, we will
have outstanding 1,500,000 shares of preferred stock, all of which is owned by
our three founders. Our board of directors has the authority, without further
action by the holders of the outstanding common stock, to:
-10-
- issue additional preferred stock from time to time in one or
more classes or series,
- modify or fix the number of shares constituting any class or
series as well as their stated value, if different from the
par value, and
- modify or fix the terms of any such series or class,
including:
- dividend rates,
- conversion or exchange rights,
- voting rights and terms of redemption, including
sinking fund provisions,
- the redemption price and the liquidation
preference of such class or series.
We have no present plans to issue any additional preferred stock or other series
or class of preferred stock. The designations, rights and preferences of any
additional preferred stock which may be issued would be set forth in a
certificate of designation which would be filed with the Secretary of State of
the State of Delaware.
BROAD MARKET FLUCTUATIONS MAY HAVE A MATERIAL ADVERSE EFFECT ON THE MARKET PRICE
OF OUR COMMON STOCK. During the 52-week period ending September 30, 2002 our
stock has traded at a low of $.27 per share and a high of $.59 per share. The
following factors may cause the market price of our common stock to fluctuate
significantly:
- market acceptance of ITL's product,
- the attainment of or failure to attain milestones in the
commercialization of our technology
- establishment of new collaborative arrangements by Image
Technology, its competitors or other third parties,
- claims of patent infringement or other material litigation
- government regulations,
- investor perception of ITL, and
- fluctuations in ITL's operating results.
Severe market price fluctuations could cause you to lose a substantial portion
of your investment if you are forced to liquidate shares during a price decline.
During the period from October 1, 2002 through February 10, 2003 our stock has
traded at a low of $.11 per share and a high of $.42 per share.
A FAILURE TO PAY DIVIDENDS MEANS YOU WILL RECEIVE NO INCOME ON YOUR INVESTMENT
AND SUCH LACK OF DIVIDENDS COULD HAVE AN ADVERSE IMPACT ON THE PRICE OF OUR
STOCK. We have never declared or paid any cash dividends on our common stock,
and we don't expect to pay dividends anytime soon. We expect to retain our
earnings, if any, and use them to finance the growth and development of our
business.
-11-
THE SO CALLED "PENNY STOCK RULE" COULD MAKE IT CUMBERSOME FOR BROKERS AND
DEALERS TO TRADE IN THE COMMON STOCK, MAKING THE MARKET FOR THE COMMON STOCK
LESS LIQUID WHICH COULD CAUSE THE PRICE OF OUR STOCK TO DECLINE. Trading in our
securities will initially be conducted on the OTC Bulletin Board and/or the
"pink sheets." As long as the common stock is not quoted on NASDAQ or at any
time that we have less than $2,000,000 in net tangible assets, trading in the
common stock is covered by `Rule 15g-9 under the Securities Exchange Act of 1934
for non-NASDAQ and non-exchange listed securities. Under that rule,
broker-dealers who recommend covered securities to persons other than
established customers and accredited investors must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to a transaction prior to sale. Securities are exempt from this rule
if the market price is at least $5.00 per share.
The SEC has adopted regulations which generally define a penny stock to be any
equity security which has a market price of less than $5.00 per share, subject
to certain exemptions. Such exemptions include an equity security listed on
NASDAQ and an equity security issued by an issuer which has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three (3) years; (ii) net tangible assets of at least $5,000,000, if such
issuer has been in continuous operation for less than three (3) years; or (iii)
average revenue of at least $6,000,000 for the proceeding three (3) years.
Unless such an exemption is available, the regulations require the delivery of a
disclosure schedule explaining the penny stock market and the risks associated
therewith prior to any transaction involving a penny stock. So long as our
common stock is subject to the regulations on penny stocks, that factor could
have a severe adverse effect on the market liquidity for the common stock due to
these limitations on the ability of broker-dealers to sell the common stock in
the public market which could cause the price of our stock to decline.
FORWARD LOOKING STATEMENTS. This prospectus and the information incorporated
into it by reference contains various "forward-looking statements" within the
meaning of federal and state securities laws, including those identified or
predicated by the words "believes," "anticipates," "expects," "plan" or similar
expressions. Such statements are subject to a number of uncertainties which
could cause the actual results to differ materially from those projected. Such
factors include, but are not limited to, those described under "Risk Factors."
Given these uncertainties, prospective purchasers are cautioned not to place
undue reliance upon such statements.
DIVIDEND POLICY
We have never paid cash dividends and do not intend to pay any cash dividends
with respect to our common stock in the foreseeable future. We intend to retain
any earnings for use in the operation of our business. Our board of directors
will determine dividend policy in the future based upon, among other things, our
results of operations, financial condition, contractual restrictions and other
factors deemed relevant at the time. We intend to retain appropriate levels of
our earnings, if any, to support our business activities.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
The following is a discussion of certain factors affecting ITL's results of
operations, liquidity and capital resources. You should read the following
discussion and analysis in conjunction with ITL's audited and unaudited
Financial Statements and related notes which are included elsewhere in this
Prospectus.
Business and Summary of Significant Accounting Policies:
ITL has entered the medical image management segment of 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 WarpSpeed PACS/RIS 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 flouroscopy
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. All of the data is retained in standard formats,
including the DICOM and HL-7 standards.
As of September 30, 2002, the Company has cash and cash equivalents of
approximately $192,000 and working capital of approximately $131,000. However,
since inception, the Company has incurred losses resulting in an accumulated
deficit of approximately $2,375,038 at September 30, 2002. The Company currently
expects to incur additional losses for the foreseeable future. In addition, the
Company has only recently introduced its product to the market and has just
begun to generate revenues. Further, as of September 30, 2002, the founding
stockholders have deferred until 2003 approximately $530,000 of compensation due
them under their employment agreements.
On August 19, 2002, the Company closed an initial contract with Radiologix, Inc.
for the sale of one of its WarpSpeed PACS/RIS systems. The WarpSpeed PACS/RIS
system, which was installed prior to September 30, 2002, and the related
three-year maintenance contract will generate fees totaling $420,000. Recurring
monthly revenues in the form of a two-year services agreement are being realized
in the amount of approximately $40,000 per month. Currently, two additional
systems are in various stages of negotiations. The Company expects that at least
one installation will occur in the first quarter of 2003.
-13-
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION:
Revenues from the provision of radiology and imaging services are recognized
over the 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
services provided that the fees are fixed ad determinable and collection is
probable. Unearned revenues are included in deferred revenues in the
accompanying condensed balance sheet.
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.
-14-
RESULTS OF OPERATIONS FOR YEAR ENDED DECEMBER 31, 2001 COMPARED TO
THE YEAR ENDED DECEMBER 31, 2000
REVENUES:
As of December 31, 2001, we had not generated any significant revenues from
operations and, accordingly, we were still in the development stage. We do not
expect to generate any significant revenues from our planned operations prior to
the second quarter of 2002.
RESEARCH AND DEVELOPMENT EXPENSES:
During the year ended December 31, 2001 and 2000, the Company incurred research
and development expenses of $635,694 and $633,798, respectively. These expenses
were primarily compensation to our three founders under their employment
contracts. The employment agreements require an annual compensation to our
founders which aggregates $450,000 through December 31, 2002. As of December 31,
2001, the founders elected to defer approximately $421,000 of this amount. In
addition, research and development expenses in each of these periods includes
$150,000 of amortization of unearned compensation relative to the issuance of
preferred stock to the founders.
GENERAL AND ADMINISTRATION EXPENSES:
During the year ended December 31, 2001, the Company incurred general and
administrative expenses of $354,765 as compared to $211,797 in 2000. The
increase in 2001 was primarily attributable to an increase in payroll and other
overhead items. During 2001, the company added personnel to its payroll, as well
as incurring additional costs as it built up its infrastructure. The increases
were offset by a non-cash charge of $75,000 that was incurred during 2000 as a
result of issuing shares of common stock for professional services.
NET LOSS:
As a result of the aforementioned, the Company incurred a loss of $969,084 ($.08
per share) for the year ended December 31, 2001, compared to $845,595 ($.08 per
share) for the year ended December 31, 2000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2001
REVENUES:
The Company was a development stage company from January 1, 1998 (date of
inception) through April 2002, at which time its software was available for
sale. During the nine ended September 30,2002, we derived service revenue of
$208,000. In addition, during the nine months ended September 30 ,2002, the
Company earned approximately $12,000 from the sale of its initial system, as
well as deferring approximately $128,000 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 nine months ended September 30, 2002, the Company incurred research
and development expenses of $378,750 as compared with $484,335 in the comparable
prior periods. These expenses consisted primarily of compensation to our three
founders under their employment contracts as further explained in the Company's
annual report, included elsewhere in the Registration Statement. In addition,
$100,000 and $75,000 of these expenses during the nine month period ended
September 30, 2002 and 2001, respectively, were attributable to compensation
associated with the issuance of the shares of preferred stock to the founders, a
non-cash charge. During the first quarter 2002, one of our founders was
terminated for cause for breach of his employment agreement; therefore, we
accelerated the remaining unamortized compensation ($37,500) associated with the
issuance of the Preferred Stock to that founder. Also, as a result of this, our
research and development costs should be reduced in the future.
GENERAL AND ADMINISTRATION EXPENSES:
During the nine months ended September 30, 2002, the Company incurred general
and administrative expenses of $316,310 as compared to $170,180 in the
comparable prior periods. The increase was primarily attributable to an increase
in payroll and other overhead items as well as incurring additional costs as we
built up our infrastructure.
SALES AND MARKETING EXPENSES:
During the nine months ended September 30, 2002, the Company began to incur
marketing expenses as we introduced our product for sale. During this period, we
incurred $65,626 of such costs.
-15-
NET LOSS:
As a result of the aforementioned, the Company incurred a loss of $541,219 ($.04
per share) for the nine months ended September 30, 2002, as compared to $654,515
($.05 per share) for the nine months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES:
As of September 30, 2002, we had cash and working capital of approximately
$192,000 and $131,000, 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 one of our principal stockholders for
$100,000 or $.25 per share, which approximated fair value. In September, we sold
an additional 75,000 shares of our common stock to one of our principal
shareholders for $21,000, or $0.28 per share, the fair market value.
During January 2002, we entered into an agreement with an investor relations
firm. In exchange for marketing services, the Company 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 nine-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 issuance of shares of common stock. On December 31, 2002, by mutual
consent, the agreement was terminated. McCaughern Trade Development returned
100,000 free trading shares and 100,000 shares of restricted stock to us. The
two-year warrants were never issued.
In addition to the aforementioned equity transactions, we have funded our
accumulated loss of approximately $2,375,000 by having our founders defer
approximately $530,000 of compensation due them under their employment
agreements.
In September, we applied for, and received, a line of credit from M&T Bank in
the amount of $75,000. Management believes the terms of the agreement are
favorable to the Company.
The Company recently executed a five-year lease (at $700 per month) for office
space at "Tech City," formerly 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 prce 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 options as variable from the date of the modification
to the date the award is exercised, forfeited or expires unexercised.
DESCRIPTION OF BUSINESS
We are a software development company which has entered the medical image
management segment of the healthcare information systems market. We were
incorporated in Delaware on December 5, 1997 and commenced operations on
January 1, 1998. We developed picture archiving and communications software
known as PACS/RIS for use in the management of medical diagnostic images by
hospitals. PACS/RIS input and store 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.
Dr. Ryon initially conceived ITL's picture archiving and communications system,
which we call ITL WarpSpeed PACS/RIS, in 1995 for the purpose of electronically
integrating all the diagnostic images and imaging modalities used at the
Kingston Diagnostic Center in Kingston, New York. His goal was to implement a
PACS/RIS system at the Center and then to create a wide area network to provide
over-reading services in the five hospital locations in the region. When he
discovered that no commercial vendor at the time had a product which could
provide a solution which met all of the Center's needs, Dr. Ryon assembled a
team to design a better PACS/RIS system. Dr. Ryon joined forces with Lewis
Edwards, an expert in networking and image management, and Carlton Phelps, M.D.,
a radiologist with several years experience implementing commercial PACS/RIS. By
late 1997, after more than a year of intensive research, the development team
had completed the specifications for the prototype ITL PACS/RIS system and had
assembled the hardware and software needed to develop the prototype at the
Center. Drs. Ryon, Phelps, and Mr. Edwards decided to form a company to
commercialize their novel PACS/RIS design based on market research which
indicated a growing demand for PACS/RIS in general and an unmet need for a
PACS/RIS such as the prototype the founders had designed. ITL has installed a
beta-version of ITL's WarpSpeed PACS/RIS at the Center. ITL began to initiate
marketing ITL's WarpSpeed PACS/RIS to hospitals beginning in the Northeast
United States in the fiscal fourth quarter of 2001. ITL's WarpSpeed PACS/RIS
will be manufactured, installed and serviced by ITL. We estimate that the basic
product development has been completed. The specification and system design are
finished leaving approximately 5% of the actual hard coding and the bench
testing yet to be performed, which represents an insignificant amount of overall
product development.
-16-
Products
ITL's lead product is ITL's WarpSpeed PACS/RIS, a unique and proprietary version
of a PACS/RIS software system. ITL's WarpSpeed PACS/RIS features a unique and
proprietary modular architecture which permits the system to be readily scaled
and easily upgraded. We believe that this will allow us to provide products
tailored to the size of our customers and to keep our customers at the forefront
of future technological advances by enabling us to easily update existing
systems. Other special features of ITL's WarpSpeed PACS/RIS include:
- automation of the total work flow,
- integration of patient data with digital images,
- a unique, radiologist designed user interface,
- quality review programs which analyze productivity and diagnostic
accuracy of individual radiologists or entire radiology centers, and
- use of Windows 2000 as the network operating system.
ITL has also developed a proprietary workstation which permits the simultaneous
viewing of multiple diagnostic images together with relevant patient data for
the purpose of replicating the viewing technique used by radiologists using
traditional view boxes for the display of multiple images.
Research has shown that simultaneous image display improves the speed and
accuracy of diagnostic interpretation. This workstation consists of software
integrated into ITL's WarpSpeed PACS/RIS which may be used with any terminal
hardware.
ITL's WarpSpeed PACS/RIS can be used to create, store, reproduce and transmit
digitized images generated by any of the currently utilized diagnostic imaging
modalities including x-rays, ultrasound, nuclear medicine, digital fluoroscopy,
CT scans, and MRIs. Using ITL's WarpSpeed PACS/RIS, radiologists can read and
interpret the digitized versions of diagnostic images from any terminal or
computer to which they can be sent. This facilitates time-critical transfer of
patient information between hospital departments, such as from radiology to
emergency room, as well as rapid off-site consultations by specialists at remote
locations or convenient home viewing by individual radiologists. Hospitals and
other health organizations can use ITL's WarpSpeed PACS/RIS permanently to
replace more costly and cumbersome image storage mediums such as film. ITL's
WarpSpeed PACS/RIS has been designed to interface with hospital and radiology
information systems so that patient data can be integrated with diagnostic
images for improved record retrieval and increased accuracy of image
interpretation.
-17-
ITL's WarpSpeed PACS/RIS represents an alternative configuration model which has
been designed to provide a unique solution to many of the disadvantages of both
hyperPACS and miniPACS configurations of other companies. The architecture used
in ITL's WarpSpeed PACS/RIS is built on a foundation of innovative intelligent
algorithms. These algorithms reduce the network bandwidth and on-line storage
requirements of the ITL system; the two most important factors in the cost
associated with building the system. Consequently, we hope that through ITL's
WarpSpeed PACS/RIS we can acquire a significant share of the U.S. market for
PACS/RIS. By making full use of the networking 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, so a client can start with one piece of hardware
which operates as a server, viewer and capture station, then expand the system
by distributing those capabilities among multiple PC's. Hardware and software
can be sized exactly to client needs. This enables ITL to offer the lowest
possible entry point purchase price for a PACS/RIS system. In addition, ITL's
WarpSpeed PACS/RIS offers capabilities not found on even the most expensive
PACS/RIS, including a unique graphical interface.
Business Strategy
We have completed initial product development of ITL's WarpSpeed PACS/RIS.
Product sales will be made in the form of:
- software licenses agreements,
- installation service agreements,
- continuing services and support agreement
- and as an Application Service Provider (ASP).
For the next two years, ITL expects to remain focused on developing additional
capabilities and enhancing ITL's WarpSpeed PACS/RIS, maximizing sales of this
product in the United States, and providing continuing customer service and
product upgrades.
Markets and Marketing Plan
The estimated market for PACS is $1.5 billion in 2001 and is expected to reach
$2.7 billion by 2010. (Concord Consulting Group PACS Opportunities: 2000-2010 -
October 19, 2001). Market analysts have identified the PACS market as an
"emerging business opportunity with enormous growth potential". In August 2000,
Technology Marketing Group released a PACS census study of more than 1,800 major
hospitals and imaging centers. The study indicated expenditures for PACS
technology reached nearly $600 million in 1999, with 7 to 10% yearly growth
anticipated for the next 5 years. The study showed that few hospitals with PACS
technology are actually operating in a filmless mode, with 91% of the
respondents still using film for diagnosis.
-18-
ITL plans to launch its ITL WarpSpeed PACS/RIS in the northeastern United States
where the reputations of its founders and the product demonstration site at the
Kingston Diagnostic Center are expected to enhance interests in the product and
generate sales leads. ITL plans to market a fourth generation medical
information management system which 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 will 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 because of their unique, proprietary architecture. Assuming
profitable regional sales, we intend to expand our sales force to market ITL's
WarpSpeed PACS/RIS throughout the United States. We plan to distribute our
PACS/RIS products via three channels:
- relationships with original equipment manufacturers,
- partnerships, and
- direct distribution through our sales representatives.
Relationships with Original Equipment Manufacturers: ITL has an agreement with
Alpha Medical Inc. of New York to act as an OEM distributor for the ITL
WarpSpeed PACS/RIS system. There are several large multi- national companies
such as General Electric and IBM who have committed to entering the PACS/RIS
market but have failed to either develop or acquire the technology needed to
gain market share. We plan to pursue relationships with a large company whose
in-house marketing, sales and support resources can be leveraged to propel ITL's
products into national and international markets.
Partnerships: We have identified several companies whose interests are
complementary with our goals. ITL will pursue mutually advantageous partnerships
with firms which can provide access to markets, technology or service and
support.
Direct Distribution: We will maintain an in-house sales and marketing staff to
provide direct sales locally and nationally. They will advertise the product
through trade shows, print advertisements and through our site on the Web. ITL
will sell primarily to two target buyer groups; those who already have a
PACS/RIS system in place and want a cost effective way of growing their system
and small hospitals and imaging centers who want to start small and enter the
PACS/RIS arena gradually.
Once we have secured a significant share of the PACS/RIS market, we intend to
apply the same tools to capture other vertical markets. We intend to sustain
growth through constant innovation.
ITL will sell to customers a license to use ITL's WarpSpeed PACS/RIS software
along with third party hardware preloaded with our proprietary software, as a
package, in order to eliminate the possibility of incompatibilities. ITL
eventually plans to sell third- party hardware components, at a profit, to
customers who wish to purchase system hardware from ITL in conjunction with
their purchase of an ITL PACS/RIS.
However, we have no plan to institute hardware-only sales in conjunction with
ITL's WarpSpeed PACS/RIS product launch and do not believe that supplying the
hardware needs of our software customers is necessary to the competitive success
of ITL's WarpSpeed PACS/RIS.
-19-
An alternative approach to marketing and sales will be to provide the system to
the customer as an Application Service Provider. Under this type of arrangement,
the customer would be charged a per use fee to view and archive image studies.
The hardware would essentially be provided and owned by ITL. This type of
contract would immediately provide recurring revenues. Combinations of both the
ASP model and the capital equipment model may be employed, depending on the
customer requirements.
Competition and Competitive Advantage
ITL will compete with a variety of companies in the United States and abroad
which are marketing or developing PACS/RIS for the medical community. A number
of highly competitive, smaller companies specialize in image management software
and equipment and a smaller number of larger medical and computer equipment
vendors have added PACS/RIS to their product line. To date no single company has
captured a predominant share of the current market for PACS/RIS. In addition, a
number of large hospital radiology centers are presently developing their own
PACS/RIS for internal use. This trend may reduce the market for ITL's WarpSpeed
PACS/RIS among larger institutions. It may also result in the introduction of
additional competitive products in the market to the extent that such
proprietary systems are being developed in collaboration with computer software
and hardware vendors who may be given the opportunity to commercialize such
products upon completion. ITL, together with all other PACS/RIS manufacturers,
will also continue to compete for sales to some extent with producers of older
diagnostic imaging technologies such as film-based x- rays, which remain the
predominant medical imaging modalities.
Currently available PACS/RIS systems can be divided into three basic
configurations:
- MiniPACS, which are small, modular systems comprising image
viewstations, image capture stations and occasionally one or
more small central servers.
- HyperPACS that cluster capture and view station around a large
central enterprise server.
- Web-based PACS/RIS.
- MiniPACS systems, such as Line Imaging, Brit Systems, E-med,
Sectra-Imtec AB and DR systems products, bundle some database
management features into their viewstations, allowing them to
hold images and intercommunicate without a large central server.
As a result, an inexpensive entry-level solution can be
assembled costing between $100,000-$500,000, and the system can
be "grown" by aggregating viewstations and miniservers into a
loose network. The communication is inherently point-to-point,
however, and the systems lack features of a true client- server
database management system such as protection of database
integrity through record locking. These systems are also
inherently more expensive to expand, since each "node" that is
added must support more functionality and thus the hardware for
each node is more expensive than it would be if it were
supported by a large central database server. These networks
also lack the advanced workflow management capabilities of
hyper-PACS.
-20-
By contrast, vendors of hyperPACS systems, including Data General, GE Medical
Systems, Agfa, Kodak, Siemens, Rogan, and MarkCare Systems, build their PACS/RIS
systems around a large central enterprise server. These servers offer superior
data protection, internet services, and increased up time through redundancy and
fail- over protection. The entry level cost, however, is much higher than for
miniPACS typically $800,000 - $2 million. While the view and capture stations
sold by these vendors support a variety of hardware/operating system
combinations, the servers are invariably UNIX based, requiring an in-house
systems administrator earning $60,000 - $80,000 annually to keep them running.
Finally, since these servers are "off-the shelf" enterprise servers, not
designed specifically for PACS/RIS, many of the services they provide, such as
automated work flow management through image routing and pre-fetching, must be
"hard coded" by software engineers, making changes expensive and time-
consuming.
In the last few years, Web-based PACS/RIS have emerged and are growing steadily
in popularity. Several companies offer PACS/RIS based on a central image server
that can be accessed through intranet or internet based viewers, including Fuji,
Eastman Kodak, Stentor, and Emageon. In addition, several mini-PACS and
hyper-PACS vendors also offer add-on web- based image distribution.
The primary advantage of web-based image management is scalability. It is easy
and inexpensive to offer image access via web browser to referring physicians
and on-call radiologists. The primary disadvantage is that most web-based
technologies are of the "pull" type, i.e. the user must request an image before
it can be sent to the client PC. Given the large size of diagnostic images and
the wide range of user web-access bandwidth, the response of a web-based system
may be slower than a traditional mini or hyper-PACS which can "push" the images
onto the client machine BEFORE the user requests it - a technique called "pre-
fetching".
We believe that most available PACS/RIS systems have significant
drawbacks such as:
- poor user interfaces,
- limited capabilities,
- 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.
-21-
Protection of Proprietary Technology
Our ability to market a competitive PACS/RIS product depends in part on our
success in protecting our proprietary interest in ITL's WarpSpeed PACS/RIS
software so that competitors cannot duplicate its innovative design. The
principal forms of protection available for software such as ITL's WarpSpeed
PACS/RIS are copyright laws and common law trade secret protection. ITL has
secured from its founders an assignment of all their rights and titles to ITL's
WarpSpeed PACS/RIS software developed prior to ITL's incorporation and
therefore, believes it owns the full rights to copyright ITL's WarpSpeed
PACS/RIS software. In addition, each founder is employed under an agreement
containing continuing obligations of confidentiality, non- disclosure,
assignment of work- product and right-to-inventions as well as obligations of
non- competition which continue for a period of two years from termination of
his employment. ITL plans to require substantially similar obligations from all
key employees hired in the future. By licensing rather than selling our
software, we expect to retain maximum trade secret protection for our product
technology. However, there can be no assurance that all elements of our software
are sufficiently original to qualify for copyright protection or that we will be
successful in preventing the unauthorized disclosure of our trade secrets. As a
result, we may face competition from sales of products which are substantially
similar to our own from which we will not benefit or we may not be entirely able
to prevent such sales even though we may have the right to sue a person who
makes unauthorized disclosure of our trade secrets.
We plan to pursue patent protection to the limited extent that patent protection
is available and advisable for any element of our products. Patent protection
may be available for certain aspects of our terminal interface technology and
for certain limited components of our software, including certain proprietary
algorithms developed for use in ITL's WarpSpeed PACS/RIS. We have not yet
retained any intellectual property counsel or filed any application for the
protection of our intellectual property.
Product Approval Process
We registered with the FDA as a medical device manufacturer. The FDA has
classified our software products as exempt from the 510-K approval process.
ITL's WarpSpeed PACS/RIS is immediately available for sale without restriction.
Although ITL is aware that there is an international market for products such as
ITL's WarpSpeed PACS/RIS, we have no present plans to market ITL's WarpSpeed
PACS/RIS in other countries, largely due to limited resources. However, should
we decide to market ITL's 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.
A medical device and its manufacturer are subject to continuing
regulatory review even after a device is approved for marketing.
Later discovery of previously unknown problems with a product or manufacturer,
or an increase in the incidence of previously known problems, may result in
restrictions on the product and/or manufacturer. The restrictions could include
withdrawal of the product from the market.
-22-
Manufacturing
We do not expect to have any manufacturing operations for hardware or software.
We expect to be able to produce sufficient copies of ITL's WarpSpeed PACS/RIS
software for licenses using the software duplication capabilities of our beta
site equipment. In the unlikely event that demand for copies of ITL's WarpSpeed
PACS/RIS exceeds our capacity to produce them, we believe that we could quickly
and inexpensively obtain copies from a computer service bureau in our area. Any
hardware we sell will be purchased fully assembled from the original equipment
manufacturer. We intend to contract with third parties for any required
customization of hardware supplied to our customers.
Insurance
ITL has obtained computer product liability insurance, errors and omissions
coverage, and general corporate liability insurance for claims arising from the
use of ITL's WarpSpeed PACS/RIS. We risk exposure to product liability claims if
the use of our products is alleged to have caused harm to a patient. The claims
might be made directly by patients or by medical organizations and medical
personnel who face liability for care rendered in conjunction with the use of
our products. There can be no assurance that the coverage obtained will be
adequate to cover claims. Product liability insurance is becoming increasingly
expensive. We may have problems:
- maintaining such insurance,
- obtaining additional insurance,
- obtaining additional insurance at a reasonable cost, or
- obtaining additional insurance in sufficient amounts to protect
against losses which individually or in the aggregate could have a
material adverse effect on our business.
Under the terms of our executive employment agreements we are obligated to
maintain term life insurance for the benefit of Dr. 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, we closed an initial contract with Radiologix, Inc. for the
sale of one of its WarpSpeed PACS/RIS systems. In addition, recurring monthly
revenue in the form of a two year services agreement are being realized in the
amount of approximately $40,000 per month.
In September, we applied for, and received, a line of credit from the M&T Bank
in the amount of $75,000. Management believes the terms of the agreement are
favorable to the Company.
We recently executed a five-year lease at $700 per month for office space at
"Tech City", formerly 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.
Currently, three additional systems, besides the Radiologix option, are in
various stages of negotiations. We expect that at least one installation will
occur in the first quarter of 2003.
-23-
Employees
We presently have four employees who essentially provide 100% of their
professional time to the company.
Facilities
Our Corporate Headquarters are located at 602 Enterprise Drive, Kingston, NY
12401. ITL occupies approximately 1500 square feet of space with an option to
expand as the need arises. ITL's telephone number is (845) 338-3366 and its
facsimile number is (845)338-8880.
ITL believes that its current facilities will meet ITL's office needs for the
foreseeable future.
Legal Proceedings
We are aware of no legal proceedings against ITL.
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of April 12, 2002 are as
follows:
NAME AGE TITLE
David Ryon 57 Director and Chairman of the Board of
Directors, President, Chief Executive
Officer, and Principal Accounting
Officer
Lewis M. Edwards 46 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
-24-
All directors of ITL hold office until the next annual meeting of shareholders
or until their successors are elected and qualified. At present, ITL's Bylaws
provide for not less than one director nor more than fifteen. Currently, there
are five directors of ITL. 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. In April 2002, we appointed Richard V.
Norell, Robert G. Carpenter and John J. Naccarato to our Board of Directors to
fill three vacancies. There are no family relationships among any officers or
directors of ITL.
DAVID RYON, MD, is a founder and principal stockholder of ITL and a co-
developer of ITL's WarpSpeed PACS/RIS. He was appointed to the Board of
Directors and appointed to serve as ITL'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 Rockland
Radiological Group, P.C. 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 ITL and a co-
developer of ITL's WarpSpeed PACS/RIS. He was appointed to the Board of
Directors and elected by the Board to serve as ITL's Vice President of Research
and Development and Chief Technical Officer in December 1997 and is currently
employed full time by ITL. Mr. Edwards has served as a senior technical staff
member at IBM since 1993. He was an architect and lead software designer for
IBM's RS/6000 SP, a massive parallel processor until 2000. 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, 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, Dr. 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 ITL and
resigned from the Board of Directors. The terms and circumstances of Dr. Phelps'
departure are currently in dispute. Dr. David Ryon has been appointed our acting
principal accounting officer as of March 5, 2002.
-25-
Limitation on Liability of Directors
As permitted by Delaware law, ITL's Certificate of Incorporation includes a
provision which provides that a director of ITL shall not be personally liable
to ITL 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
ITL 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 ITL 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 ITL or
any stockholder to obtain an injunction or any other type of non- monetary
relief in the event of a breach of fiduciary duty. ITL believes this provision
will assist in securing and retaining qualified persons to serve as directors.
EXECUTIVE COMPENSATION
ITL has not paid any compensation to its executive officers from its inception
through December 31, 1999.
The following table sets forth information for each of the Company's fiscal
years ended December 31, 2002, 2001, 2000, and 1999 concerning compensation of
(i) all individuals serving as the Company's Executive Officers during the
fiscal year ended December 31, 2000 and (ii) each other Executive Officer of the
Company whose total annual salary and bonus equaled or exceeded $100,000 in the
fiscal year ended December 31, 2000:
Annual Compensation
-------------------------
Other All Other
Name and Principal Position Year Salary($) Bonus($)(2) ($)Annual Compensation($)
-------------------------------- ---- --------- ----------- ------------ ----------------
David Ryon(1) 2001 $150,000 $150,000 0 0
Chairman, President and Chief 2000 150,000 150,000 0 (3)
Executive Officer 1999 0 0 0 0
Lewis Edwards(1) 2001 150,000 150,000 0 0
Vice President, Chief Technical 2000 150,000 150,000 0 (3)
Officer 1999 0 0 0 0
Carlton Phelps(1) 2001 150,000 150,000 0 0
Vice President, Chief Financial 2000 150,000 150,000 0 (3)
Officer, Secretary, Treasurer 1999 0 0 0 0
and Director
(1) Messrs. Ryon, Phelps and Edwards waived their salaries from ITL for the
years ended December 31, 1999 and 1998. These salaries were not deemed material
during this period. During the year ended December 31, 2000, Messrs. Ryon,
Phelps and Edwards deferred $136,407, $51,923 and $109,615, respectively. During
the year ended December 31, 2001, Dr. Ryon deferred $122,596 of his salary. For
the first nine months of 2002 Dr. Ryon deferred $110,000.
(2) Messrs. Ryon, Phelps 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 $.30 per share based on the
price of units that we were offering for sale through a private placement.
(3) See "Option Grants in Last Fiscal Year" below
-26-
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock
options granted to the Named Executive Officers during 2000. No options were
granted during 2001 or 2002. We have never granted any stock appreciation
rights.
INDIVIDUAL GRANTS (1)
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED IN EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED 2000 (2) SHARE ($) DATE
------- ------------- ------------- ---------- -------------
David Ryon 1,000,000 33.33% $.33 December 31, 2009
Lewis Edwards 1,000,000 33.33% $.33 December 31, 2009
(1) Each option represents the right to purchase one share of common stock. The
options shown in this table were all granted under our Stock Option Plan.
(2) In the year ended December 31, 2000, we granted options to employees to
purchase an aggregate of 3,000,000 shares of common stock.
(3) Mr. Phelps options are null and void according to the Company's stock option
plan. During the nine months ending September 30, 2002, upon Mr. Phelps
termination, the Company cancelled one million stock options previously granted
to him.
-27-
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No options were exercised by any of the Named Executive Officers during the
fiscal year ended December 31, 2001. The value of unexercised options held by
any such persons as of December 31, 2001 was as follows for each of Messrs. Ryon
and Edwards (the only such option holders):
Total number of shares underlying unexercised options 1,000,000
Exercisable options 200,000
Unexercisable options 800,000
Value of in-the-money options $ 24,000
Compensation of Directors
Our directors were not compensated for their services in 2001. We reimburse
directors for their expenses of attending meetings of the Board of Directors.
Employment Agreements
David Ryon is engaged as President, Chief Executive Officer and Principal
Accounting Officer of ITL and Lewis M. Edwards was engaged as Vice President and
Chief Technical Officer. Each has been signed a three-year contract which
expired December 31, 2002 (extensions are currently in the process of
negotiation) provided them with the following:
- a minimum annual base salary of $150,000 payable in regular equal
installments in accordance with our general payroll practices.
- 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.
- 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.
- 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.
- an automobile for business use in accordance with Image
Technology's standard policy for senior executive officers.
-28-
Stock Option Plan
In January 1998, ITL's stockholders ratified ITL's Stock Option Plan (the
"Plan") whereby options for the purchase of up to 5,000,000 shares of ITL'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 ITL 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
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. As of first quarter of 2002 Carlton Phelps was terminated for
cause resulting in all options issued to Carlton Phelps to be null and void.
No options were granted or exercised prior to January 1, 2000.
PRINCIPAL AND SELLING SECURITY HOLDER
The shares of common stock may be offered and sold from time to time by the
selling shareholder or by their transferees, pledgees, donees or their
successors pursuant to this prospectus. The following table sets forth certain
information about the selling shareholder. Except as otherwise provided, the
selling shareholder has not, nor within the past three years has had, any
position, office or other material relationship with ITL or any of its
predecessors or affiliates. Because the selling shareholders may offer all or
some portion of the shares pursuant to this prospectus, no estimate can be given
as to the number of shares of common stock which will be held by the selling
shareholders upon termination of any such sales.
In addition, the table sets forth certain information concerning the beneficial
ownership of our common stock as of the date of this prospectus, by (i) each
person known by us to be the beneficial owner of more than 5% of our common
stock, (ii) each of our named executive officers, (iii) each of our directors,
and (iv) all directors and executive officers as a group. Unless otherwise
indicated, each of the stockholders has sole voting and investment power with
respect to the shares beneficially owned.
Security Ownership of Management
Name, Title and Address Title of Class Shares Beneficially
----------------------- -------------- -------------------
of beneficial owners Owned
-------------------- -----------------------
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 Drive
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 Drive
Kingston, New York 12401
--------------------------------------------------------------------------------
Carlton T. Phelps, M.D. Common Stock 2,429,583 20.81%
602 Enterprise Drive
Kingston, New York 12401 Preferred Stock 500,000 33.33%
--------------------------------------------------------------------------------
Richard V. Norell Common Stock 173,000 1.5%
Director
602 Enterprise Drive
Kingston, New York 12401
--------------------------------------------------------------------------------
Rober G. Carpenter Common Stock 60,000 *
Director
602 Enterprise Drive
Kingston, New York 12401
--------------------------------------------------------------------------------
John J. Naccarato Common Stock 35,000 *
Director
602 Enterprise Drive
Kingston, New York 12401
--------------------------------------------------------------------------------
All officers and directors Common Stock 8,041,750 65.7%
as a group Preferred Stock 1,500,000 100%
--------------
* Less than 1%
-29-
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During January 2002, ITL received net proceeds of $100,000 from the sale of
400,000 shares of common stock to Kingston Diagnostic Radiology, P.C. pension
fund, the sole beneficiary of which is Dr. Ryon, our President, Chief Executive
Officer and Principal Accounting Officer.
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.
MARKET FOR OUR SECURITIES
ITL'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. As of February 2003,
the number of holders of record of Common Stock, Warrant IMTLW and Warrant IMTLZ
was 209, 23, and 167 respectively.
Between December 15, 2000 and February 11, 2003, ITL's common stock closed
highest on May 11, 2001, at $0.94 and closed lowest on December 30, 2002 $0.11.
Between December 15, 2000 and February 11, 2003, the IMTLW (.40 wt.) closed at
the highest on October 1, 2001, at $0.25 and closed the lowest on January 6,
2003 at $0.04. Between December 15, 2000 and February 11, 2003, the IMTLZ (.50
wt.) closed at the highest on May 14, 2001, at $0.25 and closed the lowest on
December 30, 2002, at $0.05.
-30-
The following table sets forth the range of the high and low closing bid prices
per share of our common stock during each of the calendar quarters identified
below. These bid prices were obtained from the OTC Bulletin Board Quarterly
Quote Summary Report received from Bloomberg Trading Market Services and the
Standard & Poor's Comstock, and do not necessarily reflect actual transactions,
retail markups, markdowns or commissions.
THE HIGH AND LOW BID SALES PRICES FOR THE EQUITY FOR EACH FULL QUARTERLY
PERIOD SINCE TRADING COMMENCED WITHIN THE TWO MOST RECENT FISCAL YEARS AND ANY
SUBSEQUENT INTERIM PERIOD FOR WHICH FINANCIAL STATEMENTS ARE INCLUDED ARE AS
FOLLOWS:
--------------------------------------------------------------------------------
Year Quarter High Bid Low Bid
2001 1st 0.90 0.30
2001 2nd 0.94 0.40
2001 3rd 0.64 0.42
2001 4th 0.30 0.27
2002 1st 0.59 0.40
2002 2nd 0.54 0.38
2002 3rd 0.51 0.30
--------------------------------------------------------------------------------
We have not paid any cash dividends to date and do not anticipate or
contemplate paying dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development of
our business.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common stock and
5,000,000 shares of preferred stock. As of Sept. 30, 2002, there were
outstanding 12,232,462 shares of common stock and 1,500,000 shares of preferred
stock.
Common Stock
Holders of common stock are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders. Holders of the common stock
do not have cumulative voting rights, and therefore the holders of a majority of
the shares of common stock voting for the election of directors may elect all of
our directors standing for election. Subject to preferences which may be
applicable to the holders of any outstanding shares of preferred stock, the
holders of common stock are entitled to receive such lawful dividends as may be
declared by the Board of Directors. In the event of a liquidation, dissolution
or winding up of the affairs of ITL, whether voluntary or involuntary, and
subject to the rights of the holders of any outstanding shares of preferred
stock, the holders of shares of common stock shall be entitled to receive pro
rata all of our remaining assets available for distribution to our stockholders.
The common stock has no preemptive, redemption, conversion or subscription
rights. All outstanding shares of common stock are, and the shares of common
stock to be issued pursuant to this offering will be, fully paid and
non-assessable. The issuance of common stock or of rights to purchase common
stock could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, a majority
of our outstanding voting stock.
-31-
Preferred Stock
The Board of Directors is authorized, subject to limitations prescribed by
Delaware law, to provide for the issuance of preferred stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the voting powers, designations, preferences and
rights, and the restrictions of those preferences and rights, of the shares of
each such series and to increase, but not above the total number of authorized
shares of preferred stock, or decrease, but not below the number of shares of
such series then outstanding, the number of shares of any such series without
further vote or action by the stockholders.
The board is authorized to issue preferred stock with voting, conversion, and
other rights and preferences which could adversely affect the voting power or
other rights of the holders of common stock. On January 7, 2000 we issued
1,500,000 shares of preferred stock to our three founders in connection with the
commencement of their employment contracts on January 1, 2000. The preferred
shares have rights to dividends, rights with respect to liquidation and other
rights equivalent to those of holders of our common stock.
Warrants
Each Class A $.40 Warrant entitles the holder to purchase one share of common
stock at an exercise price of $0.40 per share and each Class B $.50 Warrant
entitles the holder to purchase one share of common stock at an exercise price
of $0.50 per share (collectively, the "Warrants"). Unless previously redeemed,
the Warrants are exercisable at any time up until October 15, 2003. The Warrants
are transferable separately from the common stock. The Warrants are subject to
redemption by ITL at $.05 per warrant if the common stock closing bid price
exceeds $1.00 for 10 consecutive trading days ending within 15 days of the date
as of which the notice of redemption is given.
On February 11, 2003, our Board of Directors authorized the reduction of the
exercise price of both the Class A $.40 warrants and our Class B $.50 warrants
to $.20 for each Class during the period commencing February 18, 2003 and ending
on July 1, 2003. Thereafter the exercise price will revert to $.40 and $.50
cents respectively. Holders of the Warrants will automatically forfeit their
rights to purchase the shares of common stock issuable under such warrants
unless the warrants are exercised before the close of business on the business
day immediately prior to the date set for redemption. All of the outstanding
warrants of a class must be redeemed if any of that class are redeemed. A notice
of redemption shall be mailed to each registered holder of Warrants by first
class mail, postage prepaid, upon 30 days' notice before the date fixed for
redemption. The notice of redemption shall specify the redemption price, the
date fixed for redemption, the place where the Warrant certificates shall be
delivered and the redemption price to be paid, and that the right to exercise
the Warrants shall terminate at 5:00 p.m., New York City time, on the business
day immediately preceding the date fixed for redemption.
The Warrants may be exercised upon surrender of the certificate(s) therefore on
or prior to the expiration or the redemption date at the offices of ITL's
warrant agent with the subscription form on the reverse side of the
certificate(s) completed and executed as indicated, accomplished by payment, in
the form of a certified check payable to the order of ITL, of the full exercise
price for the number of Warrants being exercised.
-32-
The Warrants contain provisions which protect the holders against dilution by
adjustment of the exercise price per share and the number of shares issuable
upon exercise upon the occurrence of certain events, including issuances of
common stock, or securities convertible, exchangeable or exercisable into common
stock, at less than market value, stock dividends, stock splits, mergers, sale
of substantially all of ITL's assets, and for other extraordinary events;
provided, however, that no such adjustment shall be made upon, among other
things (i) the issuance or exercise of options or other securities under any
stock option or other benefit plan offered to employee, officers or directors of
ITL, (ii) the sale or exercise of outstanding options or warrants or (iii) the
conversion of shares of ITL's preferred stock to common stock.
ITL is not required to issue fractional shares of common stock, and instead will
make a cash payment based upon the current market value of such fractional
shares. The holders of the Warrants will not possess any rights as shareholders
of ITL unless and until such warrants have been exercised for shares of common
stock.
Anti-takeover Effects of Provisions of Our Charter, Our By-laws and Delaware Law
Our charter and by-laws contain provisions which could discourage potential
takeover attempts and make more difficult the acquisition of a substantial block
of the common stock. Our charter authorizes the directors to issue, without
stockholder approval, shares of preferred stock in one or more series and to fix
the voting powers, designations, preferences and rights, and the restrictions of
those preferences and rights, of the shares of each such series. Our charter
provides that stockholders may act only at meetings of stockholders and not by
written consent in lieu of a stockholders' meeting. Our by-laws provide that
nominations for directors may not be made by stockholders at any annual or
special meeting thereof unless the stockholder intending to make a nomination
notifies us of its intentions a specified number of days in advance of the
meeting and furnishes to us information regarding itself and the intended
nominee. Our by-laws also provide that special meetings of our stockholders may
be called only by the president and must be called by the president or the
secretary at the written request of a majority of the directors. Our by-laws
also require a stockholder to provide to our Secretary advance notice of
business to be brought by such stockholder before any stockholder meeting as
well as information regarding the stockholder and others known to support the
proposal and any material interest they may have in the proposed business. These
provisions could delay stockholder actions which are favored by the holders of a
majority of the outstanding stock until the next stockholders' meeting. These
provisions may also discourage another person or entity from making a tender
offer for our common stock, because the person or entity, even after acquiring a
majority of the outstanding stock, could only take action at a duly called
stockholders' meeting and not by written consent.
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that such stockholder became an interested stockholder,
unless;
-33-
- prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares
owned (a) by persons who are directors and also officers and (b) by
employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
- on or subsequent to such date, the business combination is approved
by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock which is
not owned by the interested stockholder. The application of Section 203
may limit the ability of stockholders to approve a transaction which
they may deem to be in their best interests.
Section 203 defines "business combination" to include (a) any merger or
consolidation involving the corporation and the interested stockholder; (b) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation to or with the interested stockholder; (c) subject to certain
exceptions, any transaction which results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (d)
any transaction involving the corporation which has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (e) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an "interested stockholder" as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person associated with, affiliated with,
controlling or controlled by such entity or person.
-34-
Limitation of Liability and Indemnification
Our charter provides that no director shall be personally liable to us or to any
stockholder for monetary damages arising out of such director's breach of
fiduciary duty, except to the extent that the elimination or limitation of
liability is not permitted by Delaware law. The Delaware law, as currently in
effect, permits charter provisions eliminating the liability of directors for
breach of fiduciary duty, except that such provisions do not eliminate or limit
the liability of directors for (a) any breach of the director's duty of loyalty
to a corporation or its stockholders, (b) any acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, (c)
any payment of a dividend or approval of a stock purchase which is illegal under
Section 174 of the Delaware General Corporation Law or (d) any transaction from
which the director derived an improper personal benefit. A principal effect of
this provision of our charter is to limit or eliminate the potential liability
of our directors for monetary damages arising from any breach of their duty of
care, unless the breach involves one of the four exceptions described in (a)
through (d) above.
Our charter and by-laws further provide for the indemnification of our directors
and officers to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, including circumstances in which indemnification is
otherwise discretionary. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the SEC that indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Continental Stock
Transfer & Trust Company.
-35-
PLAN OF DISTRIBUTION
The warrants and underlying shares offered by this prospectus may be
sold from time to time by selling stockholders. The selling stockholders may
sell the shares in the over-the-counter markets or otherwise, at market prices
or at negotiated prices. They may sell shares by one or a combination of the
following:
- a block trade in which a broker or dealer so engaged will attempt
to sell the shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by the
broker or dealer for its account pursuant to this prospectus; and
- ordinary brokerage transactions and transactions in which a broker
solicits purchasers.
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Brokers or
dealers will receive commissions or discounts from selling stockholders in
amounts to be negotiated prior to the sale. The selling stockholders and any
broker- dealers which participate in the distribution may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any proceeds or commissions received by them, and any profits on the resale of
shares sold by broker-dealers, may be deemed to be underwriting discounts and
commissions.
If any selling stockholder notifies us that a material arrangement
has been entered into with a broker-dealer for the sale of shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, we will file, a prospectus supplement, if
required pursuant to the Securities Act, setting forth:
- the name of each of the participating broker-dealers,
- the number of shares involved,
- the price at which the shares were sold,
- the commissions paid or discounts or concessions allowed to the
broker-dealers, where applicable,
- a statement to the effect that the broker-dealers did not conduct
any investigation to verify the information set out or incorporated
by reference in this prospectus, and
- any other facts material to the transaction.
Image Technology will not receive any of the proceeds of shares sold
by the selling stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
We had outstanding 12,232,462 shares of common stock at September 30, 2002. Of
these shares, only approximately 4,190,712 are freely tradable without
restriction, except for restrictions imposed by certain state regulatory
authorities, or registration under the Securities Act, except that any shares
purchased by an "affiliate" of ITL, as defined in the rules and regulations
promulgated under the Securities Act, will be subject to the resale limitations
under Rule 144 under the Securities Act. The remaining shares of outstanding
common stock were issued and sold by ITL in private transactions in reliance
upon exemptions from registration under the Act. Such shares may be sold only
pursuant to an effective registration statement filed by ITL or an applicable
exemption, including the exemption contained in Rule 144 promulgated under the
Act.
-36-
In general, under Rule 144 as currently in effect, a shareholder, including an
affiliate of ITL may sell shares of common stock after at least one year has
elapsed since such shares were acquired from ITL or an affiliate of ITL. The
number of shares of common stock which may be sold within any three-month period
is limited to the greater of: (i) one percent of the then outstanding common
stock or (ii) the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale was filed
under Rule 144.
Certain other requirements of Rule 144 concerning availability of public
information, manner of sale and notice of sale must also be satisfied. In
addition, a shareholder who is not an affiliate of ITL (and who has not been an
affiliate of ITL for 90 days prior to the sale) and who has beneficially owned
shares acquired from ITL or an affiliate of ITL for over two years may resell
the shares of common stock without compliance with the foregoing requirements
under Rule 144.
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the common stock prevailing from time to time. Nevertheless, sales of
substantial amounts of common stock, or the perception that such sales may
occur, could have a material adverse effect on prevailing market prices.
LEGAL MATTERS
James J. Quinlan, Esq., Tampa, Florida, has advised us with respect to
the validity of the securities offered by this prospectus.
EXPERTS
The financial statements of Image Technology Laboratories, Inc. as of December
31, 2001 and for the years ended December 31, 2001 and 2000 for the period from
January 1, 1998 (date of inception) to December 31, 2001 included in this
Prospectus have been audited by J.H. Cohn LLP, independent public accountants,
as stated in their report appearing elsewhere in this Prospectus, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
-37-
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC for our common
stock offered hereby. This prospectus does not contain all of the information
set forth in the registration statement. You should refer to the registration
statement and its exhibits for additional information. Whenever we make
reference in this prospectus to any of our contracts, agreements or other
documents, you should refer to the exhibits attached to the registration
statement or incorporated herein by reference for the copies of the actual
contract, agreement or other document. However, this prospectus does contain all
material information about the contents of any contract, agreement or other
document filed as an exhibit to the registration statement and to which this
prospectus refers. Following this offering we will be required to file annual,
quarterly and special reports, proxy statements and other information with the
SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's Web site at HTTP://WWW.SEC.GOV. You may also read and copy
any document we file with the SEC at its public reference facilities at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may
also obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference facilities.
-38-
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants F-2
Balance Sheet
December 31, 2001 F-3
Statements of Operations
Years Ended December 31, 2001 and 2000 and Period From January 1, 1998
(Date of Inception) to December 31, 2001 F-4
Statements of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 2001 and 2000 and Period From
January 1, 1998 (Date of Inception) to December 31, 2001 F-5
Statements of Cash Flows
Years Ended December 31, 2001 and 2000 and Period From January 1, 1998
(Date of Inception) to December 31, 2001 F-6
Notes to Financial Statements F-7/15
Condensed Balance Sheet
September 30, 2002 (Unaudited) F-16
Condensed Statements of Operations
Nine Months Ended September 30, 2002 and 2001 (Unaudited) F-17
Condensed Statement of Changes in Stockholders' Deficiency
Nine Months Ended September 30, 2002 (Unaudited) F-18
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001 (Unaudited) F-19
Notes to Condensed Financial Statements (Unaudited) F-20/23
* * *
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. (A Development Stage Company) as of December 31, 2001, and the related
statements of operations, changes in stockholders' equity (deficiency) and cash
flows for the years ended December 31, 2001 and 2000 and for the period from
January 1, 1998 (date of inception) to December 31, 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, 2001, and its results of operations and cash flows for
the years ended December 31, 2001 and 2000 and for the period from January 1,
1998 (date of inception) to December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
J.H. COHN LLP
Roseland, New Jersey
February 6, 2002
F-2
Image Technology Laboratories, Inc.
(A Development Stage Company)
Balance Sheet
December 31, 2001
ASSETS
Current assets - cash and cash equivalents $ 151,730
Equipment, net of accumulated depreciation of $4,598 42,948
-----------
Totals $ 194,678
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 37,911
Notes payable to stockholders 5,200
-----------
Total current liabilities 43,111
Accrued compensation payable to stockholders 420,541
-----------
Total liabilities 463,652
-----------
Commitments
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; 11,272,712 shares issued and outstanding 112,727
Additional paid-in capital 1,587,118
Unearned compensation (150,000)
Deficit accumulated in the development stage (1,833,819)
-----------
Total stockholders' deficiency (268,974)
-----------
Totals $ 194,678
===========
See Notes to Financial Statements.
F-3
Image Technology Laboratories, Inc.
(A Development Stage Company)
Statements of Operations
Years Ended December 31, 2001 and 2000
and Period From January 1, 1998
(Date of Inception) to December 31, 2001
2001 2000 CUMULATIVE
------------ ------------ ------------
Revenues - related party $ 21,375 $ -- $ 21,375
------------ ------------ ------------
Expenses:
Research and development 635,694 633,798 1,269,492
General and administrative 354,765 211,797 585,702
------------ ------------ ------------
Totals 990,459 845,595 1,855,194
------------ ------------ ------------
Net loss $ (969,084) $ (845,595) $ (1,833,819)
============ ============ ============
Basic net loss per share $ (.08) $ (.08)
============ ============
Basic weighted average shares outstanding 12,589,041 10,370,047
============ ============
See Notes to Financial Statements.
F-4
Image Technology Laboratories, Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficiency)
Years Ended December 31, 2001 and 2000
and Period from January 1, 1998
(Date of Inception) to December 31, 2001
PREFERRED STOCK COMMON STOCK ADDITIONAL COMMON
NUMBER NUMBER PAID-IN STOCK
OF OF CAPITAL SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
------------------------------------------------------------------------------------------
Issuance of shares effective
as of January 1, 1998 to
founders 7,288,750 $ 72,887 $ (51,637)
Net loss
------------------------------------------------------------------------------------------
Balance, December 31, 1998 7,288,750 72,887 (51,637)
Net loss
------------------------------------------------------------------------------------------
Balance, December 31, 1999 7,288,750 72,887 (51,637)
Issuance of preferred stock in
exchange for services 1,500,000 $ 15,000 435,000
Issuance of common stock in
exchange for services 250,000 2,500 72,500
Sales of units of common stock
and warrants through private
placement, net of expenses,
in February 2000 799,729 7,997 171,923
Subscription for units of
common stock and warrants through
private placement 33,333 333 9,667 $ (10,000)
Sales of units of common stock
and warrants through public
offering completed in October
2000, net of expenses 2,591,050 25,911 813,951
Amortization of unearned compensation
Net loss
------------------------------------------------------------------------------------------
Balance, December 31, 2000 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
Receipt of subscription receivable 10,000
Net loss
------------------------------------------------------------------------------------------
Balance, December 31, 2001 1,500,000 $ 15,000 11,272,712 $ 112,727 $ 1,587,118 $ --
============ ============ ============ ============ ============ ============
DEFICIT
ACCUMULATED TOTAL
IN THE STOCKHOLDERS'
UNEARNED DEVELOPMENT EQUITY
COMPENSATION STAGE (DEFICIENCY)
------------------------------------------------
Issuance of shares effective
as of January 1, 1998 to
founders $ 21,250
Net loss $ (18,407) (18,407)
--------------------------------------------
Balance, December 31, 1998 (18,407) 2,843
Net loss (733) (733)
--------------------------------------------
Balance, December 31, 1999 (19,140) 2,110
Issuance of preferred stock in
exchange for services $ (450,000)
Issuance of common stock in
exchange for services 75,000
Sales of units of common stock
and warrants through private
placement, net of expenses,
in February 2000 179,920
Subscription for units of
common stock and warrants through
private placement
Sales of units of common stock
and warrants through public
offering completed in October
2000, net of expenses 839,862
Amortization of unearned compensation 150,000 150,000
Net loss (845,595) (845,595)
--------------------------------------------
Balance, December 31, 2000 (300,000) (864,735) 401,297
Issuance of common stock upon
exercise of warrants 138,813
Amortization of unearned compensation 150,000 150,000
Receipt of subscription receivable 10,000
Net loss (969,084) (969,084)
--------------------------------------------
Balance, December 31, 2001 $ (150,000) $ (1,833,819) $ (268,974)
============ ============ ============
See Notes to Financial Statements.
F-5
Image Technology Laboratories, Inc.
(A Development Stage Company)
Statements of Cash Flows
Years Ended December 31, 2001 and 2000
and Period from January 1, 1998
(Date of Inception) to December 31, 2001
2001 2000 CUMULATIVE
----------- ----------- -------------
Operating activities:
Net loss $ (969,084) $ (845,595) $(1,833,819)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of unearned compensation 150,000 150,000 300,000
Amortization of capitalized software 2,186 2,186
Depreciation 4,598 4,598
Common stock issued for services 75,000 75,000
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 17,248 20,663 37,911
Accrued compensation payable to stockholders 122,596 297,945 420,541
----------- ----------- -----------
Net cash used in operating activities (674,642) (299,801) (993,583)
----------- ----------- -----------
Investing activities:
Software costs capitalized (2,186)
Purchase of equipment (47,546) (47,546)
----------- -----------
Net cash used in investing activities (47,546) (49,732)
----------- -----------
Financing activities:
Proceeds from issuance of notes payable to
stockholders 100 5,200
Proceeds from issuance of common stock 138,813 170,063
Receipt of subscription receivable 10,000
Net proceeds from private placement and public
offering of units of common stock and warrants 1,024,782 1,024,782
Payments of deferred private placement costs (5,000)
----------- ----------- -----------
Net cash provided by financing activities 148,813 1,024,882 1,195,045
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (573,375) 725,081 151,730
Cash and cash equivalents, beginning of period 725,105 24 --
----------- ----------- -----------
Cash and cash equivalents, end of period $ 151,730 $ 725,105 $ 151,730
=========== =========== ===========
See Notes to Financial Statements.
F-6
Image Technology Laboratories, Inc.
(A Development Stage Company)
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 is in the process of developing
picture archiving and communications software, known in the
medical industry as "PACS," which will be used to input
diagnostic images in digital format from original imaging sources
and to store, print and display those images. Such software is
used in the management of medical diagnostic images by hospitals,
health maintenance organizations, group medical practices and
individual radiologists to increase accuracy, reduce costs and
boost productivity.
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.
As of December 31, 2001, the Company's operations have been
limited to organizational activities and have not generated any
significant revenues from operations through that date.
Accordingly, the Company is considered a "development stage
company" for financial reporting purposes.
As of December 31, 2001, the Company has cash and cash
equivalents of approximately $152,000 and working capital of
approximately $109,000. However, since inception, the Company has
incurred losses resulting in an accumulated deficit of
approximately $1,834,000 at December 31, 2001. The Company
currently has no significant sources of revenues and expects to
incur additional losses for the foreseeable future. In addition,
the Company has only recently introduced its product to market
and does not expect to generate any significant revenues prior to
the second quarter of the year ending December 31, 2002. Further,
as of December 31, 2001, the stockholders have deferred until
2003 approximately $421,000 of compensation due them under their
employment agreements.
On April 4, 2002, the Company entered into a letter of intent
with a company for the purchase of one of the Company's systems
at fair market value and a service agreement. The Company is
anticipating to generate approximately $700,000 in annual fees
under this agreement. The agreement is anticipated to close no
later than May 1, 2002, unless mutually extended. In addition,
the Company is currently negotiating similar agreements with
other companies.
If the aforementioned contract does not close, as anticipated,
the Company estimates that it will need additional financing of
$200,000, either by debt or equity financing to fund its planned
operations beyond its current level over the next 12 months over
and above the $100,000 it received in January 2002 from the sale
of 400,000 shares of common stock in a private placement. At the
present time, except for the commitment of the Company's
principal stockholder to fund the $200,000, the Company has no
commitments for additional financing and there can be no
assurance that such financing will be available on satisfactory
terms, if at all. Management believes that even if the principal
stockholder funds the additional working capital of $200,000 it
will enable the Company to meet its obligations and fund its
operations through at least December 31, 2002.
F-7
Image Technology Laboratories, Inc.
(A Development Stage Company)
Notes to Financial Statements
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:
Sales are recognized when revenue is realized or becomes
realizable and has been earned. In general, revenue is
recognized when the earnings process is complete and
collectibility is assured, which is usually when the Company
delivers the diagnostic images in digital format to the
customer. During the year ended December 31, 2001 and the
period from January 1, 1998 (date of inception) to December
31, 2001, the Company earned revenue of $21,375 from Kingston
Diagnostic Radiology, P.C., a company wholly-owned by one of
the principal stockholders.
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, 2001, the Company was
not exposed to such risk.
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.
F-8
Image Technology Laboratories, Inc.
(A Development Stage Company)
Notes to Financial Statements
Note 2 - Summary of significant accounting policies (continued):
Equipment:
Equipment is stated at cost, net of accumulated depreciation.
Depreciation is provided using accelerated methods over the
estimated useful lives of the assets, which range from five to
seven years.
Impairment of long-lived assets:
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"). Under SFAS 121, impairment
losses on long-lived assets, such as goodwill 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 is 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, 2001 and 2000 in
accordance with the "two class" method of computing earnings
(loss) per share set forth in SFAS 128.
F-9
Image Technology Laboratories, Inc.
(A Development Stage Company)
Notes to Financial Statements
Note 2 - Summary of significant accounting policies (concluded):
Net earnings (loss) per common share (concluded):
Since the Company had net losses in 2001 and 2000, the assumed
effects of the exercise of 3,000,000 options outstanding at
December 31, 2001 and 2000 and 3,364,262 and 3,674,112
warrants outstanding at December 31, 2001 and 2000 would have
been anti-dilutive.
The weighted average common shares outstanding shown in the
accompanying statements of operations have been retroactively
adjusted for a 388.733 for 1 stock split that was effected on
January 7, 2000 (see Note 5).
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:
Equipment consists of the following:
Equipment $42,046
Furniture 5,500
-------
Total 47,546
Less accumulated depreciation 4,598
-------
Total $42,948
=======
Depreciation expense amounted to $4,598 during the year ended
December 31, 2001 and the period from January 1, 1998 (date of
inception) to December 31, 2001.
F-10
Image Technology Laboratories, Inc.
(A Development Stage Company)
Notes to Financial Statements
Note 4 - Notes payable to stockholders:
Notes payable to stockholders with a principal balance of $5,200
at December 31, 2001 were noninterest bearing and due on demand.
Note 5 - Stockholders' equity (deficiency):
Preferred stock:
As of December 31, 2001, the Company was authorized to issue
up to 5,000,000 shares of preferred stock with a par value of
$.01 per share. No shares of preferred stock had been issued
as of December 31, 1999. 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.
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 (see Note 9). 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 the private placement that was completed on February
4, 2000. The aggregate fair value of the preferred shares of
$450,000 has been recorded as unearned compensation and
reflected as a reduction of stockholders' equity, net of
accumulated amortization, in the accompanying balance sheet as
of December 31, 2001. The unearned compensation is being
charged to the Company's operations over the terms of the
respective employment agreements.
Common stock:
As of December 31, 1999, the Company was also authorized to
issue up to 50,000,000 shares of common stock with a par value
of $.01 per share. As of that date, it had issued 18,750
shares of common stock to its founding stockholders for total
cash consideration of $21,250 in January 1998.
F-11
Image Technology Laboratories, Inc.
(A Development Stage Company)
Notes to Financial Statements
Note 5 - Stockholders' equity (deficiency) (concluded):
Private placement of units:
On February 4, 2000, the Company completed a private placement
of 799,729 units, at $.30 per unit, that was exempt from
registration under the Securities Act of 1933 and received
proceeds of $239,920 before related expenses of $60,000. Each
unit was comprised of one share of common stock and one
warrant. In addition, the Company issued 250,000 warrants to
the broker who arranged the private placement of units. 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 October 15, 2003.
Stock subscription receivable:
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 October 15, 2003. During 2001, the Company
received the proceeds of the subscription receivable.
Shares for services:
During March 2000, the Company issued 250,000 shares of common
stock for the payment of legal services. The common shares and
legal services were valued at a total of $75,000, or $.30 per
share based on the price of units sold through the private
placement that was completed on February 4, 2000.
Initial public offering:
During 2000, the Company filed a registration statement with
the Securities and Exchange Commission related to an initial
public offering of a minimum of 1,500,000 units, on a
best-efforts, all-or-none basis and an additional 1,500,000
units on a best-efforts basis. Each unit offered consists of
one share of common stock and one warrant. Each warrant will
give the holder the right to purchase one share of common
stock at the initial exercise price of $.50 per share, expire
on October 15, 2003 and be redeemable by the Company at $.05
per warrant if the closing bid price of the common stock
exceeds $1.00 for ten consecutive trading days. Management
intends to use the proceeds for working capital and general
corporate purposes.
As of October 15, 2000, the date the offering closed, the
Company sold 2,591,050 units at $.40 per unit from which it
received proceeds of $839,862, net of related expenses of
$196,558.
F-12
Image Technology Laboratories, Inc.
(A Development Stage Company)
Notes to Financial Statements
Note 6 - Income taxes:
As of December 31, 2001, the Company had net operating loss
carryforwards of approximately $1,413,000 available to reduce
future Federal and state taxable income which will expire at
various dates through 2021. The Company's only other material
temporary difference as of that date was approximately $421,000
of 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
carryforwards to substantial annual limitations, and the extent
and timing of its future taxable income, the Company offset the
deferred tax assets attributable to the potential benefits of
approximately $734,000 related to the net operating loss
carryforwards ($566,000) and future deductibility of the
officers' compensation ($168,000) by an equivalent valuation
allowance as of December 31, 2001.
The Company had also offset the potential benefits from net
operating loss carryforwards of approximately $227,000, $7,600
and $7,200 by an equivalent valuation allowance as of December
31, 2000, 1999 and 1998, respectively and accrued officers'
compensation of approximately $119,000 as of December 31, 2000.
Although the Company had pre-tax losses in each period, income
tax benefit is included in the accompanying statements of
operations as a result of the increases in the valuation
allowance of $388,000, $338,400, $400 and $7,200 in 2001, 2000,
1999 and 1998, respectively.
Note 7 - Fair value of financial statements:
The Company's financial instruments at December 31, 2001 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 and accrued compensation payable to stockholders. In
the opinion of management, cash and cash equivalents and accounts
payable and accrued expenses were carried at fair value because
of its liquidity and short-term maturity. 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.
F-13
Image Technology Laboratories, Inc.
(A Development Stage Company)
Notes to Financial Statements
Note 8 - Stock option plan (concluded):
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.
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:
2001 2000
---------------- ---------------
Net loss - as reported $ (969,084) $ (845,595)
Net loss - pro forma (1,129,084) (1,005,595)
Basic loss per share - as reported $(.08) $(.08)
Basic loss per share - pro forma $(.09) $(.10)
The fair value of each option granted was estimated 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 - Employment agreements:
During December 1999, the Company entered into employment
agreements with its three founders that became effective on
January 1, 2000 and obligate the Company to make an aggregate
payment of $150,000 in the year ending December 31, 2002.
F-14
Image Technology Laboratories, Inc.
(A Development Stage Company)
Notes to Financial Statements
Note 10- Subsequent event:
During January 2002, the Company entered into an agreement with
an investor relations firm. In exchange for marketing services,
the Company granted 450,000 shares of common stock and 100,000
two-year warrants with a $3.00 exercise price.
The services will be valued at approximately $112,500 based on
the fair value of the shares of common stock on the date the
agreement was entered into.
During January 2002, the Company negotiated the sale of
400,000 shares of its common stock for $100,000.
* * *
F-15
Image Technology Laboratories, Inc.
Condensed Balance Sheet
September 30, 2002
(Unaudited)
ASSETS
Current assets - cash and cash equivalents $ 191,680
Equipment, net 36,052
-----------
Total $ 227,732
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 55,687
Notes payable to stockholders 5,200
-----------
Total current liabilities 60,887
Deferred revenues 128,333
Accrued compensation payable to stockholders 530,080
-----------
Total liabilities 719,300
-----------
Commitments
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
Unearned compensation (25,000)
Unearned marketing expense (56,250)
Accumulated deficit (2,375,038)
-----------
Total stockholders' deficiency (491,568)
-----------
Total $ 227,732
===========
See Notes to Condensed Financial Statements.
F-16
Image Technology Laboratories, Inc.
Condensed Statements of Operations
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
Revenues:
Service income $ 207,800
Software license fees 11,667
-----------
Total 219,467
-----------
Costs and expenses:
Research and development 378,750 $ 484,335
Sales and marketing 65,626
General and administrative 316,310 170,180
----------- -----------
Totals 760,686 654,515
----------- -----------
Net loss $ (541,219) $ (654,515)
=========== ===========
Basic net loss per share $ (.04) $ (.05)
=========== ==========
Basic weighted average shares
outstanding 13,287,998 12,539,975
=========== ==========
See Notes to Condensed Financial Statements.
F-17
Image Technology Laboratories, Inc.
Condensed Statement of Changes in Stockholders' Deficiency
Nine Months Ended September 30,2002
(Unaudited)
PREFERRED STOCK COMMON STOCK ADDI- TOTAL
NUMBER NUMBER TIONAL UNEARNED UNEARNED ACCUMU- STOCK-
OF OF PAID-IN COMPEN- MARKETING LATED HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION EXPENSE DEFICIT DEFICIENCY
------ ------ ------ ------ ------- ------ ------- ------- ----------
Balance, January 1, 2002 1,500,000 $ 15,000 11,272,712 $ 112,727 $1,587,118 $(150,000) $(1,833,819) $(268,974)
Sales of shares of
common stock
through private
placement 475,000 4,750 116,250 121,000
Issuance of common
stock upon
exercise of
warrants 34,750 348 16,027 16,375
Issuance of common
stock for services
to be rendered 450,000 4,500 108,000 $(112,500)
Amortization of
unearned
compensation 125,000 125,000
Amortization of
unearned
marketing expense 56,250 56,250
Net loss (541,219) (541,219)
----------- --------- ----------- --------- ---------- --------- ------------ ----------- ---------
Balance,
September 30, 2002 1,500,000 $ 15,000 12,232,462 $ 122,325 $1,827,395 $ (25,000) $ (56,250) $(2,375,038) $(491,568)
=========== ========= =========== ========= ========== ========= =========== =========== =========
See Notes to Condensed Financial Statements.
F-18
Image Technology Laboratories, Inc.
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
--------- ----------
Operating activities:
Net loss $(541,219) $(654,515)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of unearned compensation 125,000 112,500
Amortization of unearned marketing expense 56,250
Depreciation 6,896
Changes in operating assets and liabilities:
Other current assets (6,250)
Accrued compensation payable to stockholders 109,539 77,789
Accounts payable and accrued expenses 17,776 (20,383)
Deferred revenues 128,333
--------- ---------
Net cash used in operating activities (97,425) (490,859)
--------- ---------
Financing activities:
Proceeds from exercise of warrants 16,375 104,513
Proceeds from private placement of common stock 121,000
--------- ---------
Net cash provided by financing activities 137,375 104,513
--------- ---------
Net increase (decrease) in cash and cash equivalents 39,950 (386,346)
Cash and cash equivalents, beginning of period 151,730 725,105
--------- ---------
Cash and cash equivalents, end of period $ 191,680 $ 338,759
========= =========
See Notes to Condensed Financial Statements.
F-19
Image Technology Laboratories, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited
condensed financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present
fairly the financial position of Image Technology Laboratories,
Inc. (the "Company") as of September 30, 2002, its results of
operations and cash flows for the nine months ended September
30, 2002 and 2001, and the changes in stockholders' deficiency
for the nine months ended September 30, 2002. Certain terms
used herein are defined in the audited financial statements of
the Company as of December 31, 2001 and for the years ended
December 31, 2001 and 2000 and the period from January 1, 1998
(date of inception) to December 31, 2001 (the "Audited
Financial Statements") included in the Company's Annual Report
on Form 10-KSB previously filed with the Securities and
Exchange Commission (the "SEC"). Pursuant to rules and
regulations of the SEC, certain information and disclosures
normally included in financial statements prepared in
accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted from
these financial statements unless significant changes have
taken place since the end of the most recent fiscal year.
Accordingly, the accompanying unaudited condensed financial
statements should be read in conjunction with the Audited
Financial Statements and the other information included in the
Registration Statement on Form SB-2.
The results of operations for the nine months ended
September 30, 2002 are not necessarily indicative of the
results of operations for the full year ending December 31,
2002.
The Company was a development stage company for accounting
purposes from January 1, 1998 (date of inception) through April
2002, at which time the picture archiving and communications
software that inputs diagnostic images in digital format from
original imaging sources became available for sale (see Note
2). The Company obtained its first contract for the sale of its
software product and related hardware and maintenance services
in August 2002. Although the Company has been deriving revenues
from the provision of radiology and imaging services to
affiliated and nonaffiliated companies, management expects that
the Company will derive its revenues in the future primarily
from sales of the software product.
As of September 30, 2002, the Company had cash and cash
equivalents of approximately $192,000 and working capital of
approximately $131,000. However, since its inception, the
Company has incurred recurring losses and, as a result, it had
an accumulated deficit of approximately $2,375,000 at September
30, 2002. In addition, as of September 30, 2002, the major
stockholders of the Company had deferred approximately $530,000
of compensation due them under their employment agreements
until 2003. Although the Company has just begun to generate
revenues from its software product, management currently
expects that the Company will incur additional losses, although
at a reduced level, for the foreseeable future.
F-20
Image Technology Laboratories, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 1 - Unaudited interim financial statements (concluded):
Management believes that the Company needs additional debt or
equity financing of $80,000 to enable the Company to meet its
obligations and fund its operations through at least September
30, 2003. During September 2002, the Company obtained a $75,000
working capital loan. In addition, the Company's principal
stockholder has agreed to provide funds totaling $80,000 if the
Company cannot obtain that amount through other sources or the
working capital loan is insufficient. Management cannot assure
that the Company will be able to obtain any additional
financing on satisfactory terms that may be required during
that period other than the amount the principal stockholder is
committed to provide.
Note 2 - Revenue recognition:
Revenues from the provision of radiology and imaging services
are recognized over the 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.
Unearned revenues are included in deferred revenues in the
accompanying condensed balance sheet.
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 at the annual rate of $450,000.
Management anticipates that fees for the system, which was
installed prior to September 30, 2002, and the related
three-year maintenance contract will exceed $400,000.
Note 3 - Earnings (loss) per share:
The Company presents basic earnings (loss) per share and, if
appropriate, diluted earnings per share in accordance with the
provisions of Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128").
F-21
Image Technology Laboratories, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 3 - Earnings (loss) per share (concluded):
The rights of the Company's preferred and common stockholders
are substantially equivalent. In accordance with the "two
class" method of computing earnings (loss) per share set forth
in SFAS 128, the Company has included the 1,500,000 outstanding
preferred shares from the date of their issuance in the
weighted average number of shares outstanding used in the
computation of basic loss per share for the nine months ended,
2002 and 2001.
Since the Company had net losses for the nine months ended
September 30, 2002 and 2001, the assumed effects of the
exercise of options to purchase 3,000,000 common shares
outstanding at September 30, 2002 and 2001 and warrants to
purchase 3,429,512 and 3,434,862 common shares outstanding at
September 30, 2002 and 2001, respectively, and the application
of the treasury stock method would have been anti-dilutive and,
therefore, diluted per share amounts have not been presented in
the accompanying condensed statements of operations for those
periods.
Note 4 - Exercise of warrants:
During the nine months ended September 30, 2002, the Company
received $12,375 upon the exercise of warrants to purchase
24,750 common shares at $.50 per share and $4,000 upon the
exercise of warrants to purchase 10,000 common shares at $.40
per share. As of September 30, 2002, warrants to purchase
3,429,512 common shares were outstanding.
Note 5 - 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
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.
F-22
Image Technology Laboratories, Inc.
Notes to Condensed Financial Statements
(Unaudited)
Note 6 - Issuance of common 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 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. The exchange is a
noncash transaction and, as such, is not reflected in the
Company's condensed statement of cash flows for the nine months
ended September 30, 2002.
The investor relations firm will provide the services over the
six month period that commenced in July 2002 and the Company is
amortizing the unearned marketing expense over that period. The
unearned marketing expense, net of accumulated amortization,
has been reflected as a separate component of stockholders'
deficiency in the accompanying condensed balance sheet as of
September 30, 2002.
On December 31, 2002, by mutual consent, the agreement was
terminated. MacCaughern Trade Development returned 100,000 free
trading shares and 100,000 shares of restricted stock to the
Company. The 2-year warrants exercisable at $3.00 were not
issued.
Note 7 - Income taxes:
As the ultimate realization of the potential benefits of the
Company's net operating loss carryforwards is considered
unlikely by management, the Company has offset the deferred tax
assets attributable to those potential benefits through
valuation allowances and, accordingly, the Company did not
recognize any credits for income taxes in the accompanying
condensed statements of operations to offset its pre-tax
losses.
Note 8 - Bank loan agreement:
During September 2002, the Company entered into a one-year
$75,000 working capital loan agreement with M&T Bank.
Outstanding borrowings will bear interest payable monthly at 1%
above the prime rate, and will be guaranteed by the Company's
principal stockholder. At September 30, 2002, there were no
outstanding borrowings under the agreement.
Note 9 - Subsequent events:
On February 11, 2003, the Company reduced the exercise price of
its Class A $.40 warrants and its 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, the Company will account for these options as variable
from the date of the modifications to the date the award is
exercised, forfeited or expires unexercised.
* * *
F-23
PART II
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law affords a Delaware
corporation the power to indemnify its present and former directors and officers
under certain conditions. Article SEVENTH of the charter of ITL provides that
ITL shall indemnify each person who at any time is, or shall have been, a
director or officer of ITL, and is threatened to be or is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he or she
is, or was, a director or officer of ITL, or is or was serving at the request of
ITL as a director, officer, employee, trustee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
incurred in connection with any such action, suit or proceeding to the maximum
extent permitted by the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law gives a Delaware
corporation the power to adopt a charter provision eliminating or limiting the
personal liability of directors to the corporation or its stockholders for
breach of fiduciary duty as directors, provided that such provision may not
eliminate or limit the liability of directors for (a) any breach of the
director's duty of loyalty to the corporation or its stockholders, (b) any acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (c) any payment of a dividend or approval of a stock
purchase which is illegal under Section 174 of the Delaware Corporation Law or
(d) any transaction from which the director derived an improper personal
benefit. Article NINTH of ITL's charter provides that to the maximum extent
permitted by the Delaware General Corporation Law, no director of ITL shall be
personally liable to ITL or to any of its stockholders for monetary damages
arising out of such director's breach of fiduciary duty as a director of ITL. No
amendment to or repeal of the provisions of Article NINTH shall apply to or have
any effect of the liability or the alleged liability of any director of ITL with
respect to any act or failure to act of such director occurring prior to such
amendment or repeal. A principal effect of such Article NINTH is to limit or
eliminate the potential liability of our directors for monetary damages arising
from breaches of their duty of care, unless the breach involves one of the four
exceptions described in (a) through (d) above.
Section 145 of the Delaware General Corporation Law also affords a Delaware
corporation the power to obtain insurance on behalf of its directors and
officers against liabilities incurred by them in those capacities. ITL has
procured a directors' and officers' liability and company reimbursement
liability insurance policy that (a) insures directors and officers of ITL
against losses (above a deductible amount) arising from certain claims made
against them by reason of certain acts done or attempted by such directors or
officers and (b) insures ITL against losses (above a deductible amount) arising
from any such claims, but only if ITL is required or permitted to indemnify such
directors or officers for such losses under statutory or common law or under
provisions of ITL's charter or by-laws.
-39-
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses to be paid by ITL in
connection with the issuance and distribution of the securities being
registered, other than sales commissions. All amounts shown are estimates except
for amounts of filing and listing fees.
Filing fee of SEC............................................ $ 369
Accounting fees and expenses................................. 25,000
Legal fees and expenses...................................... 80,000
Printing and engraving expenses.............................. 12,000
Transfer Agent's fees ....................................... 5,000
Miscellaneous................................................ 2,631
--------
Total...................................................... $125,000*
========
*All of which has been previously paid upon initial filing.
Item 26. Recent Sales of Unregistered Securities
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, we 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 we were offering for sale through a private placement. The
aggregate fair value of the preferred shares of $450,000 is being charged to our
results of operations over the terms of the respective employment contracts.
During March 2000, we completed an offering of units for a total consideration
of approximately $240,000. 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 shares of common stock, 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.
-40-
During February 2000, we 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, we 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, we issued 400,000 shares of common stock to Kingston
Diagnostic Radiology, P.C. pension fund, the sole beneficiary of which is Dr.
Ryon, our President, Chief Executive Officer and Principal Accounting Officer
upon receiving consideration of $.25 per share or a total of $100,000.
On January 16, 2002, we entered into a consulting agreement with MacCaughern
Trade Development pursuant to which ITL agreed to issue 350,000 shares of its
common stock, valued at $87,500, to MacCaughern Trade Development in exchange
for its consulting services pursuant to an exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended. In addition, MacCaughern
Trade Development will receive 100,000 shares of restricted stock valued at $.25
per share and 100,000 2-year warrants exercisable at $3.00 per share, upon the
registration for resale of the initial 350,000 shares.
On December 31, 2002, by mutual consent, the agreement was terminated.
MacCaughern Trade Development returned 100,000 free trading shares and 100,000
shares of restricted stock to the company. The 2-year warrants exercisable at
$3.00 were not issued
During September, 2002 we issued 75,000 shares of common stock to Kingston
Diagnostic Radiology, P.C. pension fund, the sole beneficiary of which is Dr.
Ryon, our President, Chief Executive Officer and Principal Accounting Officer
upon receiving consideration of $.28 per share or a total 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. We have provided the recipients
of such shares access to all relevant information about our Company, including
our business plan, financial statements, material agreements and any other
information reasonably requested by them.
Item 27. Exhibits
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------
3.1* Certificate of Incorporation of ITL
3.2* Certificate of Amendment to Certificate of Incorporation of Image
Technology dated December 23, 1999
3.3* By-Laws of ITL
4.1* Specimen certificate for common stock of ITL
4.2* Specimen certificate for preferred stock of ITL
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
4.7****** Form of Amended Warrant
5.1 Opinion of James J. Quinlan, Esq.
10.1* ITL 1998 Stock Option Plan
10.2* Stockholders Agreement dated January 16, 1998 among certain
investors and ITL
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10.3* Form of Registration Rights Agreement dated February 2000 among
certain stockholders of ITL and ITL
10.4* Assignment of Intellectual Property Agreement dated as of December
18, 1997 between ITL 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
Rockland Radiological Group, P.L.C. and ITL dated
January 12, 1998 II-3
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
10.9**** Consulting Agreement dated January 16, 2002 between the Company
and MacCaughern Trade Development.
10.10***** Letter of Intent, dated April 4, 2002 by and between Image
Technology and Mid Rockland Imaging Partners.
23.1 Consent of J.H. Cohn LLP
23.2 Consent of James J. Quinlan, Esq. (included in Exhibit 5.1)
24.1 Power of Attorney (contained on page II-5 of the registration
statement)
*Filed with amendment no. 1 to registration statement on Form SB-2
(No.333-336787) filed on June 6, 2000.
** Filed with amendment no. 2 to registration statement on Form SB-2
(No.333-336787) filed (No. 333-336787) on July 27, 2000.
***Filed with amendment no. 3 to registration statement on Form SB-2
(No.333- 336787) filed (No. 333-336787) on August 6, 2000.
****Filed with registration statement on Form SB-2 (No. 333-82420)
filed on February 8, 2002.
*****Filed with Amendment No. 2 to registration statement on Form SB-2
(No. 333-82420) filed on June 7, 2002.
******Filed with Post Effective Amendment No. 1 to registration
statement on Form SB-2 (No. 333-336787) on July 3, 2002.
(b) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the related notes.
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ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this Registration
Statement to;
(i) Include any prospectus required by Section
10(a)(3) for the Securities Act of 1933, as amended
(the "Securities Act");
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a
fundamental change in the information set forth in
the Registration Statement; and
(iii) Include any additional changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each such post-effective amendment as a new registration
statement of the securities offered, and the offering of the
securities at that time to be the initial BONA FIDE offering
thereof.
(3) File a post-effective amendment to remove from
registration any of the securities which remain unsold at the
end of the offering.
(4) Provide to the transfer agent at the closing, certificates
in such denominations and registered in such names as are
required by the transfer agent to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Kingston, State of New York on February 14,2003.
IMAGE TECHNOLOGY LABORATORIES, INC.
By /s/ David Ryon
-----------------
David Ryon, MD
CEO, President, Chairman of the Board
and Principal Accounting Officer
By /s/ Lewis M. Edwards
-----------------------
Lewis M. Edwards
Vice President of Research and Development,
Chief Technical Officer and Director
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Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on February 14, 2003.
SIGNATURE TITLE
/s/ David Ryon Chairman, President, Chief Executive Officer,
------------------------ Chief Financial Officer, Principal Accounting
David Ryon, MD Officer and Director
/s/ Lewis M. Edwards Vice President of Research and Development,
------------------------ Chief Technical Officer and Director
Lewis M. Edwards
/s/ Richard V. Norell Director
---------------------
Richard V. Norell
/s/ Robert G. Carpenter Director
-----------------------
Robert G. Carpenter
/s/ John J. Naccarato Director
---------------------
John J. Naccarato
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