SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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IMAGE TECHNOLOGY LABORATORIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 22-3531373
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
602 ENTERPRISE DRIVE, KINGSTON, NEW YORK 12401
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (845) 338-3366
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The issuer's revenues for the most recent fiscal year was $775,405.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the $.72 last sales price reported by OTC.BB on March 29,
2004 was $9,900,000.
As of March 29, 2004, the registrant had issued and outstanding 13,851,278
Shares of Common Stock.
FORWARD-LOOKING STATEMENTS
This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate, " "intend, " "plan", "believe," "seek", "estimate," "may," "will"
and "continue" or similar words. You should read statements that contain these
words carefully. They discuss our future expectations, contain projections of
our future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update forward
looking statements or update the reasons actual results could differ materially
from those anticipated in forward-looking statements, except as required by law.
Factors, that could cause actual results to differ materially from those
expressed or implied by such forward looking statements include that factors
discussed in the report in Part 1, Item 1, including the section captioned "Risk
Factors that May Affect Future Results; and "Management's Discussion and
Analysis of Financial Condition or Plan of Operation."
PART I
Item 1. Description of Business
Image Technology Laboratories, Inc. ("ITL") is a medical image and information
management company in the healthcare IT market. We were incorporated in Delaware
on December 5, 1997. ITL has developed a fully integrated "radiology information
system/picture archiving and communication system", known as RIS/PACS for use in
the management of patient information and medical images by hospitals and
diagnostic imaging centers. The PACS portion of the system inputs and stores
diagnostic images in digital format from original imaging sources such as:
Computerized Tomography (CAT scan)
Magnetic Resonance Imaging (MRI)
Ultrasound
Nuclear Imaging
Digital Fluoroscopy and Radiography.
The RIS portion of the system inputs and stores patient demographics, insurance
information, billing and scheduling information required to complete the patient
visit. The RIS system also manages the reports generated by the radiologist from
the patient's image data. All of the data is retained in standard DICOM and HL-7
formats.
Dr. Ryon initially conceived Image Technology's picture archiving and
communications, which has the trademark WarpSpeed PACS/RIS system(TM)
(WarpSpeed). His goal was to implement an all digital radiology business
management system. Dr. Ryon assembled a team of engineers to design and
implement a medical information system tailored to the need of the radiology
community. Dr. Ryon joined forces with Lewis Edwards, an expert in networking
and image management. After more than two years of intensive research, the
development team had completed the specifications for the prototype WarpSpeed
system. ITL was formed to commercialize their state of the art system design. An
initial command decision was made to totally integrate all radiology information
into the system.
1
ITL installed a beta-version of the system at the Kingston Diagnostic Center
during May 2001. The entire process of patient scheduling, registration, image
acquisition, image display, and radiographic report generation was totally
automated in a way yet to be demonstrated in the industry. At the heart of the
system is a software module referred to as the workflow manager. This software
determines what resources are available on the enterprise and distributes the
various pieces of work as applicable. For example, if multiple radiologists are
logged on to the system, unread studies are distributed based upon their
preference and skills. Once the study has been read, the dictation is
distributed to an available stenographer. After transcription, the report
returns to the reporting radiologist, wherever he is logged on, for proof
reading and final signature.
Products
ITL's lead product is the WarpSpeed system. Through its unique modular
architecture ITL has created a total radiology business solution that is readily
scaled and easily upgraded. These features will allow the Company to provide
products tailored to the size of its customers and to keep its customers at the
forefront of future technological advances by enabling the Company to easily
update existing systems.
The main special features of the WarpSpeed product include:
Automation of the total workflow,
Integration of patient data with digital images,
A unique, radiologist designed user interface,
The ability to place key, annotated images in the radiologist's report,
Quality review programs, which analyze productivity and diagnostic
accuracy of individual radiologists or entire Radiology centers, and
Windows 2000 as the network operating system.
ITL has also designed a proprietary display workstation that permits the
simultaneous viewing of multiple diagnostic images together with relevant
patient data. The display of information emulates the current film based
paradigm that uses traditional X-Ray view boxes for the display of multiple
images. The heart of radiologists view station is a proprietary multi-monitor
touch-screen controlled workstation. Research has shown that simultaneous image
display improves the speed and accuracy of diagnostic interpretation. The
display workstation consists of proprietary software developed by ITL and
commercially available hardware. The unique feature of the display station is
its ability to present an unlimited number of diagnostic images on multiple
display surfaces. The software blends together an unlimited number of monitors,
of arbitrary resolution, into one large virtual display.
The WarpSpeed system can be used to create, store, reproduce and transmit
digitized images generated by current diagnostic imaging modalities, including
digital radiography, ultrasound, nuclear medicine, digital
fluoroscopy, computed tomography, and MRI. Using WarpSpeed, radiologists can
read and interpret digital images from any imaging modality that is connected to
the network. This includes remote locations connected via encrypted tunnels
(VPN's) over the Internet. This facilitates time-critical transfer of patient
information between hospital departments, as well as rapid off-site
consultations by specialists at remote locations. The system also affords
convenient home viewing by radiologists.
2
Hospitals and other health organizations can utilize the WarpSpeed system to
permanently replace film. The solution has been designed to interface with
hospital information systems so that a patient's clinical data can be integrated
with diagnostic images for increased accuracy of image interpretation and
diagnosis.
The architecture used in the WarpSpeed system is built upon the foundation of
innovative intelligent algorithms. These algorithms reduce the network bandwidth
and on-line storage requirements of the system; the two most important factors
in the cost associated with building a PACS/RIS system.
By making full use of the networking and database management infrastructure of
Windows 2000, ITL has leveraged recent advances in operating system design,
software development, and networking tools to produce a product, which offers
greater functional capability at lower costs through scalable system
architecture. Its truly modular architecture permits capability to be
distributed incrementally, allowing a client to begin with one piece of
hardware, which operates as a server, viewer and archive, and then expand the
system by distributing those capabilities among multiple PCs. Hardware and
software can be sized exactly to client needs, thus enabling ITL to offer the
lowest possible entry point purchase price for a PACS/RIS system.
In addition, WarpSpeed offers capabilities not found on even the most expensive
systems, including:
Unique graphical interface
Transfer of control of the viewing surface to a separate
touch-screen control display
Infinite screen "real estate"
Intuitive, interactive interface that minimizes the
need for training
Support for the Application System Provider model
Full support for DICOM, HL7 and the IHE initiative.
Marketing Plan
ITL is marketing its WarpSpeed system in the North Eastern United States where
the reputations of its founders and the product demonstration sites are expected
to generate interest in the product and sales leads. This effort will capitalize
on the two showcase sites that have been established in Kingston, NY and
Binghamton, NY. After penetrating the regional markets, the Company intends to
expand throughout the United States.
ITL plans to distribute its products via three channels:
Relationships with original equipment manufacturers
Partnerships
Direct distribution through its own sales representatives.
3
ITL will target hospitals with less than 400 beds and freestanding radiology
imaging centers. According to the American Hospital Association, there are 5,801
hospitals in the U.S. Approximately one-half have less than 400 beds. According
to the American Medical Information, Inc. there are 2,795 major diagnostic
imaging centers and more than 5,000 smaller imaging centers in the U.S. The
overall diagnostic imaging market in the United States was $4.43 billion in
2001.
According to the latest market research by Frost & Sullivan the U.S. market for
Radiology IT in 2004 will be approximately $640 million annually. In the same
research report it is stated that only 12% of radiology centers are currently
using an image and information management system.
ITL markets a fourth generation medical information and image management system
that we believe is more open, usable and scalable than any currently available
product. We plan to market ITL's WarpSpeed system through an in-house sales
force supported by product advertising and promotion at industry trade shows. We
offer the product at a price point, which is well within the reach of even the
smallest hospital or imaging facility. We believe that we can offer systems with
superior price/performance characteristics.
ITL is a systems integrator that provides a total solution of hardware and
software to the customer. There are two pricing models. The first is an outright
capital purchase and the second is on a fee per usage basis. The latter plan is
an attractive approach for the smaller client as there is no capital outlay, and
the cost is expensed.
Competition and Competitive Advantage
ITL is unique among the 50 companies in the U.S. that are marketing or
developing RIS/PACS solutions for the radiology community. We believe we are the
only company that has implemented a single unified product that encompasses all
aspects of the radiology business. To date no one company has captured a
predominant market share. Currently the top six vendors are GE Medical Systems,
Stentor, Merge, Agfa, Siemens Medical Solutions and Kodak Health Imaging.
The superiority of ITL's system has been demonstrated in many areas. Its user
interfaces are intuitive thereby minimizing training time and operator error.
The unique touch screen interface increases speed of operation and productivity
of the radiologist. Radiology report turn around is typically less than two
hours, which is far superior to any other system currently in production. The
underlying architecture and design characteristics have been shown to be highly
scalable. These features alone set ITL apart from all competition.
We believe that most available RIS/PACS systems have significant drawbacks such
as:
Poor user interfaces
Inadequate workflow tools
Lack of scalability
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 20% of the market in recent
years. ITL intends to capitalize on these inherent weaknesses in the
competition.
4
Product Approval Process
ITL is a registered medical device manufacturer by the Food and Drug
Administration ("FDA"). The WarpSpeed solution is exempt from the pre-market
authorization process by the FDA. Our products have been declared substantially
equivalent to already approved products.
Although ITL is aware that there is an international market for products such as
WarpSpeed, we have no present plans to market our products in other countries,
largely due to limited resources. However, should we decide to market WarpSpeed
in other countries, we would have to comply with the laws of, and meet the
applicable regulatory procedures and standards in each jurisdiction in which we
sought to market our products. Approval in one jurisdiction does not assure
approval in another as the various federal, state, and local regulatory
authorities are independent of each other.
Insurance
ITL has obtained both corporate, product, and computer omissions and errors
liability insurance. We are at risk to product liability claims if the use of
our products is alleged to have caused harm to a patient. There is no direct
contact between the ITL product and the patient.
Under the terms of our executive employment agreements we are obligated to
maintain term life insurance for the benefit of Drs. Ryon and Mr. Edwards each
in the amount of $300,000 if this can be obtained on commercially reasonable
terms. The Company at this time has not purchased life insurance.
Material Contracts
On August 19, 2002 the Company closed on an initial contract with Radiologix,
Inc. for the sale of its WarpSpeed system. In addition, recurring monthly
revenue in the form of a two year radiology services agreement are being
realized at the rate of approximately $50,000 per month.
In September 2002, the Company received a $75,000 line of credit from the M&T
Bank. As of December 31, 2003, $67,000 is outstanding.
The Company recently executed a five-year lease (at $700 per month) for office
space at TechCity, Kingston, NY. TechCity has become the home of many technology
firms in the Hudson Valley. The space is sufficient for both our growing R&D
team and our marketing/sales department.
In May 2003, ITL signed a five-year contract with Park Avenue Associates in
Radiology, PC. for the installation of it's solution in a multi-site
environment. This installation required the deployment of hardware and software
in four physically separate locations interconnected with microwave links,
fiber-optic cable, and a traditional LAN. The interconnections also include the
use of secure, encrypted tunnels via the internet (VPN's). Remote review
stations have been deployed in private physician's offices.
Item 2. Description of Property
Image Technology's principal executive office currently occupies leased space at
602 Enterprise Drive, Kingston, NY. Image Technology's telephone number is (845)
338-3366 and its facsimile number is (845) 338-8880.
5
Image Technology believes that its current facilities will meet ITL needs for
the foreseeable future.
Item 3. Legal Proceedings
The Company is party to an arbitration proceeding commenced by Dr. Carlton
Phelps before the American Arbitration Association in New York City. Dr. Phelps,
a former officer and director of the Company claimed that he had been
constructively discharged in violation of his employment agreement by virtue of
a significant diminution of his duties and responsibilities at the Company. He
also claimed that he had been defamed in the Company's public filings when it
was asserted that he had been discharged for cause. The Company denied the
allegations and affirmatively sought the return by Dr. Phelps of some or all of
his stock on the basis of his breach of fiduciary responsibilities. By Opinion
and Award dated February 25, 2004, the Arbitrator determined that Dr. Phelps had
not been constructively discharged, but had voluntarily resigned. As a
consequence, all of Dr. Phelps's claims for monetary awards were dismissed but,
as to the defamation claim, the Company was directed to amend prior filings to
reflect that he was not terminated for cause. The Company's claim for return of
Dr. Phelps's stock was denied. It is the opinion of management that there will
be no material effect on the Company, or its operations.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2003.
Item 5. Market For Common Equity and Related Stockholder Matters
Image Technology's Common Stock currently trades on the Over-the-Counter
Bulletin Board ("OTCBB") under the symbol "IMTL". These securities commenced
trading on December 15, 2000.
Fiscal Year
Fiscal Year 2002 2003 2004
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High Low High Low High Low
1st Qtr. $0.55 $0.40 $0.28 $0.15 $ 1.05 $0.45
2nd Qtr. 0.54 0.38 0.33 0.18
3rd Qtr. 0.50 0.30 0.31 0.17
4th Qtr. 0.48 0.11 0.50 0.26
As of March 29, 2004, the number of holders of record of Common Stock was 197.
Dividend Policy
The Company does not anticipate paying any cash dividends on its common stock in
the foreseeable future because it intends to retain its earnings to finance the
expansion of its business. Thereafter, the Board of Directors in light of
conditions then existing, including, without limitation, the Company's financial
condition, capital requirements and business condition will determine the
declaration of dividends.
During 2003, the Registrant sold the securities listed below pursuant to
exemptions from registration under the Securities Act.
During December 2003 we sold 500,000 shares of our common stock to our principal
stockholder for $170,000 or $0.34 per share, the approximate fair value at the
time.
During the nine months ended September 30, 2003 the Company received $221,094
upon the exercise of Class A and Class B warrants for the purchase of 1,105,483
shares of common stock at $0.20 per share. A total of 1,999,029 that remained
outstanding expired unexercised on October 15, 2003. In addition, the Company
issued 83,333 shares of common stock as compensation to the investment banker in
accordance with the terms of the original issuance of the warrants.
6
As compensation to each member of the Board of Directors, the Company issued a
total of 30,000 shares having a fair market value of approximately $9,000 at
the time of issuance.
The issuances described above were made in reliance upon the exemptions from
registration set forth in Section 4(2) of the Securities Act relating to sales
by an issuer not involving any public offering. None of the foregoing
transactions involved a distribution or public offering. No underwriters were
engaged in connection with the foregoing issuances of securities, and no
underwriting commissions or discounts were paid.
Item 6. Management's Discussion and Analysis or Plan of Operations
Overview
The following is a discussion of certain factors affecting Image Technology's
results of operations, liquidity and capital resources. You should read the
following discussion and analysis in conjunction with Image Technology's audited
and related notes, which are included elsewhere in this Annual Report on Form
10-KSB.
Business and Summary of Critical Accounting Policies:
Image Technology Laboratories, Inc. ("ITL") is a medical image management
company in the healthcare information systems market. We were incorporated in
Delaware on December 5, 1997. ITL has developed a fully integrated "radiology
information system and picture archiving and communications system", known as
RIS/PACS for use in the secure management of patient information and diagnostic
images. The PACS portion of the system inputs and stores diagnostic images in
digital format from original imaging sources such as:
Computerized Tomography (CAT scan)
Magnetic Resonance Imaging (MRI)
Ultrasound
Nuclear imaging
Digital Fluoroscopy and Radiography
The RIS portion of the system manages patient demographics, insurance data,
billing, scheduling, and examination reports. All of the data is stored in
standard DICOM and HL-7 formats.
We were in the development stage for accounting purposes and were required to
make certain related disclosures from January 1, 1998 (date of inception)
through April 2002; at which time our software product became available for
sale. From time to time, we have and will continue to derive revenues from the
provision of radiology and imaging services to affiliate and nonaffiliated
companies. However, we expect that we will derive our revenues in the future
primarily from sales of our WarpSpeed system. We obtained our first contract for
the sale of WarpSpeed and related hardware and maintenance services in August
2002. Accordingly, we are no longer in the development stage.
7
Although we have incurred recurring losses and negative cash flows from
operating activities since inception, we had cash and cash equivalents of
approximately $195,000 and working capital of approximately $68,000 as of
December 31, 2003. Management expects a reduction in the level of such losses
now that sales of the software products have commenced. A substantial portion of
our historic losses have been attributable to noncash charges. As of December
31, 2003, certain of our stockholders had agreed to defer approximately $142,000
of compensation due them under their employment agreements as of that date until
2005 and to defer certain additional amounts that will accrue after December 31,
2003 which has and will continue to preserve our liquidity. During September
2002, we obtained a $75,000 working capital loan from a financial institution.
We have outstanding borrowings of $67,000 as of December 31, 2003. In
addition, during March 2004, we received proceeds of $50,000 from the sale of
100,000 shares of common stock in a private placement. We believe that as a
result of the additional cash flows from the software product sales and our
ability to draw on the working capital loan and defer payments to certain
stockholders and the subsequent private placement, we will be able to continue
to meet our obligations as they become due through at least December 31, 2004.
We also believe, but cannot assure, that if needed, we will be able to obtain
additional capital resources from financing through financial institutions and
other unrelated sources and/or through additional related party loans.
Critical Accounting Policies
The Securities and Exchange Commission issued disclosure guidance for "critical
accounting policies." The Securities and Exchange Commission defines "critical
accounting policies" as those that require the application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.
Our significant accounting policies are described in Note 2 to our financial
statements, contained elsewhere in this report. We believe that the following
accounting policies or estimates require the application of management's most
difficult, subjective or complex judgments.
Revenue Recognition:
Revenues from the provision of radiology and imaging services are recognized
over the estimated period during which the applicable services are performed
provided that the fees are fixed and determinable and collection is probable.
Contracts for the sale of our imaging systems involve multiple elements
including the delivery and installation of software and hardware products,
training and system maintenance. However, we cannot allocate the revenues from
such contracts to each element based on the relative fair value of each element.
Accordingly, we will recognize the revenues from a system contract ratably over
the period during which we are required to provide maintenance or any other
service provided that the fees are fixed and determinable and collection is
probable. Unearned revenues are included in deferred revenues in our balance
sheet.
Valuation of Deferred tax Assets:
We regularly evaluate our ability to recover the reported amount of our deferred
tax assets considering several factors, including our estimate of the likelihood
that we will generate sufficient taxable income in future years in which
temporary differences reverse. Presently we believe that it is more likely than
not that we will not realize a substantial portion of the benefit of our
8
deferred tax assets based primarily on our projected operating results and,
accordingly, have recorded a valuation allowance of $1,120,000. In the event
that actual results differ from our estimates or we adjust these estimates in
future periods, we may need to adjust this valuation allowance, which could
materially impact our financial position and results of operations.
Valuation Of Long-Lived Assets:
We assess the recoverability of long-lived assets, such as equipment and
improvements, whenever we determine that events or changes in circumstances
indicate that their carrying amount may not be recoverable. Our assessment is
primarily based upon our estimate of future cash flows associated with these
assets. We have determined that there has not been an impairment of any of our
long-lived assets is December 31, 2003. However, should our operating results
deteriorate, we may determine that some portion of our long-lived assets is
impaired. Such determination could result in non-cash charges to income that
could materially affect our financial position and results of operations for
that period.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2002
Revenues:
We were a development stage company from January 1, 1998 (date of inception)
through April 30, 2002, at which time our software was available for sale.
During the year ended December 31, 2003, we derived service income of
approximately $635,000, as compared with approximately $383,000 during 2002. The
increase is mainly due to our initial service contract being in effect for a
full year as oppose to 8 months in 2002. In addition, during the year ended
December 31, 2003, we earned approximately $140,000 from the sale of our initial
unit, as compared to approximately $47,000 in 2002. We expect our service income
to increase within 2004 due to the Park Avenue contract which commenced in
December 2003 and the St. Anthony contract commenced in early 2004.
Cost of sales:
During the year ended December 31,2003, the cost of sales consisting of Medical
Director and related fees which was approximately $110,000, as compared with
$50,500 during the same period in 2002. The increase in these fees is a result
of our increase in service income.
Research and Development Expenses:
During the year ended December 31, 2003, we incurred research and development
expenses of approximately $82,500 as compared with approximately $123,750 in the
preceding year. These expenses consisted primarily of compensation to our
founders under their employment contracts. In addition, $41,000 of the expense
in 2002 was attributable to compensation associated with the issuance of the
shares of preferred stock to the founders, a non-cash charge. As a result of
product being introduced for sale during 2002, our research and development
expenses were reduced in 2002 and should remain at this reduced level for the
foreseeable future.
General and Administrative Expenses:
During the year ended December 31, 2003, we incurred general and administrative
expenses of approximately $557,000 as compared to approximately $539,000 in the
prior year. The increase of $18,000 is primarily attributable to an increase in
professional fees associated with the arbitration case previously described [See
Item 3- Legal Proceedings]. As our revenue begins to increase, we will be
required to increase our infrastructure in order to support the anticipated
volume.
9
Sales and Marketing Expenses:
During the years ended December 31, 2003 and 2002, we incurred marketing
expenses as we introduced our product for sale. During this period, we incurred
approximately $360,000 of such costs, as compared to approximately $350,000 in
the prior year.
Net Loss:
As a result of the aforementioned, we incurred a loss of approximately $335,000
($.02 per share) for the year ended December 31, 2003 as compared to a loss of
approximately $633,000 ($.05 per share) for the year ended December 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES:
As of December 31, 2003, we had cash and cash equivalents and working capital of
approximately $195,000 and $68,000, respectively.
During 2003, our operations utilized approximately $251,000 of cash. This arose
primarily from our net loss of approximately $335,000 and an increase in
accounts receivable of approximately $66,000. These uses of cash were partially
offset by non-cash charges aggregating approximately $34,000 and an increase in
accounts payable and accrued expenses of approximately $90,000 and accrued
compensation of approximately $18,000. During 2002, our operations utilized
approximately $150,000 of cash. This arose primarily from our loss of
approximately $633,000, which was offset by noncash charges relating mainly to
amortization of unearned compensation and marketing fees aggregating $263,000
and an increase in accrued compensation of approximately $130,000 and deferred
revenue of $93,000.
During 2003 and 2002, we used cash of approximately $143,000 and $6,000,
respectively, for the acquisition of equipment and improvements.
We financed the aforementioned operating and investing activities by the
following financing activities.
In January 2002, we sold 400,000 shares of our common stock to our principal
stockholder for $100,000 or $.25 per share, which approximated fair value. In
September 2002, we sold an additional 75,000 shares of our common stock to the
same stockholder for $21,000 or $.28 per share, the approximate fair value. In
December 2003 we sold 500,000 shares of our common stock to our principal
stockholder for $.34 per share, the approximate fair value, and received
proceeds of $170,000.
On February 11, 2003, we reduced the exercise price of our Class A $.40 warrants
and our Class B $.50 warrants to $.20 during the period commencing February 18,
2003 and ending July 1, 2003. Unexercised warrants expired on October 15, 2003.
Approximately $221,000 was realized from the exercise of both classes of
warrants and the issuance of common shares.
In addition to the aforementioned equity transactions, we have funded a part of
our accumulated loss of approximately $2,800,000 by having our founders defer
approximately $142,000 of compensation due them under their employment
agreements. During 2003, one of our founders contributed $426,000 of
compensation, which was due them, to capital.
In September 2002, we applied for, and received, a line of credit from M & T
Bank for one year in the amount of $75,000. At December 31, 2003, outstanding
borrowings approximated $67,000.
In November 2002, we executed a five-year lease (at $700 per month) for office
space at "TechCity", formally the IBM facility in Kingston, NY. Tech City has
become the home of many high technology firms in the Hudson Valley. The space is
sufficient for both our growing research and development team and a
sales/marketing force.
In January 2004, we closed a five year contract for the WarpSpeed system with
St. Anthony Community Hospital, Warwick, NY. St. Anthony is a member of Bon
Secours Charity Health System, which owns and operates 32 health care
facilities.
Item 7. Financial Statements
See Item 13, Exhibits, Financial Statement Schedules, and Reports on
Form 8K.
10
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 8a. Controls and Procedures.
As of December 31, 2003, we carried out an evaluation, under the
supervision and with the participation of our Chief Executive and Principal
Accounting Officer of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended). Based upon that
evaluation, our Chief Executive and Principal Accounting Officer
concluded that our disclosure controls and procedures are effective in alerting
them on a timely basis to material information required to be disclosed in our
periodic reports to the Securities and Exchange Commission. During the fourth
quarter of 2003, there were no changes in our internal control over financial
reporting that have materially affected, or reasonably likely to materially
affect, our internal control over financial reporting. There have been no
significant changes in our internal controls or in other factors which could
significantly affect internal controls subsequent to such evaluation.
Our management, with the participation of our Chief Executive
and Principal Accounting Officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") as of the end of the period covered by this report. Based on
that evaluation, our Chief Executive and Principal Accounting Officer
have concluded that, as of the end of such period, our disclosure controls and
procedures are effective.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
Executive Officers and Directors
Our executive officers and directors and their ages as of March 31, 2004 are as
follows:
Name Age Title
---- --- -----
David Ryon 59 Director and Chairman of the Board of
Directors, President, Chief Executive
Officer and Principal Accounting Officer
Lewis M. Edwards 48 Director, Vice President of Research and
Development, Chief Technical Officer
Richard V. Norell 58 Director
Robert G. Carpenter 66 Director
John J. Naccarato 71 Director
All directors of Image Technology hold office until the next annual meeting of
shareholders or until their successors are elected and qualified. At present,
Image Technology's Bylaws provide for not less than one director nor more than
fifteen. Currently, there are five directors of Image Technology. The Bylaws
permit the Board of Directors to fill any vacancy and such director may serve
until the next annual meting of shareholders or until his successor is elected
and qualified. Officers serve at the discretion of the Board of Directors. There
are no family relationships among any officers or directors of Image Technology.
11
DAVID RYON, MD, is a founder and principal stockholder of Image Technology and a
co-developer of the ITL WarpSpeed system. He was appointed to the Board of
Directors and appointed to serve as Image Technology's President and Chief
Executive Officer in December 1997. Dr. Ryon is the founder of the Kingston
Diagnostic Center in Kingston, New York. Dr. Ryon operated the Kingston
Diagnostic Center as a sole proprietor from its inception in 1992 until the sale
of the business to Mid Rockland in 1997. Dr. Ryon worked as a radiologist at the
Kingston Hospital for five years before founding the Center. Dr. Ryon graduated
as an M.D. cum laude from Albany Medical College in 1975 and served residencies
in surgery and radiology at Albany Center Hospital. Among other post-graduate
specialties, Dr. Ryon also trained as an Emergency Physician. Prior to becoming
a physician, Dr. Ryon earned a B.S. in physics with high honors and an M.S. in
engineering at the University of Rochester. He worked as an engineer at General
Electric in the medical systems division after graduation where he gained
experience in the patent process.
LEWIS M. EDWARDS is a founder and principal stockholder of Image Technology and
a co-developer of WarpSpeed. He was appointed to the Board of Directors and
elected by the Board to serve as Image Technology's Vice President of Research
and Development and Chief Technical Officer in December 1997. Mr. Edwards has
served as a senior technical staff member at IBM since 1993. He is currently an
architect and lead software designer for IBM's RS/6000 SP, a massive parallel
processor. From 1982 to 1993 he served as the head of engineering for Graphic
Systems Labs, a CAD/CAM Independent Business Unit start-up company within IBM.
He is a member of the IEEE and ACM professional societies and a charter member
of the Microsoft Developer Network. He has provided computer-consulting services
to Boeing, General Motors, Chrysler, Ford and the Federal government's FAA and
ATC teams. He holds a BSEE magna cum laude from Princeton University and an MSCE
from Syracuse University.
RICHARD V. NORELL was appointed to our Board of Directors in April 2002. Since
1995 he has served as a consultant in securities law compliance matters, after
being employed 26 years with the U.S. Securities and Exchange Commission,
Washington, D.C. in the Division of Enforcement, from 1972 to 1995. Mr. Norell
acted as the Division's Chief of Market Surveillance overseeing the Division's
investigators and financial analysts. In addition to implementing programs for
detecting securities fraud and improper conduct, Mr. Norell advised the Director
of the Division concerning policy issues and emerging problems in the securities
industry. Mr. Norell graduated American University, Washington, D.C. with an MBA
in Investment Analysis, University of Rochester, Rochester, N.Y. Bachelor of
Arts, in Economics. Mr. Norell currently resides in Great Falls, VA.
ROBERT G. CARPENTER was appointed to our Board of Directors in April 2002. Mr.
Carpenter brings extensive business experience from a career spanning over 30
years in a succession of executive management positions overseeing technology,
engineering, marketing and business development at Bell Research Labs in NJ, IBM
Yorktown Heights Research Center, and IBM Development Labs in Kingston and
Poughkeepsie, NY. Retired from IBM in 1991, Mr. Carpenter currently serves as
Chief Engineering Liaison on a $6.7 million water facilities project in the
County of Ulster, NY. Mr. Carpenter resides in Saugerties, NY.
12
JOHN J. NACCARATO was appointed to our Board of Directors in April 2002. He
served for 26 years as District Representative to the late United States
Congressman Hamilton Fish, Jr., with oversight responsibility for three District
offices, under the direct supervision of Congressman Fish. From 1988 to the
present, Mr. Naccarato has held the office of Ulster County Legislator, serving
on Mental Health and Ways and Means committees, and chairing the Criminal
Justice / Public Safety Committee. A former President of the Central
Businessmen's Association, Mr. Naccarato serves on the Ulster County Community
Action Board, United Way Board, City of Kingston Board of Assessment, and the
board of the Catskill Regional OTB Corporation. Mr. Naccarato currently resides
in Kingston, NY.
In the first quarter of 2002, Carlton Phelps departed the Company and resigned
from the Board of Directors. The terms and circumstances of Carlton Phelps'
departure are currently in dispute [See Legal Proceedings].
Limitation on Liability of Directors
As permitted by Delaware law, Image Technology's Certificate of Incorporation
includes a provision which provides that a director of Image Technology shall
not be personally liable to Image Technology or its stockholders for monetary
damages for a breach of fiduciary duty as a director, except (i) for any breach
of the director's duty of loyalty to Image Technology or its stockholders, (ii)
under Section 174 of the General Corporation Law of the State of Delaware, which
prohibits the unlawful payment of dividends or the unlawful repurchase or
redemption of stock, or (iii) for any transaction from which the director
derives an improper personal benefit. This provision is intended to afford
directors protection against and to limit their potential liability for monetary
damages resulting from suits alleging a breach of duty of care by a director. As
a consequence of this provision, stockholders of Image Technology will be unable
to recover monetary damages against directors for action taken by them which may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within one of the foregoing exceptions. The provision,
however, does not alter the applicable standards governing a director's
fiduciary duty and does not eliminate or limit the right of Image Technology or
any stockholder to obtain an injunction or any other type of non-monetary relief
in the event of a breach of fiduciary duty. Image Technology believes this
provision will assist in securing and retaining qualified persons to serve as
directors.
Section 16(a) Beneficial Ownership Reporting Compliance. Based solely on a
review of Forms 3 and 4, and amendments thereto furnished to the Registrant
under Rule 16a-3(e) promulgated under the Securities Exchange Act of 1934 during
the most recent fiscal year, and Form 5 and amendments thereto furnished to the
Registrant with respect to its most recent fiscal year, all reports required
under Section 16(a) of the Securities Exchange Act of 1934 were timely filed.
We have adopted a code of ethics that applies to our executive officers, a copy
of which has been filed with this report on Form 10-KSB as Exhibit 13. Persons
who would like a copy of such code of ethics may receive one without charge upon
request made to Valerie McDowell, Investor Relations, Image Technology
Laboratories, Inc., 602 Enterprise Drive, Kingston, New York 12401.
Item 10. Executive Compensation
The following table sets forth information for each of the Company's Fiscal
years ended December 31, 2003, 2002, and 2001 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the Fiscal
year ended December 31, 2003 and (ii) each other executive officer of the
Company whose total annual salary and bonus equaled or exceeded $100,000 in the
Fiscal year ended December 31, 2003:
13
Annual Compensation
--------------------
Other All Other
Name and Principal Position Year Salary ($) Bonus ($)(1) ($) Annual Compensation ($)
--------------------------- ---- --------- ----------- -------- ---------------
David Ryon 2003 $150,000 $0 0 0
Chairman, President and Chief 2002 150,000 50,000 0 (2)
Executive Officer 2001 150,000 50,000 0 0
Lewis Edwards(1) 2003 150,000 0 0 0
Vice President, Chief Technical 2002 150,000 50,000 0 (2)
Officer and Director 2001 150,000 50,000 0 0
(1) Messrs. Ryon and Edwards were each issued 500,000 shares of preferred stock
in conjunction with the commencement of their employment agreements. The
preferred shares were valued at $.30 per share based on the price of units that
we were offering for sale through a private placement and amortized at a rate of
$100,000 per annum over their initial employment contracts which expired
December 31, 2002.
(2) See "Option Grants in Last Fiscal Year" below
Employment Agreements
---------------------
David Ryon is engaged as President, Chief Executive Officer and Principal
Accounting Officer of Image Technology and Lewis M. Edwards is engaged as Vice
President and Chief Technical Officer. Each has been signed to a one-year
contract which provides 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.
14
In January 1998, Image Technology's stockholders ratified Image Technology's
Stock Option Plan (the "Plan") whereby options for the purchase of up to
5,000,000 shares of Image Technology's common stock may be granted to key
personnel in the form of incentive stock options and nonstatutory stock options,
as defined under the Internal Revenue Code. Key personnel eligible for these
awards include our employees, consultants and nonemployee directors. Under the
Plan, the exercise price of all options must be at least 100% of the fair market
value of our common shares on the date of grant. The exercise price of an
incentive stock option granted to an optionee which holds more than ten percent
of the combined voting power of all classes of stock of Image Technology must be
at least 110% of the fair market value on the date of grant. The maximum term of
any stock option granted may not exceed ten years from the date of grant and
generally vest over three years.
On January 1, 2000, we granted options under the plan to David Ryon,
Carlton T. Phelps and Lewis M. Edwards, our three founders, for the purchase of
a total of 3,000,000 shares of its common stock at $.33 per share, approximately
110% of the fair market value on the date of grant, which are exercisable
through December 31, 2009. The options for Phelps were canceled in January 2003
upon his departure from the Company in accordance with the option agreement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of December 31, 2003, the number of shares of
the Company's common stock (the "Common Stock") beneficially owned by all
persons known to be holders of more than five percent (5%) of the Common Stock
and by all executive officers and directors of the Company individually and as a
group.
Security Ownership of Management
Name, Title
and Address Title of Class Shares Beneficially Owned of beneficial owners
Number Percent
-------------------------------------------------------------------------------
David Ryon, M.D. Common Stock 3,585,084 26.07%
CEO, President
and Director Preferred Stock 500,000 50.00%
602 Enterprise Dr.
Kingston, New York
12401
-------------------------------------------------------------------------------
Lewis M. Edward Common Stock 2,429,583 17.67%
Chief Technical Officer
and Director Preferred Stock 500,000 50.00%
602 Enterprise Dr.
Kingston, New York
12401
-------------------------------------------------------------------------------
All officers and directors Common Stock 6,325,167 46%
as a group Preferred Stock 1,000,000 67%
ITEM 12: Certain Relationships and Related Transactions
In December 2003, we issued 500,000 shares of our common stock to Dr. David
Ryon, our Chief Executive Officer, for a purchase price of $0.34 per share, or a
total of $170,000, in a transaction exempt from registration pursuant to Section
4(2) of the Securities Act of 1933, as amended.
15
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Refer to the list of Exhibits which are being filed as a part of this report.
Exhibits
EXHIBIT NO. DESCRIPTION
----------- ---------------------------------------------------
3.1* Certificate of Incorporation of Image Technology
3.2* Certificate of Amendment to Certificate of Incorporation of Image
Technology dated December 23, 1999
3.3* By-Laws of Image Technology
4.1* Specimen certificate for common stock of Image Technology
4.2* Specimen certificate for preferred stock of Image Technology
4.3* Form of Private Placement Warrant
4.4* Form of Investor Warrant
4.5* Form of Oakes Warrant
4.6** Form of Subscription Agreement
10.1* Image Technology 1998 Stock Option Plan
10.2* Stockholders Agreement dated January 16, 1998 among certain
investors and Image Technology
10.3* Form of Registration Rights Agreement dated February 2000 among
certain stockholders of Image Technology and Image Technology
10.4* Assignment of Intellectual Property Agreement dated as of
December 18, 1997 between Image Technology and David Ryon, M. D.,
Carlton T. Phelps, M. D. and Lewis M. Edwards.
10.5* Form of Facility Usage and Equipment Lease Agreement by and
between Mid Rockland Imaging and Image Technology dated January
12, 1998
10.6* Form of Employment Agreement dated December 21, 1999 between
Image Technology and David Ryon, M. D.
10.7* Form of Employment Agreement dated December 21, 1999 between
Image Technology and Carlton T. Phelps, M. D.
10.8* Form of Employment Agreement dated December 21, 1999 between
Image Technology and Lewis M. Edwards
13 Code of Ethics
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) under the Exchange Act
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
* Filed with amendment no. 1 to registration statement (No.333-336787) on
June 6, 2000.
** Filed with amendment no. 2 to registration statement (No. 333-336787) on
July 27, 2000.
No reports were filed on Form 8-K during the last quarter of the period
covered by this report.
16
Image Technology Laboratories, Inc.
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Public Accountants F-2
Balance Sheet
December 31, 2003 F-3
Statements of Operations
Years Ended December 31, 2003 and 2002 F-4
Statements of Changes in Stockholders' Deficiency
Years Ended December 31, 2003 and 2002 F-5
Statements of Cash Flows
Years Ended December 31, 2003 and 2002 F-6
Notes to Financial Statements F-7/16
* * *
F1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Board of Directors and Stockholders
Image Technology Laboratories, Inc.
We have audited the accompanying balance sheet of Image Technology Laboratories,
Inc. as of December 31, 2003, and the related statements of operations, changes
in stockholders' deficiency and cash flows for the years ended December 31, 2003
and 2002. 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, 2003, and its results of operations and cash flows for
the years ended December 31, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States of America.
/s/ J.H. Cohn LLP
Roseland, New Jersey
March 30, 2004
F2
Image Technology Laboratories, Inc.
Balance Sheet
December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 195,257
Accounts receivable 66,380
Prepaid expenses and other current assets 1,555
--------------
Total current assets 263,192
Equipment and improvements, net 157,452
------------
Total $ 420,644
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 125,429
Notes payable 66,952
Notes to stockholders 3,400
-----------
Total current liabilities 195,781
Deferred revenues 93,333
Accrued compensation payable to stockholders 142,000
------------
Total liabilities 431,114
------------
Commitments and Contingencies
Stockholders' deficiency:
Preferred stock, par value $.01 per share; 5,000,000 shar
authorized; 1,500,000 shares issued and outstanding 15,000
Common stock, par value $.01 per share; 50,000,000 shares
authorized; 13,751,278 shares issued and outstanding 137,513
Additional paid-in capital 2,638,305
Accumulated deficit (2,801,288)
-----------
Total stockholders' deficiency (10,470)
-------------
Total $ 420,644
===========
See Notes to Financial Statements.
F3
Image Technology Laboratories, Inc.
Statements of Operations
Years Ended December 31, 2003 and 2002
2003 2002
------------ ------------
Revenues:
Service income $ 635,405 $ 382,870
Software license fees 140,000 46,863
------------ ------------
Totals 775,405 429,733
Cost of revenue 110,000 50,521
------------ ------------
Net revenue 665,405 379,212
------------ ------------
Expenses:
Research and development 82,500 123,750
Sales and marketing 360,474 349,721
General and administrative 556,958 538,683
------------ ------------
Totals 999,932 1,012,154
------------ ------------
Net loss $ (334,527) $ (632,942)
============ ============
Basic net loss per share $ (.02) $ (.05)
============ ============
Basic weighted average common shares outstanding 14,247,717 13,400,958
============ ============
See Notes to Financial Statements.
F4
Image Technology Laboratories, Inc.
Statement of Changes in Stockholders' Deficiency
Years Ended December 31, 2003 and 2002
PREFERRED STOCK COMMON STOCK ADDI- TOTAL
NUMBER NUMBER TIONAL UNEARNED UNEARNED ACCUMU- STOCK
OF OF PAID-IN COMPEN- MARKETING LATED HOLDERS'
SHARES AMOUNT CAPITAL AMOUNT EXPENES SATION 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 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 450,000 4,500 108,000 $ (112,500)
Amortization of
unearned compen-
sation 150,000 112,500 262,500
Net loss (632,942) (632,942)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31,
2002 1,500,000 15,000 12,232,462 122,325 1,827,395 (2,466,761) (502,041)
Return of common
stock in
settlement
of dispute (200,000) (2,000) 2,000
Issuance of common
stock upon exercise
of warrants 1,188,816 11,888 209,206 221,094
Issuance of common
stock to
directors 30,000 300 8,700 9,000
Accrued
compensation
contributed
to capital 426,004 426,004
Sales of common
stock through
private placement 500,000 5,000 165,000 170,000
Net loss (334,527) (334,527)
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance,
December 31,
2003 1,500,000 $ 15,000 13,751,278 $ 137,513 $ 2,638,305 $ -- $ -- $(2,801,288) $ (10,470)
=========== =========== =========== =========== =========== =========== =========== =========== ===========
See Notes to Financial Statements.
F5
Image Technology Laboratories, Inc.
Statements of Cash Flows
Years Ended December 31, 2003 and 2002
2003 2002
--------- ---------
Operating activities:
Net loss $(334,527) $(632,942)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of equipment and
improvements 24,535 9,733
Amortization of unearned compensation 150,000
Amortization of unearned marketing expenses 112,500
Issuance of common stock to directors 9,000
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 8,441 (9,996)
Accounts receivable (66,380)
Accounts payable and accrued expenses 90,182 (2,664)
Deferred revenues 93,333
Accrued compensation payable to stockholders 17,962 129,501
--------- ---------
Net cash used in operating activities (250,787) (150,535)
--------- ---------
Investing activities - purchase of equipment and improvements (142,656) (6,116)
--------- ---------
Financing activities:
Proceeds from notes payable 66,952
Repayment of loan to stockholders (1,800)
Proceeds from exercise of warrants 221,094 16,375
Proceeds from private placement of common stock 170,000 121,000
--------- ---------
Net cash provided by financing activities 456,246 137,375
--------- ---------
Net increase (decrease) in cash and cash equivalents
62,803 (19,276)
Cash and cash equivalents, beginning of year 132,454 151,730
--------- ---------
Cash and cash equivalents, end of year $ 195,257 $ 132,454
========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 2,305
=========
Supplemental disclosure of noncash investing and financing activities:
Contribution of accrued compensation payable to stockholders
to capital $ 426,004
=========
See Notes to Financial Statements.
F6
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 1 - Business:
Image Technology Laboratories, Inc. (the "Company") was
incorporated on December 5, 1997 and commenced operations on
January 1, 1998. The Company has developed software for a fully
integrated "radiology information system/picture archiving and
communications," known as "RIS/PACS," for use in the management
of medical diagnostic images and patient information by
hospitals. The "PACS" portion of the system inputs and stores
diagnostic images in digital format from original imaging sources
such as:
Computerized Tomography, or CT scans,
Magnetic Resonance Imaging, or MRIs,
Ultrasound, Nuclear Imaging and
Digital Fluoroscopy and Radiography
The "RIS" portion of the system inputs and stores patient
demographics, along with the appropriate insurance, billing and
scheduling information required to complete the patient's visit.
All of the data is retained in standard formats, including the
DICOM and HL-7 standards.
The Company was a development stage company for accounting
purposes, and was required to make certain related disclosures
from January 1, 1998 (date of inception) through April 2002, at
which time its PACS software product became available for sale
(see Note 2). From time to time, the Company has and will
continue to derive revenues from the provision of radiology and
imaging services to affiliated and nonaffiliated companies.
However, management expects that the Company will derive its
revenues in the future primarily from sales of its software
products. The Company obtained its first contract for the sale of
its software product and related hardware and maintenance
services in August 2002. Accordingly, the Company is no longer in
the development stage.
Although the Company has incurred recurring losses and negative
cash flows from operating activities since its inception, the
Company had cash and cash equivalents of approximately $195,000
and working capital of approximately $67,000 as of December 31,
2003. Management expects a reduction in the level of such losses
now that sales of the software products have commenced. A
substantial portion of the Company's historic losses have
been attributable to noncash charges. As of December 31, 2003,
certain stockholders of the Company had agreed to defer
approximately $142,000 of compensation due them under their
employment agreements as of that date until 2005 and to defer
certain additional amounts that will accrue after December 31,
2003 which has and will continue to accrue to preserve the
Company's liquidity. Management believes that as a result of the
additional cash flows from the software product sales and the
Company's ability to defer payments to certain stockholders, the
Company will be able to continue to meet its obligations as they
become due through at least December 31, 2004. Management also
believes, but cannot assure, that if needed, the Company will be
able to obtain additional capital resources from financing
through financial institutions and other unrelated sources and/or
through additional related party loans.
F7
Image Technology Laboratories, Inc.
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:
Revenues from the provision of radiology and imaging services
are recognized over the estimated period during which the
applicable services are performed provided that the fees are
fixed and determinable and collection is probable.
Contracts for the sale of the Company's imaging systems
involve multiple elements including the delivery and
installation of software and hardware products, training and
system maintenance. However, the Company cannot allocate the
revenues from such contracts to each element based on the
relative fair value of each element. Accordingly, it
recognizes 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 reasonably assured.
Unearned revenues are included in deferred revenues in the
accompanying balance sheet.
The Company derives principally all of its revenues in both
2003 and 2002 from two customers and all of its accounts
receivable are also from these same two customers.
The Company closely monitors the extension of credit to its
customers while maintaining allowances, if necessary, for
potential credit losses. On a periodic basis, the Company
evaluates its accounts receivable and establishes all
allowance for doubtful accounts, based on a history of past
writeoffs, and collections and current credit conditions.
Management does not believe that significant credit risk
exists with respect to accounts receivable at December 31,
2003.
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, 2003, the Company had
cash and cash equivalents with one bank that exceeded
Federally insured limits by approximately $85,000.
F8
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 2 - Summary of significant accounting policies (continued):
Equipment and leasehold improvements:
Equipment and leasehold improvements are stated at cost.
Depreciation of equipment is provided using accelerated
methods over the estimated useful lives of the assets, which
range from five to seven years. Leasehold improvements are
amortized over the lesser of the estimated useful life of the
asset or the term of the lease.
Impairment of long-lived assets:
Impairment losses on long-lived assets, such as equipment and
improvements, 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.
F9
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 2 - Summary of significant accounting policies (continued):
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, 2003 and 2002 in
accordance with the "two class" method of computing earnings
(loss) per share set forth in SFAS 128.
Since the Company had net losses in 2003 and 2002, the assumed
effects of the exercise of 3,000,000 and 2,000,000 options
outstanding at December 31, 2003 and 2002, respectively, and
3,329,512 warrants at December 31, 2002 would have been
anti-dilutive.
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
has elected to continue to account for employee stock options
using the intrinsic method under APB 25, by making that
election it is required by Statement of Financial Accounting
Standards No. 123 "Accounting for Stock Based Compensation
("SFAS 123") and SFAS 148 "Accounting for Stock Based
Compensation-Transition and Disclosure"("SFAS 148") to provide
proforma disclosures of net loss and loss per share as if a
fair value added method of accounting has been applied.
Proforma loss was approximately $793,000 and basic proforma
loss per share was $.06 in 2002 (see Note 9). The proforma
compensation impact of the outstanding options was fully
amortized as of December 31, 2002.
Reclassifications:
Certain accounts in the 2002 financial statements have been
reclassified to conform to the 2003 presentation.
F10
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 2 - Summary of significant accounting policies (concluded):
Effects of recent accounting pronouncements:
In December 2002 the Financial Accounting Standards Board (the "FASB")
issued SFAS 148, which amends SFAS 123 to provide alternative methods
of transition for entities that elect to switch to the fair value
method of accounting for stock options in fiscal years ending after
December 15, 2002. The Company has not made such an election. SFAS 148
also requires more prominent and detailed disclosures in annual and
interim financial statements for stock-based compensation regardless of
which method of accounting is selected. The Company has included the
additional disclosures required by SFAS 148 above and in Note 9.
In April, the FASB issued Statement of Financial Accounting Standards
No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. " The Company does not hold any material derivative
instruments and does not conduct any significant hedging activities.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150") which requires an issuer to classify financial
instruments that are within its scope as liabilities. Many of those
instruments were classified as equity under previous guidance. Most of
the guidance in SFAS 150 was effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after
June 15, 2003. The Company adopted the guidance in the consensus in the
quarter beginning July 1, 2003. The adoption of the provisions of SFAS
150 did not have any impact on the Company's consolidated financial
statements.
In November 2002, the EITF reached a consensus on Issue No 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." This
consensus provides guidance on when and how separate elements of an
arrangement that may involve the delivery or performance of multiple
products, services and rights to use assets into separate units of
accounting. The guidance in the consensus is effective for revenue
arrangements entered into in fiscal periods beginning after June 15,
2003. The Company adopted the guidance in the consensus in the quarter
beginning July 1, 2003. The adoption of the consensus did not have a
material effect on the Company's results of operations.
Note 3 - Equipment and improvements:
Equipment and improvements consist of the following at December
31, 2003:
Equipment $ 184,702
Furniture 8,111
Leasehold improvements 3,505
----------
Total 196,318
Less accumulated depreciation and amortization 38,866
----------
Total $157,452
========
F11
Depreciation and amortization expense amounted to $24,535 and
$9,733 in 2003 and 2002, respectively.
Note 4 - Notes payable to stockholders:
Notes payable to stockholders with a principal balance of $3,400
at December 31, 2003 are noninterest bearing and are due on
demand.
Note 5 - Accrued compensation payable to stockholders:
During 2003, the Company's principal stockholder contributed
$426,004 of compensation owed to him to capital.
Note 6 - Stockholders' deficiency:
Preferred stock:
As of December 31, 2003, the Company was authorized to issue
up to 5,000,000 shares of preferred stock with a par value of
$.01 per share. Under the Company's Articles of Incorporation,
the Board of Directors, within certain limitations and
restrictions, can fix or alter preferred stock dividend
rights, dividend rates, conversion rights, voting rights and
terms of redemption including price and liquidation
preferences.
Issuance of preferred stock to founders:
On January 7, 2000, the Board of Directors authorized the
issuance of a total of 1,500,000 shares of preferred stock to
the three founders of the Company in conjunction with the
commencement of their employment agreements on January 1,
2000. The preferred shares 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.
F12
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 6 - Stockholders' deficiency (continued):
Issuance of preferred stock to founders (concluded):
Since the rights of the Company's preferred and common
stockholders are substantially equivalent, the preferred
shares were valued at $.30 per share based on the price of
units of common stock and warrants that the Company sold
through a private placement that was completed on February 4,
2000. The aggregate fair value of the preferred shares of
$450,000 had been recorded as unearned compensation in 2000
and reflected as a reduction of stockholders' equity. The
unearned compensation was amortized primarily to research and
development expenses over the terms of the respective initial
employment agreements, which expired on December 31, 2002.
Private placement of common shares:
During January 2002, the Company completed a private placement
pursuant to which it sold 400,000 shares of common stock to a
company wholly-owned by its principal stockholder at $.25 per
share (the approximate fair value of the shares at the time of
sale) and received proceeds of $100,000.
During September 2002, the Company completed another private
placement pursuant to which it sold 75,000 shares of common
stock to a company wholly-owned by its principal stockholder
at $.28 per share (the approximate fair value of the shares at
the time of sale) and received proceeds of $21,000.
During December 2003, the Company completed another private
placement pursuant to which it sold 500,000 shares of common
stock to its principal stockholder at $.34 per share (the
approximate fair value of the shares at the time of sale) and
received proceeds of $170,000.
During March 2004, the Company completed another private
placement to which it sold 100,000 shares of common stock at
$.50 per share to an unrelated third party and received
proceeds of $50,000.
Shares for services:
During January 2002, the Company agreed to issue 450,000
shares of common stock and warrants to purchase 100,000 shares
of common stock in exchange for the provision of marketing
services by an investor relations firm. The Company recorded
the fair value of the shares of $112,500 on the date of the
agreement as unearned marketing expense. The shares and
warrants became issuable and were issued in June 2002. The
warrants are exercisable at $3.00 per share during the
two-year period subsequent to the date of issuance.
F13
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 6 - Stockholders' deficiency (concluded):
Shares for services (concluded)
Under the agreement, the investor relations firm was required
to provide the marketing services over the six-month period
that commenced in July 2002, and the Company amortized the
unearned marketing expense over that period. However, during
that period, disputes arose related to those services. On
December 31, 2002, the disputes were resolved and the investor
relations firm agreed to return 200,000 shares of common stock
and allow the Company to cancel the warrants it had issued for
the purchase of 100,000 shares. During 2003, the investor
relations firm returned the 200,000 shares of common stock and
the Company cancelled them.
Directors' fees:
During September 2003, the Company issued to its Board of
Directors a total of 30,000 shares of common stock as
directors' fees. The Company recorded the fair value of the
shares of $9,000 on the date they agreed to issue them.
Note 7 - Income taxes:
As of December 31, 2003, the Company had net operating loss
carryforward of approximately $2,659,000 available to reduce
future Federal and state taxable income that will expire at
various dates through 2023. The Company's only other material
temporary difference as of that date was approximately $142,000
attributable to accrued officers' compensation. Due to the
uncertainties related to, among other things, the future changes
in the ownership of the Company, which could subject those loss
carryforwards to substantial annual limitations, and the extent
and timing of its future taxable income, the Company offset the
potential benefits of its deferred tax assets of approximately
$1,120,000 (of which $1,063,000 was attributable to the net
operating loss carryforwards and $57,000 was attributable to the
future deductibility of the officers' compensation) by an
equivalent valuation allowance as of December 31, 2003.
The Company had also offset the potential benefits of its
deferred tax assets of approximately $987,000 (of which $767,000
was attributable to the net operating loss carryforwards and
$220,000 was attributable to the future deductibility of the
officers' compensation) and $734,000 (of which $565,000 was
attributable to the net operating loss carryforwards and $169,000
was attributable to the future deductibility of the officers'
compensation) by equivalent valuation allowances as of December
31, 2002 and 2001, respectively. As a result of the increases
(decreases) in the valuation allowance of $(133,000) and $253,000
in 2003 and 2002, respectively, there are no benefits for income
taxes reflected in the accompanying statements of operations to
offset pre-tax losses.
F14
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 8 - Fair value of financial statements:
The Company's financial instruments at December 31, 2003 for
which disclosure of estimated fair value is required by certain
accounting standards consisted of cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses, notes
payable, notes payable to stockholders, deferred revenues and
accrued compensation payable to stockholders. In the opinion of
management, cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, deferred revenues and
notes payable were carried at fair value because of their
liquidity and short-term maturities. Because of the relationship
of the Company and its stockholders, there is no practical method
that can be used to determine the fair value of the notes payable
to stockholders and accrued compensation payable to stockholders.
Note 9 - Stock option plan:
In January 1998, the Company's stockholders ratified the
Company's Stock Option Plan (the "Plan") whereby options for the
purchase of up to 5,000,000 shares of the Company's common stock
may be granted to key personnel in the form of incentive stock
options and nonqualified stock options, as defined under the
Internal Revenue Code. Key personnel eligible for these awards
include employees of the Company, consultants to the Company and
nonemployee directors of the Company. Under the Plan, the
exercise price of all options must be at least 100% of the fair
market value of the Company's common shares on the date of grant
(the exercise price of an incentive stock option granted to an
optionee that holds more than ten percent of the combined voting
power of all classes of stock of the Company must be at least
110% of the fair market value on the date of grant). The maximum
term of any stock option granted may not exceed ten years from
the date of grant and options generally vest over three years.
Since the Company has elected to use the provisions of APB 25 in
accounting for stock options, no earned or unearned compensation
cost will be recognized in the financial statements for stock
options granted to employees at exercise prices that are equal to
or greater than the fair market value of the Company's common
stock on the date of grant. Instead, the Company makes the pro
forma disclosures required by SFAS 123 of net loss as if a fair
value based method of accounting for stock options had been
applied.
On January 1, 2000, the Company granted options to its founders
for the purchase of a total of 3,000,000 shares of its common
stock at $.33 per share (approximately 110% of the fair market
value on the date of grant) that are exercisable through December
31, 2009 and cancelled 1,000,000 of these options in 2002 when
one of the founders terminated his employment. No other options
have been issued and 2,000,000 options remain outstanding as of
December 31, 2003.
F15
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 9 - Stock option plan (concluded):
The pro forma amounts computed as if the Company had elected to
recognize compensation cost for all stock options granted to
employees based on the fair value of the options at the date of
grant as prescribed by SFAS 123 and the related historical amounts
reported in the accompanying 2002 statement of operations are set
forth below:
2002
---------
Net loss-as reported $(632,942)
Deduct total based employee based compensation expense
determined under a fair value based method for all
awards, net of related taxes (160,000)
--------
Net loss - pro forma
Loss per share: (792,942)
========
Basic loss per share - as reported $(.05)
========
Basic loss per share - pro forma $(.06)
========
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%
The proforma expense associated with the options issued to the
founder was amortized over their initial employment contracts which
expired on December 31, 2002.
Note 10- Related party transactions:
Service income includes approximately $20,000 in 2002,
attributable to a company wholly-owned by the Company's principal
stockholder.
As of December 31, 2003, two of the Founders of the Company have
employment contracts that are renewed annually and provide for
aggregate annual compensation of $300,000 through December 31,
2004.
Note 11- Working capital loan agreement:
During September 2002, the Company entered into a one-year
working capital loan agreement, which automatically renews
annually, with a financial institution for borrowings of up to
$75,000. Outstanding borrowings bear interest payable monthly at
1% above the prime rate, and is guaranteed by the Company's
principal stockholder. At December 31, 2003, there is $66,952
outstanding under this agreement.
F16
Image Technology Laboratories, Inc.
Notes to Financial Statements
Note 12 - Contingency:
During 2003, the Company entered into, and has since
concluded, binding arbitration with Carlton Phelps pertaining
to certain provisions of his employment agreement which was
executed in December 1999. The results of the arbitration are
expected in the second quarter of 2004. It is the opinion of
management that the Company will prevail in these matters, and
there will be no material effect on the Company, or its
results of operations.
The Company is party to an arbitration proceeding commenced by
Dr. Carlton Phelps before the American Arbitration Association
in New York City. Dr. Phelps, a former officer and director of
the Company claimed that he had been constructively discharged
in violation of his employment agreement by virtue of a
significant diminution of his duties and responsibilities at
the Company. He also claimed that he had been defamed in the
Company's public filings when it was asserted that he had been
discharged for cause. The Company denied the allegations and
affirmatively sought the return by Dr. Phelps of some or all
of his stock on the basis of his breach of fiduciary
responsibilities. By Opinion and Award dated February 25,
2004, the Arbitrator determined that Dr. Phelps had not been
constructively discharged, but had voluntarily resigned. As a
consequence, all of Dr. Phelps's claims for monetary awards
were dismissed but, as to the defamation claim, the Company
was directed to amend prior filings to reflect that he was not
terminated for cause. The Company was ordered to pay all
administrative fees and Dr. Phelps' reasonable attorney's fees
in an amount that has not yet been determined. The Company's
claim for return of Dr. Phelps's stock was denied.
F17
Item 14. Principal accountants fees and services
Audit Fees
For the fiscal year ended 2003 and 2002, our principal accounting firm, J.
H. Cohn LLP, billed us aggregate fees of approximately $30,000 and $ 23,000,
respectively, for the audit of our annual financial statements and review of the
financial statements included in our quarterly reports.
Audit Related Fees
For the fiscal year ended 2003 and 2002, our principal accounting firm, J.
H. Cohn LLP, billed us aggregate fees of approximately $6,000 and $12,000,
respectively, for work related to audit related reports.
Tax Fees:
For the fiscal year ended 2003 and 2002, our principal accounting firm J.H. Cohn
LLP, billed us aggregate fees of approximately $2,200 and $1,800 for tax
services.
All Other Fees:
J.H. Cohn LLP did not bill us for any other services in either 2003 or 2002.
17
S I G N A T U R E S
-------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Image Technology Laboratories, Inc.
By: /s/ DAVID RYON
-------------------------------
David Ryon
Chief Executive Officer and
Principal Accounting Officer
Date: April 2, 2004
Pursuant to the requirements of the securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ DAVID RYON Director April 2, 2004
--------------
David Ryon
18