Misleading Technology Statements:
The concerns around the technology misrepresentations are as follows:
1. misrepresentation of material facts in prior annual reports regarding who owned the technology, including the 1997 patent
2. omission of material facts in prior annual reports including the fact that the most precious contract we could possibly have was not memorialized;
3. gross negligence in failing to memorialize that contract between the company and a major shareholder (Grable) until now with the resulting terms being substantially different than previously disclosed;
4. potential conflict of interest of management with shareholders (with shareholders losing the conflict);
5. serious risk of reversion of our main asset to Grable under very plausible circumstances.
The main asset of the company is its right to use the CTLM technology. Grable's employment contract granted him a "development royalty" for his efforts in developing the technology. This royalty was disclosed in the 1996 and 1997 10ks, but no other obligations were mentioned. The Background sections of the 1996 and 1997 10ks refer to a patent that was applied for in 1995 and eventually granted in 1997. The '96 and '97 reports say that the company
(not Grable) filed "its" (not "his") patent application due to advances made by the company (using company funds and company time). Never at any time was it represented that Grable was the owner of the new patent, in fact, the opposite was clearly stated. Never at any time was it disclosed that the company had any other obligations to Grable for the technology other than the development royalty disclosed in the 1996 10K.
Now, however, footnote 9 of the 1998 10k states that GRABLE is the owner of the technology including the 1997 patent. Suddenly, the technology that INVESTORS funded through their contributions to IMDS was being represented as the property of GRABLE! Considering that the technology is our ONLY real asset, this sudden change was crushing to the common shareholder!
The 1998 10k notes that Grable issued a license to IMDS to use the technology in June 1998 (technology the shareholder had thought already belonged to them). However, paragraph 13 of that license agreement states that the license can be revoked by Grable AT HIS OPTION in certain circumstances including bankruptcy (a legitimate risk for this company) or change of control. Not only was this not disclosed previously, but it actually results in a
conflict between Grable and the shareholders. In a perverse way, Grable is better off if the company goes bankrupt, as long as FDA approval is received, since he would have all of the rights to the technology by himself.
The 1998 10k and the 14C issued 10/29/98 make the admission that the patent license was not memorialized in writing with Grable until June 1998. According to the 14C, during the delay in memorializing the contract circumstances turned in Grable's favor, allowing him to negotiate more favorable terms, including:
1. Grable was granted an additional 7 million shares
2. The contract included a reversion clause in the event of bankruptcy or change of control
3. The royalty rate in his employment contract was doubled from a maximum of 5% to a maximum of 10% depending on the sale amount
4. Anti-dilution protection was granted to Grable.
The company admitted in the public filing that Grable had a "fiduciary duty to the Company and its Shareholders to formalize, in writing, the oral agreement regarding the patent". This can only be interpreted as meaning that Grable was grossly negligent in failing to perform his fiduciary responsibilities by memorializing the contract only after circumstances moved in his favor. All of this pre-supposes that the Company did not own the technology
in the first place which is a highly disputable premise based on prior public filings.
Considering the fact that there IS NO SHAREHOLDER VALUE without the technology, these misrepresentations were egregious. |
