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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-1000
CHROMAVISION MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 75-2649072
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
33171 PASEO CERVEZA
SAN JUAN CAPISTRANO, CA 92675-4824
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(888) 443-3310
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01
RIGHTS TO PURCHASE SERIES C PREFERRED STOCK
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 [ ]
Indicate by check mark if the 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the closing sales price of March 7, 2000 the aggregate market value
of the voting stock held by nonaffiliates of the registrant was $380,222,661.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value was 19,498,598 at March 7, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
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LOCATION IN FORM 10-K INCORPORATED DOCUMENT
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Part III: Items 10, 11, 12 and 13 Proxy Statement for 2000 Annual Meeting of Shareholders
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TABLE OF CONTENTS
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PAGE NUMBER
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PART I
Item 1. Business..................................................................... 3
Item 2. Properties................................................................... 12
Item 3. Legal Proceedings............................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.......................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 14
Item 6. Selected Financial Data...................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 16
Operations...................................................................
Item 7a. Quantitative and Qualitative Disclosures About Market Risk................... 18
Item 8. Financial Statements and Supplementary Data.................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 31
Disclosure...................................................................
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 31
Item 11. Executive Compensation....................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 32
Item 13. Certain Relationships and Related Transactions............................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K............. 33
SIGNATURES 35
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Statements in this report describing the plans, goals, strategies,
intentions, and expectations of the Company and anticipated events are
forward-looking statements. Such statements include, but are not limited to, the
discussion under the heading "Business Corporate Strategy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
well as discussions throughout this report of new tests under development,
anticipated reimbursement for tests performed using the Company's automated
cellular imaging system, the future success of that system and other
technologies that compete with it. Important factors which could cause actual
results to differ materially from those described in such forward-looking
statements include the following: an inadequate supply of biological samples
could delay completion of the clinical trials; the clinical trials could fail to
demonstrate the efficacy of the ChromaVision Automated Cellular Imaging System
("ACIS") applications; new applications may not be successfully developed; the
ability to commercialize new applications may be dependent on obtaining
appropriate U.S. Food and Drug Administration (the "FDA") and foreign regulatory
approvals, which may not be obtained when anticipated or at all; manufacture of
the ACIS is subject to FDA regulation; commercialization of the Company's
products is dependent on acceptance by the medical community and medical
insurance industry, which could be delayed or not obtained.
PART I
ITEM 1. BUSINESS
THE COMPANY
ChromaVision Medical Systems, Inc. (the "Company"), formerly
MicroVision Medical Systems, Inc., is a Delaware corporation formed on March 28,
1996. Prior to the formation of the Company on March 28, 1996, the Company's
business was conducted as the MicroVision Medical Systems Division (the
"Division") of XL Vision, Inc. ("XL Vision").
ChromaVision develops, manufactures and markets an automated cellular
imaging system, referred to as the ACIS(TM), which is designed to assist in the
detection, diagnosis and treatment of cellular diseases such as cancer and
infectious disease. ChromaVision has designed the ACIS system to serve as a tool
to assist, rather than replace, the pathologist in generating accurate,
quantitative and reproducible results, eliminating the subjectivity associated
with current manual methods. On July 28, 1999, the U.S. Food and Drug
Administration granted clearance for the use of the ACIS to perform tests using
a particular staining method based upon a master validation protocol. The FDA
clearance allows ChromaVision to introduce tests for the ACIS using that
staining method without having to apply for additional FDA clearance.
ChromaVision's current test menu for the ACIS includes seven tests currently
released with additional tests in various stages of development.
INDUSTRY OVERVIEW
A critical aspect in diagnosing many cancers, infectious diseases and
genetic disorders is the detection of abnormal cells with specific
characteristics. This diagnosis is made during a microscopic examination
generally performed by a trained technologist or pathologist on biological
specimens taken from patients, also called manual microscopy. Estimates place
the number of diagnostic procedures performed in the United States at over one
billion per year. These procedures are performed in approximately 14,200
clinical laboratories in the United States and numerous clinical laboratories
worldwide, as well as in hospitals, doctors' offices and research laboratories.
Diagnostic and biotechnology companies have responded to the opportunities
presented by this large market by developing a growing number of highly specific
and increasingly sensitive reagents, used to identify, often in color, targeted
cellular characteristics of biological specimens.
Manual microscopy works well for simple diagnoses and for cases where
disease is obvious. However, manual microscope is highly laborious and
subjective, particularly when identifying "rare cellular events" such as finding
a few cancer cells in a patient sample containing millions of cells. Among the
factors contributing to this subjectivity is the lack of a standardized
methodology for both the handling and the staining of the specimen. Once slides
are prepared and stained, current diagnostic testing relies on the human eye
which, even with the aid of a microscope, has limited ability to discriminate
between slight color variations associated with the staining process or to
detect differences in the form and structure of cells. As a result, examining
cells under this method can result in variations in reportable results, ranging
from modest and probably insignificant differences to cases of incorrect
diagnoses. Healthcare providers are increasingly seeking more efficient and more
accurate methods of disease diagnosis in order to improve patient care and
eliminate unnecessary and costly examinations and procedures.
ChromaVision submitted data in its FDA filing showing that pathologists
using manual microscopy identified the existence of cancer cells in only 56% of
the bone marrow samples where early-stage cancer was present. ChromaVision's
ACIS, on the other
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hand, detected cancer cells in over 90% of these cases. The ACIS provides
greater specificity, which means the ability to find one cell among others, than
current alternative methods. It is capable of correctly identifying one tumor
cell in one hundred million normal cells, allowing the ACIS to be used for the
detection of rare events, such as locating potential early stage cancer cells.
The ACIS also is able to produce the same result at a rate approaching 100% upon
repeated examinations of the same slide. In addition, the ACIS provides
automation to its users and can enhance pathologist productivity.
BUSINESS SEGMENTS
Segment and geographic area information for the three years ended
December 31, 1999 is incorporated by reference from Note 11 "Business Segments,"
of the Notes to the Consolidated Financial Statements.
CHROMAVISION'S ACIS
Product Description and Benefits
The ACIS combines a proprietary color-based imaging technology with a
fully automated, computer-controlled microscope system and is designed to
improve the detection, diagnosis and treatment of cellular disease. The
ChromaVision ACIS uses internally developed software to detect colored objects,
such as stained cells, dramatically better than the human eye and with greater
accuracy and sensitivity than automated systems that rely on form, structure,
size or shape for detection of cells of interest. The ACIS detects and counts
cells based on color, form and structure. The majority of slide-based tests
currently being performed in laboratories already use some form of color to
assist in analysis. The color on a microscope slide is produced by the reaction
between common laboratory reagents and the cells of interest. The ACIS relies
upon color as the primary means of detecting disease and achieves greater
sensitivity than existing methods through its ability to discriminate among up
to 256 levels of intensity of any chosen color.
The ACIS is able to find specific types of diagnostic cells, count them
and determine the amount of critically relevant substances on or in the cells by
measuring color intensity at a level of discrimination far exceeding the
capabilities of manual microscopy. It then produces high-resolution color
digital images of the targeted cells, creating a permanent visual archive of the
results for use in diagnosis or monitoring of numerous medical conditions. The
ACIS is designed to enable a laboratory technician to operate the system using
simple "point and click" commands to scan up to 100 patient samples with fully
automated, walk-away operation. The system automatically scans the slides,
initially at low magnification to identify targeted cells using color
characteristics. The ACIS then re-images the targeted cells at a higher power
and, using additional color criteria and pattern recognition software, confirms
the significance of the targeted cell. Unlike other existing technologies, the
end result of slide analysis on the ACIS is the automated location of abnormal
cells, quantification of those cells and an image of the abnormal cells
displayed on the computer monitor. The system stores the digital images of the
targeted cells for scoring and review by the technologist/ pathologist at a
later time. Once the image is reviewed and accepted, the digital images serve as
a permanent record of the patient's sample and test results. The digital image
also can be sent electronically for remote review and consultation.
The visual aspect of the ACIS system has many advantages including
enabling the healthcare practitioner to see the actual intact cells containing
the diagnostic information needed to guide therapy, rather than just a numeric
value indicating size or quantity. In competing technologies, creation of this
numeric value destroys the actual specimen being analyzed, which prevents
further visual review of the specimen and can lead to false positive and false
negative results.
The increased sensitivity of the ACIS allows ChromaVision to address
tests that require rare event detection, such as diagnostic tests for cancer and
infectious diseases. Newer therapeutic treatments require more accurate and
objective information to guide therapeutic options. It will no longer be enough
to interpret a test result as positive or negative. Physicians will need to know
how positive or negative a specific sample is, in order to arrive at an accurate
clinical decision. ChromaVision believes that the ACIS will provide this
information accurately, objectively and quickly.
ChromaVision offers its customers an entire testing system, including
an intelligent, automated microscope, specialized proprietary color-based
imaging software, particular staining and slide preparation techniques, training
and service. The hardware of the ACIS system includes a computer with a modem
and monitor, a digital camera, an Olympus microscope and a color printer.
The ACIS is designed to identify many different stains and staining
characteristics of cells, thereby enabling the system to be used for a
significant number of clinical tests for conditions including cancer, infections
and genetic abnormalities. The ACIS system
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is designed to be easily adapted to work with a significant number of existing
FDA approved reagents and stains allowing each new test for the ACIS to be
developed with significant savings in time and resources.
The ACIS technology has been designed to complement the skills of
pathologists by assisting them in generating more accurate, specific and
reproducible results and eliminating the subjectivity associated with current
manual methods. ChromaVision expects that the ACIS will enable healthcare
providers to improve the accuracy and consistency of patient diagnoses, enhance
overall patient outcomes and lower healthcare costs.
Testing Menu
The FDA clearance of the ACIS for performing tests using the particular
staining method, immunohistochemistry, is expected to enable ChromaVision to
commercialize new tests quickly without further FDA filings. ChromaVision has
commercialized, to date, seven tests for the ACIS. It is continuing to develop a
pipeline of new tests, some of which have already been successfully evaluated in
feasibility studies. ChromaVision believes that the ACIS has the potential to
become a valuable tool in the detection and treatment of a large number of
additional diseases and medical conditions.
The tests that ChromaVision has targeted take advantage of particular
capabilities of the ACIS system, address large, attractive markets and are
anticipated to be eligible for higher levels of reimbursement beyond the current
third party payers reimbursement for manual testing. The primary focus will be
on the development of tests in the cancer market. The following is a description
of the seven cancer tests currently commercialized and available.
- MICROMETASTASES IN BONE MARROW. This is a test for early
detection of cancer that involves finding minute quantities of
cancer cells in bone marrow. The presence of these cells,
which have spread from the primary tumor, has been shown to be
an early indicator of cancer. Testing for small quantities of
cancer cells also can be used to monitor the progress of the
disease and to provide required information in connection with
stem cell and bone marrow transplants. This test takes
advantage of the enhanced sensitivity of the ACIS.
- HER2/NEU. This is a test that measures excess quantities of
the HER2 protein, which is associated with more aggressive
breast cancer, faster disease progression and shorter overall
survival. Candidates for the new cancer drug Herceptin(R),
which has recently been approved by the FDA and developed and
marketed by Genentech, Inc., are required to be tested for
overexpression of HER2/neu. Currently, the test is performed
using manual microscopy, and a pathologist assigns a score to
the result for use by the oncologist to determine if Herceptin
will be prescribed. This subjective procedure produces a
significant variation of results among individual laboratories
and pathologists. HER2/neu testing performed using the ACIS in
conjunction with the recently released HercepTest(TM)
developed by DAKO Corporation has achieved greater than 90%
reproducibility and is expected to substantially improve the
standardization of test results. ChromaVision has a joint
development and marketing agreement with DAKO Corporation.
- ESTROGEN RECEPTORS (ER).The estrogen receptor assay is ordered
by physicians for virtually all new cases of breast cancer in
order to assess patient prognosis and to guide clinical
decision-making. Patients who are estrogen receptor positive
may be candidates for anti-estrogen hormonal therapies such as
tamoxifen.
- PROGESTERONE RECEPTORS (PR). The progesterone (PR) assay is
very similar to the estrogen receptor assay in that it
predicts response to hormonal therapies in settings of node
negative and node positive breast cancer. Most studies show
that when patients' tumors are positive for both estrogen and
progesterone receptors, patients are more likely to respond to
systemic hormonal treatments. Because the two assays are
highly complementary, both tests are routinely ordered by
physicians for their newly diagnosed breast cancer patients.
- PROTEIN EXPRESSION (P53) , nicknamed "the tumor suppressor
gene" is a gene product (or protein) involved in cell cycle
regulation. It is the most commonly altered (or mutated) gene
in cancer. The test for P53 is done using the
immunohistochemical (IHC) staining method. Overexpression of
the P53 protein indicates whether or not mutation has occurred
in the gene. Mutated P53 is non-functional but can be detected
in IHC studies owing to its longer half-life relative to
non-mutated P53. This information can be used in cancer
staging, risk of reoccurrence, or potentially to evaluate risk
of being diagnosed with cancer. P53 has very broad
application, and can be applied to multiple cancer types.
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- CELL-PROLIFERATION (KI-67) Ki-67 is a cell proliferation
marker. Ki-67 testing targets a protein which is present in
greatest quantity in S, G2, and M phases of the cell cycle
(those in which DNA synthesis and cell replication occurs).
The protein is absent or is present in lesser quantities in
the G0 (resting) and G1 phases, respectively. Ki-67 can
therefore serve as an indicator of tumor proliferative
activity and, by extension, of tumor aggressiveness. Ki-67
testing may be performed upon relatively small biopsy
specimens, such as those, which are obtained by fine needle
aspiration of mammographically detected breast (and other)
lesions. Ki-67 testing is currently performed in other
diseases (such as ovarian, prostate, lung, and colorectal
cancers), although with somewhat lesser frequency than in
breast cancer.
- Leukocyte Alkaline Phosphatase (LAP). This test is used to
detect possible fetal abnormalities and certain blood cancers
(leukemias). A high result is indicative of an inflammatory
reaction whereas a low result is indicative of a leukemic
condition. A low LAP value in a pregnant woman indicates a
possible fetal abnormality (LAP values are high in pregnant
women with normal fetuses).
CORPORATE STRATEGY
ChromaVision's goal is to establish the ACIS as a necessary tool to
assist in the standardization of information for cellular disease needed to
maximize diagnostic certainty. To implement this strategy, ChromaVision intends
to:
- take advantage of the flexibility of both the ACIS platform
and the nature of its FDA clearance to develop and
commercialize numerous cancer and infectious disease tests,
including seven tests commercially released to date;
- continue to build a direct sales and marketing organization
which will be focused on educating the pathology, oncology and
patient community about the benefits of the ACIS system;
- offer the ACIS to hospital, commercial laboratory and
pathology customers on a fee-per-use basis in which the fee is
based on the number of tests run on the system, thus avoiding
capital expenditure issues that can make generating sales more
difficult;
- establish higher reimbursement levels for tests performed
using the ACIS under established incremental payment codes
applicable to computerized image analysis; and
- continue to collaborate with leaders in the medical community
to assist ChromaVision in developing new tests for the ACIS
and enhance ChromaVision's marketing and distribution
capabilities.
There is considerable uncertainty as to whether these strategies can be
implemented successfully, and ChromaVision cannot assure investors that it will
be successful in doing so.
COLLABORATIONS
ChromaVision has and will continue to use collaborations to assist in
further developing its test menu and enhancing its marketing and distribution
capabilities. ChromaVision collaborates with researchers at prestigious
hospitals, centers of excellence and major laboratories that assist with
clinical studies. Currently, seven ChromaVision tests are in various stages of
development at the following institutions:
- Cytometry Associates Esoterix
- Mayo Clinic - Rochester
- UCLA School of Medicine
- University of Texas MD Anderson Cancer Center
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- University of Vermont
- USC Kenneth Norris Cancer Center
ChromaVision also enters into collaborations that will focus on
integrating reagents with the ChromaVision ACIS platform in a manner which
provides an entire testing system to the customer. ChromaVision has entered into
agreements with two companies for the application of their tests on the ACIS.
In October 1998, ChromaVision entered into an agreement with DAKO
Corporation to jointly develop an ACIS test for Herceptest, an FDA-cleared
diagnostic that is used to identify breast cancer patients likely to respond to
the recently cleared drug Herceptin developed by Genentech. In addition, in
October 1997, ChromaVision entered into an exclusive, worldwide distribution and
development agreement with Sigma Diagnostics, Inc. for a potential screening
test for Down syndrome, known as Triple Plus(TM).
The development of new tests to be performed using the ACIS is
important to ChromaVision's success. In order to mitigate the risk that any one
test will not be successfully developed, ChromaVision maintains a pipeline of
tests in a prioritized cue so that if any one test is not successfully
developed, or market feedback suggests changing trends, then ChromaVision can
move other tests up in priority. ChromaVision is focusing its near term efforts
on prioritizing cancer tests based on immediate market opportunities.
SALES & MARKETING
The ACIS is being offered to the clinical test market under an
arrangement in which the customer pays only on the basis of the number of tests
performed. Because ChromaVision will continue to own the ACIS, there is no need
for a large initial capital expenditure by any clinical customer. Rather than
selling the systems, ChromaVision's fee-per-use strategy removes any capital
equipment acquisition barrier to new system sales and customer concerns of
system component obsolescence. The annuity model shortens ChromaVision's
sell-cycle and is expected to yield very attractive margins over time. The
customer will be charged on a fee-per-use basis determined by the specific test
being run. The anticipated fee-per-use charges for the six tests currently
released, (excluding LAP), range from approximately $50 to $150, although those
prices could change based on a number of factors, including the amount of
third-party reimbursements for the tests. The customer will also be committed to
minimum monthly payments for the use of the ACIS. Systems may be sold to
research centers that do not offer tests commercially and in foreign countries
where the fee-per-use payment model is not feasible because of the structure of
the healthcare system.
As of December 31, 1999, the sales and marketing organization consisted
of seventeen people, including five direct sales people and two technical
service specialists in the United States and four direct sales people and one
technical service specialists in Europe. The Company intends significant
incremental increases in resources for the sales and marketing organization to
support the acceleration of the Company's commercialization. ChromaVision has
entered into an agreement with independent distributors to market the ACIS in
Italy, the Scandinavian countries and the Benelux countries and is in
discussions with potential distributors for the United Kingdom. The direct sales
force is marketing the ACIS in the rest of Western Europe.
There is a high level of interest in micrometastases in Europe, and
ChromaVision has entered into agreements with two prominent academicians: Ingo
J. Diel, M.D., Associate Professor of Medicine at University Hospital at
Heidelberg, and Klaus Pantel, M.D., Ph.D., Associate Professor of Medicine and
Head of the Micrometastases Research Laboratory at the University of Munich
Institute of Immunology. Both of them will be studying the detection of
micrometastases using the ACIS and will be working with ChromaVision to increase
awareness and acceptance of the ACIS technology within the medical and
scientific communities in Europe.
CUSTOMERS
ChromaVision's customers include pathologists and clinical
laboratories. ChromaVision's targeted customers can be classified into four
groups:
- UNIVERSITY MEDICAL CENTERS. These medical centers include
transplant and oncology centers and research centers of
excellence.
- COMMERCIAL LABORATORIES. These laboratories include those
which have a national presence and specialized focus such as
Quest Diagnostics Incorporated, Specialty Laboratories Inc.,
and Laboratory Corporation of America.
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- PHARMACEUTICAL COMPANIES. These companies benefit by using the
ACIS in the drug development process. In addition, the ACIS
may assist in directing the treatment protocol for patients to
pharmaceutical companies' new therapeutics, such as the
HercepTest and Herceptin.
- RESEARCH INSTITUTIONS. These institutions include the
governmental sanctioned groups such as The National Cancer
Institute, The National Institutes for Health and the Center
for Disease Control as well as cancer cooperative groups such
as the American College of Obstetrics and Gynecology.
ACIS systems have been placed in each of these segments throughout the
United States and Western Europe.
REIMBURSEMENT STRATEGY
ChromaVision's reimbursement strategy is to pursue the use of specific
existing medical billing codes, known as CPT codes, that qualify for
reimbursement to hospital laboratories and to pathologists from Medicare and
from private carriers at rates incrementally above that for manual microscopy.
These CPT codes are established by the American Medical Association, and each
code is associated with a specific medical service. The U.S. Healthcare Finance
Administration, known as HCFA, has established predetermined payment amounts for
the Medicare program based on these specific codes. Private insurers also use
the CPT codes to make decisions with regard to reimbursement. The codes that
ChromaVision has identified relate specifically to the use of image analysis in
the testing process and are not available to providers who use only manual
microscopy to analyze patient specimens. A number of independent reimbursement
consultants, the reimbursement directors at a major U.S. cancer center and two
national independent laboratories, the American Medical Association CPT coding
committee and HCFA have reviewed the ACIS testing process and acknowledged that
these incremental codes should apply for the reimbursement of tests using the
ACIS.
To date, ChromaVision has only limited experience with reimbursement
and, while it has received assurances from experts that higher reimbursement
will be available for its tests, there remains significant uncertainty.
ChromaVision cannot assure investors that reimbursement at these levels will be
achieved.
PATENTS AND PROPRIETARY TECHNOLOGY
ChromaVision files patent applications to protect technology,
innovations and improvements that it considers important to the development of
its business. ChromaVision has filed eighteen patent applications with the U.S.
Patent and Trademark Office regarding specific aspects of the ChromaVision ACIS
software technology one of which the Company has received notice of allowance.
In July 1999, ChromaVision was issued a notice of allowance on the method of
"scoring" cells performed by the ACIS, although the patent has not yet been
issued. The Company also is preparing to file six additional patent
applications. ChromaVision also relies on trade secrets and proprietary know-how
that it seeks to protect in part through confidentiality agreements with its
employees and consultants. Litigation may be necessary in order to enforce any
patents that are issued from these applications, to protect trade secrets or
know-how ChromaVision owns or to determine the enforceability, scope and
validity of the proprietary rights of others.
There can be no assurance that other parties will not in the future
make claims or threaten to take legal action against the Company alleging
infringement of patents by the Company. The medical device industry has been the
subject of extensive litigation regarding patents and other rights. Patent
litigation can be costly and time consuming, and there can be no assurance that
the Company will not incur substantial litigation expenses in the future. If the
Company were determined to be infringing any patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses and/or
cease certain activities. In addition, if patents are issued to others which
contain claims that cover subject matter made, used or sold by the Company, the
Company may be required to obtain licenses to these patents, to develop or
obtain alternative technology or to cease using such technology. If the Company
is required to obtain any licenses, there can be no assurance that the Company
will be able to do so on terms acceptable to the Company, if at all. A
determination that the Company is infringing the patents of others could have a
material adverse effect on the Company's business and results of operations.
COMPETITION
The predominant method of cell-based diagnostics today and the
Company's principal competitor is traditional manual microscopic analysis
performed by pathologists. The manual method can be subjective and difficult to
reproduce because many of the tests targeted for the ACIS require quantification
and not just a qualification evaluation, such as HER2-neu. The Company has
recognized this need and the ACIS can give a more objective and reproducible
result.
Additionally, there are companies engaged in the development of
cell-based
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diagnostic imaging systems that could compete with the ACIS. However, most
automated systems do not have the ability to reproducibly find small numbers of
tumor cells amongst millions of normal cells. The rare event detection of the
ACIS, by using color as its primary discriminate, allows the Company to target
tests that require this level of sensitivity. However, most automated microscopy
competitors have focused their sales and marketing efforts on pap smear tests,
where their value proposition is based on labor replacement through automation.
The pap testing market has been typically one where reimbursement is low because
of the limited value proposition. Alternatively, the Company's value proposition
is based on displacing costly and invasive procedures (surgical or expensive
drug regiments) through improved diagnostic certainty. This value proposition
results in a significantly higher reimbursement level.
Additional sources of competition include alternative diagnostic
testing methods such as flow cytometry, polymerase chain reaction, referred to
as PCR, and fluorescent in-situ hybridization, referred to as FISH. Flow
cytometry involves separating individual cells in blood and analyzing them based
on results obtained by passing a beam of light through the cells at very high
speed. PCR involves rapidly replicating small quantities of genetic material to
permit analysis by detecting color or electrical charge. Both methods have the
disadvantages of destroying the patient sample in the process of analysis and
yielding a large number of false positive results. The pathologist has to draw
conclusions from data produced by the flow cytometry or PCR process, as opposed
to actually seeing the cells of interest. Flow cytometry has not proven to be
specific enough for applications such as micrometastases, which involves finding
a very small number of cancer cells in a large population of cells. FISH
involves using fluorescent antibodies to tag genetic material, either DNA or
RNA, and analyzing the result by counting the points of light. Since
fluorescence emits a very weak signal, use of the FISH method is very slow as
compared to the ACIS, this method is also tedious and requires substantial
pathologist time to both define areas of interest within the specimen and then
manually count the fluorescent signals emitted.
ChromaVision believes that its proprietary color-based image analysis,
the multi-test potential of the ACIS, the significant speed and specificity of
its tests and its unique FDA clearance distinguish ChromaVision from these other
companies.
SERVICE
The Company intends to offer service and maintenance to ChromaVision
ACIS customers as part of the "per-test" pricing structure. The Company has
developed a support, field service, and parts distribution plan designed to
support its installed base of ACIS systems. This plan will offer the following
services as part of the "per-test" fee structure: (i) installation, (ii)
customer training, (iii) a 24-hour a day, seven-day per week customer help desk
available via a toll free number, (iv) the ability to remotely diagnose
ChromaVision ACIS units and load new software via dial-up modems with a goal of
correcting 80% of customer problems at initial customer contact, and (v) on-site
field service and parts replacement utilizing regionally based ChromaVision
field engineers which will be supported by headquarters development and
engineering staff.
RESEARCH AND DEVELOPMENT
The Company's core competency to date has been in the area of advanced
imaging as applied to the detection and quantification of reagent-stained
cellular material. Currently, the Company has 23 employees dedicated to
engineering and research and development, including several scientists who hold
Ph.D. degrees in various disciplines, primarily in the areas of image science
and software algorithms. The senior members of the research and development
staff that initially developed the proprietary technology have experience in the
development of sophisticated imaging systems including those used in the
Strategic Defense Initiative and the Cruise Missile program. ChromaVision's
research and development staff is experienced in the rapid prototyping and
development of advanced software-based, electro-optical-mechanical systems. The
Company intends to continue to invest heavily in the recruitment of experienced
scientists and engineers with an emphasis on achieving a balance between
research and development innovation and support of focused, market driven
requirements. Research and development spending was approximately, $3,565,000,
$4,664,000 and $ 6,076,000 for 1997, 1998 and 1999, respectively.
MANUFACTURING
The ChromaVision ACIS is currently developed and manufactured at the
Company's headquarters in San Juan Capistrano, California. At the San Juan
Capistrano facility, components are assembled, the microscope is optically
aligned, software is loaded, and the system is tested. Components of the system
are either manufactured by the Company, purchased off-the-shelf, or manufactured
by subcontractors to the Company's specifications. The Company relies on sole
source suppliers for certain components in its product of which any interruption
would cause a material adverse impact on the Company's operations. The system
uses an off-the-shelf CCD camera and an Intel/Microsoft-based personal computer.
The system can be adapted for use with most popular microscopes and
9
<PAGE> 10
related optical accessories. Proprietary color detection techniques have been
developed by ChromaVision researchers. The Company is Quality Systems Regulation
(QSR) compliant, achieved ISO 9001 certification and received a CE Mark in 1998.
See "Governmental Regulatory Status".
GOVERNMENTAL REGULATORY STATUS
The Company's products are subject to governmental regulation in the
United States and other countries. In the United States, the Medical Device
Amendments to the Federal Food, Drug and Cosmetic Act ("the FDA Act") and other
statutes and regulations, including various state statutes and regulations,
govern the testing, manufacture, labeling, storage, record keeping,
distribution, sale, marketing, advertising and promotion of such products.
Failure to comply with applicable requirements can result in fines, recall or
seizure of products, total or partial suspension of production, withdrawal of
existing product approvals or clearances, refusal to approve or clear new
applications or notices and criminal prosecution.
Prior to commercial sale in the United States, most medical devices,
including the ChromaVision ACIS, must be cleared by the FDA for specific uses.
The regulatory process can be lengthy, expensive and uncertain. Securing FDA
clearance may require the submission of extensive clinical data together with
other supporting information to the FDA. Any clinical testing of medical devices
must be conducted in conformity with applicable FDA regulations. In addition,
state and local approvals may be required for some clinical activities.
Under the FDA Act, medical devices are classified into one of three
classes on the basis of the controls necessary to reasonably ensure their safety
and effectiveness. Class I devices are those whose safety and effectiveness can
reasonably be ensured through general controls, such as labeling, premarket
notification and adherence to FDA-mandated QSR. Class II devices are those whose
safety and effectiveness can reasonably be ensured through "special controls,"
such as performance standards, post-market surveillance, patient registries and
FDA guidelines. Class III devices are devices that must receive premarket
approval ("PMA") by the FDA to ensure their safety and effectiveness. They are
generally life sustaining, life-supporting or implantable devices, and also
include most devices that were not on the market before May 18, 1976 and for
which the FDA has not made a finding of substantial equivalence pursuant to a
less extensive procedure known as a 510(k) clearance.
Before a new device or a new use of an existing device can be
introduced to the market, the manufacturer generally must obtain FDA clearance
through a 510(k) or approval of a PMA application. Following submission of the
510(k), the manufacturer may not market the new device until an order is issued
by the FDA finding the device to be "substantially equivalent" to a legally
marketed medical device, i.e., a legally marketed Class I or Class II medical
device or a legally marketed Class III medical device for which the FDA has not
called for PMA applications ("predicate device"). The FDA has no specific time
limit by which it must respond to a 510(k) filing. It generally takes from three
to nine months from the date of submission for the FDA to respond with a
clearance for a 510(k) application depending on the complexity of the technology
and the level of review the FDA employs for evaluating the 510(k) filing, but it
may take longer. The FDA may determine that the proposed device is not
substantially equivalent, or that additional clinical or other data are needed
before a substantial equivalence determination can be made. Modification or
enhancement of a product that has been cleared through the 510(k) process
requires clearance of a new 510(k) if the modification or enhancement could
significantly affect the safety or effectiveness of the original device.
The Company obtained its first 510(k) clearance from the FDA to market
the ChromaVision ACIS with a test to screen blood for malignancy. On July 28,
1999, the Company received its second 510(k) clearance from the FDA which
granted broad use of the ACIS to perform multiple tests using a staining method
called immunohistochemistry. Immunohistochemistry is widely used in the
diagnosis or monitoring of numerous medical conditions, including cancer and
infectious diseases. This method involves the use of antibodies and stains to
create color reactions, enabling the identification of suspected tumor- or
virus-producing cells.
ChromaVision has pursued a novel regulatory strategy for the ACIS. This
strategy was developed with the FDA to use a clearance program known as a master
validation protocol that recognizes a class of similar diagnostic tests. The FDA
clearance allows the ACIS to be marketed for use with a class of cellular
diagnostic tests using the immunohistochemistry staining method. This strategy
eliminates the need to seek clearances for each immunohistochemistry staining
test to be performed on the ACIS, meaning that a large number of tests that use
this staining method can be developed and marketed.
For future applications, should the FDA determine that the ChromaVision
ACIS is not substantially equivalent to other 510(k) predicate devices, the
Company may be required to file for a PMA. The PMA process is significantly more
complex, expensive and time consuming than the 510(k) process. The PMA process
generally requires the performance of well-controlled clinical investigations in
order to obtain FDA clearance, although other kinds of valid scientific evidence
may be sufficient to
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<PAGE> 11
determine the effectiveness of some devices. The PMA process typically requires
two years and may never result in approval. Determination by the FDA that any of
the Company's products or applications is subject to the PMA process could have
a material adverse effect on the Company's business, results of operations and
financial condition. Nonetheless, should a PMA be required, a business benefit
can accrue in the sense that a PMA can serve as a competitive barrier to entry.
Although no time frames can be assured for either a 510(k) clearance or PMA
approval, it is generally assumed that a 510(k) clearance may be more readily
obtained.
The FDA Act requires that medical devices be manufactured in accordance
with the FDA's current QSR regulations. These regulations require, among other
things, that (i) the manufacturing process must be regulated and controlled by
the use of written procedures and (ii) the ability to produce devices which meet
the manufacturer's specifications be validated by extensive and detailed testing
of every aspect of the process. They also require investigation of any
deficiencies in the manufacturing process or in the products produced and
detailed record keeping. Manufacturing facilities are therefore subject to FDA
inspection on a periodic basis to monitor compliance with QSR requirements. If
violations of the applicable regulations are noted during FDA inspections of the
Company's manufacturing facilities or the manufacturing facilities of its
contract manufacturers, there may be a material adverse effect on the continued
marketing of the Company's products.
Other applicable requirements include the medical device reporting
regulation, which requires that the Company provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of its
devices, as well as product malfunctions that would likely cause or contribute
to a death or serious injury if the malfunction were to recur.
The FDA regulates certain computer products as medical devices, such as
control software for imaging or other diagnostic devices, including the
Company's ChromaVision ACIS software. The Company's ChromaVision ACIS software
may become subject to increased or more rigorous regulation, which the Company
cannot predict. No assurance can be given that compliance with more extensive
regulatory processes will be achieved or that the necessary clearances for such
software will be obtained by the Company on a timely basis, if at all. The
Company may, as a result, be required to expend additional time, resources and
effort in the areas of software design, production and quality control to ensure
full technical compliance.
If the FDA believes that the Company is not in compliance with the law,
the FDA can take one or more of the following actions: withdraw previously
approved applications; require notification to users regarding newly found,
unreasonable risks; request repair or refund of faulty devices; request
corrective advertisements, formal recalls or temporary marketing suspension;
refuse to review or clear applications to market any of the Company's future
products in the United States or to allow the Company to enter into government
supply contracts; or institute legal proceedings to detain or seize products,
enjoin future violations or assess criminal or civil penalties against the
Company, its officers or employees. Any such action by the FDA could result in
disruption of the Company's operations for an indeterminate period of time.
Various states in which the Company's product may be sold in the future may
impose additional regulatory requirements.
Laws and regulations regarding the manufacture, sale and use of medical
devices are subject to change and depend heavily on administrative
interpretations. There can be no assurance that future changes in regulations or
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company.
The Company and its products may be subject to a variety of other laws and
regulations in those states and countries where its products are or will be
marketed. These restrictions may hinder the Company's ability to market its
products in those states or countries. Use of the Company's products may further
be subject to periodic inspection, quality control, quality assurance,
proficiency testing, documentation and safety reporting standards pursuant to
the Joint Commission on Accreditation of Healthcare Organizations, a
self-regulated consortium of health care organizations. Depending on
circumstances, including but not limited to Company strategies and discussions
with potential distribution partners, the Company may develop a distribution
strategy that initiates marketing in international markets prior to marketing in
the United States.
EMPLOYEES
As of December 31, 1999, the Company employed 72 persons of which 23
persons were in product development and engineering, 22 persons were in
manufacturing, quality assurance and field services, 10 persons were in finance,
executive and administrative capacities and 17 persons were in sales and
marketing. The Company is not subject to any collective bargaining agreements,
and the Company believes that the relationship with its employees is good.
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In addition to full-time employees, the Company utilizes the services
of various independent contractors, primarily for certain product development
and foreign sales, marketing and administrative activity.
ITEM 2. PROPERTIES
The Company's executive and development and manufacturing facilities
are located in San Juan Capistrano, California, in approximately 21,000 square
feet. The Company leases the space at an annual rent of approximately $127,000.
The existing lease agreement expired on February 28, 2000 and the Company
exercised its option to extend the lease to February 28, 2001. The Company has
an option to extend the lease to February 28, 2003. Management of the Company
anticipates that additional space will be required as the business expands and
believes that it will be able to obtain suitable space as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company currently is not a party to any legal proceedings, the
adverse outcome of which, individually or in the aggregate, management believes
would have a material adverse effect on the business, financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter ended December 31, 1999.
EXECUTIVE OFFICERS
The following persons were executive officers of the Company at March 30,
2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Douglas S. Harrington, M.D. 47 Chief Executive Officer, President and Director
Kenneth D. Bauer, Ph.D. 49 Vice President and Chief Science Officer
Kevin C. O'Boyle 44 Senior Vice President of Operations and Chief Financial Officer
Diethart Reichardt 57 Vice President, Managing Director of ChromaVision International, Inc.
Michael G. Schneider 50 Vice President of Manufacturing and Service
Patricia Sisson 46 Senior Vice President of Marketing, Sales and Strategic Planning
Jose de la Torre-Bueno, Ph.D. 51 Vice President of Research and Development
David Weisenthal 50 Vice President of Marketing
</TABLE>
Douglas S. Harrington, M.D. has been Chief Executive Officer since December
1996 and President since December 1998. Prior to joining the Company, Dr.
Harrington served as Chairman and President of Strategic Business Solutions,
Inc., a privately held company specializing in the commercialization of
biotechnology, and as a Principal in Douglas S. Harrington and Associates, a
strategic consulting firm. From 1992 to 1995, Dr. Harrington served as President
of Nichols Institute, a publicly traded healthcare laboratory services provider,
now part of Quest Diagnostics, Inc., a publicly traded laboratory services
provider. Prior to 1992, Dr. Harrington held various management positions within
Nichols Institute including Vice President of Operations and Medical Director.
Dr. Harrington is a Director of Merge Technologies, Inc. and serves on the Board
of Directors, Advisory Boards, or Scientific Advisory Boards of several other
related healthcare and medical device companies. Dr. Harrington is also
Associate Professor of Clinical and Anatomic Pathology at the University of
Nebraska Medical Center, and has authored over 80 peer-reviewed publications. He
received his Bachelor of Arts degree with distinction and a Medical Degree from
the University of Colorado. Professional affiliation memberships include the
American Medical Association, the American Society of Clinical Pathologists, the
College of American Pathologists and the International Academy of Pathology.
Kenneth D. Bauer, Ph.D. has been Vice President and Chief Science Officer
since August 1997. From 1992 until he joined the Company, Dr. Bauer was Senior
Scientist in the Immunology Division and head of Cytometry for Genentech, Inc. a
publicly traded biotechnology company. Prior to Genentech, Dr. Bauer was
Associate Professor of Pathology at Northwestern University Medical
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<PAGE> 13
School and Director of the Quantitative Cytology Laboratory at the Northwestern
Memorial Hospital in Chicago, Illinois. He has authored more than 90 scientific
publications and served as Associate Editor of Cytometry for the Journal of the
Society of Analytical Cytology for ten years. Dr. Bauer has been a member of the
scientific advisory boards for several public companies and served on scientific
review sections for the National Institutes of Health, Department of Energy, and
National Aeronautics and Space Administration. He is currently an Adjunct
Professor of Pathology and Laboratory Medicine at the University of Pennsylvania
School of Medicine and a subcommittee member of the National Committee for
Clinical Laboratory Standards.
Kevin C. O'Boyle has been Vice President and Chief Financial Officer of the
Company since December 1996 and Senior Vice President of Operations since
January 1999. From 1990 to 1994, Mr. O'Boyle was the Chief Financial Officer and
from 1994 to 1996, he was Sr. Vice President of Operations for Albert Fisher
North America, a publicly traded international food processor and distributor.
From 1984 to 1990, Mr. O'Boyle served as the Vice President and Controller of
American Cablesystems, a publicly traded cable television firm. He previously
held various accounting positions on the audit and tax staff with Pannell, Kerr
& Forster, an international public accounting firm.
Diethart Reichardt has been Vice President, Managing Director of
ChromaVision International, Inc. since January 1998. Previously, Mr. Reichardt
spent more than twenty years with Allergan, Inc., a publicly traded provider of
therapeutic eye care. Mr. Reichardt held various senior management positions
including Corporate Vice President and head of the global optical, consumer and
over-the-counter division.
Michael G. Schneider has been Vice President of Manufacturing and Service
since June 1996. From 1995 to May 1996, Mr. Schneider was Vice President of
Manufacturing at Kodak Health Imaging Systems, Inc. From 1993 to 1995, Mr.
Schneider was Director of Worldwide Service at Kodak's Customer Service
Division. From 1990 to 1993, Mr. Schneider was Manager of Services Support at
Kodak's Health Science Division. Mr. Schneider has twenty-four years of
experience in manufacturing and service management.
Patricia Sisson has been Vice President of Marketing of the Company since
December 1997 and Senior Vice President of Sales, Marketing and Strategic
Planning since January 1999. From 1995 to 1997, Ms. Sisson was Vice President of
Marketing at Quest Diagnostics, Inc., a commercial laboratory having more than a
billion dollars in annual revenue. From 1986 to 1995, Ms. Sisson served as Vice
President of Marketing at Nichols Institute, a reference laboratory, and Vice
President of Marketing and Sales for Nichols Institute Diagnostics, a
manufacturer of diagnostic kits. In addition, Ms. Sisson spent more than a
decade with Beckman Instruments, Inc. in product and marketing management roles.
Ms. Sisson is a licensed medical technologist certified by the American Society
of Clinical Pathology.
Jose de la Torre-Bueno, Ph.D. has been Vice President of Research and
Development since February 1999 and Senior Applications Engineer since July
1998. Prior to joining ChromaVision, Dr. Torre-Bueno was engaged as a consultant
to Tower Technologies in Encinitas, California. In 1982, he founded American
Innovision; an image analysis company that configured complete application
systems, designed and built software and hardware. He acted as President, and VP
of Research and Development for American Innovision, a company owned by him,
until its sale to Oncor Instrument Systems in 1992. He remained with Oncor for
three years after the sale as Senior Scientist and R&D Manager. Dr. Torre-Bueno
has been an inventor on two issued patents, five pending patents, including two
patents assigned to ChromaVision.
David Weisenthal, has been Vice President of Marketing since October 1999
and Director of Marketing since September 1998. From 1997 to 1998, Mr.
Weisenthal served as Vice President, Marketing at US Labs, an anatomic pathology
reference laboratory in Irvine, California. Prior to that, Mr. Weisenthal spent
seven years at Oncotech, Inc., a cancer testing laboratory, where he was
Director, Corporate Marketing. From 1992 to 1995, Mr. Weisenthal was a partner
in an oncology reference laboratory that he co-founded. He also spent seven
years in the radio and television industry and served in the United States Army.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock trades on the NASDAQ National Market under
the symbol "CVSN". The table below sets forth the high and low sales prices of
the common stock:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
January 1, 1998 - March 31, 1998.......... 11 1/2 7 1/4
April 1, 1998 - June 30, 1998............. 10 3/8 7 3/8
July 1, 1998 - September 30, 1998......... 9 10/16 5 1/2
October 1, 1998 - December 31, 1998....... 8 2 11/16
January 1, 1999 - March 31, 1999.......... 9 1/4 5
April 1, 1999 - June 30, 1999............. 11 6 1/4
July 1, 1999 - September 30, 1999......... 18 1/4 9 7/8
October 1, 1999 - December 31, 1999....... 17 3/4 11 3/8
</TABLE>
- ----------
As of March 7, 2000 the Company had outstanding 19,498,598 shares of
common stock held by approximately 15,000 shareholders including beneficial
owners of the common stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers and other fiduciaries.
The Company has not paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. The Company expects to utilize future
earnings to finance its operations. The actual amount of any dividends paid
would be subject to the discretion of the Board of Directors of the Company and
would depend on the Company's operations, financial and business requirements
and other factors.
CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 7, 1999 the Company completed a private placement of
1,775,000 shares of its common stock to a limited number of institutional and
other accredited investors. The shares were sold for $11.25 per share, resulting
in gross proceeds from the offering of $19,968,750. Net proceeds were
approximately $18,600,000. Prudential Vector Healthcare Group, a division of
Prudential Securities, acted as placement agent for the offering and received a
fee equal to 6% of the gross proceeds of the offering, or approximately
$1,198,000, plus reimbursement of certain expenses of the offering. The shares
were issued in reliance upon the exemption from the registration requirement of
the Securities Act of 1933 afforded to transactions not involving a public
offering by Section 4(2) of that Act and Rule 506 of the Securities and Exchange
Commission. The shares issued in the offering have been registered for resale by
the purchasers of the shares. Of the $18.6 million of net proceeds of the
offering, approximately $3.4 million were used to fund working capital.
The Company completed its initial public offering pursuant to a
registration statement (Registration No. 333-26129) which became effective on
July 1, 1997. Of the $28.4 million of net proceeds of the offering,
approximately $5.5 million were used for repayment of the bank line of credit
indebtedness and reduction of an inter-company payable to XL Vision, Inc. and an
additional $22.9 million were used to fund working capital and research and
development through approximately November 30, 1999.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company for
the last five years of the operation of its business. The business of the
Company was operated as a division of XL Vision, Inc. through March 27, 1996
when the Company was incorporated. The following information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto in Item
8 and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7.
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<PAGE> 15
<TABLE>
<CAPTION>
PERIOD
PERIOD FROM FROM MARCH 28,
JANUARY 1, (INCORPORATION)
YEAR ENDED THROUGH THROUGH
DECEMBER 31, MARCH 27, DECEMBER 31, YEARS ENDED DECEMBER 31,
1995 1996 1996 1997 1998 1999
------------ ------------ --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues(1) ................. $ 900,000 $ -0- $ -0- $ 43,500 $ 16,823 $ 268,720
Selling, general and
Administrative expenses . 1,040,070 221,476 $ 2,648,694 3,185,583 4,068,675 6,186,332
Research and development
Expenses(2) ............. 1,513,014 230,681 1,747,923 3,565,331 4,664,311 6,075,835
Net (loss)(3) ............... $ (1,963,187) $ (377,157) $ (4,030,263) $ (6,343,927) $ (8,078,325) $(11,560,830)
Net loss subsequent to
Incorporation ............. $ (4,030,263) $ (6,343,927) $ (8,078,325) $(11,560,830)
Basic and diluted net (loss)
per common share subsequent
to Incorporation(3) ....... $ (0.37) $ (0.47) $ (0.47) $ (0.64)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ -0- $ 124,092 $ 12,926,398 $ 2,853,546 $ 11,802,668
Total assets(4)............. 345,664 880,430 22,249,016 14,630,955 22,434,855
Total liabilities(5)........ 4,744,264 2,535,937 878,720 1,243,735 1,314,797
Accumulated deficit......... (4,398,600) (8,806,020) (15,149,947) (23,228,272) (34,789,102)
Total stockholders' equity
(deficit)................. (4,398,600) (1,655,507) 21,370,296 13,387,220 21,120,058
</TABLE>
- ----------
(1) Revenue includes income from prototype instrument sales for 1995, technical
support services for 1997 and revenue generated from on-going operations in
1998 and 1999.
(2) Research and development expenses for the period from March 28, 1996
(incorporation) through December 31, 1996 include the value of Preferred
Stock issued to Centocor, Inc. as compensation for its clinical
collaboration on the minimal residual disease applications.
(3) See Note 2 of the Notes to the Consolidated Financial Statements for
information concerning the calculation of net profit (loss) per common
share.
(4) 1997 and 1998 include a $5,000,000 demand note from Safeguard Scientific,
Inc which was paid in full in June 1999. Short-term investments for 1997,
1998 and 1999 are approximately $2.4 million, $3.5 million and $5.8 million,
respectively.
(5) Includes the outstanding balance on the revolving line of credit and amounts
due to XL Vision through 1996. The Company has no long-term debt or capital
leases.
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
ChromaVision develops, manufactures and markets an automated cellular
imaging system, referred to as the ACIS(TM), which is designed to assist in the
detection, diagnosis and treatment of cellular diseases such as cancer and
infectious disease. ChromaVision has designed the ACIS system to serve as a tool
to assist, rather than replace, the pathologist in generating accurate,
quantitative and reproducible results, eliminating the subjectivity associated
with current manual methods. On July 28, 1999, the FDA granted clearance for the
use of the ACIS to perform tests using a particular staining method based upon a
master validation protocol. The FDA clearance allows ChromaVision to introduce
tests for the ACIS using that staining method without having to apply for
additional FDA clearance. ChromaVision's current test menu for the ACIS includes
seven tests currently released with additional tests in various stages of
development.
From the inception of the ChromaVision business on April 1, 1993 to
September 30, 1999, the business was considered to be in the development stage
as defined by Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises". The Company exited,
in the fourth quarter of 1999, the development stage as significant revenue was
realized from planned operations.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
Revenue. Revenue increased approximately $252,000 or 1,498% over the
comparable period in 1998 primarily due to the sale of an ACIS to a research
facility and an increase in revenue generated from monthly rental charges for
usage of the ACIS. Management anticipates continued revenue growth in 2000 as
the Company accelerates its commercialization activities.
Selling, general and administrative expenses. Expenses increased
approximately $2.1 million or 52% over the comparable period in 1998. The
increase is primarily due to increases in the Company's Sales and Marketing
costs related to staffing and commercial launch activities for the ACIS in both
the European and U.S. markets. The Company anticipates selling, general and
administrative expenses to continue to increase in the near future as the
Company accelerates the commercialization of its ACIS.
Research and development expenses. Expenses increased approximately
$1.4 million or 30% over the comparable period in 1998. The increase is
primarily attributable to the addition of technical personnel to further develop
and release the Company's menu of applications. The Company anticipates that
research and development expenses will continue to increase in the near future
due to costs related to the development of new applications, additional clinical
trials and the continuation of technological advances to the ChromaVision ACIS.
Legal settlement. In April 1998 the Company paid $300,000 in settlement
of certain pending patent litigation. See Note 8 of notes to the consolidated
financial statements.
Other income (expense). Other income for year ended December 31, 1999
was approximately $559,000 and consists of net interest income from the
investment of the Company's $18.6 million of net proceeds received from the
completion in October 1999 of the Company's private placement of 1,775,000 newly
issued shares of common stock as well as the investment of other cash on hand
during the year. For the comparable period in 1998, net interest income was
higher at approximately $947,000 as the Company benefited the entire year from
the investment of the remainder of the Company's initial public offering net
proceeds.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenue. Revenue of approximately $17,000 for the year ended December
31, 1998, is primarily due to the first commercial placement of the Company's
ACIS. The revenue is currently being generated from monthly rental charges for
usage of the ACIS. Revenue of $43,500 for the comparable period in 1997 resulted
from technical services rendered.
Selling, general and administrative expenses. Expenses increased
approximately $900,000 or 28% over the comparable period in 1997. The increase
is primarily due to increases in the Company's Sales and Marketing staff and
increases in advertising and trade show costs necessary to support the
commercialization of the Company's applications. These increases in 1998 were
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<PAGE> 17
partially offset by relocation costs incurred in 1997 for moving the Company to
California. Selling, general and administrative expenses will continue to
increase in the near future as the Company enters the commercial phase of its
development.
Research and development expenses. Expenses increased approximately
$1.1 million or 31% over the comparable period in 1997. The increase is
primarily attributable to the addition of technical personnel to further develop
the Company's applications and costs of the current clinical trials for prenatal
screening for Down syndrome and cancer.
Legal settlement. In April 1998 the Company paid $300,000 in settlement
of certain pending patent litigation. See Note 8 of notes to the consolidated
financial statements.
Other income (expense). Other income for year ended December 31, 1998
was approximately $947,000 and consists of net interest income from the
investment of the Company's initial public offering net proceeds in interest
bearing securities. For the comparable period in 1997, net interest income was
lower at approximately $363,000 as the initial public offering proceeds were not
received until approximately August of 1997 and interest expense was incurred
due to borrowings on the Company's revolving line of credit before it was paid
off during the third quarter of 1997.
UNCERTAINTIES AS TO FUTURE OPERATIONS
During 1999, the Company began the transition from being focused almost
entirely on the development of the ACIS system to focusing more on marketing and
sales of the system as tests performed with the ACIS became available for
commercial distribution. The Company faces significant uncertainties in this
regard, including its ability to achieve market acceptance of the ACIS,
manufacture of the system in commercial quantities and achieve satisfactory
reimbursement from third-party payers for tests performed using the ACIS. The
Company also faces uncertainties with respect to its ability to complete
development of additional tests for the ACIS. In order to mitigate the risk that
any one test will not be successfully developed, the Company maintains a
pipeline of tests in a prioritized cue so that if any one test is not
successfully developed, or market feedback on the pipeline suggests that a test
should be given a lower priority, ChromaVision can move other tests up in
priority. As an example of this, the clinical trials for Triple Plus have taken
longer than expected. Results of the clinical trial appear positive. However,
the Company is still evaluating the possibility for the commercial release of
the test and is concentrating more of its efforts on other tests that presently
show more promise, such as tests relating to cancer and infectious disease.
Other uncertainties affecting the Company include its ability to
collaborate successfully with other companies in the development of new tests,
initiate and complete clinical trials of new products and obtain governmental
approvals for the products. Lack of success in these efforts could have a
material adverse effect on the future results of the Company's operations and
its ability to generate sufficient cash flow to reduce its dependence on
additional financing.
LIQUIDITY AND CAPITAL RESOURCES
On August 13, 1997, the Company completed its initial public offering
of 6,020,000 shares of Common Stock. The Company received net proceeds of
approximately $28.4 million after deducting underwriting discounts and offering
expenses. On October 7, 1999, the Company completed a private placement of
1,775,000 shares of Common Stock to selected institutional and other accredited
investors. The net proceeds to the Company from the sale of the shares were
approximately $18.6 million.
The Company has an agreement with its principal bank for a $5,000,000
revolving line of credit. The line expires May 30, 2000 and the Company may seek
to extend or renegotiate another line of credit. At the Company's option, the
interest rate is prime less .25% or LIBOR plus 1.75%. There were no borrowings
outstanding under the line of credit during the period. Any borrowings
outstanding under the line of credit will be collateralized by the Company's
investment in securities held by the principal bank having a market value equal
to 111% of the principal balance of the loans. At December 31, 1999, the Company
had approximately $17.6 million of cash and cash equivalents, investments and
working capital of approximately $16.6 million and no long-term debt.
Capital expenditures for the year ended December 31, 1999 were
approximately $2.9 million and related primarily to the manufacture of the
ChromaVision ACIS systems placed with customers. Capital expenditures are
expected to total approximately $4 million in 2000, and are expected to be
primarily related to the manufacture of the ChromaVision ACIS for placements
with customers, although the Company's present plans could change and this
amount could be materially different. The Company's business plan anticipates
placing these instruments with users and charging a "per-click" fee for each use
of the instrument. The manufacture of these instruments will require a
significant outlay of cash for which revenues will be recognized over the lease
term.
17
<PAGE> 18
The Company intends to fund these expenditures with its current cash resources,
which may be partially supplemented by third-party asset based financing for
these instruments. The Company presently has an agreement for such financing
totaling $1 million.
The Company anticipates that existing cash resources and investments
will be sufficient to satisfy its operating cash needs for at least the next
twelve months. Management expects that losses from operations and increases in
working capital requirements will produce significant negative cash flows from
operations for at least the next twelve months. In addition, to support the
Company's future cash needs, it intends to consider additional debt or equity
financing. However there can be no assurance that any such financing will be
available to the Company or that adequate funds for the Company's operations
will be available when needed or on terms attractive to the Company. If the
Company is unable to obtain sufficient additional funds, the Company may have to
delay, scale back or eliminate some or all of its development activities,
clinical studies and/or regulatory activities or cease operations entirely.
YEAR 2000 PROBLEM
The Company has experienced no material disruption in the operation of
its business as a result of the transition from 1999 to 2000 and continues to
monitor the Year 2000 issue. It is possible that Year 2000 problems (or leap
year issues) may become evident as the year progresses. Such issues could have a
material adverse impact on the Company's results of operations, financial
condition and cash flows if the Company is unable to conduct its business in the
ordinary course.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company invests excess cash in short-term debt securities that are
intended to be held to maturity. These short-term investments have various
maturity dates, which do not exceed one year.
Two of the main risks associated with these investments are interest
rate risk and credit risk. Typically, when interest rates rise, there is a
corresponding decline in the market value of debt securities. Fluctuations in
interest rates would not have a material effect on the Company's financial
statements because of the short term nature of the securities in which the
Company invests. Credit risk refers to the possibility that the issuer of the
debt securities will not be able to make principal and interest payments. The
Company has limited its investments to investment grade or comparable securities
and has not experienced any losses on its investments to date due to credit
risk.
Changes in foreign exchange rates, and in particular a strengthening of
the U.S. dollar, may negatively affect the Company's consolidated sales and
gross margins as expressed in U.S. dollars. To date, the Company has not entered
into any foreign exchange contracts to hedge its exposure to foreign exchange
rate fluctuations. However, as its international operations grow, the Company
may enter into foreign exchange contracts to manage its foreign exchange risk.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................................................... 20
Consolidated Balance Sheets as of December 31, 1998 and 1999................................................... 21
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999..................... 22
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999. 23
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999..................... 24
Notes to Consolidated Financial Statements..................................................................... 25
</TABLE>
19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ChromaVision Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of
ChromaVision Medical Systems, Inc. and subsidiaries as of December 31, 1998 and
1999 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ChromaVision
Medical Systems, Inc. and subsidiaries as of December 31, 1998 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Orange County, California
January 28, 2000
20
<PAGE> 21
CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 2,853,546 $ 11,802,668
Short-term investments ........................................ 3,533,747 5,822,451
Note receivable - affiliate ................................... 5,000,000 --
Other ......................................................... 229,889 257,577
------------ ------------
Total current assets .................................. 11,617,182 17,882,696
Property and equipment, net ..................................... 2,891,471 4,344,891
Other ........................................................... 122,302 207,268
------------ ------------
Total assets .......................................... $ 14,630,955 $ 22,434,855
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 466,156 $ 578,961
Accrued liabilities ........................................... 777,579 735,836
------------ ------------
Total current liabilities ............................. 1,243,735 1,314,797
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock, $.01 par value,
authorized 7,246,000 shares, none issued and outstanding ... -- --
Series B convertible preferred stock, $.01 par value,
authorized 221,850 shares, none issued and outstanding ..... -- --
Common stock $.01 par value, authorized 50,000,000 shares,
issued and outstanding 17,270,816 in 1998 and
19,488,629 in 1999 ......................................... 172,708 194,886
Additional paid-in capital .................................... 36,442,784
55,742,904
Accumulated deficit ........................................... (23,228,272) (34,789,102)
Accumulated other comprehensive loss .......................... -- (28,630)
------------ ------------
Total stockholders' equity ............................ 13,387,220 21,120,058
------------ ------------
Total liabilities and stockholders' equity ...................... $ 14,630,955 $ 22,434,855
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue .......................... $ 43,500 16,823 $ 268,720
Cost of revenue .................. -- 9,576 126,507
------------ ------------ ------------
Gross profit ........... 43,500 7,247 142,213
------------ ------------ ------------
Operating expenses:
Selling, general and
administrative .............. 3,185,583 4,068,675 6,186,332
Research and development ....... 3,565,331 4,664,311 6,075,835
Legal settlement ............... -- 300,000 --
------------ ------------ ------------
Total operating expenses 6,750,914 9,032,986 12,262,167
------------ ------------ ------------
Loss from operations ... (6,707,414) (9,025,739) (12,119,954)
------------ ------------ ------------
Other income:
Interest income, net ........... 363,487 947,414 551,254
Other income ................... -- -- 7,870
------------ ------------ ------------
Total other income ..... 363,487 947,414 559,124
------------ ------------ ------------
Loss before income taxes (6,343,927) (8,078,325) (11,560,830)
Income taxes ..................... -- -- --
------------ ------------ ------------
Net loss ......................... $ (6,343,927) $ (8,078,325) $(11,560,830)
============ ============ ============
Basic and diluted net loss per
common share .................... $ (.47) $ (.47) $ (.64)
============ ============ ============
Weighted average number of common
shares outstanding ............. 13,455,529 17,233,340 18,027,471
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE
SERIES A SERIES B SHARES AMOUNT CAPITAL DEFICIT LOSS
-------- -------- ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1996 ... $ 71,351 $ -- 1,931,250 $ 19,313 $ 7,059,849 $ (8,806,020) $ --
Sale of preferred
stock.............. 2,219 -- -- 996,106 -- --
Conversion of
preferred stock ... (71,351) (2,219) 9,196,129 91,961 (18,391) -- --
Sale of common
stock ............. 6,020,000 60,200 30,039,800 -- --
Exercise of stock
options ........... 26,250 262 20,738 -- --
Offering costs ...... -- -- (1,749,595) -- --
Comprehensive loss:
Net loss ............ (6,343,927)
Comprehensive loss -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1997 . 17,173,629 171,736 36,348,507 (15,149,947) --
Exercise of stock
options ........... 97,187 972 94,277 -- --
Comprehensive loss:
Net loss ............ (8,078,325)
Comprehensive loss -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1998 . 17,270,816 172,708 36,442,784 (23,228,272) --
Exercise of
stock options ..... 442,813 4,428 726,960 -- --
Sale of common
stock ............. 1,775,000 17,750 19,951,000 -- --
Offering costs ...... -- -- (1,377,840) -- --
Comprehensive Loss:
Net loss ............ (11,560,830)
Foreign currency
translation
adjustment ........ (28,630)
Comprehensive loss
Balances at
December 31, 1999 ... $ -- $ -- 19,488,629 $ 194,886 $ 55,742,904 $(34,789,102) $ (28,630)
============ ============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
COMPREHENSIVE
TOTAL LOSS
----- -------------
<S> <C>
Balances at
December 31,
1996 ................ $ (1,655,507)
Sale of preferred
stock ............... 998,325
Conversion of
preferred
stock ............... --
Sale of common
stock ............... 30,100,000
Exercise of stock
options ............. 21,000
Offering costs ...... (1,749,595)
Comprehensive loss:
Net loss ............ (6,343,927) (6,343,927)
------------
Comprehensive loss -- (6,343,927)
------------ ============
Balances at
December 31,
1997 ................ 21,370,296
Exercise of stock
options ............. 95,249
Comprehensive loss:
Net loss ............ (8,078,325) (8,078,325)
------------
Comprehensive loss -- (8,078,325)
------------ ============
Balances at
December 31,
1998 ................ 13,387,220
Exercise of
stock options ....... 731,388
Sale of common
stock ............... 19,968,750
Offering costs ...... (1,377,840)
Comprehensive Loss:
Net loss ............ (11,560,830) (11,560,830)
Foreign currency
translation
adjustment .......... (28,630) (28,630)
------------
Comprehensive loss $(11,589,460)
============
Balances at
December 31, 1999 ... $ 21,120,058
============
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 24
CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................. $ (6,343,927) $ (8,078,325) $(11,560,830)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ....... 155,421 671,087 1,430,527
Changes in operating assets and
liabilities:
Other ............................... (290,986) (32,978) (114,584)
Accounts payable .................... 182,353 155,995 113,534
Accrued liabilities ................. (659,091) 214,989 (36,619)
------------ ------------ ------------
Net cash used in operating
activities ................... (6,956,230) (7,069,232) (10,167,972)
------------ ------------ ------------
Cash flows from investing activities:
Note receivable - affiliate .............. (5,000,000) -- 5,000,000
Purchases of investments ................. (2,406,078) (5,795,640) (5,822,451)
Sales of investments ..................... -- 4,667,971 3,533,747
Purchases of property and equipment ...... (1,169,397) (1,965,231) (2,883,947)
------------ ------------ ------------
Net cash used in
investing activities ......... (8,575,475) (3,092,900) (172,651)
------------ ------------ ------------
Cash flows from financing activities:
Payments to XL Vision, Inc. .............. (374,470) (5,969) --
Proceeds from exercise of stock options .. 21,000 95,249 731,388
Sale of common stock ..................... 30,100,000 -- 19,968,750
Repayments under revolving line of credit (806,009) -- --
Sale of preferred stock .................. 998,325 -- --
Offering costs ........................... (1,604,835) -- (1,377,840)
------------ ------------ ------------
Net cash provided by financing
activities ................... 28,334,011 89,280 19,322,298
------------ ------------ ------------
Effect of exchange rate changes on cash
and cash equivalents ................... -- -- (32,553)
Net increase (decrease) in cash
and cash equivalents ......... 12,802,306 (10,072,852) 8,949,122
Cash and cash equivalents beginning of
period ................................. 124,092 12,926,398 2,853,546
------------ ------------ ------------
Cash and cash equivalents end of period .. $ 12,926,398 $ 2,853,546 $ 11,802,668
============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid for interest ................... $ 156,902 $ -- $ --
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
CHROMAVISION MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
OVERVIEW
ChromaVision develops, manufactures and markets an automated cellular
imaging system, referred to as the ACIS, which is designed to assist in the
detection, diagnosis and treatment of cellular diseases such as cancer and
infectious disease. ChromaVision has designed the ACIS system to serve as a tool
to assist, rather than replace, the pathologist in generating accurate,
quantitative and reproducible results, eliminating the subjectivity associated
with current manual methods. On July 28, 1999, the FDA granted clearance for the
use of the ACIS to perform tests using a particular staining method based upon a
master validation protocol. The FDA clearance allows ChromaVision to introduce
tests for the ACIS using that staining method without having to apply for
additional FDA clearance. ChromaVision's current test menu for the ACIS includes
seven tests currently released with additional tests in various stages of
development.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Consolidation
The consolidated financial statements include the results of
operations, account balances and cash flows of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
(b) Change in Development Stage Status
From the inception of the ChromaVision business on April 1, 1993 to
September 30, 1999, the business was considered to be in the development stage
as defined by Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises". The Company exited,
in the fourth quarter of 1999, the development stage as significant revenue was
realized from planned operations.
(c) Revenue Recognition
The Company's revenues in 1997 were derived from the provision of
technical services. In 1998 and 1999, revenues were derived from the leasing of
ACIS systems in addition to an ACIS system sale in 1999. Technical service
revenue was recognized at the completion of the performance of the related
engineering services.
The Company anticipates placing most of its instruments with users at
no charge and billing on a "per-test" or "per-use" basis. The Company will
obtain the billing information primarily via a modem, which accesses the ACIS
database. Revenue is recognized as usage occurs but with a minimum monthly
rental in place. It is anticipated that under this pricing model, the Company
will own most of the ACIS instruments that are engaged in service and,
accordingly, all development and maintenance costs will be expensed in cost of
sales as incurred. For those instruments that are sold, revenue is recognized
upon acceptance by the customer subsequent to a testing and evaluation period.
During such time period, the Company maintains ownership of the ACIS.
(d) Cash and Cash Equivalents and Investments in Marketable Securities
Cash and cash equivalents consist of amounts held as bank deposits and
highly liquid debt instruments with a maturity of three months or less. The
Company also has investments in short-term debt securities that have been
classified under the provisions of SFAS No. 115 as held to maturity. Management
has the intent and ability to hold these investments to maturity, and
accordingly the investments are carried on the balance sheet at amortized cost
and temporary unrealized gains or losses are not recognized.
The short-term investments have various maturity dates, which do not
exceed one year.
Cash equivalents and short-term investments are comprised of investment
grade corporate bonds and commercial paper, and no single investment exceeds 5%
of the combined total of cash and cash equivalents, investments and notes
receivable.
25
<PAGE> 26
The Company has not experienced any significant losses on cash, cash
equivalents, or investments. The Company believes it is not exposed to any
significant credit risk on cash, cash equivalents or investments.
(e) Depreciation and Amortization
Property and equipment are depreciated and amortized on the straight-line
basis over the following estimated useful lives:
<TABLE>
<S> <C>
Office, Computer and Laboratory Equipment........................ 3 to 5 years
Automated Cellular Imaging Systems (ACIS)........................ 3 years
Furniture and Fixtures........................................... 5 years
Leasehold Improvements........................................... Life of lease
</TABLE>
Expenditures for maintenance, repairs and minor improvements are
charged to expense as incurred. Major improvements and additions are
capitalized. ChromaVision ACIS instruments begin depreciation upon placement at
which time depreciation related to ACIS instruments placed for research and
development or placed for commercial use are expensed in research and
development or cost of sales, respectively.
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
---- ----
<S> <C> <C>
Office, computer and laboratory equipment .......... $ 901,073 $ 932,963
Automated Cellular Imaging Systems (ACIS) .......... 1,765,458 3,955,879
ACIS in progress ................................... 586,753 721,984
Furniture and fixtures ............................. 86,234 394,131
Leasehold improvements ............................. 374,123 481,270
---------- ----------
$3,713,641 $6,486,227
Less: accumulated depreciation and amortization .... 822,170 2,141,336
---------- ----------
Property and equipment, net ........................ $2,891,471 $4,344,891
========== ==========
</TABLE>
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount may not be recoverable. If
the fair value is less than the carrying amount of the assets, a loss is
recognized for the difference.
(f) Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(g) Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) for stock options and other
stock-based awards while disclosing pro forma net loss and net loss per share as
if the fair value method had been applied in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No.123) see Note 5. The fair value of options granted to
non-employees is expensed over the performance period or at the time when a
performance commitment is reached.
(h) Net Loss Per Share
Basic and diluted loss per common share is calculated by dividing net
loss by the average common shares outstanding during the year. Stock options to
purchase 1,818,513, 2,050,938 and 2,121,675 shares of common stock were
outstanding at December 31, 1997, 1998 and 1999. These stock options outstanding
were not included in the computation of diluted earnings per share because the
Company incurred a loss in all periods presented and hence, the impact would be
antidilutive.
26
<PAGE> 27
(i) Use of Estimates
The preparation of the Company's financial statements, in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
(j) Financial Instruments
The Company estimates the fair value of its monetary assets and
liabilities based upon the existing interest rates related to such assets and
liabilities compared to current market rates of interest for instruments with a
similar nature and degree of risk. The Company estimates that the fair value of
all of its monetary assets and liabilities approximates the recorded value as of
December 31, 1998 and 1999.
(k) Recent Accounting Developments
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued, as
amended. The provisions of the statement require the recognition of all
derivatives as either assets or liabilities in the consolidated balance sheet
and the measurement of those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not believe that adoption of this pronouncement will have a material impact on
the financial statements.
(l) Foreign Currency Translation
The financial position and results of operations of the Company's
foreign subsidiaries are generally determined using their local currency as the
functional currency. Assets and liabilities of these subsidiaries are translated
at the exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in accumulated other comprehensive loss in
stockholders' equity. Foreign currency transaction and translation losses were
$0, $0 and $28,630 for the year ending 1997, 1998 and 1999.
(m) Reclassification
Certain prior year amounts have been reclassified to conform to the
1999 presentation.
(3) LINE OF CREDIT
On June 9, 1998, the Company entered into an agreement with its
principal bank for a $5,000,000 revolving line of credit. The line expires May
30, 2000 and the Company may seek to extend or renegotiate another line of
credit. At the Company's option, the interest rate is either prime less .25% or
LIBOR plus 1.75%. There were no borrowings outstanding under the line of credit
during the period. Any borrowings outstanding under the line of credit will be
collateralized by the Company's investment in securities held by the principal
bank having a market value equal to 111% of the principal balance of the loans.
(4) PREFERRED STOCK
Each share of Series A and Series B convertible preferred stock was
converted into 1.25 shares of common stock during 1997, as required upon
successful completion of the initial public offering. The holders of the Series
A and Series B convertible preferred stock were entitled to vote as a separate
class to elect two directors to the Board of Directors of the Company and had
liquidation preference over the common stockholders.
(5) STOCK OPTIONS
The Company has a stock option plan (the "Plan") pursuant to which its
Board of Directors may grant stock options to employees, directors and
consultants. The Plan authorizes grants of options to purchase up to 3,200,000
shares of authorized but unissued common stock. The number of authorized shares
reflects a 700,000 share increase approved by the Board of Directors in
27
<PAGE> 28
February 2000, subject to stockholder approval. All options granted by the
Company had an exercise price equal to the stock's fair market value at the date
of grant. Stock options granted have a maximum of ten-year terms and become
exercisable in increments over periods of up to four years.
The Company granted non-qualified stock options in 1997, 1998 and 1999
to purchase 31,000 shares, 145,000 shares and 30,000 shares, respectively, to
consultants and directors of ChromaVision at prices between $5.00 and $11.88 per
share. The Company recorded compensation expense of $55,000 and $50,000 for the
years ended December 31, 1998 and 1999, respectively, related to these options.
At December 31, 1999, options to purchase approximately 129,000 of these shares
were exercisable.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year ........................ 1,370,438 $ 1.91 1,818,513 $ 3.04 2,050,938 $ 3.27
Options granted ............... 479,950 6.19 646,600 6.26 554,550 9.63
Options exercised ............. (26,250) .80 (97,187) .98 (442,813) 1.41
Options canceled .............. (5,625) 5.00 (316,988) 8.76 (41,000) 5.06
--------- --------- ---------
Outstanding at end of year .... 1,818,513 $ 3.04 2,050,938 $ 3.27 2,121,675 $ 5.29
========= ========= =========
Options exercisable at year-end 733,206 1,107,998 1,130,799
Shares available for future
grant ....................... 86,300 166,688 933,138
</TABLE>
The following summarizes information about the Company's stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
OPTIONS EXERCISABLE
WEIGHTED AVG. ------------------------------
NUMBER REMAINING WEIGHTED AVG. NUMBER WEIGHTED AVG.
RANGE OF OUTSTANDING CONTRACTUAL LIFE EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES AT 12/31/99 (IN YEARS) PRICE 12/31/99 PRICE
--------------- ----------- ---------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
at $ .80 12,500 3.45 $ .80 12,500 $ .80
at $ 2.40 928,500 6.42 $ 2.40 868,342 $ 2.40
$ 3.44 -- $ 5.75 468,925 8.02 $ 5.40 148,525 $ 5.29
$ 6.00 -- $ 9.25 512,250 9.08 $ 7.70 93,432 $ 6.57
$10.25 -- $13.44 199,500 9.37 $12.53 8,000 $11.88
--------- ---------
$ .80 -- $13.44 2,121,675 7.68 $ 5.29 1,130,799 $ 3.17
========= =========
</TABLE>
The Company applies APB 25 and related interpretations in accounting
for stock option plans. Had compensation cost been recognized consistent with
SFAS No. 123, the Company's consolidated net loss and loss per share would have
been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Consolidated net loss As reported..... $(6,343,927) $(8,078,325) $(11,560,830)
Pro forma....... $(6,679,851) $(8,914,666) $(12,894,567)
Loss per share -- Basic
and Diluted As reported..... $ (.47) $ (.47) $ (.64)
Pro forma....... $ (.50) $ (.52) $ (.72)
</TABLE>
The per share weighted-average fair value of stock options granted by
the Company during 1997, 1998 and 1999 was $3.35, $3.54 and $6.26, respectively,
on the date of grant.
The following assumptions were used by the Company to determine the
fair value of stock options granted using the Black- Scholes option-pricing
model:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Dividend yield................... 0.0% 0.0% 0.0%
Expected volatility.............. 55.0% 70.0% 85.0%
Average expected option life..... 5 years 4 years 4 years
Risk-free interest rate.......... 5.9 - 6.8% 4.2 - 6.8% 5.2 - 6.4%
</TABLE>
On December 14, 1998, the Company repriced all employee stock options
outstanding which had an option price exceeding $6.50. The vesting dates with
respect to such options were extended six months; however, all other terms were
maintained. The
28
<PAGE> 29
Company did not recognize compensation expense related to the repricing of the
employee stock options, as the adjusted exercise price was equal to the fair
value of the common stock as of the repricing date.
(6) INCOME TAXES
The following table summarizes the tax effects of temporary differences
which give rise to significant portions of the deferred tax assets and liability
at December 31:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Current assets:
Accrued liabilities and other deferred tax assets..... $ 109,679 $ 358,161
Noncurrent assets:
Net operating loss carryforward ...................... 7,289,530 11,635,241
Intangible asset, net of amortization ................ 1,552,280 1,425,563
Depreciation ......................................... -- 44,605
Accrued liabilities and other deferred tax assets .... 165,255 51,330
Federal tax credit carryover ......................... 147,610 434,576
------------ ------------
Deferred tax assets .......................... 9,154,675 13,591,315
Deferred tax liability:
Depreciation ......................................... (22,547) --
------------ ------------
Total ........................................ 9,241,807 13,949,476
Less valuation allowance for net deferred tax assets ... (9,241,807) (13,949,476)
------------ ------------
Deferred tax assets (liability), net ......... $ -0- $ -0-
============ ============
</TABLE>
The Company has estimated a valuation allowance for the full amount of
net deferred tax assets as it is not more likely than not that such amounts will
be utilized in the future.
Actual income tax expense differs from amounts computed by applying the
U.S. federal income tax rate of 34% to pretax income as a result of the
following for the year ending December 31:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Computed expected tax benefit ........... $(2,156,935) $(2,746,632) $(3,936,170)
State income taxes net of federal benefit (496,552) (471,322) (746,823)
Nondeductible expenses .................. -- 10,586 73,601
Change in valuation allowance ........... 2,914,973 3,401,428 4,707,669
Other ................................... (261,486) (194,060) (98,277)
----------- ----------- -----------
Actual tax expense ............ $ -- $ -- $ --
=========== =========== ===========
</TABLE>
As of December 31, 1999, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately
$29,773,000 and $23,798,000, respectively, which are available to offset future
federal taxable income, if any, through 2018. As of December 31, 1999, the
Company has tax credit carryforwards for federal and state income tax purposes
of $300,000 and $204,000, respectively, which are available to offset future
federal tax, if any, through 2018.
(7) RELATED PARTY TRANSACTIONS
XL Vision provided certain personnel and administrative services to the
Company through June 1997. Related charges were either allocated to the Company
or charged under an administrative service agreement. Allocations consisted of
all direct costs and certain indirect costs based upon the proportional value of
all expenses incurred by XL Vision. Management of the Company believes the
allocated costs reasonably reflect the costs of the operations of the Company as
if it were on a stand-alone basis. Administrative service fees allocated or
charged amounted to $260,000 in 1997 and none in 1998 and 1999.
Effective January 1997, the Company entered into an additional
administrative service agreement which specifies a fee based upon a percentage
of gross revenues. The fee is payable quarterly to Safeguard and XL Vision based
upon an aggregate of 1.5% (.75% each) of gross revenues subject to an annual
limit of $300,000. The fee is payable upon achievement of positive cash flow
from operations. The agreement extends through January 31, 2002 and continues
thereafter unless terminated by either party. As of December 31, 1999,
approximately $5,000 has been accrued under this agreement. Per the initial
stock purchase agreement, the Company paid Safeguard $50,000 for services in
connection with the initial public offering.
29
<PAGE> 30
(8) COMMITMENTS AND CONTINGENCIES
Agreement with Centocor, Inc. The Company sold Centocor, Inc. six ACIS
units in 1995 to facilitate Centocor's clinical trials for cancer applications.
As Centocor received feedback from those trials the Company, which was
continuing its research and development efforts, incorporated the feedback into
its technology. In July 1996, both parties entered into an agreement stipulating
their various rights to the reagents being tested for cancer and the ACIS
technology. As an outcome of this agreement, the Company agreed to a put option
by which Centocor would have the right to return the six instruments for
$800,000 and the issuance of 770,192 shares of preferred stock at $1.00. As a
result of this agreement, the Company recognized $770,192 of research and
development expenses during 1996. During December 1996, negotiations commenced
which prompted Centocor's waiver of its rights to return the six instruments and
extinguished any commitment to repurchase these instruments. In exchange for
Centocor's waiver, the Company agreed to provide a specified number of hours of
technical support and software development services through September 1997.
Voluntary Employee Savings 401(k) Plan. The Company has a voluntary
employee savings 401(k) plan, which is available to all full time employees' 21
years or older. The plan provides for a matching by the Company of the
employee's contribution to the plan for 50% of the first 6% of the employee's
annual compensation. The Company's matching contributions were approximately
$36,000, $79,000 and $116,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
Lease Commitment. The Company leases furniture and office space under
existing operating leases which expire in 2000. The Company has exercised its
option to extend the office lease to February 2001 and will exercise its option
to extend the furniture lease an additional year. Rental commitments under these
agreements for 2000 and 2001 are approximately $168,000 and $40,000,
respectively. Total rent expense related to these leases was approximately
$139,000, $163,000 and $163,000 for years ended December 31, 1997, 1998 and 1999
.
Litigation. On April 21, 1998, the Company signed a settlement
agreement with IDEA Research LLC ("IDEA Research") related to litigation filed
by the Company on November 10, 1997 involving, among other things, a claim by
IDEA Research of patent infringement against the Company. The agreement
contemplates a collaboration between both parties on a screening test for Down
syndrome for a period of two years and provides for the grant of a license to
the Company under the patent, an up front payment by the Company of $300,000
upon the signing of the settlement agreement, a $150,000 payment if certain
requirements with respect to commercializing the Down syndrome screening test
are met and a five percent royalty payable to IDEA Research on net collectible
revenues for each Down syndrome screening test performed. In April 1998, the
$300,000 up front payment was paid to IDEA Research and included in legal
settlement charges on the statement of operations.
(9) STOCK TRANSACTIONS
In August 1997, the Company completed an initial public offering and
sold 6,020,000 shares of common stock. The Company received net proceeds of
approximately $28.4 million after deducting underwriting discounts and offering
expenses. Approximately $5.5 million of the net proceeds were used for repayment
of a bank line of credit indebtedness and reduction of an inter-company payable
to XL Vision, Inc.
On October 7, 1999, the Company completed a private placement of
1,775,000 shares of common stock to selected institutional and other accredited
investors. The net proceeds to the Company from the sale of the shares were
approximately $18.6 million.
In March 1999, the Company adopted a Stockholder Rights Plan, which
provides each stockholder of the Company with one right for each share of common
stock held. Generally, if a person or entity becomes the beneficial owner of 15%
or more of the Company's outstanding common stock, each right (other than those
held by that new 15% stockholder) would be exercisable to purchase that number
of shares of the Company's Common Stock having, at that time, a market value
equal to two times the then current exercise price. The exercise price will
initially be $30 per right, subject to adjustment for certain events. Certain
acquisitions by the holders of 15% or more of the Company's Common Stock on the
date the Stockholder Rights Plan was adopted do not result in the rights
becoming exercisable.
The record date set for distribution of the rights under the Rights
Plan was March 22, 1999, and after that date any shares of common stock traded
will automatically be accompanied by the associated rights. No separate
certificate will be issued to evidence the Rights until they become exercisable.
The rights expire on February 9, 2009 (unless they previously became
exercisable), and are subject to redemption by the Board of Directors of the
Company at $.001 per right at any time prior to the first date upon which they
become exercisable.
30
<PAGE> 31
(10) NOTES RECEIVABLE
In August 1997, the Company advanced $5,000,000 to Safeguard
Scientifics, Inc. ("Safeguard") which is a principal stockholder of the Company
pursuant to the terms of a revolving note agreement. The terms of the agreement
call for a payment on demand with interest payable monthly at Safeguard's
effective rate of borrowing less .75% (5.60% at June 30, 1999). Interest income
earned during 1997, 1998 and 1999 amounted to approximately $75,000, $308,000
and $115,000, respectively. The note was paid in full as of June 1999.
(11) BUSINESS SEGMENTS
The Company operates primarily in one business segment engaged in the
development, manufacture and marketing of an automated cellular imaging system
which is designed to perform a wide variety of diagnostic tests for cancer,
infectious disease and genetic screening.
The following table represents the Company's business segment information
by geographic area:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net sales
United States ............. $ 43,500 $ 16,823 $ 188,120
Europe(a) ................ -- -- 80,600
----------- ----------- -----------
Total net sales ........ 43,500 16,823 268,720
=========== =========== ===========
Operating loss
United States ............. $ 6,707,414 $ 9,025,739 $12,044,986
Europe(a) ................ -- -- 74,968
----------- ----------- -----------
Total operating loss ... $ 6,707,414 $ 9,025,739 $12,119,954
=========== =========== ===========
Identifiable assets
United States ............. $22,249,016 $14,630,955 $22,283,123
Europe(a) ................ -- -- 151,732
----------- ----------- -----------
Total assets ........... $22,249,016 $14,630,955 $22,434,855
=========== =========== ===========
</TABLE>
(a) European operations represent business activities conducted primarily in
Germany and France.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Company incorporates by reference the information contained under
the caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative
to its June 7, 2000 annual meeting of shareholders, to be filed within 120 days
after the end of the year covered by this Form 10-K pursuant to Regulation 14A
under the Securities Act of 1934, as amended.
31
<PAGE> 32
EXECUTIVE OFFICERS
The information with respect to executive officers required by this Item is
set forth in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information contained under
the captions "Directors' Compensation," "Compensation Committee Interlocks and
Insider Participation" and "EXECUTIVE COMPENSATION" in its definitive Proxy
Statement relative to its June 7, 2000 annual meeting of shareholders, to be
filed within 120 days after the end of the year covered by this Form 10-K
pursuant to Regulation 14A under the Securities Exchange Act of l934, as
amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information contained under
the caption "SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"
in its definitive Proxy Statement relative to its June 7, 2000 annual meeting of
shareholders, to be filed within 120 days after the end of the year covered by
this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of
l934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information contained under
the captions "Compensation Committee Interlocks and Insider Participation,"
"Certain Relationships" and "Certain Transactions" in its definitive Proxy
Statement relative to its June 7, 2000 annual meeting of shareholders, to be
filed within 120 days after the end of the year covered by this Form 10-K
pursuant to Regulation 14A under the Securities Exchange Act of l934, as
amended.
32
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The following financial statements and schedules listed below are included
in this Form 10-K.
Financial Statements (See Item 8)
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998, and 1999
Consolidated Statements of Shareholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1998, and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998, and 1999
Notes to Consolidated Financial Statements
Financial Statement Schedules
All information for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission is either
included in the financial statements or is not required under the related
instruction or are inapplicable, and therefore have been omitted.
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Commission on October 15, 1999 to
report the completion of a private placement of 1,775,000 newly issued shares of
it's common stock to selected investors. No financial statements were filed with
this report.
(c) Exhibits
The following is a list of exhibits filed as part of this Form 10-K.
Where so indicated by footnotes, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ----------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company (as amended)**...........................................
3.2 By-laws of the Company, as amended**.................................................................
10.1 ChromaVision Medical Systems, Inc. 1996 Equity Compensation Plan**...................................
10.2 Employment Agreement between Dr. Douglas S. Harrington and the Company, as of December 30, 1996**....
10.3 Employment Agreement between Kevin C. O'Boyle and the Company, dated November 27, 1996**.............
10.4 Administrative Services Agreement among the Company, XL Vision, Inc. and Safeguard Scientifics, Inc.
dated as of March 31, 1997**.........................................................................
10.5 Subscription Agreement between the Company and Safeguard Scientifics, Inc., dated as of December 31,
1996**...............................................................................................
10.6 Lease Agreement between Blue Family Trust, Lingo Family Trust and the Company, dated January 13,
1997**...............................................................................................
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C>
10.7 Distribution Agreement between ChromaVision Medical Systems, Inc. and Sigma Diagnostics, Inc. dated
October 22, 1997***..................................................................................
10.8 UR-NAP Application Development Agreement and Right of First Refusal of New Applications between the
Company and Sigma Diagnostics, Inc. dated October 22, 1997***........................................
10.9 Form of Stock Purchase Agreement, dated September 24, 1999 by and among ChromaVision Medical
Systems, Inc. and the purchaser**** ................................................................
21.1 Subsidiaries of the Registrant**.....................................................................
23 Consent of KPMG LLP*.................................................................................
27.1 Financial Data Schedule*.............................................................................
</TABLE>
- ----------
* Filed herewith.
** Filed on April 30, 1997 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-26129) and incorporated by reference.
*** Previously filed as an exhibit to the Company's Form 10-Q on November
14, 1997 and incorporated by reference.
**** Filed on September 28, 1999 as an exhibit to the Company's Registration
Statement on Form S-3 (No. 333-87969) and incorporated by reference.
34
<PAGE> 35
SIGNATURES
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, in San Juan
Capistrano, California on March 30, 2000.
CHROMAVISION MEDICAL SYSTEMS, INC.
By: /s/ DOUGLAS S. HARRINGTON, M.D.
-------------------------------------
Douglas S. Harrington, M.D.
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
March 30, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE(S)
---------- --------
<S> <C>
/s/ DOUGLAS S. HARRINGTON, M.D. Chief Executive Officer, President and Director
- ------------------------------------ (Principal Executive Officer)
Douglas S. Harrington, M.D.
/s/ KEVIN C. O'BOYLE Senior Vice President of Operations and Chief Financial Officer
- ------------------------------------ (Principal Financial and Accounting Officer)
Kevin C. O'Boyle
/s/ JOHN S. SCOTT, PH.D. Chairman of the Board of Directors
- ------------------------------------
John S. Scott, Ph.D.
/s/ RICHARD C. E. MORGAN Director
- ------------------------------------
Richard C. E. Morgan
/s/ MARY LAKE POLAN, M.D., PH.D. Director
- ------------------------------------
Mary Lake Polan, M.D., Ph.D.
/s/ CHARLES A. ROOT Director
- ------------------------------------
Charles A. Root
/s/ THOMAS R. TESTMAN Director
- ------------------------------------
Thomas R. Testman
</TABLE>
35
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ----------- ------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Company (as amended)**...........................................
3.2 By-laws of the Company, as amended**.................................................................
10.1 ChromaVision Medical Systems, Inc. 1996 Equity Compensation Plan**...................................
10.2 Employment Agreement between Dr. Douglas S. Harrington and the Company, as of December 30, 1996**....
10.3 Employment Agreement between Kevin C. O'Boyle and the Company, dated
November 27, 1996**..................................................................................
10.4 Administrative Services Agreement among the Company, XL Vision, Inc. and Safeguard Scientifics, Inc.
dated as of March 31, 1997**.........................................................................
10.5 Subscription Agreement between the Company and Safeguard Scientifics, Inc., dated as of December 31,
1996**...............................................................................................
10.6 Lease Agreement between Blue Family Trust, Lingo Family Trust and the Company, dated January 13,
1997**...............................................................................................
</TABLE>
36
<PAGE> 37
<TABLE>
<S> <C> <C>
10.7 Distribution Agreement between ChromaVision Medical Systems, Inc. and Sigma Diagnostics, Inc. dated
October 22, 1997***..................................................................................
10.8 UR-NAP Application Development Agreement and Right of First Refusal of New Applications between the
Company and Sigma Diagnostics, Inc. dated October 22, 1997***........................................
10.9 Form of Stock Purchase Agreement, dated September 24, 1999 by and among ChromaVision Medical
Systems, Inc. and the purchaser**** ................................................................
21.1 Subsidiaries of the Registrant**.....................................................................
23 Consent of KPMG LLP*.................................................................................
27.1 Financial Data Schedule*.............................................................................
</TABLE>
- -------
* Filed herewith.
** Filed on April 30, 1997 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-26129) and incorporated by reference.
*** Previously filed as an exhibit to the Company's Form 10-Q on November 14,
1997 and incorporated by reference.
**** Filed on September 28, 1999 as an exhibit to the Company's Registration
Statement on Form S-3 (No. 333-87969) and incorporated by reference.
37
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors,
ChromaVision Medical Systems, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-65815) on Form S-8 and registration statement (No. 333-87969) on Form S-3 of
ChromaVision Medical Systems, Inc. of our report dated January 28, 2000,
relating to the consolidated balance sheets of ChromaVision Medical Systems,
Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1999,
which report appears in the December 31, 1999 annual report on Form 10-K of
Chromavision Medical Systems, Inc.
Orange County, California
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,802,668
<SECURITIES> 5,822,451
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,882,696
<PP&E> 6,486,227
<DEPRECIATION> 2,141,336
<TOTAL-ASSETS> 22,434,855
<CURRENT-LIABILITIES> 1,314,797
<BONDS> 0
0
0
<COMMON> 194,886
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,434
<SALES> 268,720
<TOTAL-REVENUES> 268,720
<CGS> 126,507
<TOTAL-COSTS> 126,507
<OTHER-EXPENSES> 12,262,167
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,560,830)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,560,830)
<EPS-BASIC> (.64)
<EPS-DILUTED> (.64)
</TABLE>
