<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1999
Commission file number: 1-15051
Careside, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 23-2863507
(State or other jurisdiction of incorporation
or organization) (IRS Employer Identification No.)
</TABLE>
6100 Bristol Parkway, Culver City, CA 90230
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 338-6767
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 per share
(Title of Class)
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 disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
On March 24, 2000, the aggregate market value of the Registrant's Common
Equity, par value $.01 per share, held by nonaffiliates of the Registrant was
approximately $76.9 million, based upon the closing sale price reported for
such date on the American Stock Exchange. For purposes of this disclosure,
shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock and shares held by officers and directors
of the registrant have been excluded because such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive for other purposes.
On March 24, 2000, 8,565,620 shares of the Registrant's Common Stock, par
value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Commission
in connection with the Annual Meeting of Shareholders scheduled to be held on
May 9, 2000 are incorporated by reference into Part III of this Form 10-K.
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<PAGE>
PART I
Item 1. Business
We have developed and sell a proprietary blood testing system. It is
designed to decentralize laboratory operations. The system provides cost-
effective, accurate test results within 10 to 15 minutes at the point-of-care,
for a comprehensive menu of routine blood tests. Because it provides rapid
test results, the Careside system can also perform blood tests required for
critical care testing. The Careside system performs chemistry,
electrochemistry, coagulation and hematology tests currently. We plan to offer
immunochemistry tests for the Careside system later in 2000. Tests in these
five different test categories comprise the vast majority of blood tests
ordered. No other point-of-care product currently in the market offers as
broad a menu of tests or combines these five test categories. Our goal is to
make the Careside system the standard for routine and critical care blood
testing. If we are successful, diagnostic information will travel more rapidly
and healthcare costs for physicians, providers and payers will be reduced.
The Careside system consists of the Careside Analyzer and disposable test
cartridges, the H-2000 and the Careside Connect. The H-2000 is a separate
hematology testing device. We have also developed a data interface, which will
link the testing devices. This is called the Careside Connect. It enables the
electronic transmission of blood test results to customer information systems.
We expect to release the Careside Connect for sale in the summer 2000. We are
currently developing the software that will allow data interchange from the
hematology testing device to the Careside Analyzer. The Careside system is
easy to use and can be operated by a non-technical person with appropriate
training in connection with use of the device. Its software will enable the
user to capture all data required to comply with the Clinical Laboratory
Improvement Amendments of 1988. This law, commonly called CLIA, governs
quality assurance and quality control processes and reporting for healthcare
providers.
The FDA has granted pre-market clearance for the Careside Analyzer and the
H-2000, and pre-market clearance or exemption for 37 blood tests performed by
the Analyzer and a 16-parameter hematology test for the H-2000, as well as
tests for professional laboratory use. As part of our market strategy, we have
received FDA approval for point-of-care testing for the Careside Analyzer,
thereby enabling its use by non-technical personnel with appropriate training.
Similar approvals will be sought for the H-2000 in 2000.
We have utilized strategic partners with specific design expertise and
state-of-the-art technology in order to develop the Careside system rapidly,
and on a cost-effective basis. Much of our partners' expertise is in the area
of test reagents. Reagents are the materials within the test cartridges that
react with a patient's blood. The Careside system then performs the test by
analyzing the reaction between the reagent and the patient's blood. Currently,
we have agreements with:
. Fuji Photo Film Co., Ltd. for the supply of its dry film based chemistry
reagents (exclusive);
. International Technidyne Corporation for the joint development of
coagulation reagents;
. UMM Electronics, Inc. to design and manufacture the Careside Analyzer;
In addition, we have design and manufacturing agreements for the H-2000,
clearing and reagent solutions with:
. Ysebaert to design and manufacture the H-2000; and
. Aqua Solutions to manufacture certain hematology solutions.
Currently, we are negotiating a long-term agreement with Diagnostic
Reagents, Inc. to supply reagents for the test cartridges. We previously
contracted with Hauser, Inc. for the design of the Careside system and with
Battelle Memorial Institute for the design of the system's disposable test
cartridges and their automated assembly manufacturing system. Hauser designed
the outer appearance of the Careside Analyzer and has been contracted to
modify the outside appearance of the H-2000 with the goal of achieving an
appearance similar to the Careside Analyzer.
1
<PAGE>
In 1993, SmithKline Beecham Clinical Laboratories, Inc. ("SBCL") conducted
extensive surveys of the point-of-care market. As a result, in 1994, SBCL
started our predecessor business to develop the technology we use today. In
November 1996, we acquired the assets and contracts used in the predecessor
business, including intellectual property, equipment and other assets, from
SmithKline to continue the development of point-of-care diagnostic technology
and to create a commercial product. This acquisition has resulted in the
development and commercial launch of the Careside Analyzer.
Several senior members of our management team worked on this point-of-care
project at SBCL, including W. Vickery Stoughton, our Chief Executive Officer,
and Thomas H. Grove, Executive Vice President--Chief Technology Officer. SBCL
has since been acquired by Quest Diagnostics Incorporated. We continue to have
a business relationship with Quest Diagnostics through a distribution and
supply agreement described in greater detail below. This agreement gives Quest
Diagnostics distribution rights in the United States and certain foreign
countries, including the right to use the Careside system in its commercial
laboratory business. Discussions with Quest Diagnostics concerning the
implementation of the contract were put aside because of consolidation
priorities within Quest Diagnostics and SBCL. Contract discussions between
Quest Diagnostics and Careside have recently been resumed; however, it is too
early to make any comments on the possible outcome of these ongoing
discussions.
In June 1999, we completed our initial public offering. Our publicly traded
common stock is listed on the American Stock Exchange under the ticker symbol
"CSA", and our publicly traded warrants under the symbol "CSA.WS." In December
1999, we acquired Texas International Laboratories, Inc. (TIL). TIL owned and
marketed a proprietary hematology-testing device that we have renamed the
Careside H-2000. Additional information on the TIL acquisition is included
below.
The Careside Analyzer, with 37 tests, and the H-2000, with a 16-parameter
test, are cleared for marketing in the United States. Our commercial product
launch occurred in the fourth quarter of 1999, at which time 53 tests were
placed in the market as part of the Careside system. In addition to the
product launch, we are starting pilot marketing studies in physician offices,
nursing homes, and a large health care system. These pilot studies are
intended to determine utilization patterns, demonstrate cost-effectiveness and
develop a "how-to" book. The how-to book will be a tool for customers to
follow in order to take the appropriate steps in establishing diagnostic
testing services using the Careside system. The outcome of these studies will
be used to improve the market strategy and tools used in the sales process.
The Careside system is being sold in the United States through our own sales
force. This effort will be enhanced with the conclusion of the pilot studies
expected in the second quarter of 2000.
2
<PAGE>
Status of CARESIDE Product Development
<TABLE>
<CAPTION>
Product Regulatory Status Technology Partner
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<S> <C> <C> <C> <C>
CARESIDE Cleared under Section 510(k) of the Food, Drug and Cosmetic UMM Electronics, Inc.
Act for use
Analyzer in licensed laboratories and for Point-of Care (POC). Hauser, Inc.
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Disposable Test Test cartridges are integral to approval of the tests listed Battelle
cartridges below. Chemistry, electrochemistry and coagulation
cartridges have been developed. The immunochemistry test
cartridge is in development.
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Cleared/Exempt for Submitted Pending
Laboratory and POC Marketing Clearance Planned 2000
Test Category Use Submissions
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Chemistry Glucose Hemoglobin Fuji Photo Film Co.,
Ltd.
BUN (Urea Nitrogen) Lactate
Creatinine Cholinesterase
BUN/Creatinine Ratio Direct LDL-
cholest.
Albumin Direct HDL-
cholest.
A/G Ratio (calc.)
Globulin (calc.)
Creatine Kinase
Creatine Kinase MB
% CKMB (calc.)
Total Cholesterol
HDL-Cholesterol*
LDL-Cholesterol
(calc.)
Cholesterol/HDL Chol
Ratio
GGT
ALT
Total Bilirubin
Phosphorus
Total Protein
Total Calcium
Uric Acid
Triglycerides
LDH
Bilirubin, Direct
Ammonia*
Carbon Dioxide, Total
Anion Gap (CO2+Echem)
Magnesium
Osmolality
Alkaline Phosphatase
AST
ALT/AST Ratio
Amylase
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Electrochemistry Chloride Ionized Calcium Fuji Photo Film Co.,
Ltd.
Potassium
Sodium
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Coagulation PT* APTT International
Technidyne
Fibrinogen Corporation
Thrombin Time
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Immunochemistry Theophylline Diagnostic Reagents,
Inc.
Phenytoin
Digoxin
Phenobarbital
T4
T3 Uptake
Carbamazepine
</TABLE>
* Requires separate clearance or exemption for point-of-care.
3
<PAGE>
Status of CARESIDE Product Development
<TABLE>
<CAPTION>
Product Status of Development Technology Partner
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<S> <C> <C>
CARESIDE H-2000
16 parameter, 3 part
differential........... FDA Cleared Third Party Manufacturer
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16 parameter, 3 part
differential........... All hematology tests have been CARESIDE proprietary solutions
FDA cleared under Section
Hematology Tests 510(k)
WBC
RBC
Platelet count
Lymphocyte
% Lymphocyte
Monocyte
% Monocyte
Granulocytes
% Granulocytes
Hematocrit
Hemoglobin
MCV
MCH
MCHC
RDW
MPV
PCT**
PDW**
** For diagnostic use outside U.S., for quality control use within U.S.
<CAPTION>
Communication Product Status of Development Technology Partner
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<S> <C> <C>
CARESIDE CONNECT To be available Q3, 2000 Third Party Manufacturer
provides an electronic
link between the
Careside Analyzer and
the Careside H2000
testing device
</TABLE>
We have recently executed a long-term supply agreement with Fuji Photo Film
Co., Ltd. for the use of its dry film chemistry reagent technology. Although
in dry form, the film uses the same technology as the wet reagent technology
used in high volume commercial analyzers. The agreement replaces an earlier
agreement with Fuji that was applicable only during the development stage of
the Careside system. The new agreement continues to provide us with an
exclusive supply of Fuji's dry film chemistry reagents for use in our point-
of-care system for more than 25 chemistry tests. We have agreed to purchase
our dry chemistry reagents exclusively from Fuji. Fuji is also developing four
additional chemistry tests at its expense. Any additional tests that Fuji
develops may be available to us over the period of the existing agreement,
which runs through 2003 and thereafter is automatically renewed on an annual
basis.
In December 1999, we acquired Texas International Laboratories (TIL) in an
all-stock acquisition. TIL was a privately held corporation owned by two
shareholders: Yves and Jean LeBihan. TIL was founded in 1983 and over the last
three years developed a new hematology analyzer, the Hematil-2000, which we
have renamed the Careside H-2000. This device was introduced to the market in
April 1999 as a high quality, low cost hematology analyzer that was designed
for both human and animal testing. We have signed a three year employment
contract with Jean LeBihan and a consulting agreement with Yves LeBihan for a
similar term. Jean has responsibility for veterinary market sales of our
products and will assist the sales force with the sale of the H-2000 into the
human market. Yves LeBihan, the original founder of TIL will continue work in
developing international sales and assist
4
<PAGE>
us in the development of future generations of hematology products. The H-2000
is currently being sold into China, Mexico, Brazil, Turkey, Egypt, Algeria,
Korea and various South American countries through specific distribution
agreements.
In December 1999 we initiated the first of a number of product installations
in pilot sites. These pilots involve assessing both the economic opportunity
provided to the customer from the use of the Careside system and refining an
instruction manual which is intended to provide customers with the information
they need to operate a lab using the Careside system. By year end 1999, two of
four planned pilots were initiated. The first was started at a small group
practice that had never run a lab. The second was with a larger group
currently operating a lab.
We have worked with an outside consultant/programmer to develop a software
system for modeling the economic opportunity of specific point of care
operations. This system is designed to develop a customer-specific economic
model based on historical test volumes and all lab cost that would be incurred
by using the Careside system. This software product has been made available to
the Careside sales force.
We will be launching further pilots in nursing homes and in a large health
care system in 2000. In all the pilots, we will be looking at the most cost
effective start up process, the impact on customer productivity, patient
reactions to immediate test results, and any other benefits that might result.
In addition to the pilots, we launched the sale of the Careside system to the
market in December 1999 and have begun installing the system in California,
Kentucky, Arizona and Texas, with other states scheduled to follow.
Item 2. Properties
We lease approximately 16,000 square feet of space in Culver City,
California as our executive offices, for the research and development,
validation, manufacture and assembly of test cartridges and for product
development. The lease has a term of seven years, with a current monthly rent
of $14,420, increasing to $23,233 per month until the expiration of the lease
in August 2005. We have an option to renew the lease for one additional five-
year term at 95% of the fair market rental value. We believe that the Culver
City facility is suitable to expand to $50 million in cartridge revenues and
will adequately serve our needs for the immediate future.
Item 3. Legal Proceedings
We are not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the vote of security holders during the fourth
quarter of 1999.
5
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company completed its initial public offering of Common Stock on June
16, 1999, and its Common Stock is traded on the American Stock Exchange under
the symbol "CSA."
The following table sets forth, for the fiscal quarters indicated, the high
and low sales prices per share for the Company's Common Stock, as reported on
the American Stock Exchange:
<TABLE>
<CAPTION>
Fiscal 1999 High Low
----------- ------ -----
<S> <C> <C>
Third Quarter (commencing July 16, 1999)(1).................... $ 5.75 $5.00
Fourth Quarter................................................. $10.25 $4.75
</TABLE>
- --------
(1) The date the Company's Common Stock commenced trading separately and not
as part of a unit.
As of March 21, 2000, there were 522 holders of record of the Company's
Common Stock and an estimated number of beneficial owners of the Common Stock
of approximately 1,627.
The Company has not declared or paid any cash dividends or distributions on
its Common Stock. The Company currently intends to retain any future earnings
to fund operations and the continued development of its business and,
therefore, does not anticipate paying any cash dividends on its common equity
in the foreseeable future. Future cash dividends, if any, will be determined
by the Board of Directors, and will be based upon the Company's earnings,
capital requirements, financial condition and other factors deemed relevant by
the Board of Directors.
On June 15, 1999, our Registration Statement on Form S-1 (File No. 33-69207)
(the "Registration Statement") was declared effective by the Securities and
Exchange Commission, which registration statement related to the Company's
initial public offering of up to 2,000,000 Units (not including the over-
allotment option granted to the underwriters). The Registration Statement also
related to the shares of Common Stock and Warrants included in such 2,000,000
Units, warrants to purchase up to 200,000 Units granted to the representatives
of our underwriters in the IPO, and 2,200,000 Shares of Common Stock
underlying the Warrants included in all of the Units. The managing
underwriters of the IPO were Paulson Investment Company, Inc., Millennium
Financial Group, Inc. and marion bass securities corporation. Two million
Units were sold at a public offering price of $7.50 per share, for an
aggregate offering price of $15.0 million. Expenses of the IPO were $2.6
million, including an underwriting discount of $920,000 and other offering
expenses of $1.7 million, for net proceeds to the Company of $12.4 million. As
of December 31, 1999, approximately $7.5 million has been used for research
and development and other operating costs. Remaining net proceeds of the IPO
have been invested in short term interest bearing investments.
On December 7, 1999, we acquired all of the outstanding stock of Texas
International Laboratories, Inc. (TIL). The acquisition was effected by the
merger of TIL with and into Careside Hematology, Inc., our wholly- owned
subsidiary. The stockholders of TIL received 521,739 unregistered shares of
our Common Stock.
6
<PAGE>
Item 6. Selected Financial Data
The following table presents summary financial information for Careside and
the predecessor business at SmithKline Beecham Clinical Laboratories, Inc. (in
thousands, except share data):
<TABLE>
<CAPTION>
Predecessor Business Careside, Inc.
------------------------ ----------------------------------------------------------------
Period from Period from
Ten months Inception Inception
Year ended ended (July 10, 1996) Years ended December 31, (July 10, 1996)
December 31, October 31, to December 31, ------------------------------- to December 31,
1995 1996 1996 1997 1998 1999 1999
------------ ----------- --------------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ -- $ -- $ -- $ -- $ 61 $ 61
Cost of Sales........... -- -- -- -- -- 31 31
------- --------- --------- --------- --------
Gross Profit............ -- -- -- -- -- 30 30
Operating expenses
Research and
development.......... 2,110 3,055 1,562 5,896 8,298 8,252 24,008
Sales and marketing... -- 85 249 1,205 1,539
General and
administration....... 585 224 55 555 601 1,448 2,659
------- ------- ------- --------- --------- --------- --------
Operating loss...... $(2,695) $(3,279) (1,617) (6,536) (9,148) (10,875) (28,176)
======= =======
Goodwill amortization... -- -- -- (37) (37)
Net interest
income/(expense)....... (21) 205 212 (679) (283)
------- --------- --------- --------- --------
Net loss................ (1,638) (6,331) (8,936) (11,591) (28,496)
Dividend on Series A
Preferred.............. -- -- -- (55) (55)
------- --------- --------- --------- --------
Net loss to common
shareholders........... $(1,638) $ (6,331) $ (8,936) $ (11,646) $(28,551)
======= ========= ========= ========= ========
Net loss per share...... $ (2.25) $ (2.04) $ (1.93) $ (1.88)
======= ========= ========= =========
Shares used in computing
net loss per share..... 728,465 3,098,980 4,629,916 6,210,496
</TABLE>
<TABLE>
<CAPTION>
Careside, Inc.
Predecessor ------------------------------------
Business Years ended December 31,
----------- -----------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ -- $ 31 $ 1,237 $ 3,927 $ 4,905
Total assets............ 307 1,193 3,140 7,911 14,389
Long-term liabilities... -- -- -- 2,045 1,096
Deficit accumulated
during development
stage.................. (3,670) (1,638) (7,969) (16,905) (28,496)
Total stockholders'
equity................. -- (1,067) 2,438 4,149 9,079
</TABLE>
7
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Development of the point-of-care technology used in the Careside system
began in 1994 at SmithKline Beecham Clinical Laboratories, Inc., a subsidiary
of SmithKline Beecham Corporation. In November 1996, we acquired the
intellectual property, equipment and other assets, from SmithKline, to
continue the development of point-of-care diagnostic technology and to create
a commercial product. As part of the consideration paid for the acquisition,
SmithKline Beecham Corporation became an equity owner in Careside.
Since November 1996, we have devoted substantially all of our resources to
research and development activities. We have incurred losses since inception.
As of December 31, 1999, the aggregate loss incurred was approximately $28.5
million. We expect to incur significant additional losses over at least the
next 12 months as we continue product development activities, complete a pilot
marketing program and expand marketing efforts.
Results of Operations
Years Ended December 31, 1999 and 1998
Research and Development Expenses. Research and development expenses
remained basically unchanged for the year ended December 31, 1999 as compared
to the year ended December 31, 1998. Total expense for 1999 remained at
approximately $8.3 million. This reflects the Company's efforts to complete
the production design of the Careside Analyzer and to support additional test
submissions to the FDA.
Selling and Marketing Expenses. Selling and marketing expenses increased to
$1.2 million for 1999 compared to $249,000 for the same period in 1998. This
increase reflects the preparations for the launch of the Careside system in
1999, including the partial year effect of hiring sales force staff.
General and Administrative Expenses. General and administrative expenses
increased to $1.4 million for 1999 compared to $601,000 for the same period in
1998. This increase reflects the increase in efforts related to computer
systems and software consulting, salaries for additional administrative staff,
and increased legal expense and investor relations efforts after the initial
public offering in 1999.
Net Interest Income (Expense). Interest income was $291,000 for the year
ended December 31, 1999 as compared to $234,000 for the same period in 1998.
This reflects comparable levels of cash and cash equivalents available for
investment. Interest expense was $971,000 for 1999 compared to $22,000 in
1998. This increase reflects interest paid on the line-of-credit to purchase
equipment initiated in late 1998, accrued interest on the S.R. One bridge
loan, and the non-cash interest charges associated with the cost of warrants
granted to S.R. One in connection with the bridge loan facility and its
partial conversion to preferred stock in 1999.
Goodwill. Goodwill amortization of $36,000 associated with the December 1999
acquisition of Texas International Laboratories was recorded for part of one
month in 1999. No such expense occurred in prior periods.
Net Loss. The net loss increased to approximately $11.6 million for the
twelve months ended December 31, 1999 compared to $8.9 million in the same
period in 1998. This increase reflects the increase in selling and marketing,
administrative expenses and interest expense on the line-of-credit to purchase
equipment and the S.R. One bridge loan.
Years Ended December 31, 1998 and 1997
Research and Development Expenses. Research and development expenses
increased to approximately $8.3 million for the year ended December 31, 1998
compared to approximately $5.9 million in the same period in 1997, an increase
of 41%. This increase reflects increased payments to third parties for the
development of the Careside Analyzer and increased staffing for additional
test development and submissions to the FDA.
8
<PAGE>
Selling and Marketing Expenses. Selling and marketing expenses increased to
$249,000 for the year ended December 31, 1998 compared to $85,000 in the same
period in 1997, an increase of 192%. This increase reflects the increase in
the preliminary sales and marketing efforts and the full year effect of
marketing staff salaries.
General and Administrative Expenses. General and administrative expenses
increased to $601,000 for the year ended December 31, 1998 compared to
$555,000 in the same period in 1997, an increase of 8%.
Net Interest Income (Expense). Net interest income was approximately the
same for the year ended December 31, 1998 as compared to the same period in
1997 at $212,000 and $205,000, respectively. This reflects comparable levels
of cash and cash equivalents available for investment.
Net Loss. The net loss was approximately $8.9 million for the year ended
December 31, 1998 compared to approximately $6.3 million in the same period in
1997, an increase of 41%. This increase reflects the increase in research and
development expenses and preliminary sales and marketing efforts.
Liquidity and Capital Resources
We have financed our operations since inception primarily through the net
proceeds generated from the issuance of common stock and preferred stock,
warrants, long-term debt and certain short-term borrowings that were
subsequently converted into equity securities. As of December 31, 1999, we
have received net proceeds aggregating approximately $36.8 million from these
transactions.
Net cash used in operating activities for the twelve months ended December
31, 1999 was approximately $9.4 million. For the twelve months ended December
31, 1999, cash used in operating activities represents the net loss for the
period offset by an increase in depreciation, accrued expenses and the non-
cash amortization of imputed interest in the S.R. One bridge loan and
warrants. Net cash used in operating activities was approximately $7.7 million
for the year ended December 31, 1998. This represents the net loss for the
year partially offset by an increase in accounts payable to the manufacturer
of the CareSide Analyzer. Net cash used in operating activities was
approximately $6.5 million for the year ended December 31, 1997. Cash used for
operations was primarily related to funding expansion of research and
development activities as well as the establishment of marketing, sales and
administrative infrastructure.
Cash used in investing activities for the purchase of property and equipment
was approximately $3.8 million for the twelve months ended December 31, 1999
and $2.0 million and $0.9 million for the years ended December 31, 1998 and
1997, respectively. The cash was used primarily for the acquisition of
manufacturing equipment and laboratory equipment used in research and
development.
At December 31, 1999, our principal source of liquidity was approximately
$4.9 million in cash and cash equivalents.
In December 1998, we entered into an agreement with an equipment lease
financing company regarding a $2.5 million facility secured by specific
equipment. Each draw will be a separate loan under the facility. Approximately
$1.4 million of this facility was drawn by December 1999 and was secured by
our existing equipment. We anticipate drawing the remaining amount in early
2000 which will be secured by manufacturing equipment for cartridge assembly
which we have purchased previously. Each equipment loan has a 48-month term
and bears an interest rate of approximately 14% per annum adjusted for an
index rate based on four-year U.S. Treasury Notes at the time of borrowing.
In addition, we entered into an agreement for bridge financing with S.R.
One, Limited in December 1998. Under this agreement, $1.5 million was funded
in December 1998 and $1.5 million was funded in January 1999. In June 1999,
S.R. One, Limited agreed to convert $1 million of the $3 million loan,
together with accrued interest at the rate of 8% on $1 million, into shares of
Series A Convertible Preferred Stock. The conversion price was $6.375, which
was 85% of the initial public offering price per unit. S.R. One received
162,914 shares
9
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of Series A Convertible Preferred Stock. Each share of Series A Convertible
Preferred Stock may in turn be converted, at the option of the holder, into
one share of our common stock and one warrant to purchase an additional share
of our common stock. All accrued and unpaid dividends with respect to shares
of Series A Convertible Preferred Stock that are converted by S.R. One will
also be converted into units at the initial public offering price per unit.
The exercise price and other terms of the warrant received on the conversion
will be the same as the warrants included in units sold in the offering. The
remaining $2 million of the loan matures in March 2000. At that time, we
expect either to repay the $2 million balance on the bridge financing with the
proceeds of a new loan or to negotiate to convert the balance of it into
preferred or common equity. The annual interest rate on the remaining $2
million increased to 10% on July 1, 1999. S. R. One has the option to convert
all or any portion of the remaining loan, plus accrued interest thereon, into
shares of Series A Convertible Preferred Stock. This Series A Convertible
Preferred Stock will be issued to S.R. One on the same basis as the Series A
Convertible Preferred Stock that was issued to S. R. One in connection with
the $1 million conversion discussed above.
We issued a bridge warrant to S.R. One, Limited in connection with the
bridge financing. The bridge warrant was initially exercisable for the number
of shares of common stock equal to $750,000 divided by 85% of the initial
public offering price of the common stock in an initial public offering. The
number of warrants doubled if the loan was not repaid by June 30, 1999. As
part of the conversion of a portion of the bridge financing into shares of
Series A Convertible Preferred Stock, the bridge warrant was modified such
that it will be exercisable in all events for the number of shares of common
stock which is equal to $1,500,000 divided by $6.375, which is 85% of our
initial public offering price per unit in the offering. Upon completion of our
initial public offering, the bridge warrant became exercisable for 235,294
shares of common stock. The bridge warrant has an exercise price of 85% of the
initial public offering price per unit. The bridge warrant was exercisable at
December 31, 1999 and will expire on June 16, 2003.
At December 31, 1999, our current liquidity, sales revenue expected after
1999 and equipment lease financing proceeds (under our current equipment lease
facility already in place), were projected to be sufficient to fund our
operating expenses and capital requirements for at least 5 months. Our
operating expenses will increase due to higher selling and marketing expenses
in 2000. The Company expects to issue additional equity to fund operations,
however such financing may not be available on acceptable terms.
On March 8, 2000, the Company completed the sale of an additional 956,039
shares of common stock in a private placement to 5 institutional investors at
a price of $8.77 per share. Based on the net proceeds from this transaction,
we project adequate cash to fund operations for a minimum of 12 months. To the
extent that we need additional funds in connection with our commercial product
launch, we expect to borrow funds to complete our automated cartridge assembly
line and build sufficient cartridge inventory for launch and subsequent sales.
We also expect that the development of additional tests will require research
expenditures at a level lower than past spending for test development. Sales
and marketing activities will require hiring and training additional staff in
2000. This estimate of the period for which we expect our available sources of
cash to be sufficient to meet our funding needs is a forward looking statement
that involves risks and uncertainties. There can be no assurance that we will
be able to meet our capital requirements for this period. In the event our
capital requirements are greater than estimated, we may need to raise
additional capital to fund our research and development activities, to scale-
up manufacturing activities and to expand our sales and marketing efforts. Our
future liquidity and capital funding requirements will depend on numerous
factors, including the extent to which our products under development gain
market acceptance, the exercise of outstanding warrants to purchase common
stock, the timing of regulatory actions regarding our products, the costs and
timing of expansions of sales, marketing and manufacturing activities,
procurement and enforcement of patents important to our business, and the
impact of competitors' products. There can be no assurance that such
additional capital will be available on terms acceptable to us, if at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may include restrictive covenants. If
adequate funds are not available, we may be forced to curtail our operations
significantly or to obtain funds through entering into collaborative
agreements or other arrangements on unfavorable terms. Our failure to raise
capital on acceptable terms could have a material adverse effect on our
business, financial condition or results of operations.
10
<PAGE>
Income Taxes
As of December 31, 1999, we had approximately $17.8 million and $759,000 of
net operating loss and research and development credit carryforwards,
respectively, for federal income tax purposes, which expire on various dates
between 2011 and 2014. These amounts reflect different treatment of expenses
for tax reporting than are used for financial reporting. The Tax Reform Act of
1986 contains certain provisions that may limit our ability to utilize net
operating loss and tax credit carryforwards in any given year. We experienced
a change in ownership interest in excess of 50% as defined under the Tax
Reform Act upon the first closing of our 1997 equity financing. We do not
believe that this change in ownership will impact our ability to utilize our
net operating loss and tax credit carryforwards. There can be no assurance
that ownership changes in future periods will not significantly limit our use
of existing or future net operating loss and tax credit carryforwards.
Year 2000 Compliance
We previously identified our Year 2000 risks in three major categories:
internal business operations software; software utilized within the CareSide
Analyzer; and software used by our external suppliers and distributor. We did
not experience Year 2000 issues in any of the three catagories. As a result no
additional costs were realized.
Item 8. Financial Statements
The Company's consolidated financial statements appear at pages F-1 through
F-18, as set forth in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
11
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information concerning the
individuals who serve as our directors, executive officers and key employees:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Directors and Executive Officers:
W. Vickery Stoughton............. 53 Chairman of the Board of Directors and
Chief Executive Officer
Thomas H. Grove.................. 50 Executive Vice President--Chief
Technology Officer, Secretary and
Director
James R. Koch.................... 45 Chief Financial Officer, Treasurer,
Executive Vice President and Director
Anthony P. Brenner(1)............ 42 Director
William F. Flatley(2)(3)......... 58 Director
Kenneth N. Kermes(2)............. 64 Director
C. Alan MacDonald(2)(3).......... 66 Director
Diana Mackie(1).................. 52 Director
Philip B. Smith(1)(3)............ 64 Director
Key Employees:
Kenneth Asarch................... 41 Vice President--Quality Systems and
Regulatory Affairs
Grant Frazier.................... 38 Vice President--Marketing
Dennis E. Rieger................. 54 Senior Vice President--Information
Technology and Chief Information
Officer
Sandra P. Twyon.................. 61 Vice President--Operations
Marija N. Valentekovich.......... 67 Vice President--Manufacturing
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Nominating Committee
Directors and Executive Officers
W. Vickery Stoughton, Chairman of the Board of Directors and Chief Executive
Officer. Mr. Stoughton has served as our Chairman of the Board of Directors
and the Chief Executive Officer since our formation in July 1996. Prior to
that, he served as President of SmithKline Beecham Diagnostics Systems Co.
(SBDS), a diagnostic services and product company, from October 1995 to July
1996, and was President of SmithKline Beecham Clinical Laboratories, Inc.
(SBCL), a provider of diagnostic laboratory services, from August 1992 to
September 1995. As President of SBDS, Mr. Stoughton had responsibility for
SBCL, SmithKline Beecham Clinical Laboratories International and SBDS's
genetic testing and point-of-care testing projects. In addition, Mr. Stoughton
served as Chief Executive Officer and Vice Chancellor for Health Affairs of
Duke University Hospital from 1991 to 1992, Chief Executive Officer of Toronto
Hospital in Toronto, Canada from 1981 to 1991, Chief Operating Officer of
Brigham and Women's Hospital in Boston from 1980 to 1981 and Chief Executive
Officer of Peter Bent Brigham Hospital in Boston from 1978 to 1980. Mr.
Stoughton holds a B.S. in Chemistry from St. Louis University and a M.B.A.
from the University of Chicago. He is currently a director of Sun Life
Assurance Company of Canada, a financial services company, and Biomira, Inc.,
a pharmaceutical company.
12
<PAGE>
Thomas H. Grove, Executive Vice President--Chief Technology Officer,
Secretary and Director. Dr. Grove has served as our Executive Vice President--
Chief Technology Officer, Secretary and as one of our directors since our
formation in July 1996. From April 1984 to July 1996, he served in a number of
management positions at SmithKline Beecham Clinical Laboratories, Inc.
involving research and development activities, including the position of Vice
President of Scientific Affairs from January 1991 to July 1996, where, among
other things, he was in charge of National Quality Control and Quality
Assurance for SBCL. Dr. Grove has received a number of awards, including a
NATO Science Fellowship to attend Oxford University from 1978 to 1979. He was
also named Young Investigator of the Year in 1980 by the American Association
for Clinical Chemistry and was elected to the National Academy of Clinical
Biochemistry in 1977. Dr. Grove holds a B.S. in Biology from SUNY-Albany and a
Ph.D. in Biochemistry from Syracuse University.
James R. Koch, Chief Financial Officer, Treasurer, Executive Vice President
and Director. Mr. Koch has served as our Chief Financial Officer, Treasurer,
Executive Vice President and as one of our directors since July 1998. Prior to
joining us, Mr. Koch served as Vice President and Chief Financial Officer of
ILEX Oncology, Inc., a company which develops oncology drugs, from August 1996
to July 1998. In addition, Mr. Koch served as Vice President, Finance and
Chief Financial Officer for two start-up specialty pharmaceutical companies,
Symphony Pharmaceuticals, Inc., from September 1993 to August 1996, and Neose
Pharmaceuticals, Inc., currently Neose Technologies, Inc., from September 1991
to September 1993. His prior experience also includes ten years in senior
financial management positions with G.D. Searle Pharmaceutical, a manufacturer
of pharmaceutical products. Mr. Koch holds a B.S. in Mechanical Engineering
from General Motors Institute and a M.S. from the Krannert School of
Management at Purdue University.
Anthony P. Brenner, Director. Mr. Brenner has served as one of our directors
since November 1996. Since January 1998, he has served as a Managing Director
with Crosslink Capital, a venture capital firm, where he oversees investment
activities in the e-Business and outsourcing industries. Prior to that, Mr.
Brenner served as Senior Managing Director of Advanta Partners LP, a private
equity investment partnership, and as a member of the Board of Directors of
Advanta Corporation, a financial services company, from 1992 to 1996. In
addition, from 1989 to 1998, Mr. Brenner served as President of Cedar Point
Partners, a private equity investment partnership. Mr. Brenner earned a B.A.
from Yale University and a M.B.A. from Stanford University.
William F. Flatley, Director. Mr. Flatley has served as one of our directors
since November 1996. Since July 1997, he has served as the President and Chief
Executive Officer of Executive Health Group, a provider of preventive
healthcare services to corporations. From 1980 to December 1994, he held a
number of senior management positions with Bristol-Myers Squibb Corporation, a
pharmaceutical company, including President of a multi-division medical device
business, the Health Care Group, and President of the Drackett Company, a
household products manufacturer. Mr. Flatley retired from Bristol-Myers Squibb
at the end of 1994 but continued to provide the company with certain
consulting services after his retirement. Mr. Flatley obtained a B.S. from
Villanova University and a M.B.A. from the Wharton School of the University of
Pennsylvania.
Kenneth N. Kermes, Director. Mr. Kermes has served as one of our directors
since February 1997. Since June 1998, he has served as a principal of Riparian
Partners Limited and of Bay View Equity Partners, two related investment
banking and private equity investment partnerships. Prior to that, he served
as Vice President of Business and Finance for the University of Rhode Island
from December 1994 to June 1998 and as Chief Financial Officer for SmithKline
Beecham Corporation from October 1986 to July 1989 and as Senior Vice
President and Group Director of Corporate Development from July 1989 to 1991.
From 1991 to 1994, Mr. Kermes was a consultant and an investor in the venture
capital industry. Mr. Kermes obtained a B.A. from Amherst College and attended
the New York University Graduate School of Business and the Harvard Business
School Advanced Management Program. In addition to Careside, Mr. Kermes serves
as director of four private, closely held manufacturing companies in the
Northeast.
C. Alan MacDonald, Director. Since 1999, Mr. MacDonald has served as
President of the Club Management Co., LLC. Prior to that he has served as one
of our directors since November 1996. Since October 1997, Mr. MacDonald has
served as a Managing Director of Directorship, Inc., a consulting firm
specializing in
13
<PAGE>
corporate governance issues. Prior to that, he served as General Partner of
the Marketing Partnership, Inc., a full service marketing consulting firm,
from January 1995 to July 1997 and as an acquisitions consultant with the Noel
Group, a venture capital firm, from July 1994 to December 1994. In addition,
he served as Chairman and Chief Executive Officer of Lincoln Snacks Co., a
caramelized popcorn snack company, from September 1992 to July 1994. Mr.
MacDonald holds a B.S. in Hotel Administration from Cornell University and is
a member of the Cornell Society of Hotelmen and the Dean's Advisory Committee
at Cornell. Mr. MacDonald is also a director of Lincoln Snacks Co. Lord Abbot,
J.B. Williams and Fountainhead Water Co.
Diana Mackie, Director. Ms. Mackie has served as one of our directors since
February 1997. As of January 24, 2000, Ms. Mackie has accepted the position to
co-lead the merger integration process for Glaxo SmithKline. From June 1999 to
January 21, 2000, she held the position of Vice President and Director,
Category Management, Dermatologicals, Phytomedicines and Vitamins, SmithKline
Beecham Consumer Healthcare (SBCH). From October 1997 to May 1999, she held
the position of Vice President for Strategy and Business Development at
SmithKline Beecham Healthcare Services, the business development division of
SmithKline Beecham Corporation, a position she has held since October 1997,
where her responsibilities include developing business plans, long-range
strategy and negotiating external alliances and investments. Prior to that,
Ms. Mackie served as Vice President, Group Business Initiatives for SBHS from
November 1996 to October 1997. From March 1996 to November 1996, she was
General Manager of Diversified Prescription Delivery, a pharmaceutical mail
services company and a wholly-owned subsidiary of Diversified Pharmaceutical
Services, a pharmaceutical benefit management group. From March 1993 to March
1996, she served as Vice President, Strategy Development, SmithKline Beecham
Pharmaceuticals, a pharmaceutical company. Ms. Mackie holds a B.S. in
Chemistry from the University of Illinois, a M.B.A. from The Massachusetts
Institute of Technology Sloan School of Management and a M.S. in Polymer and
Fiber Engineering from The Massachusetts Institute of Technology.
Philip B. Smith, Director. Mr. Smith has served as one of our directors
since November 1996. Since June 1998, Mr. Smith has served as a Vice Chairman
of Laird & Co., LLC, a merchant bank. In addition, from 1991 until August
1998, Mr. Smith served as a Vice Chairman with Spencer Trask Securities
Incorporated, an investment banking firm. Mr. Smith served in a number of
other senior management positions. From June 1986 to June 1988, Mr. Smith
served as Managing Director of Prudential Securities, an investment firm, in
its merchant bank division. From December 1967 to December 1972, Mr. Smith
served as President and Chief Executive Officer of Citicorp Venture Capital, a
venture capital company which he founded. Mr. Smith currently serves on the
board of directors of Movie Gallery, Inc., Digital Video Systems, Inc., and
KLS Enviro Resources, Inc. Mr. Smith has a B.S.E. from Princeton University
and a M.B.A. from the Harvard Business School.
Key Employees
Kenneth Asarch, Vice President--Quality Systems and Regulatory Affairs. Dr.
Asarch has served as our Vice President--Quality Systems and Regulatory
Affairs since November 1996. From June 1995 to October 1996, Dr. Asarch served
as Director of Regulatory Affairs for SmithKline Beecham Clinical
Laboratories, Inc. and SmithKline Beecham Diagnostics Systems Co. Prior to
that, he served as Director of Regulatory Affairs, Quality Assurance and
Clinical Affairs with Diagnostic Products Corporation, an immuno-diagnostic
testing company, from 1987 to 1995, where his duties included overseeing the
FDA regulatory clearance and approval process for approximately 150 blood
testing products. Dr. Asarch holds a B.S. in Biochemistry from the University
of California at Los Angeles and doctoral degrees in both Clinical Pharmacy
(Pharm.D.) and Pharmaceutical Sciences (Ph.D.) from the University of Southern
California.
Grant Frazier, Vice President--Marketing. Mr. Frazier has served as our Vice
President-Marketing since November 1999. Prior to joining us, Mr. Frazier
served as Vice President-Marketing & Business Development at Mobile Technology
Inc., a provider of magnetic resonance imaging, lithotripsy and cancer therapy
services. Mr. Frazier joined MTI in December 1991 and was responsible for
developing the first mobile radiation therapy cancer care service deployed
within the United States. He led this strategic business unit until August
1998
14
<PAGE>
before assuming his corporate marketing and business development
responsibilities. Mr. Frazier holds a B.S. in Industrial Engineering from
Stanford University and a M.B.A. from UCLA's Anderson School of Management.
Dennis E. Rieger, Senior Vice President--Information Technology and Chief
Information Officer. Mr. Rieger joined us in December 1999. Mr. Rieger's
professional experience includes over 28 years in the high technology products
industry. Mr. Rieger is also serving as President and CEO of Advanced Medical
Information Technologies (AdMIT), a company he founded in 1992 that developed
a mobile, bedside clinical information system, and a new universal medical and
laboratory device data acquisition system. Prior to AdMIT, Mr. Rieger served
as President and Chief Operating Officer of Compare Data Systems, an insurance
and telecommunications software company, from 1987 to 1992; President of TRG,
Inc., a technology based consulting and venture funding firm, from 1981 to
1987; and held several management positions in research and development,
strategic planning and marketing at Apple Computer, Hewlett Packard and
Procter and Gamble from 1971 to 1981. Mr. Rieger has a B.Sc. in Computer
Information Science, with honors, from California State University at
Sacramento, and served with the U.S. NAVY. Mr. Rieger is also serving on the
board of directors of two companies, an embedded software products company and
a publishing company, and is one of the Industry Advisory Board members for
the new Biomedical Engineering Interdepartmental program at the UCLA School of
Engineering and Applied Science.
Sandra P. Twyon, Vice President--Operations. Ms. Twyon joined us in January
2000. Prior to that she held positions as Vice President for Patient Services
with the Mercy Health System in Pittsburgh, PA (1994-1999); Vice President for
Nursing at the Toronto Hospital in Toronto, Canada (1989-1993) and Chairman of
Nursing at Tufts New England Medical Center in Boston, MA (1977-1989). In
addition she was President and founder of the Center for Case Management
(1989-1992), an original developer of critical pathways which consulted widely
throughout the U.S. and Canada. Ms. Twyon received a B.S. Degree from the
College of Saint Rose and holds a M.S. from Boston College.
Marija N. Valentekovich, Vice President--Manufacturing. Dr. Valentekovich
has served as our Vice President--Manufacturing since January 1998 when she
came out of retirement to join us. Before that, Dr. Valentekovich served as a
Production Manager with Diagnostic Products Corporation from January 1989 to
July 1997. Dr. Valentekovich received a M.S. in Chemical Engineering and a
Ph.D. in Physical Organic Chemistry, using radioisotope techniques, from the
University of Zagreb, Croatia.
Agreement Relating to Election of Directors
Each of our directors was originally nominated and elected pursuant to the
terms and conditions of a stockholders' agreement we entered into with our
stockholders and warrantholders in connection with two private placements of
our common stock in 1997 and 1998. Pursuant to this stockholders' agreement,
SmithKline Beecham Corporation was granted the right to nominate an individual
to our Board of Directors to serve as its representative. Spencer Trask
Securities Incorporated was also granted the right in the stockholders'
agreement to nominate one individual to our Board of Directors to serve as its
representative. Currently, Ms. Mackie was elected as SmithKline's
representative and Mr. Smith as Spencer Trask's representative. Mr. Stoughton
and Dr. Grove were originally nominated and elected to our Board of Directors
pursuant to this stockholders' agreement. In addition, the stockholders'
agreement requires that three individuals who are independent of us and hold
no more than five percent of our common stock serve on our Board of Directors.
The number of directors permitted by the stockholders' agreement was increased
from seven to nine with the consent of Spencer Trask as called for in the
stockholders' agreement. This stockholders' agreement expires by its terms
June 16, 2000.
Classified Board of Directors
The Board of Directors is divided into three classes. Each class contains
three directors. Directors within each class are elected to serve three-year
terms and one-third of the directors sit for election at each annual meeting
of our stockholders. Mr. Koch, Mr. Kermes and Mr. Smith serve in the class
whose term expires in
15
<PAGE>
2000. Dr. Grove, Mr. Flatley and Ms. Mackie serve in the class whose term
expires in 2001. Mr. Stoughton, Mr. Brenner and Mr. MacDonald serve in the
class whose term expires in 2002. A classified board of directors may have the
effect of deterring or delaying any attempt by any group to obtain control of
us by a proxy contest since such third party would be required to have its
nominees elected at two separate annual meetings of our Board of Directors in
order to elect a majority of the members of our Board of Directors.
Information under the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement are incorporated herein by reference in
response to this Item 10.
Item 11. Executive Compensation
The information contained in the section titled "Executive Compensation" in
the Proxy Statement, with respect to executive compensation, and the
information contained in the section entitled "Director Compensation" with
respect to director compensation, are incorporated herein by reference in
response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in the section titled "Security Ownership of
Certain Beneficial Owners" in the Proxy Statement, with respect to security
ownership of certain beneficial owners and management, is incorporated herein
by reference in response to this Item 12.
Item 13. Certain Relationships and Related Transactions
The information contained in the section titled "Certain Relationships and
Transactions" in the Proxy Statement, with respect to certain relationships
and related transactions, is incorporated herein by reference in response to
this Item 13.
16
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements
The financial statements listed in the accompanying Index to Consolidated
Financial Statements are filed as part of this Form 10-K, commencing on page
F-1.
(2) Financial Statement Schedules
Financial statement schedules are not included because they are not required
or the information is otherwise shown in the financial statements or notes
thereto.
(3) Exhibits
<TABLE>
<C> <S>
2.1* Agreement and Plan of Merger dated as of December 7, 1999 by and among
Careside, Inc., Careside Hematology, Inc., Texas International
Laboratories, Inc., Yves LeBihan and Jean-Yves LeBihan
3.2b* Form of Amended and Restated ByLaws of Careside, Inc. (effective June
16, 1999)
4.6* Form of Warrant Agreement dated June 21, 1999, by and between Careside,
Inc. and Paulson Investment Company, Inc.
4.7* Form of Warrant Agreement dated June 16, 1999 by and between Careside,
Inc. and American Stock Transfer & Trust Company, as Warrant Agent
4.8* Form of Warrant issued to S.R. One, Limited on June 21, 1999
4.9* Form of New Note issued to S.R. One, Limited dated as of December 17,
1999
4.10* Registration Rights Agreement dated as of December 7, 1999 by and
between Careside, Inc. and Yves LeBihan and Jean-Yves LeBihan
10.22* Commitment Letter between S.R. One, Limited and Careside, Inc. dated
April 29, 1999
10.23* Distribution and Supply Agreement dated as of November 7, 1996, by and
between SmithKline Beecham Clinical Laboratories, Inc. and Careside,
Inc., as amended on February 12, 1999
10.31* Employee Stock Purchase Plan
10.35* Waiver Letter Agreement dated as of May 25, 1999 by and between
Careside, Inc. and Spencer Trask Securities, Incorporated
10.36* Letter Agreements between Advanced Medical Information Technologies,
Inc. and Careside, Inc. dated January 11, 1999, January 25, 1999 and
February 19, 1999
10.37* Form of Securities Conversion Agreement dated as of June 14, 1999
between S.R. One, Limited and Careside, Inc.
10.38* Form of Amended and Restated Registration Rights Agreement dated as of
June 21, 1999 between S.R. One, Limited and Careside, Inc.
10.39* Agreement dated as of April 13, 1999 by and between Fuji Photo Film
Co., Ltd. and Careside, Inc.
27.1 Financial Data Schedule
</TABLE>
- --------
*Incorporated by reference.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on December 22, 1999 reporting the Company's
acquisition of Texas International Laboratories, Inc. on December 7, 1999. An
amendment to that 8-K was filed on February 22, 2000, reporting Item 7
Financial Information.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in Culver
City, California, on the 28th day of March, 2000.
CARESIDE, INC.
/s/ W. Vickery Stoughton
By: _________________________________
W. Vickery Stoughton
Chairman of the Board of
Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ W. Vickery Stoughton Chairman of the Board of March 28, 2000
____________________________________ Directors, Chief Executive
W. Vickery Stoughton Officer and Director
(principal executive
officer)
/s/ Thomas H. Grove Executive Vice President-- March 28, 2000
____________________________________ Research and Development
Thomas H. Grove and Director
/s/ James R. Koch Chief Financial Officer, March 28, 2000
____________________________________ Treasurer, Executive Vice
James R. Koch President and Director
(principal financial and
accounting officer)
/s/ Anthony P. Brenner Director March 28, 2000
____________________________________
Anthony P. Brenner
/s/ William F. Flatley Director March 28, 2000
____________________________________
William F. Flatley
/s/ Kenneth N. Kermes Director March 28, 2000
____________________________________
Kenneth N. Kermes
/s/ C. Alan MacDonald Director March 28, 2000
____________________________________
C. Alan MacDonald
/s/ Diana Mackie Director March 28, 2000
____________________________________
Diana Mackie
/s/ Philip B. Smith Director March 28, 2000
____________________________________
Philip B. Smith
</TABLE>
18
<PAGE>
CARESIDE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
CARESIDE, INC.: ----
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Careside, Inc.:
We have audited the accompanying consolidated balance sheets of Careside,
Inc. (a Delaware corporation) as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Careside,
Inc. as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for the each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial statements have been prepared
assuming that Careside, Inc. will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has accumulated a deficit during the
development stage that raises substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Arthur Andersen LLP
Los Angeles
March 13, 2000
F-2
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents........................ $ 3,926,603 $ 4,905,440
Accounts receivable, net of allowance of $0...... -- 78,046
Inventory........................................ -- 548,623
Prepaid expenses and other....................... 82,173 102,615
------------ ------------
Total current assets........................... 4,008,776 5,634,724
------------ ------------
Property and Equipment, net........................ 3,386,484 5,939,186
Deferred Offering Costs............................ 498,443 2,318
Deposits and Other................................. 17,700 15,000
Goodwill, net...................................... -- 2,798,170
------------ ------------
$ 7,911,403 $ 14,389,398
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current portion of long-term debt................ $ 186,998 $ 2,316,192
Current portion of obligation under capital
lease........................................... -- 11,006
Accounts payable................................. 1,369,889 844,904
Accrued expenses................................. 160,439 886,260
Accrued interest................................. -- 156,493
------------ ------------
Total current liabilities...................... 1,717,326 4,214,855
------------ ------------
Long-Term Debt, net of current portion............. 2,044,932 1,059,876
------------ ------------
Obligation Under Capital Lease, net of current
portion........................................... -- 35,835
------------ ------------
Commitments
Stockholders' Equity:
Preferred stock, $.01 par value: 5,000,000 shares
authorized--none and 162,914 shares issued and
outstanding at December 31, 1998 and 1999,
respectively.................................... -- 1,629
Common stock, $.01 par value: 50,000,000 shares
authorized--5,084,340 and 7,609,581 shares
issued and outstanding at December 31, 1998 and
1999, respectively.............................. 50,843 76,095
Additional paid-in capital....................... 21,003,545 37,496,984
Deficit accumulated during development stage..... (16,905,243) (28,495,876)
------------ ------------
Total stockholders' equity..................... 4,149,145 9,078,832
------------ ------------
$ 7,911,403 $ 14,389,398
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
from Inception
(July 10, 1996)
For the Year Ended December 31, through
-------------------------------------- December 31,
1997 1998 1999 1999
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Sales, net.............. $ -- $ -- $ 60,956 $ 60,956
Cost of Sales........... -- -- 30,566 30,566
----------- ----------- ------------ ------------
Gross Profit............ -- -- 30,390 30,390
Operating Expenses:
Research and
development.......... 5,895,465 8,297,974 8,252,081 24,007,367
Selling and
marketing............ 85,402 249,000 1,204,548 1,538,950
General and
administrative....... 555,172 601,129 1,448,300 2,660,116
----------- ----------- ------------ ------------
Operating Loss...... (6,536,039) (9,148,103) (10,874,539) (28,176,043)
Interest Income......... 213,585 234,089 291,008 738,682
Interest Expense........ (8,329) (22,275) (970,525) (1,021,938)
Goodwill amortization... -- -- (36,577) (36,577)
----------- ----------- ------------ ------------
Net Loss................ (6,330,783) (8,936,289) (11,590,633) (28,495,876)
Preferred stock
dividends.............. -- -- (55,201) (55,201)
----------- ----------- ------------ ------------
Net loss available to
common stockholders.... (6,330,783) (8,936,289) (11,645,834) (28,551,077)
----------- ----------- ------------ ------------
Basic and Diluted Net
Loss per Common Share.. $ (2.04) $ (1.93) $ (1.88)
----------- ----------- ------------
Shares used in Computing
Basic and Diluted Net
Loss per Common Share.. 3,098,980 4,629,916 6,210,496
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Deficit
Preferred Accumulated Total
Stock Common Stock Additional Stock During Stockholders'
-------------- ----------------- Paid-In Subscription Development Equity
Shares Amount Shares Amount Capital Receivable Stage (Deficit)
------- ------ --------- ------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 10, 1996
(inception)............. -- $ -- -- $ -- -- $ -- $ -- $ --
Shares issued to
founders and
management.............. -- -- 659,344 6,593 (6,593) -- -- --
Shares issued to
SmithKline Beecham
Corporation in
connection with asset
purchase................ -- -- 34,702 347 571,006 -- -- 571,353
Sales of shares to
Exigent Partners, L.P... -- -- 557,601 5,576 93,419 (98,995) -- --
Shares issued to
investment banker in
connection with equity
financing............... -- -- 30,173 302 (302) -- -- --
Shares issued to
SmithKline Beecham
Corporation pursuant to
antidilution agreement.. -- -- 30,935 310 (310) -- -- --
Net loss................ -- -- -- -- -- -- (1,638,171) (1,638,171)
------- ------ --------- ------- ----------- -------- ------------ ------------
Balance, December 31,
1996.................... -- -- 1,312,755 13,128 657,220 (98,995) (1,638,171) (1,066,818)
Shares issued in
connection with private
placement, net of
offering costs of
$1,291,772.............. -- -- 1,923,090 19,231 8,688,998 -- -- 8,708,229
Shares issued to
SmithKline Beecham
Corporation upon
conversion of note
payable................. -- -- 129,555 1,295 1,026,689 -- -- 1,027,984
Payment of stock
subscription............ -- -- -- -- -- 98,995 -- 98,995
Net loss................ -- -- -- -- -- -- (6,330,783) (6,330,783)
------- ------ --------- ------- ----------- -------- ------------ ------------
Balance, December 31,
1997.................... -- -- 3,365,400 33,654 10,372,907 -- (7,968,954) 2,437,607
Shares issued in
connection with private
placement, net of
offering costs of
$1,302,029.............. -- -- 1,701,225 17,012 10,180,959 -- -- 10,197,971
Shares issued in
connection with exercise
of stock options........ -- -- 17,715 177 119,565 -- -- 119,742
Value of warrants issued
in connection with
bridge financing........ -- -- -- -- 330,114 -- -- 330,114
Net loss................ -- -- -- -- -- -- (8,936,289) (8,936,289)
------- ------ --------- ------- ----------- -------- ------------ ------------
Balance, December 31,
1998.................... -- -- 5,084,340 50,843 21,003,545 -- (16,905,243) 4,149,145
Shares issued in
connection with initial
public offering, net of
offering costs
$2,639,212 ............. -- -- 2,000,000 20,000 12,340,788 -- -- 12,360,788
Issuance of Series A
Preferred Stock in
exchange for bridge
financing............... 162,914 1,629 -- -- 1,036,946 -- -- 1,038,575
Issuance of warrant in
connection with exchange
of bridge financing for
Series A Preferred
Stock................... -- -- -- -- 289,801 -- -- 289,801
Accrued dividend on
Series A Preferred
Stock................... -- -- -- -- (55,201) -- -- (55,201)
Shares issued in
connection with the
acquisition of Texas
International
Laboratories, Inc....... -- -- 521,739 5,217 2,864,348 -- -- 2,869,565
Shares issued in
connection with employee
stock purchase plan..... -- -- 3,502 35 16,757 -- -- 16,792
Net loss................ -- -- -- -- -- -- (11,590,633) (11,590,633)
------- ------ --------- ------- ----------- -------- ------------ ------------
Balance, December 31,
1999.................... 162,914 $1,629 7,609,581 $76,095 $37,496,984 $ -- $(28,495,876) $ 9,078,832
======= ====== ========= ======= =========== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Period from
Inception
(July 10,
1996)
For the Year Ended December 31, through
-------------------------------------- December 31,
1997 1998 1999 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operating Activities:
Net loss.............. $(6,330,783) $(8,936,289) $(11,590,633) $(28,495,876)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization....... 145,858 367,231 1,357,488 1,882,852
Imputed interest on
note payable....... 8,329 -- -- 8,329
Amortization of debt
discount........... -- 20,960 309,154 330,114
Noncash interest
expense............ -- -- 289,801 289,801
Changes in operating
assets and
liabilties, net of
acquisition:
Accounts
receivable......... -- -- (73,446) (73,446)
Inventory........... -- -- (472,123) (472,123)
Prepaid expenses and
other.............. (210,740) (25,118) (20,442) (102,618)
Deposits and other.. 19,933 80,067 2,700 --
Accounts payable.... 208,906 876,904 (72,942) 1,296,950
Accrued expenses.... (346,014) (49,192) 670,621 850,716
Accrued interest.... -- -- 195,068 195,068
----------- ----------- ------------ ------------
Net cash used in
operating
activities....... (6,504,511) (7,665,437) (9,404,754) (24,290,233)
----------- ----------- ------------ ------------
Investing Activities:
Purchases of property
and equipment........ (888,510) (2,005,463) (3,820,634) (7,228,865)
Cash acquired in
purchase of Texas
International
Laboratories, Inc. .. -- -- 118 118
----------- ----------- ------------ ------------
Net cash used in
investing
activities....... (888,510) (2,005,463) (3,820,516) (7,228,747)
----------- ----------- ------------ ------------
Financing Activities:
Net borrowings
(repayments) on line
of credit............ (400,000) -- --
Proceeds from
borrowings under
long-term debt....... -- 2,541,084 2,058,831 5,599,915
Payments on long-term
debt................. -- -- (223,847) (223,847)
Payments on capital
lease obligation..... -- -- (6,139) (6,139)
Deferred offering
costs................ -- (498,443) (2,318) (692,667)
Proceeds from the
issuance of common
stock................ 8,900,134 10,317,713 12,377,580 31,595,427
Payment of stock
subscription......... 98,995 -- -- 98,995
Cash received from
SmithKline Beecham
Corporation in
connection with asset
purchase............. -- -- -- 52,736
----------- ----------- ------------ ------------
Net cash provided
by financing
activities....... 8,599,129 12,360,354 14,204,107 36,424,420
Net Increase in Cash and
Cash Equivalents....... 1,206,108 2,689,454 978,837 4,905,440
Cash and Cash
Equivalents, beginning
of period.............. 31,041 1,237,149 3,926,603 --
----------- ----------- ------------ ------------
Cash and Cash
Equivalents, end of
period................. $ 1,237,149 $ 3,926,603 $ 4,905,440 $ 4,905,440
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Careside
Background
Careside, Inc. ("Careside") is focused on designing products intended to
perform routine diagnostic blood tests in doctors' offices, hospital rooms,
patient homes or anywhere a patient is receiving medical attention. Careside's
first product in development is a compact portable device with related
disposables that performs chemistry, electrochemistry, immunochemistry and
coagulation testing.
In December 1999, Careside completed its acquisition of Texas Instrument
Laboratories, Inc. ("TIL") and merged TIL into a newly formed, wholly-owned
subsidiary, Careside Hematology. TIL manufactures hematology products used
primarily in veterinary applications. Careside and Careside Hematology are
collectively referred to as the Company.
Development Stage Risks and Liquidity
Careside was incorporated in July 1996 to acquire an ongoing, point-of-care
("POC") testing, development-stage product from SmithKline Beecham Corporation
and its affiliates ("SmithKline") and to complete the development of and to
manufacture, market and distribute POC diagnostic products. Since its
inception, Careside has generated minimal revenues and incurred significant
losses. Careside anticipates incurring additional losses over at least the
next year, and such losses are expected to increase as Careside expands its
marketing activities. Substantial financing will be needed by Careside to fund
its operations and to commercially develop its products. The ability of
Careside to commercialize its products will depend on, among other things, the
relative cost to the customer of Careside's products compared to alternative
products, its ability to obtain necessary regulatory approvals and to
manufacture the products in accordance with Good Manufacturing Practices, and
its ability to market and distribute its products. There can be no assurance
that Careside's future product enhancements will receive regulatory clearance
or be profitable in the marketplace.
The accompanying consolidated financial statements have been prepared in
conformity with principles of accounting applicable to a going concern. These
principles contemplate the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements for the year ended December 31, 1999, the
Company incurred a net loss of $11,590,633, has used cash for operating
activities of $9,404,754 and has accumulated a deficit of $28,495,876 since
inception. Management believes that the Company's existing sources of
liquidity, which contemplates that $2,000,000 of bridge financing (see Note 9)
will be converted to equity, together with the proceeds received in March 2000
from its private placement of common stock (see Note 15) will be sufficient to
fund its planned operations into 2001. However, until the Company has
successfully entered its targeted markets, there are uncertainties that may
impact the Company's ability to fund its planned operations and meet its
operational objectives.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Careside and
Careside Hematology. Intercompany accounts and transactions are eliminated in
consolidation.
Use of Estimates
The preparation of 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
F-7
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or
less are presented as cash equivalents in the accompanying consolidated
financial statements. At December 31, 1999, a $453,255 bank overdraft was
included in accrued expenses.
Inventory
Inventories are stated at the lower of cost or market with cost determined
on a first-in, first-out basis, and are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Raw materials............................................ $ -- $369,937
Work in process.......................................... -- 48,620
Finished goods........................................... -- 130,066
-------- --------
$ -- $548,623
======== ========
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets or the lease term, whichever is shorter. The Company uses
lives of two to five years for research and manufacturing equipment and three
to seven years for office equipment. Leasehold improvements generally are
amortized over the life of the lease.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset or a
group of assets may not be recoverable. If an asset is determined to be
impaired, the loss is measured as the amount by which the carrying amount of
the asset exceeds fair value. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required. The Company is still in the
development stage and has not recorded an impairment loss in any period
presented.
Fair Value of Financial Instruments
Cash equivalents are reflected in the accompanying consolidated financial
statements at fair value due to the short-term nature of those instruments.
The carrying amount of long-term debt approximates fair value on the balance
sheet dates based on borrowing rates currently available to the Company for
loans with similar terms and maturities.
Revenue Recognition
The Company recognizes revenue upon shipment, except that revenue from
analyzers is not recognized until customer acceptance.
F-8
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." Under SFAS No. 109, the liability method
is used in accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using
enacted tax rates that are expected to be in effect when the differences
reverse.
Accounting for Stock-Based Compensation
The Company applies Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock
options. The Company follows the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits pro forma disclosure
of the net loss using a fair value-based method of accounting for employee
stock option plans (see Note 10).
Net Loss Per Common Share
The Company has presented net loss per common share pursuant to SFAS No.
128, "Earnings per Share." Basic loss per common share was computed by
dividing net loss applicable to common shareholders by the weighted average
number of shares of common stock outstanding during the period. Dilutive loss
per common share has not been presented since the impact on loss per share
using the treasury stock method is anti-dilutive due to the Company's losses.
Recapitalization
In February 1999, Careside's stockholders approved a 1-for-5.2 reverse stock
split of Careside's common stock to be effective upon consummation of the
initial public offering which took place in June 1999. All references in the
accompanying consolidated financial statements to the number of shares and per
share amounts have been retroactively restated to reflect the reverse stock
split.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Recently Issued Pronouncements
In June 1999, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company is currently
evaluating the potential impact of SFAS No. 133 and SFAS No. 137.
F-9
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Laboratory equipment.... $3,433,811 $ 7,098,808
Computer and office
equipment.............. 106,798 315,414
Leasehold improvements.. 371,239 371,239
---------- -----------
3,911,848 7,785,461
Less--Accumulated
depreciation and
amortization........... (525,364) (1,846,275)
---------- -----------
$3,386,484 $ 5,939,186
========== ===========
</TABLE>
At December 31, 1999, there was approximately $1,600,000 of production
equipment that was in the process of being assembled. Depreciation and
amortization expense for the years ended December 31, 1997, 1998 and 1999, and
the period from inception (July 10, 1996) through December 31, 1999 was,
$145,858, $367,231, $1,320,911 and $1,846,275, respectively.
4. Income Taxes
Deferred income tax assets or liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the enacted marginal income tax rate in effect
for the year in which the differences are expected to reverse. Realization of
the net deferred tax assets is dependent on generating sufficient taxable
income during the periods in which temporary differences will reverse. The
amount of the net deferred tax assets considered realizable, however, could be
adjusted in the near term if estimates of future taxable income during the
reversal periods are revised. Deferred income tax expenses or credits are
based on the changes in the deferred income tax assets or liabilities from
period to period.
At December 31, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $17,769,156. In addition, the
Company has federal research and development credit carryforwards of
approximately $759,464. The net operating loss and credit carryforwards begin
to expire in 2011 and are subject to review and possible adjustment by the
Internal Revenue Service. The Tax Reform Act of 1986 contains provisions that
may limit the net operating loss carryforwards available to be used in any
given year in the event of significant changes in ownership interests.
The components of the deferred income tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1999
----------- ------------
<S> <C> <C> <C>
Net operating loss carryforwards.......... $ 730,438 $ 7,612,306
Research and development credit
carryforwards............................ 224,775 1,115,120
Capitalized research and development...... 1,955,893 2,152,254
Start-up costs............................ 419,936 1,570,460
Accruals.................................. 6,663 18,569
Depreciation and amortization............. 178,623 783,964
Deferred rent............................. -- 31,365
State tax benefit......................... -- (319,686)
Valuation allowance....................... (3,516,328) (12,964,352)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
F-10
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has provided a valuation allowance against the entire
asset.
5. Common Stock Placements
In March 1997, Careside completed a private placement (the "1997 Private
Placement") of 1,923,090 shares of its common stock at $5.20 per share. The
1997 Private Placement raised approximately $8.7 million, net of the placement
agent's commission and offering costs. In connection with the 1997 Private
Placement, the placement agent and its affiliates received warrants to
purchase 384,615 shares of Careside's Common stock at $5.20 per share. These
warrants are currently exercisable and expire seven years from the date of
issuance.
In June 1998, Careside completed a private placement (the "1998 Private
Placement") of 1,701,225 shares of its common stock at $6.76 per share, which
generated net proceeds of approximately $10.2 million. In connection with the
1998 Private Placement, the placement agent and its affiliates received
warrants to purchase 340,237 shares of Careside's common stock at $6.76 per
share. These warrants are currently exercisable and expire seven years from
the date of issuance. In connection with providing financial consulting
services for the 1998 Private Placement, Careside granted an option to
purchase 1,154 shares of common stock at $.05 per share to an entity owned by
a director of Careside.
In June 1999, Careside completed an initial public offering of its common
stock. The offering totaled 2,000,000 shares of common stock and 2,000,000
tradable warrants exercisable into one share of common stock each. The
combined share and warrant were sold at a price of $7.50 per unit. The
warrants are currently exercisable at a price of $9.00 per share and expire on
the earlier of five years from the date of issuance or if they are called.
They are callable at $0.05 per warrant upon 30 days written notice if the
common stock trades for ten consecutive days at a price equal to or exceeding
$14.00 per share.
6. Preferred Stock
In June 1999, the Company exchanged $1,038,575 of bridge financing and
unpaid interest (see Note 9) for 162,914 shares of Series A Convertible
Preferred Stock.
The Series A Convertible Preferred Stock has a stated value equal to $7.50
per share. The Series A Convertible Preferred Stock has preference over common
stock in dividends and has a liquidation preference over common stock of
$7.50, plus all accrued and unpaid dividends. Each share of Series A
Convertible Preferred Stock has one vote on all matters to be voted on by the
holders of the common stock and votes with the holders of the common stock as
one voting group. The Series A Convertible Preferred Stock has the right to
vote as a separate class pursuant to applicable law and on any action limiting
the preferences or rights of the Series A Convertible Preferred Stock,
reclassifying the common stock or any other capital stock ranking junior to
the Series A Convertible Preferred Stock into any class of security ranking
senior to or the same as the Series A Convertible Preferred Stock, or
increasing the authorized number of shares of Series A Convertible Preferred
Stock. The Series A Convertible Preferred Stock bears a cumulative dividend,
which accrues if not declared by the Board of Directors, at an annual rate of
10% of stated value. In 1999, the Company accrued dividends payable in the
amount of $55,201.
Each share of Series A Convertible Preferred Stock is convertible at the
option of the holder into one unit comprised of one share of common stock and
a warrant to purchase one additional share of common stock. All accrued and
unpaid dividends with respect to shares of Series A Convertible Preferred
Stock that are converted will be converted into units at the initial offering
price per unit. The terms and conditions of the warrants received on
conversion of Series A Convertible Preferred Stock, including its exercise
price, will be identical to the terms and conditions of the warrants included
in the units sold in the Offering.
F-11
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has the right to redeem the Series A Convertible Preferred Stock
at any time for a per share amount equal to the sum of $7.50, plus any accrued
and unpaid dividends and the greater of $0.05 or the excess of the average
five day closing price of a share of common stock over the exercise price of
the warrant issuable upon conversion of the Series A Convertible Preferred
Stock.
7. Purchase of Texas Instrument Laboratories, Inc.
In December 1999, the Careside acquired all of the outstanding common stock
of TIL in exchange for 521,739 shares of Careside's common stock. TIL was then
merged into Careside's newly formed, wholly-owned subsidiary, Careside
Hematology. The transaction was accounted for using the purchase method of
accounting. Careside acquired substantially all assets of TIL for $2,869,565,
which represented the market value of the 521,739 shares of common stock on
the date of acquisition. The excess of the purchase price over the book value
of TIL was recorded as goodwill in the amount of $2,834,747. Goodwill will be
amortized over a five-year period. Amortization expense was $36,577 in 1999.
The following unaudited proforma results of operations for the years ended
December 31, 1998 and 1999 have been prepared as if the acquisition of TIL
occurred on January 1, 1998:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1998 1999
----------- ------------
(unaudited)
<S> <C> <C>
Revenue......................................... $ 285,856 $ 321,823
Net loss........................................ (9,532,870) (12,103,215)
Net loss available to common stockholders....... (9,532,870) (12,158,416)
Basic and diluted loss per common share......... (1.85) (1.81)
</TABLE>
8. Related Party Transactions
During 1997, SmithKline loaned Careside $1,000,000, which along with accrued
expenses of $27,985 was converted into an additional 2% equity interest
(129,555 common shares) in Careside upon the closing of the 1997 Private
Placement. SmithKline currently owns 229,808 shares, representing 3.0% of the
current outstanding common stock.
In December 1998, Careside entered into an agreement with an affiliate of
SmithKline for up to $3,000,000 of bridge financing. In 1999, $1,000,000 of
this debt, plus $38,575 of accrued interest of unpaid interest was converted
to Series A Preferred Stock (see Note 9).
F-12
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Note payable, interest at 8%, due on January 31,
2000, net of unamortized discount of $309,154.... $1,190,846 $ --
Note payable, interest at 10%, due on March 17,
2000............................................. -- 2,000,000
Equipment loan due to finance company, interest at
14%, due in monthly installments of principal and
interest of $26,837, with a final payment of
$133,490 in December 2002........................ 1,041,084 854,286
Equipment loan due to finance company, interest at
15%, due in monthly installments of principal and
interest of $14,347, with a final payment of
$69,854 in September 2003........................ -- 521,782
---------- -----------
2,231,930 3,376,068
Less--Current Portion............................. (186,998) (2,316,192)
---------- -----------
$2,044,932 $ 1,059,876
========== ===========
</TABLE>
In December 1998, Careside entered into a $2,500,000 facility with an
equipment financing company. Borrowings under the facility are evidenced as
separate loans and are secured by specific equipment assets. Each equipment
loan has a 48-month term and bears interest at approximately 14% and 15% per
year, adjusted for an index rate based on 48-month U.S. Treasury Notes at the
time of borrowing (6.44% at December 31, 1999). Careside borrowed $1,041,084
in 1998 and $558,831 in 1999 under this facility to finance equipment
purchases. Careside recorded interest expense of $0 and $155,369 in 1998 and
1999, respectively related to these borrowings.
In December 1998, Careside entered into an agreement with an affiliate of
SmithKline for up to $3,000,000 of bridge financing, of which $1,500,000 was
drawn on December 28, 1998 and the remaining $1,500,000 was drawn on January
31, 1999. The outstanding principal under the bridge financing originally
matured upon the earliest of the completion of Careside's initial public
offering (the "Offering"), a private equity financing of at least $8,000,000
or January 31, 2000. The maturity date has been extended to March 24, 2000.
Careside issued a warrant (the "Bridge Warrant") in connection with the bridge
financing. The Bridge Warrant was originally exercisable into that number of
shares of common stock which is equal to $750,000 divided by 85% of the
Offering price per share. The Bridge Warrant has an exercise price equal to
85% of the Offering price. The Bridge Warrant became exercisable in December
1999 and expires on June 16, 2003. Using the Black-Scholes pricing model, the
estimated fair value of the Bridge Warrant was calculated at $330,114 and was
recorded as a reduction in the carrying amount of the bridge note, with a
corresponding increase in stockholders' equity. The discount on the bridge
note was amortized over the estimated term of the note as additional interest
expense. In June 1999, $1,000,000 of the bridge financing plus $38,575 of
unpaid interest was converted to Series A Convertible Preferred Stock (see
Note 6). In connection with the conversion, the Bridge Warrant was modified
such that it will be exercisable into that number of shares of common stock
which is equal to $1,500,000 divided by 85% of the Offering price per share.
Using the Black-Scholes pricing model, the estimated fair value of the
increase in shares under the Bridge Warrant modification was calculated at
$289,801 and was recorded as interest expense in 1999, with a corresponding
increase in stockholders' equity.
F-13
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future maturities of debt at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000.......................................................... $2,316,192
2001.......................................................... 363,598
2002.......................................................... 525,366
2003 ......................................................... 170,912
----------
$3,376,068
==========
</TABLE>
10. Stock Options and Warrants
Stock Options
Careside has adopted the 1996 Incentive and Non-Qualified Stock Option Plan,
1996 Key Executive Stock Option Plan, 1998 Incentive and Non-Qualified Stock
Option Plan and the 1998 Director Stock Option Plan (together, the "Plans"),
which provide for the granting of options to purchase up to 1,201,923 shares
of common stock to directors, officers, consultants and employees of the
Company. At December 31, 1999 701,953 shares were available for future grant
under the Plans. The number of options to be granted and the option prices are
determined by the Board of Directors in accordance with the terms of the
Plans. Generally, options are not granted at prices below the fair market
value at the date of grant. Each option expires on such date as the Board of
Directors may determine. Generally options vest from 3 to 5 years.
The table below summarizes the option activity for 1997, 1998, and 1999:
<TABLE>
<CAPTION>
Weighted Exercisable
Weighted Average Fair Weighted
Average Value of Average
Number of Exercise Options Granted Number Exercise
Shares Price During the Year Exercisable Price
--------- -------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at December
31, 1996............... --
Granted............... 317,163 $5.49 $2.14
------- ----- =====
Outstanding at December
31, 1997............... 317,163 5.49 23,051 $5.28
======= =====
Granted............... 111,950 6.76 $1.83
=====
Exercised............. (17,715) 6.76
Cancelled............. (673) 5.20
------- -----
Outstanding at December
31, 1998............... 410,725 5.78 198,343 $5.08
======= =====
Granted............... 95,017 6.17 $2.82
=====
Exercised............. -- --
Cancelled............. (5,772) 6.07
------- -----
Outstanding at December
31, 1999............... 499,970 $5.85 390,278 $5.76
======= ===== ======= =====
</TABLE>
F-14
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below summarizes information about options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Weighted Average
Range of Number Weighted Average Exercise Price Number
Exercise Outstanding at Remaining of Options Exercisable at
Prices December 31, 1999 Contractual Life Outstanding December 31, 1999
-------- ----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
$0.05-
0.05.. 1,154 7.4 years $0.05 1,154
$5.00-
7.50.. 497,614 7.9 years $5.86 388,884
$8.01.. 1,202 9.0 years $8.01 240
------- --------- ----- -------
$0.05-
8.01.. 499,970 7.9 years $5.85 390,278
======= ========= ===== =======
</TABLE>
As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company continues to apply the accounting rules of APB No. 25 governing the
recognition of compensation expense for employee stock options. Such
accounting rules measure compensation expense on the first date at which both
the exercise price and the number of shares are known. Expense is only
recognized in circumstances where the exercise price is less than the fair
market value at the measurement date. No such expense has been recorded in the
accompanying consolidated statements of operations. In 1998 Careside issued
1,154 options to a consultant. Compensation expense recorded for these options
was immaterial.
Under the requirements of SFAS No. 123 pro forma disclosure of compensation
expense using the fair value method is required to be disclosed if the Company
applies APB No. 25. Pro forma compensation has been computed by estimating the
fair value of options at the date of grant using the Black-Scholes option
pricing model.
The following assumptions were used in estimating the fair value of options:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Weighted average risk-
free interest rate..... 6.41% 5.56% 5.92%
Weighted average
expected life.......... 6.7 years 7.0 years 4.17 years
Weighted average
volatility............. 0% 0% 60%
Dividend yield.......... 0% 0% 0%
</TABLE>
Had the compensation cost of these options been recorded for the years ended
December 31, 1997, 1998 and 1999, the Company's net loss would have increased
by approximately $28,000, $316,000 and 442,256, respectively.
Stock Warrants
The following table summarizes outstanding warrants at December 31, 1999
issued in connection with private placements of Careside's common stock prior
to the Offering:
<TABLE>
<CAPTION>
Outstanding Exercise Expiration
Type of Warrants Warrants Price Issuance Date Date
---------------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Common stock.............. 384,615 $5.20 February 1997 February 2004
Common stock.............. 340,237 $6.76 April 1998 April 2005
-------
724,852
=======
</TABLE>
In addition to the above warrants, the Company issued a Bridge Warrant in
connection with the issuance of debt (see Note 9). The Bridge Warrant became
exercisable in December 1999 and expires in June 2003. Warrants to purchase
200,000 units were granted to the underwriters of the Offering. Each warrant
carries an exercise price
F-15
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of $9.00 and allows the purchase of one share of common stock and a tradable
warrant identical to those sold in the Offering. The warrants are exercisable
for a four year period beginning on the first anniversary of the Offering.
11. Statements of Cash Flows
The Company prepares its statements of cash flows using the indirect method
as defined under SFAS No. 95. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Supplemental cash flows disclosures are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Cash paid for interest................................. $ -- $ -- $157,653
Cash paid for income taxes............................. -- -- --
</TABLE>
Non-cash Investing and Financing Activities:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----------
<S> <C> <C> <C>
Conversion of bridge financing to Series A
Preferred Stock................................... $ -- $ -- $1,038,575
Acquisition of equipment under capital lease....... -- -- 52,980
Accrued dividends on Series A Preferred stock...... -- -- 55,201
</TABLE>
In connection with the Company's initial public offering, $498,433 of
previously unpaid deferred offering costs were offset against accounts
payable.
In connection with the acquisition of TIL in December 1999, the Company
recorded the following non-cash amounts which have been excluded from the
consolidated statement of cash flows:
<TABLE>
<S> <C>
Additional paid-in capital..................................... $2,869,565
Goodwill....................................................... 2,834,747
Net assets acquired............................................ 34,818
</TABLE>
12. Commitments
Leases
The Company leases office and laboratory facilities under noncancelable
operating leases expiring from August 2000 to July 2006. Rent expense for the
years ended 1997, 1998 and 1999 and the period from inception (July 10, 1996)
through December 31, 1999 was $156,756, $156,756, $174,497 and $514,135,
respectively.
Included in property and equipment is approximately $52,980 of equipment, at
acquisition cost, which is leased under a noncancellable lease accounted for
as a capital lease expiring in June 2003.
F-16
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, the future minimum annual rental payments under lease
agreements are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
-------- ---------- ----------
<S> <C> <C> <C>
December 31:
2000................................... $ 16,875 $ 189,065 $ 205,940
2001................................... 16,875 219,515 236,390
2002................................... 16,875 238,746 255,621
2003................................... 9,019 253,965 262,984
2004................................... -- 263,577 263,577
Thereafter............................. -- 435,820 435,820
-------- ---------- ----------
59,644 $1,600,688 $1,660,332
========== ==========
Less--Amount representing interest at
approximately 14 percent................ (12,803)
--------
Present value of minimum lease payments.. 46,841
--------
Less--Current portion.................... (11,006)
--------
$ 35,835
========
</TABLE>
Collaborative Arrangements
Careside has utilized strategic partners with specific design and technology
expertise in order to develop the Careside system rapidly and on a cost-
effective basis. Careside has agreements with (i) Fuji Photo Film Co., Ltd.
for the supply of its dry film based chemistry reagents, (ii) International
Technidyne Corporation for the joint development of coagulation reagents,
(iii) UMM Electronics, Inc. to design and manufacture the CareSide Analyzer
and (iv) Advanced Medical Information Technologies, Inc. to develop software
to link the Careside system and other medical devices, including the
hematology device. In addition, Careside contracted with Hauser, Inc. for the
design of the Careside system and with Battelle Memorial Institute for the
design of the system's disposable test cartridges and their automated assembly
manufacturing system. TIL has agreements with Ysebaert, Inc., the manufacturer
of the Hematology Analyzer. The Company's agreements with its strategic
partners do not obligate it to any minimum purchase commitments.
The Company purchases its dry film based chemistry reagents solely from Fuji
Photo Film Co., Ltd. In addition, UMM Electronics, Inc. is the sole designer
and manufacturer of the Careside Analyzer. The loss of these suppliers could
impact the Company's ability to obtain and produce these items in the short-
term. However, the Company believes that acceptable alternative suppliers are
available.
Employment Agreements
The Company has entered into three-year renewable employment agreements with
three of its executive officers that provide for aggregate annual compensation
of approximately $543,325.
13. Retirement Plan
The Company maintains a 401(k) profit sharing plan on behalf of its
employees. Participation in the plan is voluntary and eligible employees, as
defined, may contribute up to 15% of their compensation to the plan. The
Company matches 50% of the employee's contribution up to 4% of an employee's
compensation. Contributions
F-17
<PAGE>
CARESIDE, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under the Plan were, $32,315, $34,657, 47,195 and $114,167 for the years ended
1997, 1998 and 1999 and the period from inception (July 10, 1996) through
December 31, 1999, respectively.
14. Employee Stock Purchase Plan
In 1999, the Company's shareholders approved the Employee Stock Purchase
Plan ("ESPP"), under which 150,000 shares of the Company's common stock could
be sold to employees. Each quarter, an eligible U.S. employee may elect to
withhold up to 15 percent of his or her salary to purchase shares of the
Company's stock at a price equal to 85 percent of the fair value of the stock
as of the first day of the quarter, or the last day of the quarter. The ESPP
will terminate at the earlier of the date that all 150,000 shares have been
sold or the date as of which the Board of Directors chooses to terminate the
plan as provided in the plan provision. In 1999, 3,502 shares of the Company's
stock were sold under the ESPP for $16,792, and at December 31, 1999,
146,498 shares remained available for sale.
15. Subsequent Events
In January 2000, the Company financed the purchase price of certain
equipment totaling $795,465 and pledged the equipment as collateral. The loan
is paid in monthly installments and is due over 48 months.
In January 2000, the Company granted 86,500 options under the 1996 and 1998
stock option Plans with a weighted average exercise price of $10.00.
In March 2000, the Company sold 956,039 shares of common stock in a private
placement for $7,626,270, net of $758,192 of offering costs. The Company has
agreed to file a registration statement with the Securities and Exchange
Commission to register these shares by April 7, 2000. In connection with the
sale, the Company issued a warrant for nominal value exercisable into 114,725
shares of the Company's common stock at an exercise price of $0.01 per share.
The warrant is exercisable upon certain conditions and expires on December 15,
2000.
F-18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 3,927 4,905
<SECURITIES> 0 0
<RECEIVABLES> 0 78
<ALLOWANCES> 0 0
<INVENTORY> 0 549
<CURRENT-ASSETS> 4,009 5,635
<PP&E> 3,912 7,785
<DEPRECIATION> (525) (1,846)
<TOTAL-ASSETS> 7,911 14,389
<CURRENT-LIABILITIES> 1,717 4,215
<BONDS> 0 0
0 0
0 2
<COMMON> 51 76
<OTHER-SE> 21,004 37,497
<TOTAL-LIABILITY-AND-EQUITY> 7,911 14,389
<SALES> 0 61
<TOTAL-REVENUES> 0 61
<CGS> 0 31
<TOTAL-COSTS> 0 31
<OTHER-EXPENSES> 9,148 10,875
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 22 971
<INCOME-PRETAX> (8,936) (11,591)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,936) (11,591)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,936) (11,591)
<EPS-BASIC> (1.93) (1.88)
<EPS-DILUTED> (1.93) (1.88)
</TABLE>
