<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File
March 31, 1996 No. 0-9767
----------------------
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2579751
(State or other (I.R.S. Employer
jurisdiction of identification
incorporation or No.)
organization)
9162 Eton Avenue, Chatsworth Ca. 91311
(Address of principal executive offices) (Zip Code)
Telephone Number: 818-709-1244
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
------- -------
The number of shares of Common Stock of the registrant outstanding as of May 6,
1996 was 6,287,712.
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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
INDEX TO FORM 10-Q
Three months ended March 31, 1996 and 1995
PAGE
PART 1 - FINANCIAL INFORMATION
ITEM 1 - Consolidated Financial Statements
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Operations. . . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements.. . . . . . . . . . . . . . . . . 5
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 13
PART 2 - OTHER INFORMATION
ITEM 6 - Exhibits And Reports on Form 8-K
(a) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 19
1
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PART 1 FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
December 31 March 31
A S S E T S 1995 1996
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,511,395 --
Short-term investments 4,736,727 4,616,857
Accounts receivable-trade, net of allowance for doubtful
accounts of $35,443 in 1995 and $87,759 in 1996 3,402,007 4,086,753
Accounts receivable-service contracts 481,367 582,014
Accounts receivable-other 407,245 862,658
Inventories 2,869,813 3,171,606
Prepaid expenses and other current assets 238,683 256,495
Deferred tax asset 800,900 800,900
------------ -------------
Total current assets 14,448,137 14,377,283
Property and equipment, at cost, net of accumulated
depreciation 995,044 1,346,370
Software development costs, net of accumulated
amortization of $667,425 in 1995 and $675,180 in 1996 298,030 434,151
Long term investments 100,000 100,000
Deferred warrant costs 1,574,780 1,547,155
Deferred tax asset 3,594,100 3,594,100
Other assets 1,460,157 1,864,481
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Total assets $ 22,470,248 $ 23,263,540
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 810,819 $ 1,245,526
Notes payable 185,633 --
Accrued expenses 1,276,099 1,363,269
Service contracts-deferred income 685,907 686,364
Total current liabilities 2,958,458 3,295,159
Notes payable - long term portion 150,000 --
Service contracts-deferred income 190,045 234,043
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Total liabilities 3,298,503 3,529,202
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Shareholders' equity:
Common stock, $.01 par value
Authorized: 15,600,000 shares
Issued and outstanding: 6,292,408 in 1995
6,374,970 in 1996 62,924 63,750
Additional paid-in capital 34,154,116 34,169,223
Treasury stock (96,473 and 84,462 shares in 1995 and 1996) (453,386) (377,980)
Unearned compensation (95,884) (66,848)
Deficit (14,496,025) (14,053,807)
------------ -------------
Total shareholders' equity 19,171,745 19,734,338
------------ -------------
Total liabilities and shareholders' equity $ 22,470,248 $ 23,263,540
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31
-----------------------------------
1995 1996
---- ----
<S> <C> <C>
Sales of workstations and related supplies $ 1,889,816 $ 2,753,537
Sales of other instruments and related supplies 680,065 882,276
Service contracts 597,396 708,758
Research and development contracts 274,360 812,687
------------ -------------
Net sales 3,441,637 5,157,258
------------ -------------
Cost of goods from workstations and supplies 774,875 1,144,121
Cost of goods from other instruments and supplies 420,376 487,714
Cost of goods from service contracts 436,218 528,932
Cost of research and development contracts 319,360 822,318
------------ -------------
Cost of goods sold 1,950,829 2,983,085
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Gross margin 1,490,808 2,174,173
Marketing and selling 639,977 794,410
General and administrative 428,160 719,321
Research and development expenses 131,314 260,472
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Total 1,199,451 1,774,203
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Operating income 291,357 399,970
Other income:
Interest income 83,908 54,433
Other income 34,229 27,815
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Income before provision for income taxes 409,494 482,218
Provision for income taxes 12,000 40,000
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Net income $ 397,494 $ 442,218
------------ -------------
------------ -------------
Net income per share $ .06 $ .07
------------ -------------
------------ -------------
Weighted average number of common shares and common
share equivalents outstanding for the period 5,910,561 6,513,281
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
For the three months ended March 31
-----------------------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating expenses:
Net income $ 397,494 $ 442,218
Adjustments to reconcile net income to
cash provided by operations:
Depreciation and amortization 89,676 106,329
Common stock compensation 11,702 29,036
Changes in assets and liabilities:
Accounts receivable - trade 469,583 (684,746)
Accounts receivable - other (187,177) (455,413)
Service contracts, net (86,728) (56,190)
Inventories 44,761 (301,793)
Prepaid expenses and other current assets (79,880) (17,812)
Accounts payable (305,762) 377,365
Accrued expenses (277,942) 87,170
------------ -------------
Net cash provided by operating activities (124,273) (473,836)
------------ -------------
Cash flows from investing activities:
Acquisition of property and equipment, (165,330) (446,900)
Acquisition of product line -- (213,700)
Software development costs (2,615) (146,876)
Acquisition of other assets (787,910) (162,999)
(Increase) decrease in short term investments (429,871) 119,869
------------ -------------
Net cash used in investing activities (1,385,726) (850,606)
------------ -------------
Cash flow from financing activities:
Notes payable (200,000) (335,633)
Issuance of common stock for cash 174,656 29,893
Issuance of common stock for cash under Employee Stock
Purchase Plan -- 61,445
Book overdraft -- 57,342
------------ -------------
Net cash provided by financing activities 174,656 (186,953)
------------ -------------
Net decrease in cash and cash equivalents (1,335,343) (1,511,395)
Cash and cash equivalents at beginning of period 2,688,250 1511,395
------------ -------------
Cash and cash equivalents at end of period $ 1,352,907 $ --
------------ -------------
Supplemental schedule of non cash investing activities:
Issuance of warrants for acquisition of other assets $ 213,750 $ --
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY.
International Remote Imaging Systems, Inc. (IRIS) was incorporated in
California in 1979 and reincorporated during 1987 in Delaware. In February
1996, IRIS acquired StatSpin Technologies, IRIS engages in the business of
developing, manufacturing and selling microscopical image analyzing systems and
other laboratory instruments based on proprietary technologies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
In the opinion of IRIS, the accompanying unaudited financial statements
contain all normal recurring adjustments necessary to present fairly the
financial position of IRIS as of March 31, 1996 and the results of its
operations and cash flows for the three months ended March 31, 1996 and 1995.
It is suggested that these financial statements be read in conjunction with the
financial statements and notes included in the latest IRIS annual report on Form
10-K. Interim results are not necessarily indicative of results for a full
year.
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
statement and the reported amount of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Principles of consolidation:
The financial statements include the accounts of IRIS and StatSpin
Technologies, a wholly-owned subsidiary acquired on February 1, 1996. All
significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements. IRIS acquisition of StatSpin was recorded
using the pooling-of-interest method of accounting.
Cash, Cash Equivalents and Short-term Investments:
Short-term investments principally include certificates of deposit and debt
instruments of the United States Government with initial maturities greater than
three months and less than one year. Long term investments represent
certificates of deposit and debt instruments with maturities greater than one
year. IRIS considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. IRIS places its cash
and investments with high credit quality institutions. At times, these deposits
may be in excess of the federally insured limit.
Accounts Receivable:
IRIS sells predominantly to entities in the healthcare industry. IRIS
grants uncollateralized credit to customers, primarily domestic hospitals. IRIS
performs ongoing credit evaluations of its customers before granting
uncollaterized credit and, to date, has not experienced any material credit
related losses.
Property and Equipment and Depreciation:
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
three to five years, the estimated useful lives of these assets. Leasehold
improvements are amortized over the lesser of their useful life or the remaining
term of the lease.
Costs of maintenance and repairs are charged to expense when incurred;
costs of renewals and betterments are capitalized. Upon sale or retirement,
the cost and related accumulated depreciation are eliminated from the respective
accounts and the resulting gain or loss is included in current income.
5
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Software Development Costs:
IRIS capitalizes certain software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86 -- "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" for new
products currently under development and product enhancements once technological
feasibility has been established. IRIS amortizes capitalized software costs
using the greater of the straight line method divided by the estimated
product life, or a percentage of total units sold over the projected sales.
Amortization of software development costs was $7,775 and $5,752 for the
three months ended March 31, 1996 and 1995, respectively.
Deferred Warrant Costs:
Deferred warrant (see balance sheets "Deferred Warrant Costs") costs are
the result of the issuance of warrants in conjunction with various development
agreements and a product line acquisition. These costs are being amortized on a
straight line basis over the expected life of the related technology of ,
generally, ten years.
Revenue Recognition:
IRIS derives revenue from the sale of urinalysis workstations, other
laboratory instruments and related supplies, the sales of service contracts and
repairs, and research and development contracts. IRIS generally recognizes
product revenues once all of the following conditions have been met: (i) an
authorized purchase order has been received in writing, (ii) customer credit
worthiness has been established, and (iii) shipment of the product to the
customer designated location has occurred. Estimated installation expense is
recognized as part of the accrual for warranty expenses at the time of shipment.
IRIS recognizes service revenues ratably over the term of the service
period, which typically ranges from twelve to sixty months. Payments for
service contracts are generally made in advance. Deferred revenue represents
the revenues to be recognized over the remaining term of the service contracts.
Revenues are recognized under research and development contracts in amounts
equivalent to reimbursable research and development costs incurred on the
related project plus, where contractually provided for, an amount to cover
general and administrative costs of the project.
Warranties:
IRIS recognizes the full estimated cost of warranty expense at the time of
product shipment.
Research and Development Expenditures:
Except for certain software development costs required to be capitalized as
described above (see Software Development Costs), research and development
expenditures are charged to operations as incurred.
Income Taxes:
In 1993, IRIS changed its method of accounting for income taxes by adopting
SFAS No. 109, "Accounting for Income Taxes," which requires recognition of
deferred tax liabilities and assets for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based
on the difference between the financial statement and the tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense represents the tax payable for the period and
the change during the period in deferred tax assets and liabilities.
6
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3. MARKETABLE DEBT SECURITIES.
On January 1, 1994, IRIS adopted Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115) and determined that all its debt securities should be
classified as "held-to-maturity" based on the Company's intent and ability to
hold those securities to maturity. Under SFAS 115, debt securities classified as
"held-to-maturity" are carried at amortized cost.
At March 31, 1996, IRIS had the following debt securities included in
short-term and long-term investments:
Expected Maturity Value and Period
----------------------------------
Amortized Cost Within One One to Five
-------------- ---------- -----------
Year Years
---- -----
US Treasury Bills $3,816,073 $4,033,000
US Treasury Note 100,000 $100,000
4. INVENTORIES.
Inventories, with the exception of rental units, are carried at the lower
cost or market on a first in, first out basis and are composed of the following:
December 31, 1995 March 31, 1996
----------------- --------------
Finished goods $ 316,218 $ 272,000
Work-in-process 195,266 261,402
Raw materials, parts,
sub-assemblies 2,358,329 2,638,204
----------- ----------
$ 2,869,813 $ 3,171,606
----------- ----------
----------- ----------
5. PROPERTY AND EQUIPMENT.
Property and equipment is composed of the following:
December 31,1995 March 31, 1995
---------------- --------------
Leasehold improvements $ 327,178 $ 341,897
Furniture and fixtures 115,544 188,474
Machinery and equipment 2,718,211 2,507,416
Tools, dies, and molds 236,694 804,566
Rental units 166,268 180,407
---------- ---------
3,563,895 4,022,760
---------- ---------
Less accumulated depreciation (2,568,851) (2,676,390)
---------- ---------
$ 995,044 $ 1,346,370
---------- ---------
---------- ---------
Property and equipment includes $1,304,448 and $1,284,448 for March 31,
1996 and December 31, 1995, respectively, of fully depreciated assets which
remain in service. Depreciation expense was $106,000 and $83,000 for the three
month periods ended March 31, 1996 and 1995, respectively. Maintenance and
repairs expense for the three months period ended March 31, 1996 and 1995 was
$13,000 and $12,000, respectively.
Rental units are carried at cost less accumulated depreciation ($175,123
at March 31, 1996 and $163,952 at December 31, 1995). Future minimum rental
revenue on noncancellable lease as of March 31, 1996 is approximately $204,000
due during 1996.
7
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6. ACCRUED EXPENSES.
Accrued expenses are composed of the following:
DECEMBER 31, 1995 MARCH 31, 1996
Accrued bonuses $ 366,372 $ 116,149
Accrued commission 76,079 90,000
Accrued payroll 72,405 33,122
Accrued vacation 135,832 149,515
Accrued professional fees 113,403 93,202
Accrued taxes - other 64,564 33,448
Accrued expenses - other 140,121 549,260
Accrued warranty expense 307,323 298,573
----------- ----------
$ 1,276,099 $ 1,363,269
----------- ----------
----------- ----------
7. INCOME TAXES.
The income tax provision for the three months ended March 31, 1996 and 1995
consists of estimated alternative minimum taxes and reflects the utilization of
net operating loss carryforwards for both federal and state purposes.
In the fourth quarter of 1995, IRIS recognized a tax benefit of
$3,587,000 through a reduction in the Company's deferred tax asset valuation
allowance. This reduction in the valuation allowance resulted principally
from the Company's assessment of the realizability of its net operating loss
carryforwards based on recent operating history as well as an assessment that
operations will continue to generate taxable income. Realization of the
deferred tax assets are dependent upon continued generation of sufficient
taxable income prior to expiration of the loss carryforwards. Although
realization is not assured, management believes it is more likely than not
that the remaining net deferred tax assets will be realized. The amount of
the deferred tax assets considered realizable, however, could be reduced in
the future if estimates of future taxable income during the carryforward
period are reduced.
At March 31, 1996, IRIS had federal and state net operating loss
carryforwards of $13.8 million and $323,000, respectively, which expire in
fiscal years ending in 2000 through 2010. As of March 31, 1996, IRIS had
investment tax and R & D credit carryforwards of approximately $72,000 expiring
in fiscal years through 2003.
8. LDA AND WARRANTS.
In October, 1992, LDA Systems, Inc. (LDA) completed an initial public
offering of 107,750 units, each unit consisting of one share of callable LDA
common stock and ten IRIS warrants, each five warrants entitling the holder to
purchase one share of IRIS common stock for $3.75, exercisable at any time from
November 16, 1992 through July 31, 1995. LDA received net proceeds of $774,000
from the unit offering. LDA used these funds to engage IRIS during the period
October 1992 through June 1995 to conduct research, development, clinical
evaluations and pre-market testing of The White IRIS-Registered Trademark-, a
proposed new product, in accordance with a research and development contract. In
addition, IRIS funded an additional $500,000 of the development costs at a rate
of $15,000 per month during this period.
On April 25, 1994, LDA completed the sale of additional units to Corange
Limited consisting of 85,714 shares of callable LDA common stock and warrants to
purchase an aggregate of 248,571 shares of IRIS common stock at an exercise
price of $3.75 per share. As part of the investment agreement, Corange was
granted the option to participate with LDA in the joint development,
manufacture, and marketing of certain future hematology instruments. This
option expired October 30, 1995.
IRIS had the option to purchase for cash or shares of IRIS common stock all
of the outstanding shares LDA common stock at $20 per share until November 29,
1995. In June 1995, IRIS completed the acquisition of LDA for approximately
498,000 shares of IRIS Common Stock. IRIS acquired LDA
8
<PAGE>
pursuant to the exercise of its call option under the LDA Restated Certificate
of Incorporation to purchase all the outstanding shares of LDA Common Stock
tendering 2.5765 shares of IRIS Common Stock for each share of LDA Common Stock.
As a result of the acquisition, IRIS incurred a non-recurring charge of
approximately $2.9 million against earnings for the acquisition of in-process
research and development (i.e., work-in-process not yet cleared for interstate
commerce by the Food and Drug Administration).
The following unaudited pro forma combined financial information gives
effect to the acquisition of LDA by IRIS under the purchase method of accounting
as though the acquisition had occurred on January 1, 1994. Substantially all of
the purchase price for the acquisition of LDA paid by IRIS, including amounts of
liabilities of LDA to be assumed by IRIS, has been allocated to in-process
research and development. Under the purchase method of accounting, the
purchased research and development has been written off as of the purchase date.
The one time write-off of in-process research and development of approximately
$2.9 million is excluded from the pro forma information as it represents a non-
recurring item.
December 31, 1994 December 31, 1995
----------------- -----------------
Net revenues $10,661,943 $12,644,655
Net income $331,767 $4,812,003
Primary and fully diluted
earnings per share $0.06 $0.79
The pro forma combined financial information is presented for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the merger been consummated as of the above dates. In
addition, the pro forma results are not intended to be a projection of future
results.
9. PSI DEVELOPMENT AGREEMENT.
On September 25, 1995, Poly U/A Systems, Inc. (PSI) engaged IRIS to develop
several new products based on IRIS and other technology to further enhance
automation in the urinalysis field. Under the terms of the project, PSI will
have the right to use the IRIS technology and any newly developed technology for
developing, manufacturing and marketing the new products as stand-alone devices,
and IRIS will have the right to use any newly developed technology for any other
purpose and to incorporate the new products into The Yellow IRIS-Registered
Trademark-. PSI has retained IRIS to conduct the research, development,
clinical evaluation and pre-market testing of the proposed new products. IRIS
will fund the first $15,000 per month (up to a maximum of $500,000) of the cost
of the project, and PSI will reimburse IRIS for the excess. IRIS has an option
until 121 days after termination of the project (which terminates not later than
July 31, 1998) to acquire all of the Common Stock of PSI at prices rising over
time from $14 to $20 per share of PSI Common Stock. IRIS may pay the option
exercise price in cash or with shares of IRIS Common Stock. IRIS is also
providing financial and administrative services to PSI at cost.
PSI, a privately-held company based in Los Angeles, California, was organized
in June 1995 to undertake the commercial development of several potential
products based on technology developed or licensed by IRIS. In order to fund
its share of the project, PSI, in 1995, raised net proceeds of $2.0 million
through the sale of 128 units at the price of $20,000 per unit. Each unit
consists of 2,000 shares of PSI's Callable Common Stock and a warrant to
purchase 4,000 shares of IRIS Common Stock. In the aggregate, investors
purchased 256,000 shares of PSI's Callable Common Stock and warrants to purchase
512,000 shares of IRIS Common Stock. The IRIS warrants are exercisable at $6.50
per share during the last two years of their three-year duration. In connection
with PSI's sale of units, IRIS also issued warrants to the placement agent and
the finder to purchase an aggregate of 150,000 shares of IRIS Common Stock.
These warrants are exercisable at $7.80 per share for a five year period and
include certain registration rights.
9
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10. REFERENCE LAB AGREEMENT.
During the first quarter of 1995, IRIS and Boehringer Mannheim Corporation
(Bmc) and Boehringer Mannheim GmbH (BMG), its German affiliate, announced a
joint project to develop a high capacity automated urinalysis system
primarily for reference laboratories based on the proprietary technologies of
both companies. The program is jointly funded by both companies. In addition
to designing specific components of the new system, BMG originally agreed to
pay IRIS a fixed amount of $640,000 for its research and development of the
project. During the first quarter of 1996, BMG agreed to pay IRIS an
additional $350,000 to complete the project.
In connection with this project and certain distribution considerations,
IRIS issued Corange (an affiliate of BMG) warrants to purchase 250,000 shares
of IRIS common stock at an exercise price of $7.375 per share and granted
Corange certain registration rights with respect to the shares of IRIS common
stock issuable upon exercise of these warrants.
11. PRODUCT LINE ACQUISITIONS.
During the first quarter of 1995, IRIS acquired the digital refractometer
product line of Biovation, Inc. for $850,000 in cash and warrants to purchase
75,000 shares of IRIS Common Stock at an exercise price of $8.125 per share.
IRIS granted Biovation certain registration rights with respect to the shares of
IRIS Common Stock issuable upon exercise of these warrants. The product line
consists of a patented device known as a digital refractometer and the related
consumables used in the operation and maintenance of the refractometer.
In March 1996, IRIS acquired the urinalysis business of UroHealth Systems,
Inc. for $850,000; $788,000 in cash and $62,000 in the assumption of
liabilities. UroHealth Systems generated 1995 revenues of approximately
$550,000 from this business which consists primarily of manufacturing and
marketing two proprietary product lines: the Cen-Slide-Registered Trademark-
1500 System for centrifugal urine sedimentation and manual microscopic
examination and the FloStar-Registered Trademark- urine specimen collection and
dispensing container. These products are used primarily by hospital and
physician office laboratories in manually performing routine urinalysis. Among
other things, IRIS acquired seven U.S. patents and eight corresponding foreign
patents as well as the design for the unique centrifuge used in the
Cen-Slide-Registered Trademark- system.
IRIS is transferring production of these products to its StatSpin subsidiary
and will market them under the IRIS/StatSpin label through StatSpin's existing
distribution channels.
12. CAPITAL STOCK.
Stock Issuances:
During 1990, the IRIS Board of Directors adopted an Employee Stock Purchase
Plan designed to allow employees of the Company to buy its shares at 50% of the
then current market price, provided that the employee agrees to hold the shares
purchased for a minimum of 2 years. Payments for the 50% portion may be made at
the option of the employee either by payroll deduction or by lump sum payment,
but in no event may it exceed more than 15% of the employee's total compensation
during any year. The remaining 50% portion is recorded as deferred compensation
and amortized over the vesting period. The shares purchased pursuant to the
Plan may not be transferred, except following the death of the employee or a
change in control, for a period of 2 years following the date of purchase.
During the period of the limitation on transfer, IRIS has the option to
repurchase the shares at the employee purchase price, if the employee terminates
employment with IRIS either voluntarily or as a result of termination for cause.
During the periods ended March 31, 1996 and 1995, IRIS issued 15,882 and 3,200
shares of common stock, respectively, in exchange for $61,445 and $17,680 in
cash and services, respectively, under the Plan.
In addition during the quarter ended March 31, 1995, IRIS issued 8,000
shares of stock on exercise of stock options granted to employees, former
employees and consultants.
10
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Stock Options:
For the three months ended March 31, 1996, 122,400 shares of common stock
were granted under the 1994 Stock Option Plan. Options for 8,000 shares were
exercised and options for 9,600 shares were canceled. At March 31, 1996,
options to purchase 728,201 shares of common stock were issued and
outstanding under IRIS stock option plans. The outstanding options expire by
the end of 2006. The exercise price for these options range from $1.10 to
$5.42 per share for an aggregate exercise price of $3,239,200. There were an
additional 216,267 shares available at March 31, 1996, for the granting of
future options.
Warrants:
At March 31, 1996, there were warrants outstanding and exercisable to
purchase 250,000 shares of common stock exercisable at $7.375 per share until
February 6, 1998, 75,000 shares at $8.125 per share until March 30, 1998,
512,000 shares at $6.50 per share until September 29, 1998 and 150,000 shares at
$7.80 per share until September 28, 2000.
Preferred Stock:
IRIS is authorized to issue 3,000,000 shares of preferred stock in one or
more series with such terms as may be designated by the Board of Directors.
There is no preferred stock outstanding.
13. COMMITMENTS.
Leases:
IRIS leases its primary business location at a monthly rent of $13,623,
subject to increases based on the Consumer Price Index. IRIS has the option to
renew the lease for two additional three-year periods commencing on July 3,
1997. Through its StatSpin subsidiary ( acquired in March 1996) located at 85
Morse Street, Norwood, Massachusetts, IRIS leases an additional 10,851 square
feet of office, laboratory, and manufacturing space. The monthly rent for this
space is approximately $7,100. While IRIS does not have any material amount of
unused space in its facilities, it has sufficient capacity now and expects it
capacity to be sufficient to meet any reasonable production increases in the
near term.
At March 31, 1996, the minimum lease payments due over the remaining life
of this lease and an automobile lease were:
Year ended
DECEMBER 31 AMOUNT
----------- ------
1996 (nine months) $ 198,435
1997 196,735
-------
$ 395,170
-------
Rent expense under all operating leases during the three months ended March
31, 1996 and 1995 was $47,310 and $44,973, respectively.
Other:
Effective September 1, 1988, IRIS entered into a consulting and licensing
agreement with Cytocolor, Inc. relating to the use of a patented leukocyte stain
in The White IRIS-TM-, a product currently under development by IRIS. Under the
terms of the agreement, IRIS is subject to the following future royalty
payments:
Royalty
-------
1997 $ 20,000
1998 20,000
1999 20,000
Years thereafter 280,000
-------
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$340,000
-------
-------
In connection with the development agreement with PSI, IRIS has agreed to
fund $15,000 per month (up to a maximum of $500,000) of the cost of the
development project (see Note 9).
14. EARNINGS PER SHARE.
The computation of per share amounts for the three months ended March 31,
1996 and 1995 is based on the weighted average number of common shares and
common share equivalents outstanding for the period. Fully diluted and primary
earnings per share were $.07 and $.06 for the three months ended March 31,
1996 and 1995, respectively.
15. LICENSES.
Pursuant to earlier payments and certain agreements with TOA Medical
Electronics Co., Ltd. (TOA), TOA has developed a urine sediment analyzer under
license from IRIS using pre-1989 IRIS technology. The 1995 royalty amount
reflects an agreement with TOA to temporarily increase the amount of the royalty
from 3% to 5% and the scope of the royalty to apply to revenue on consumables
and service contracts, as well as instruments. These changes were made
retroactive to October 1994 and expire in September 1996, at which time the
scope and amount of the royalty will revert to their original term unless TOA
exercises its right under the temporary agreement to negotiate a permanent
change to the license. IRIS received royalties of $22,000 and $32,000,
respectively, for the periods ended March 31, 1996 and 1995.
16. EXPORT SALES.
IRIS had export equipment sales of $39,619 and $52,350, respectively,
during the three month periods ended March 31, 1996 and 1995.
17. SIGNIFICANT EVENTS.
StatSpin Merger:
On February 1, 1996, a newly formed subsidiary of IRIS completed its merger
with Norfolk Scientific, Inc., d/b/a/ StatSpin Technologies, (StatSpin), which
became a wholly owned subsidiary of IRIS. StatSpin manufactures special purpose
centrifuges and other small instruments widely used in clinical, veterinary,
physicians offices and research laboratories and sells its products primarily
through leading distributors to the physician office and veterinary laboratory
markets. IRIS issued approximately 340,000 shares of common stock for all of
the outstanding common stock and appreciation rights of StatSpin and assumed
options and warrants to purchase and additional 126,000 shares of IRIS common
stock. This represents an exchange ratio of 4.095 shares of IRIS for each
common share and stock appreciation right of StatSpin. This transaction is
being accounted for as a pooling-of-interests.
18. RESEARCH AND DEVELOPMENT FUNDING.
During the first quarter of 1995, IRIS and BMG announced a joint project to
develop a high-capacity, automated urinalysis system for reference laboratories
based on the proprietary technologies of both companies. The program is jointly
funded by BMG and IRIS. During the first quarter of 1996, IRIS received
$150,000 from BMC as partial payment for this project. (See Note 10).
In September 1995, IRIS and PSI entered into a joint project to develop
several new products based on IRIS technology (the PSI Products) to further
enhance automation in the urinalysis field. (See Note 9).
Development contract revenues and costs connected with the PSI Products and
the Reference Lab projects are as follows:
Three months ended March 31,
----------------------------
1995 1996
---- ----
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Revenues $274,360 $812,687
Costs (319,360) (822,318)
------- -------
$(45,000) $ (9,631)
------- -------
------- -------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
In 1995, IRIS began implementing a new strategy to expand its urinalysis
business by adding a line of proprietary cost-effective, outcome-enhancing
urinalysis products suitable for laboratories of all sizes. As part of this
strategy, IRIS acquired (i) the digital refractometer product line of Biovation,
Inc. in March 1995, (ii) the complete business of StatSpin Technologies in
February 1996 and (iii) the urinalysis business of UroHealth Systems, Inc. in
March 1996. IRIS may pursue additional acquisitions in the future consistent
with this strategy. See "Business--Narrative Description of Business--Recent
Acquisitions" in the IRIS Annual Report on Form 10-k for the year ended December
31, 1995 ("IRIS Annual Report").
During March 1995, IRIS acquired the digital refractometer product line of
Biovation, Inc. for $850,000 in cash and warrants to purchase 75,000 shares of
IRIS Common Stock at an exercise price of $8.125 per share. The product line
consists of manufacturing and marketing a patented device known as a digital
refractometer and the related consumables used in its operation and maintenance.
During February 1996, IRIS acquired Norwood, Massachusetts based Norfolk
Scientific, Inc. for approximately 340,000 shares of IRIS Common Stock and the
assumption of options and warrants to purchase an additional 126,000 shares of
IRIS Common Stock. Norfolk Scientific, which conducts business under the trade
name "StatSpin Technologies," manufactures special purpose centrifuges and other
small laboratory instruments and plastic consumable items used in their
operation. StatSpin had net sales of $3.1 million for the twelve months ended
December 31, 1995. The total consideration paid by IRIS (including the
immediately realizable value of the assumed options and warrants) is estimated
at $3,000,000 based on a negotiated price of $7.58 per share of IRIS Common
Stock in the transaction. The acquisition was accomplished through the merger
of the newly-formed subsidiary of IRIS into StatSpin, with StatSpin being the
surviving corporation and becoming a wholly-owned subsidiary of IRIS. The
acquisition was accounted for using the pooling-of-interests method. In
response to the exercise of demand registration rights granted in connection
with the acquisition, IRIS filed a shelf registration statement with the
Securities and Exchange Commission on March 27, 1996 to register approximately
466,000 shares of IRIS Common Stock which may be offered for sale from time to
time by the former securityholders of StatSpin. The registration statement
became effective on May 2, 1996.
During March 1996, IRIS acquired the urinalysis business of UroHealth
Systems, Inc. for $850,000, of which $788,000 was cash and $62,000 the
assumption of liabilities. UroHealth Systems generated revenues of
approximately $550,000 from this business in 1995. The business consists
primarily of manufacturing and marketing two proprietary product lines: the
Cen-Slide-Registered Trademark- 1500 System for centrifugal urine sedimentation
and manual microscopic examination and the FloStar-Registered Trademark- urine
specimen collection and dispensing container.
There were also several significant developments in 1995 related to the
IRIS core business of marketing major instruments and related consumables. IRIS
completed the acquisition of LDA Systems, Inc. (LDA) in June 1995 for
approximately 498,000 shares of IRIS Common Stock and thereby reacquired the
rights to The White IRIS-Registered Trademark- leukocyte differential analyzer.
The White IRIS-Registered Trademark- is major new product which IRIS was
developing in a joint program with LDA similar to the current program with PSI
(described below). IRIS is currently awaiting FDA clearance to market The White
IRIS-Registered Trademark-. However, there can be no assurance that IRIS can
secure FDA clearance or that The White IRIS-Registered Trademark- will be a
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commercially feasible or successful product. As a result of the LDA
acquisition, IRIS incurred a non-recurring, non-cash charge of $2.9 million
against earnings in the second quarter of 1995 for the acquisition of
in-process research and development (i.e. work in process not yet cleared for
interstate commerce by the FDA). See "Business--Future Developments--The
White IRIS-Registered Trademark- and Hematology" in the IRIS Annual Report.
Late in the third quarter of 1995, IRIS began marketing two new models (the
Model 300 and Model 500) of its flagship product line, The Yellow
IRIS-Registered Trademark- series of urinalysis workstations. A new faster
workstation, the Model 500 introduces a series of technology upgrades that make
it the most accurate, fastest and easiest-to-use urine profiling system ever
built, replacing the long-established Model 450 version of The Yellow
IRIS-Registered Trademark-.
A new and faster low-cost Model 300 workstation also replaces the earlier
Model 250 version of The Yellow IRIS-Registered Trademark- . The model 250 was
introduced in 1991 as a lower priced alternative to The Yellow IRIS-Registered
Trademark- Model 450. The Model 300 is the lower-priced version of the Model
500. The lower-priced version of The Yellow IRIS-Registered Trademark-
accounted for approximately 10% and 67% of all new systems placed during the
periods ended March 31, 1996 and 1995, respectively. The lower-priced version
is expected to remain a significant percentage of total systems sales because of
its appeal to more numerous community hospitals. However, the introduction of
the new models may change the historical ratio of sales of both units as the
marketplace determines their relative appeal. While the gross margin of the
lower-priced version is smaller, IRIS believes it contributes incrementally to
the aggregate gross margin earned as it appeals to a market segment that
ordinarily would not buy the more expensive model. Because its incremental
margin exceeds the incremental operational expenses connected with its sale, it
contributes positively to the profitability of IRIS.
In September of 1995, IRIS and Poly U/A Systems, Inc. (PSI) entered into a
joint project to develop several new products based on IRIS technology (the PSI
Products) to further enhance automation in the urinalysis field. These products
are expected to have dual potential as both stand-alone products and
enhancements to the IRIS flagship products, The Yellow IRIS-Registered
Trademark- series of urinalysis workstations. Under the terms of the
Development Agreement, PSI will have the right to use the IRIS technology for
developing, manufacturing and marketing the new products as stand-alone devices,
and IRIS will have the right to use the newly developed technology for any
other purpose and to incorporate the new products into The Yellow
IRIS-Registered Trademark-. PSI has retained IRIS to conduct research,
development, clinical evaluation and pre-market testing of the proposed new
products. IRIS will fund the first $15,000 per month (up to a maximum of
$500,000) of the cost of the project, and PSI will reimburse IRIS for the
excess.
PSI a privately-held company based in Los Angeles, California, was
organized by IRIS in June 1995 to undertake the commercial development of the
PSI Products. In order to fund its share of the project, PSI raised net
proceeds of approximately $2.0 million through the sale of 128 units at a price
of $20,000 per unit. Each unit consisted of 2,000 shares of PSI's Callable
Common Stock and a warrant to purchase 4,000 shares of IRIS Common Stock. The
IRIS warrants are exercisable at $6.50 per share during the last two years of
their three-year duration. IRIS also issued warrants to the placement agent and
the finder to purchase an aggregate of 150,000 shares of IRIS Common Stock at
$7.80 per share for a period of five years.
IRIS has an option until 121 days after termination of the project with PSI
(which terminates not later than July 31, 1998) to acquire all of the Common
Stock of PSI at prices rising over time from $14 to $20 per share of PSI Common
Stock or an aggregate of $3.6 million to $5.1 million for all the outstanding
shares of PSI Common Stock. IRIS may pay the option exercise price in cash or
with shares of IRIS Common Stock valued at the 20-day average closing price just
prior to exercise. If, at the time of exercise, PSI has completed product
development and obtained FDA clearance to market any new products, IRIS would
likely capitalize that portion of the purchase price attributable to completed
products and amortize it over the estimated useful life of the completed
technology. IRIS would likely allocate a substantial portion of the balance of
the purchase price (plus any PSI liabilities outstanding at the time of
acquisition) to any products which have not been completed and approved for
marketing by the FDA and would record a nonrecurring, noncash (if purchased with
IRIS stock) charge against earnings in that amount for the acquisition of
in-process research and development (i.e. work in process not yet cleared by
the FDA).
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In 1994, IRIS developed a strategic alliance with Boehringer Mannheim
Corporation (BMC), an Indianapolis based manufacturer of diagnostic products,
and Boehringer Mannheim GmbH (BMG), BMC's German affiliate and a world leader
in clinical chemistry. BMC and BMG are wholly owned subsidiaries of Corange
Limited (Corange), a diversified healthcare company with 1995 worldwide sales
of more than $3.5 billion. All three companies underwent a significant
management restructuring in 1995. As a result of the restructuring, together
with certain events that followed the restructuring, IRIS initiated
discussions with BMG to address several concerns. Based on the position of
the BMG management to date, IRIS believes that these concerns can be
adequately addressed. While it is clear that IRIS and Corange will not
pursue a joint venture in hematology, IRIS cannot predict what other changes,
if any, in the IRIS/BMG alliance will result from these discussions. See
"Business--Strategic Alliance with Boehringer Mannheim" in the IRIS Annual
Report.
The CHEMSTRIP/IRIStrip-TM- became a significant source of revenues in 1995,
as more than sixty percent of existing IRIS customers have converted to the new
test strips. IRIS began marketing the new test strips during the fourth quarter
of 1994 concurrently with the introduction of an improved version of The Yellow
IRIS-Registered Trademark- featuring the new CHEMSTRIP-Registered Trademark-
urine test reader. BMC designed and manufactures both the test strips and
the readers especially for The Yellow IRIS-Registered Trademark-. See
"Business--Strategic Alliance with Boehringer Mannheim--Distribution of
CHEMSTRIPS/IRIStrip-TM- Urine Test Strips and Custom Reader" in the IRIS
Annual Report.
In July 1995, IRIS and BMG unveiled a prototype of the new IRIS/BMC 900
UDX-TM- Urine Pathology System, a high-capacity, automated urinalysis system
for reference laboratories based on the proprietary technologies of both
companies. The 900UDX-TM-, part of The Yellow IRIS-Registered Trademark- series
of urinalysis workstations, is being jointly developed by IRIS and BMG. IRIS
recently obtained FDA clearance to market the 900UDX-TM- and expects to start
commercial production in the second quarter of 1996. The 900UDX-TM- will be
manufactured by IRIS in its Chatsworth, California facility and distributed by
IRS in North America and by BMG and its affiliates overseas. The 900UDX-TM- is
expected to be the fastest, most accurate, most cost-effective way possible to
perform routine urinalysis today. See "Business--Strategic Alliance with
Boehringer Mannheim--Joint Development of Reference Laboratory System" in the
IRIS Annual Report.
In May 1996, IRIS signed a letter of intent to acquire the digital imaging
business of Perceptive Scientific Instruments, Inc. (Perceptive Scientific) for
$16 million, $9 million in cash and $7 million in subordinated convertible
debentures. Perceptive Scientific, a privately held company based in Houston,
is a recognized leader in the development and supply of digital imaging systems
for biological, clinical and research applications. Perceptive Scientific's
primary business is providing genetic analysis instrumentation and related
services through worldwide sales of its proprietary PowerGene-TM- product line.
The PowerGene-TM- product line, based in part on image processing technology
from NASA, is used in various cytogenetic procedures, including automatic
chromosome karyotyping, DNA probe analysis via florescent in-situ hybridization
methods and comparative genomic hybridization analysis. The PowerGene-TM-
System is marketed nationally from Perceptive Scientific's Houston
headquarters and internationally through its U. K. subsidiary. The
acquisition is subject to a number of conditions, including completion of due
diligence by IRIS, negotiation and execution of a definitive written
agreement, approval by the IRIS Board of Directors and approval by the
controlling shareholder of Perceptive Scientific's parent company.
IRIS, like many other companies in the clinical laboratory instrumentation
business, is feeling the impact of Medicare reimbursement regulations and
current economic conditions which have intensified the review of capital
expenditures by hospitals. One result has been slower than expected replacement
sales as IRIS customers postpone capital expenditures and continue using The
Yellow IRIS-Registered Trademark- beyond its five-years anticipated life. On
the other hand, IRIS believes a longer instrument life may benefit new customers
sales by providing greater product justification. IRIS also believes the impact
of intensified capital expenditures reviews may be mitigated by the current
widespread shortage of medical technologists since its products reduce the
number of medical technologists needed in the laboratory and by the increased
interest in better outcomes since its products can produce more accurate and
faster results. See "Business--Cost Containment" in the IRIS Annual Report.
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Nonetheless, healthcare is an area of extensive and dynamic change, and
IRIS cannot predict future changes in the healthcare field or their impact on
its business. In recent years, an increasing number of legislative proposals
have been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the healthcare system, either nationally or at the
state level. The cost of certain proposals would be funded in part by
reductions in payments by governmental programs, including Medicare and Medicaid
to healthcare providers. At the present time, IRIS believes that the
effectiveness of The Yellow IRIS-Registered Trademark- should be even more
beneficial to hospitals if their revenues are further controlled. However, if
IRIS is unable to convince potential customers of this fact, these changes could
have a material adverse effect on the Company's business, results of operations
and financial condition.
RESULTS OF OPERATIONS
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
IRIS had net income of $442,000 for the first quarter of 1996, an
increase of $45,000 (or 11%) from net income of $397,000 for the first
quarter of 1995. The increase of $319,000 in operating income was
significantly offset by $210,000 of expenses related to the acquisition of
StatSpin Technologies. The improvement in operating income is primarily
attributable to increased sales of workstations and related supplies
(including CHEMSTRIP/IRIStrips-TM-), other laboratory instruments and related
supplies, and service contracts and repairs. On a more comparable basis, net
income excluding the acquisition expenses would have been approximately
$630,000.
Interest income declined by $30,000 due largely to decreased amounts of
invested cash. Other income consisted primarily of royalties from TOA of
$22,000 and $32,000, respectively, for the quarters ended March 31, 1996 and
1995, respectively. These royalty amounts include the effect of an agreement
with TOA to temporarily increase the amount of the royalty from 3% to 5% and
the scope of the royalty to apply to revenues on consumables and service
contracts, as well as instruments. These changes were made retroactive to
October 1994 and expire in September of 1996, at which time the scope and
amount of the royalty will revert to their original term unless TOA exercises
its right under the temporary agreement to negotiate a permanent change in
the license.
Net sales (excluding revenues from research and development contracts)
increased 34% to $4.3 million for the first quarter of 1996 from $3.2 million
during the first quarter of 1995. The $1.1 million increase is primarily
attributable to increased sales of workstations, other instruments, service
contracts and repairs, and related supplies , including increased sales of
CHEMSTRIPS/IRIStrips -TM-. Cost of goods (excluding the cost of research and
development contracts) increased to approximately $2.2 million for the first
quarter of 1996 from $1.6 million in the first quarter of 1995 and decreased as
a percentage of sales to 50% from 52% as a result of improved utilization of
service parts and increased sales of consumables.
Total research and development expenses, including the costs of development
contracts, increased to $1.1 million in the first quarter of 1996 from $451,000
in the first quarter of 1995 as IRIS continued to invest in the development of
new applications and further improvements in its technology. Research and
development expenses related to The White IRIS-TM- decreased to $71,000 during
the first quarter of 1996 from $165,000 during the same quarter in 1995.
Research and development on this project decreased significantly following
submission to the FDA of an application for clearance to market The White
IRIS-Registered Trademark-. Research and development expenses related to the
900UDX-TM- reference laboratory system were $124,000 for the first quarter of
1996 and were offset by revenues of $150,000 from BMG. Research and
development expenses related to PSI Products were $698,000 for the first quarter
of 1996 and were offset by revenues of $663,000 from PSI. Research and
development expenses unrelated to these three projects increased to $260,000 for
the first quarter of 1996 from $131,000 for the first quarter of 1995, as
research and development activity, in general, was intensified. See
"--Overview", "Business--Future Developments--The White IRIS-Registered
Trademark-and Hematology", "Business--Strategic Alliance with Boehringer
Mannheim--Joint Development of the Reference Laboratory System" in the IRIS
Annual Report.
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Marketing and selling expenses in the first quarter of 1996 increased by
almost $154,000 to $794,000 as compared to the first quarter of 1995. The
increase is due largely to a greater emphasis on direct marketing. General and
administrative expenses of $744,000 in the first quarter of 1996 increased by
$316,000 from the first quarter of 1995 due in large part to expenses related to
the acquisition of StatSpin Technologies in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES.
Working capital decreased by $.4 million since December 31, 1995, to a
total of $11.1 million at March 31, 1996. IRIS experienced negative cash flow
of $1.5 million during the first quarter of 1996 as compared to a negative cash
flow of $1.2 million during the first quarter of 1995. Negative cash flow is
due primarily to continued, significant growth in sales (as reflected in
increased amounts of inventory and accounts receivable). IRIS believes that
its current cash on hand plus short term investments will be sufficient to
meet is liquidity needs for the next year. However, IRIS is pursuing a
revolving line of credit with its principal bank to provide an alternative
source of liquidity.
As discussed above under "Overview," IRIS has signed a letter of intent to
acquire the digital imaging business of Perceptive Scientific for $16 million,
$9 million in cash and $7 million in subordinated convertible debentures. IRIS
intends to fund the $9 million cash portion of the purchase price using the bank
credit line discussed above or other external cash sources.
During the first quarter 1996, IRIS spent $447,000 for capital
expenditures, primarily for machinery and equipment, compared with $166,000 for
capital expenditures during the first quarter of 1995. IRIS currently has no
material commitments for capital expenditures. Future commitments for capital
expenditures may prove necessary to continue IRIS efforts in research and
development and to manufacture and market its existing products.
IRIS has made numerous improvements in The Yellow IRIS-Registered
Trademark- over the years, and further improvements to The Yellow
IRIS-Registered Trademark- will require a substantial amount of research and
development and financial resources. While IRIS believes that it has the
technical ability and financial resources for such implementations, IRIS is
currently funding the majority of this work through a collaborative arrangement
with BMG and through a joint development program with PSI. See --"Overview" in
the IRIS Annual Report.
IRIS currently plans to use only modest amounts of its current working
capital for further development of products other than those related to The
Yellow IRIS-Registered Trademark- and The White IRIS-Registered Trademark-.
More vigorous development of The Purple IRIS-Registered Trademark- and other
products depends on securing alternative sources of funding such as the joint
development programs with PSI and BMG. However, there can be no assurance that
IRIS will be successful in more of these kinds of efforts, or any others, to
locate acceptable sources of funding desired for other products.
In an effort to maximize interest income on its cash and cash equivalents,
IRIS holds a significant portion of its cash funds in U.S. Treasury securities
and federally insured certificates of deposit.
INFLATION
IRIS does not foresee any material impact on its operations from inflation.
PART 2 - OTHER INFORMATION
ITEM 1 - Legal Proceedings
In 1994, IRIS became aware that a company called Intelligent Medical
Imaging, Inc. (IMI), was demonstrating a new slide-based microscopic imaging
system at various trade shows. After further examination of the IMI system,
IRIS notified IMI that its system infringed at least two IRIS patents. The
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parties entered into negotiations regarding the licensing of these and possibly
other IRIS patents to IMI. The parties were unable to reach an agreement and,
on October 19, 1995, IMI filed a complaint in the United States District Court
for the Southern District of Florida. In its complaint, IMI seeks, among other
things, declaratory judgments that (i) IMI's system does not infringe either of
the two IRIS patents in question, (ii) both of such IRIS patents are invalid and
(iii) both IRIS patents are unenforceable due to misuse of the patents by IRIS.
IMI has also alleged in its complaint that IRIS is in violation of certain U.S.
antitrust laws. IRIS is vigorously defending both patents and pursuing
infringement claims against IMI.
As part of a 1988 agreement, IRIS granted TOA Medical Electronics Co., Ltd.
(TOA), a Japanese company, the right to market urine sediment analyzers using
pre-1989 IRIS technology. In exchange, TOA agreed to pay IRIS royalties on
sales of such analyzers and granted IRIS the exclusive right to distribute in
North America any urine sediment analyzer made by TOA. In late 1990, TOA
introduced a urine sediment analyzer, the UA-1000, and in mid-1993 introduced an
improved model, the UA-2000, both into the Japanese market. Despite the fact
that the UA-2000 performs only the urine sediment analysis portion of a complete
urinalysis, as limited by the agreement, it is currently priced comparably to
The Yellow IRIS -Registered Trademark- which is more versatile. IRIS learned in
1995 that TOA is showing a new urine sediment analyzer based on TOA's particle
counting technology, the UF-100, to selected prospects in the U.S. IRIS
subsequently asserted its rights under the 1988 agreement to distribute the
UF-100 in North America. TOA disputes the right of IRIS to distribute this
product, and IRIS and TOA are currently arbitrating the issue.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Articles of Incorporation.(1)
3.2 Bylaws.(2)
10.1 Lease of the Registrant's facilities. 3)
10.2 1980 and 1982 Stock Option Plans, and forms of Stock Option
Agreements for each Plan.(4)
10.3 1983 and 1986 Stock Option Plans, and forms of Stock Option
Agreements for each Plan.(5)
10.4 Amended and Restated 1986 Stock Option Plan.(6)
10.5 1994 Stock Option Plan and forms of Stock Option Agreements.(7)
10.6 Various Agreements with TOA.(8)
10.7 Agreement for a Strategic Alliance in Urinalysis dated Jan. 7,
1994 between IRIS and BMC.(9)
10.8 Securities Purchase Agreement dated as of April 20, 1994 by and
among IRIS, LDA and Corange International Limited.(10)
10.9 Warrant Certificate dated April 22, 1994 issued to Corange
International Limited.(9)
10.10 Research and Development and Distribution Agreement dated
February 6, 1995 by and among IRIS, LDA and Corange International
Limited.(9)
10.11 Warrant Certificate dated February 6, 1995 issued to Corange
International Limited.(9)
10.12 Asset Purchase Agreement dated as March 20, 1995 between IRIS and
Biovation,Inc.(9)
10.13 Warrant Certificate dated March 20, 1995 issued to Biovation,
Inc.(9)
10.14 Technology License Agreement dated as of September 29, 1995
between IRIS and PSI.(11)
10.15 Research and Development Agreement dated as September 29, 1995
between IRIS and PSI.(11)
10.16 $100 Class "A" Note dated September 29, 1995 issued by PSI in
favor of IRIS.(11)
10.17 Certificate of Incorporation of PSI. (See Article FOUR regarding
the IRIS Option.)(11)
10.18 Agreement and Plan of Merger dated January 31, 1996 between IRIS
and StatSpin.(12)
10.19 Registration Rights Agreement dated January 31, 1996 between IRIS
and StatSpin Stockholders.(12)
10.20 Employment Agreement dated January 30, 1996 with Thomas F.
Kelley.(12)
10.21 Lease for the facilities of Registrant's subsidiary,
StatSpin.(12)
11 Statement re Computation of Per Share Earnings.
(1) Incorporated by reference to the Company's Current Report on Form 8-K dated
August 13, 1987 and its Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994 and its Annual Report on Form 10-K
for the year ended December 31, 1995.
(3) The original lease and all prior amendments are incorporated by reference
to the Company's Annual Report on Form 10-K for the year December 31, 1989,
its quarterly report on Form 10-Q for the quarter ended September 30, 1993
and its Annual Report on Form 10-K for the year ended December 31, 1994.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-2, as filed with the Securities and Exchange Commission on September 4,
1985.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-8, as filed with the Securities and Exchange Commission on May 10, 1982.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
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(7) Incorporated by reference to the Company's Registration Statement on Form
S-8, as filed with the Securities and Exchange Commission on August 8,
1994.
(8) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 15, 1988 and its quarterly report on Form 10-Q for the quarter ended
June 30, 1995.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(10)Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994.
(11)Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 31, 1995.
(12)Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(b) Reports on Form 8-K
IRIS filed a Current Report on Form 8-K on February 16, 1996 with respect
to the acquisition of Norfolk Scientific, Inc., d/b/a StatSpin Technologies,
which included certain financial statements of StatSpin and unaudited pro forma
condensed financial statements reflecting the combination of IRIS and StatSpin
using the pooling of interests accounting method. IRIS also filed a Current
Report of Form 8-K on May 9, 1996 with respect to the signing of a letter of
intent for the acquisition of the digital imaging business of Perceptive
Scientific Instruments, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
Dated: May 14, 1996 By: /s/ E. Eduardo Benmaor
---------------------------------------
E. Eduardo Benmaor
Secretary, Controller and
Principal Accounting Officer
19
<PAGE>
Exhibit 11
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
Three months ended March 31
---------------------------
1995 1996
------------ ------------
Actual Weighted Average Shares Outstanding 5,411,815 6,244,673
for the Period
Dilutive Effects of Stock Options and
Warrants Using Average Market Price 499,136 268,608
------------ ------------
Total Shares Based on Shares Outstanding
and the Assumption that All Share
Equivalents Are Exercised at Average
Stock Market Price. 5,910,951 6,513,281
Additional Dilutive Effect of Stock Options
and Warrants Being Exercised Using Ending
Market Price -- --
------------ ------------
Total Shares Based on Shares Outstanding
and the Assumption That All Stock Options
and Warrants are Exercised at Ending
Market Price 5,910,951 6,513,281
------------ ------------
------------ ------------
Net Income Applicable to Fully Diluted
Earnings Per Share $ 397,494 $ 442,218
------------ ------------
------------ ------------
Fully Diluted Net Income Per Share $ .06 $ .07
------ ------
------ ------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 4,616,857
<RECEIVABLES> 5,531,425
<ALLOWANCES> 87,759
<INVENTORY> 3,171,606
<CURRENT-ASSETS> 14,377,283
<PP&E> 1,346,370
<DEPRECIATION> 2,676,390
<TOTAL-ASSETS> 23,263,540
<CURRENT-LIABILITIES> 3,295,159
<BONDS> 0
0
0
<COMMON> 63,750
<OTHER-SE> 19,670,588
<TOTAL-LIABILITY-AND-EQUITY> 23,263,540
<SALES> 5,157,258
<TOTAL-REVENUES> 82,248
<CGS> 2,983,085
<TOTAL-COSTS> 1,774,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 482,218
<INCOME-PRETAX> 40,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 442,218
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>