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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, 1996 Commission File No. 1-9767
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
Delaware 94-2579751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9162 Eton Avenue, Chatsworth, California 91311
(Address of principal executive offices) (Zip Code)
Telephone Number: (818) 709-1244
Securities registered pursuant to Section 12(b) of the Act: Common Stock
(American Stock Exchange)
Securities registered pursuant to Section 12(g) of the Act: None
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 25, 1997, the aggregate market value of the shares of Common
Stock held by non-affiliates of the Registrant was approximately $19.4 million
based upon the closing price of $3-7/8 per share of Common Stock as reported on
the American Stock Exchange. Solely for the purpose of determining
"non-affiliates" in this context, shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded. This determination of affiliate status is not
necessarily a determination for other purposes.
The Registrant had 5,963,748 shares of Common Stock outstanding on
March 25, 1997.
Part III incorporates information by reference from the Proxy
Statement for the Registrant's 1997 Annual Meeting of Stockholders.
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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1996
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 15
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . 16
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 17
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . 24
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . 25
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 25
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . 25
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . 25
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PART I
ITEM 1. BUSINESS.
A glossary of selected technical terms is included at the end of this
section, and stockholders are encouraged to review the glossary before reading
the description of business.
OVERVIEW
International Remote Imaging Systems, Inc. and its subsidiaries
("IRIS" or the "Company") design, develop, manufacture and market in vitro
diagnostic ("IVD") imaging systems based on patented and proprietary automated
intelligent microscopy ("AIM") technology for automating microscopic procedures
performed in clinical laboratories. AIM combines the Company's capabilities in
automated specimen presentation, including its patented slideless microscope,
and proprietary high-speed digital processing hardware and software to classify
and present images of microscopic particles in easy-to-view displays. The
Company's IVD imaging systems are designed to provide customers with better and
more rapid results and labor cost-savings over manual methods of performing
microscopy. IRIS markets its products primarily to hospital and clinical
reference laboratories.
The Company pioneered its first IVD imaging system application in 1983
with its introduction of The Yellow IRIS family of workstations for urinalysis.
The Company believes that it is still the only supplier of laboratory systems
which fully automate a complete urinalysis, and it recently introduced its
fourth generation models which incorporate significant advancements in speed,
utility and ease of use. In 1996, the Company received Food and Drug
Administration ("FDA") clearance and began to market the Model 900UDx urine
pathology system designed especially for the high-volume testing requirements
of larger laboratories. The Company also provides ongoing sales of supplies
and service necessary for operation of The Yellow IRIS workstations. Most
supplies are purchased under standing orders and, following the initial
one-year warranty period, the majority of customers purchase annual service
contracts.
In addition to urinalysis, the Company has also added new applications
for its IVD imaging systems. It recently completed development of The White
IRIS leukocyte differential analyzer for the field of hematology. The FDA
cleared The White IRIS for marketing in May 1996, and the Company expects to
start sales of this system in 1997. The Company also plans to sell supplies
and service for The White IRIS comparable to those sold for The Yellow IRIS.
In July 1996, the Company entered the field of genetics with the
acquisition (the "PSI Acquisition") of the digital imaging business of
Perceptive Scientific Instruments, Inc. ("PSI"). PSI's principal product is
the PowerGene genetic analyzer -- an IVD imaging system for karyotyping, DNA
probe analysis and comparative genomic hybridization. The Company also
acquired international operations from PSI.
THE INDUSTRY
As a result of cost containment pressures from third-party payors,
healthcare providers are focusing on the more efficient use of their resources.
This goal is driving them to reduce costs while simultaneously improving the
outcome potential of patient care. Meeting this goal depends to a large degree
on reducing the cost and improving the accuracy of medical tests for diagnosing
and monitoring diseases, as well as reporting the results of these tests in
timely and useful ways.
Medical tests are performed either on the patient or on a specimen
removed from the patient. IVD testing refers to analysis of a specimen -- a
sample of blood ("hematology"), urine ("urinalysis"), chromosomes ("genetics")
or other tissue or material removed from the patient -- usually in the clinical
laboratory. Many IVD tests rely on chemical or simple physical measures of
specific characteristics of the specimen. Over the past five decades, the
chemical and particle-counting aspects of these tests have been largely
converted from manual methods to automated instruments, such as clinical
chemistry analyzers and blood cell counters.
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However, many other IVD tests require visual examination of the
specimen through a microscope ("microscopy"). Manual microscopy requires
numerous steps from specimen preparation to visual examination, making the
method labor-intensive, cumbersome, biohazardous, inefficient and imprecise.
More labor time is spent in performing manual microscopy, collectively, than in
any other IVD testing procedure in the clinical laboratory. Nonetheless, the
vast majority of microscopic procedures are still performed manually.
The pressure to reduce the costs and improve the accuracy of IVD
tests, together with recent technological developments, have created an
opportunity for automating microscopic procedures. Advances in image
processing software, computer hardware and solid-state cameras have made it
possible to capture digital images of microscopic specimens in a uniform manner
and perform sophisticated analysis and classification of these images. The
test results can then be electronically transmitted to the central computer
system of the hospital or reference laboratory for clinical use and billing.
The digital images of the specimen can also be stored in electronic format for
future review and, theoretically, transmitted to remote locations for review by
other technologists or specialists.
THE COMPANY'S STRATEGY
The Company's objectives are to maintain its technological leadership,
develop new products, continue market penetration of existing products, expand
the geographic markets for existing products and increase sales of supplies and
service. The Company is pursuing these objectives through the following
strategies:
o Adding New IVD Imaging Applications. The Company believes AIM
technology has a number of potential applications in the
clinical laboratory and is expanding beyond the field of
urinalysis. The Company recently completed development of The
White IRIS leukocyte differential analyzer for hematology and
expects to start sales of this system in 1997. In July of
1996, the Company strategically expanded into the field of
genetics through the PSI Acquisition, which included the
acquisition of the PowerGene family of IVD imaging systems.
Availability of multiplex fluorescent in-situ hybridization
("M-FISH") applications to genetics is expected to stimulate
further growth of this line.
o Continuing Market Penetration for Current Applications of IVD
Imaging Technology. Although more than 75% of all hospitals
affiliated with United States medical schools use The Yellow
IRIS urinalysis workstation, the Company estimates that it has
penetrated less than 20% of the potential market in the United
States for this family of systems. It plans to continue
penetrating this segment of the IVD testing market with
additional sales of its recently introduced fourth generation
models of The Yellow IRIS family and the Model 900UDx urine
pathology system, the latter of which was designed especially
for the high-volume testing requirements of larger
laboratories. The Company also plans to expand its rental
program for The Yellow IRIS which generates revenues based on
the number of tests performed by the customer.
o Expanding in New Geographic Markets. Until recently, the
Company has marketed its IVD imaging systems almost
exclusively in the United States. Through the PSI Acquisition
in July 1996, the Company acquired international operations
which it expects will enable it to expand the geographic
market for its other IVD imaging systems and products.
o Increasing Sales of Supplies and Service. Once an IVD imaging
system is installed, the Company generates significant
recurring revenue from sales of supplies and service for its
operation. The Company seeks to enhance this revenue stream
by installing more systems as well as increasing its product
offering of supplies for each system. For example, the
Company began selling the CHEMSTRIP/IRIStrip urine test strips
for The Yellow IRIS systems at the end of 1994 and will begin
to sell the patented 2-methylpolymethine (2-MPM) cytoprobe for
The White IRIS when this system is introduced. The Company
expects the probes used in M-FISH to offer it similar
potential.
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o Maintaining Technological Edge. The Company maintains an
active research and development program to continually enhance
its IVD imaging systems and explore other potential IVD
imaging applications for its AIM technology.
o Adding Complementary Product Lines. Over the past two years,
the Company has also added several complementary lines of
small instruments and supplies which appeal to smaller
laboratories and respond to the desire of integrated
healthcare providers to purchase systems and supplies for a
variety of clinical settings from one supplier.
AIM TECHNOLOGY
An effective system for automated microscopy in most applications
requires technology for fast, consistent and easily discernable presentation of
the specimen to the microscope ("front end processing") and for rapidly
capturing, analyzing, classifying, enhancing, arranging and displaying images
of the specimen ("back end imaging"). The Company has over the past eighteen
years created and developed its patented and proprietary AIM technology to
address both of these requirements, as well as developed significant patented
and proprietary technology for specific applications.
The Company's AIM technology automates all or most of the front end
processing in its IVD imaging systems. For example, traditional urine sediment
analysis requires manual preparation of a slide from the specimen requiring
several steps, including centrifugation followed by carefully positioning,
staining and coverslipping a sample extracted from the specimen. The slide is
then placed under the microscope and manually manipulated and scanned by a
technologist. This procedure is often time-consuming, imprecise and carries
the potential for human exposure to biohazards. In contrast, the Company's
patented slideless microscope, used in The Yellow IRIS and The White IRIS,
allows microscopic examination of a moving specimen precisely positioned in a
stream of fluid and eliminates the need for manual slide preparation,
manipulation and scanning. The slideless microscope precisely positions the
specimen to within microns in a thin layer for proper focusing as it flows past
the microscope at high-speed ensheathed in a larger stream of fluid. The
method of ensuring proper alignment, particle orientation, focus and
measurement, called "imaging flow cytometry," is patented, and the Company is
unaware of any other company which has developed similar technology. For those
IVD tests where imaging flow cytometry is not optimal or possible, AIM
technology automates the slide manipulation and scanning process. The
Company's PowerGene genetic analyzers use this technology to automatically
locate and focus microscopic particles on a slide as it is precisely
manipulated and scanned by the system.
Once the specimen is located and presented to the microscope, AIM's
back end imaging automatically captures, digitizes, classifies, organizes and
presents the microscopic images displayed on a video monitor for review by the
medical specialist. These digital images of the specimen can then be stored on
magnetic or optical media for later retrieval, even years later.
PRODUCTS
AIM Systems
The Company has three families of AIM systems -- The Yellow IRIS, The
White IRIS and the PowerGene. These systems incorporate sophisticated front
end processing and back end imaging, require customers to make substantial
capital investments and are designed for sale to clinical laboratories
performing a relatively high-volume of IVD tests.
The Yellow IRIS family of urinalysis workstations are widely used in
hospitals nationwide, including over 75% of all hospitals affiliated with
United States medical schools. This family of IVD imaging systems currently
consists of three models. Two models can also perform IVD imaging tests on a
number of body fluids other than urine, including cerebrospinal, peritoneal,
pleural, pericardial, synovial and seminal fluids as well as peritoneal
dialyzates and lavages. The third model, the Model 900UDx, is designed for
laboratories testing high numbers
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of urine specimens. The Yellow IRIS family of IVD imaging systems currently
has list prices ranging from $85,000 to $195,000.
The White IRIS leukocyte differential analyzer is an automated
high-speed workstation used to classify normal, as well as immature and other
abnormal white blood cells. It was cleared by the FDA in May 1996 and, when
introduced in 1997, is expected to be the only commercially available device
cleared for automated classification of abnormal white blood cells. The White
IRIS can perform a differential analysis which includes identifying the five
types of normally occurring white blood cells plus a number of abnormally
occurring immature white blood cells, variant lymphocytes and other cells. The
Company also holds an exclusive, worldwide license to several patents which
cover the unique cytoprobe used by The White IRIS, as well as the multi-colored
expression of 2-MPM in white blood cells. The Company expects to start sales
of this system with an introductory list price of approximately $185,000.
The PowerGene family of genetic analyzers perform certain chromosome
tests such as karyotyping, DNA probe analysis in FISH and M-FISH procedures and
comparative genomic hybridization. These tests are typically used for
analyzing genetic abnormalities for both clinical uses (e.g. prenatal
screening) and research applications (e.g. cancer studies). The Company
believes the genetics market is one of the fastest growing segments of the
global IVD market. The Company purchased this family of analyzers in July 1996
in conjunction with the PSI Acquisition. The PowerGene analyzers currently
have list prices ranging upwards from $35,000 depending upon the selected
options and configuration.
The Company believes its AIM technology may have a number of other
potential IVD imaging applications such as cytology, microbiology and
histology.
IVD Imaging System Supplies and Service
In addition to sales of IVD imaging systems, the Company obtains
significant recurring revenue from sales of supplies used in the operation of
these systems and from their service and repair. Supplies for The Yellow IRIS
family and The White IRIS include the sheath fluid used to position the
particles and cleanse the system in slideless microscopy; proprietary reagents
such as the patented cytoprobe used by The White IRIS; and "controls" used in
calibrating and monitoring the performance quality of the systems. The Company
also sells the CHEMSTRIP/IRIStrips for testing urine chemistry on The Yellow
IRIS. The Company introduced the CHEMSTRIP/IRIStrip urine test strips in late
1994 and has converted over 90% of the installed base of systems to these new
test strips.
Small Instruments and Supplies
The Company also manufacturers and markets a variety of small
instruments and supplies for the clinical laboratory market. These products
complement the Company's line of IVD imaging systems because they appeal to
smaller laboratories and physician offices performing an insufficient number of
tests to justify the capital cost of an IVD imaging system. These products
also take advantage of the Company's reputation and expertise in urinalysis and
respond to the desire of integrated healthcare providers to purchase systems
and supplies for a variety of clinical settings (both large and small) from one
supplier. This category of products includes special-purpose centrifuges,
digital refractometers for measuring the specific gravity of urine, the
CenSlide 1500 System for manual microscopic examination and other supplies
intended primarily for the urinalysis market.
RESEARCH AND DEVELOPMENT
The Company maintains an active research and development program to
continually enhance its existing IVD imaging systems and explore other IVD
imaging applications for its AIM technology. In 1995 and 1996, the Company
focused its research and development efforts on the following major projects,
as well as numerous other smaller projects:
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o Developing the Model 900UDx. The Company introduced its
newest model in The Yellow IRIS family, the Model 900UDx, in
May 1996. The Model 900UDx is the industry's first and only
fully-automated walkaway system for performing complete
macroscopic, chemical and microscopic urinalysis profiles.
o Upgrading The Yellow IRIS. The Company conducts an ongoing
process of refining its AIM technology and the
cost-effectiveness of its systems. Late in the third quarter
of 1995, the Company completed development work on its fourth
generation models of The Yellow IRIS family which offer
increased speed and other performance advantages over the
previous generation of systems.
o Completing The White IRIS. The Company has had a major
program over a number of years, under sponsorship of the
National Institutes of Health and later in conjunction with a
Company-sponsored research and development entity, to develop
The White IRIS leckoeyte differential analyzer. The Company
has received FDA clearance to market the White IRIS and is
refining engineering and manufacturing processes prior to its
expected commercial availability in 1997.
o Expanding PowerGene. The Company has dedicated significant
research and development efforts toward fluorescent in-situ
hybridization ("FISH"). FISH is providing new tools for
direct and specific evaluation, and prediction of human
genetic disease. Utilizing multi-spectral fluorescent
chemical probes, M-FISH methods enhance the sensitivity of
classical karyotyping and provide easier interpretation of
chromosome abnormalities permitting such procedures to be
performed rapidly on uncultured amniotic or cancer cells.
The Company's current research and development efforts include, among
other things:
o Developing the Next Generation Platform for Its IVD Systems.
The Company is pursuing improvements designed to significantly
increase speed and image resolution while simultaneously
reducing the amount of technologist time required to operate
the system.
o Upgrading the PowerGene Cytogenetic Capabilities. Research
and development efforts for this system are focused upon
developing improved karyotyping image classification
algorithms and expanded measures in chromosome analysis using
M-FISH methods.
o Developing the Poly Products. The Company is developing the
Poly Products (discussed below), which are expected, among
other things, to enhance future generations of The Yellow IRIS
family by improving the automated classification of the urine
sediment and reducing the amount of specimen handling.
o Identifying Future Applications. The Company is performing
market research and experiments to identify future
applications of its technology.
The Company has in the past partially funded its research and
development programs through (i) grants from NASA and NIH, (ii) joint
development programs with strategic partners and (iii) Company-sponsored
research and development entities. In recent years, the Company has entered
into four significant projects, two joint development projects with strategic
partners--Boehringer Mannheim Corporation ("BMC") and Boehringer Mannheim GmbH
("BMG")--and two projects with Company-sponsored research and development
entities--LDA Systems, Inc. ("LDA") and Poly U/A Systems, Inc. ("Poly"). From
1994 to 1996, the Company collaborated with BMC and BMG in the development of
CHEMSTRIP/IRIStrip urine test strips and the Model 900UDx. In 1992, the
Company entered into a project with LDA for development of The White IRIS
leukocyte differential analyzer and later acquired LDA for approximately
498,000 shares of common stock, $.01 par value per share ("Common Stock"), of
the Company. In 1995, the Company entered into a similar project with Poly
which is ongoing for development of several new products to enhance automated
urinalysis (the "Poly Products").
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Following a reassessment of its own priorities, BMC decided not to
pursue a joint venture in hematology with the Company and agreed to several
amendments to its contracts with the Company. Through the amendments, BMC
strengthened its ties in the supply and distribution of CHEMSTRIP/IRIStrip
urine test strips while withdrawing from longer-term commitments in the areas
of hematology and urine microscopy. BMC agreed to supply the Company with
CHEMSTRIP/IRIStrip urine test strips at a reduced price and extended the term
of the underlying agreement. BMC also agreed to supply the Company with
certain raw materials at a favorable price should the Company elect to
manufacture its own urine test strips, subject to royalties to be paid to BMC
on such strips. BMC also granted the Company the non-exclusive right to
distribute certain other BMC urinalysis products to hospitals and commercial
laboratories in the United States. In return, the Company relieved BMG of its
obligations to purchase a minimum number of Model 900UDx workstations and to
supply certain technology and components.
The term of the underlying agreement between the Company and BMG to
manufacture and market the Model 900UDx was also extended. The Company will
continue to manufacture the Model 900UDx with BMG providing certain components
on an OEM basis at cost. The Company retained exclusive marketing rights to
the Model 900UDx in Taiwan and secured non-exclusive rights for the rest of the
world outside of Germany and Italy.
As compensation to the Company for potentially missed business
opportunities in hematology, Corange International, Ltd. ("Corange"), an
affiliate of BMC and BMG, allowed the Company to repurchase 469,413 shares of
Common Stock and a warrant to purchase an additional 250,000 shares of Common
Stock held by Corange at their original aggregate purchase price of $2.1
million, or $4.54 per share, a substantial discount from the then current
market price of $7.75 per share.
During 1996, the Company also acquired additional research and
development staff as a result of the PSI Acquisition. This staff conducted
$1.3 million, $797,000 and $410,000 of research and development in 1996, 1995
and 1994, respectively. These expenditures were offset by Small Business
Innovation Research grants from NASA and the National Institutes of Health
totaling $500,000, $489,000 and $317,000 in 1996, 1995 and 1994, respectively.
MARKETING AND SALES
In the United States, the Company's IVD imaging systems are sold and
serviced through the Companys own sales and service forces. Sales activities
consist of direct sales by field sales representatives, telemarketing to
initiate and aid in pursuing sales opportunities, logistics support of the
field sales representatives and after-sales support to customers in the
operation of their systems. In addition to its sales activities, the Company
promotes the advantages of its products through advertising in trade journals,
attendance at trade shows and direct mail. All sales of IVD imaging systems
include installation, customer training and a one-year warranty. The Company's
small instruments, targeted primarily at smaller customers, are sold through
distributors. Through the PSI Acquisition, the Company acquired an overseas
sales office and staff of 14 people based in Chester, England that supports
agents and distributors in more than thirty-five countries. The Company
intends to use this international sales channel to market its other IVD systems
and products.
The Company also maintains a rental program under which it has several
systems currently in place. Under the terms of the rental agreements, payments
generally are based on the number of tests performed with a guaranteed monthly
minimum payment to the Company. The Company is responsible for supply and
service of the systems. Alternatively, some customers lease the Company's IVD
systems from medical equipment leasing companies which, in turn, purchase the
systems from the Company.
In addition, the Company markets most of the supplies used in the
operation of its IVD systems and maintains these systems through its own
national service organization. Service (after the one-year warranty period) is
generally sold under an annual service contract or, less frequently, on a
per-call basis.
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COMPETITION
There are numerous large and well-financed companies engaged in active
research and development programs within and outside of the medical
instrumentation field that have considerable experience in areas of interest to
the Company. The Company cannot determine if any such firms are currently
engaged in potentially competitive research. However, one or more of these
firms may be able to develop and introduce IVD imaging systems comparable or
superior to the Company's current products or any other product ultimately
developed or acquired by the Company.
Urinalysis
The Company's primary products for the urinalysis market are The
Yellow IRIS family of urinalysis workstations. The principal competitive
factors in this market are cost-per-test, ease of use, and quality of result.
The Company believes The Yellow IRIS competes favorably with regard to these
factors in its target markets.
The Company granted TOA Medical Electronics Co., Ltd. ("TOA") a
perpetual license to market an instrument performing only the sediment
examination portion of urinalysis using pre-1989 technology. In 1990, TOA
introduced a urine sediment analyzer, the UA-1000, and in 1993 introduced an
improved model, the UA-2000. Royalty reports from TOA indicate that, as of
December 31, 1996, TOA has sold fewer than fifty systems, all in Japan. In
1996, TOA introduced its new UF-100 urine cell analyzer. This instrument
utilizes the same flow cytometric laser scanning principles inherent in all
modern hematology instruments to determine the presence of abnormal sediment
analytes in urine samples which must then be examined manually using the
traditional method. Unlike The Yellow IRIS workstations, the UF-100 does not
include urine chemistry and specific gravity tests. Based on an existing
agreement with TOA, the Company has the exclusive right to distribute the
UF-100 in North America and a right to receive royalties on sales outside of
North America. See "Legal Proceedings." The Company and TOA are presently
engaged in discussions with the intent to commence sales of the UF-100 in the
United States later this year.
BMG has introduced the Seditron microscopic urine analyzer in Europe
and Asia, a robotic slide-based instrument for automatic sediment examination
and analyte classification. Pursuant to the existing agreement between IRIS
and BMG, IRIS plans to exercise its exclusive option to distribute the Seditron
in the United States. As a low-capacity analyzer with no urine chemistry
capability and requiring significant operator participation, the Company
believes the Seditron is more appropriate for smaller laboratories where The
Yellow IRIS is not typically cost effective.
A number of hospitals conduct urine sediment examinations using the
Kova system made by Hycor Biomedical, Inc., as well as several other similar
products, all of which are composed largely of disposable plastic parts. These
products provide a more standardized method of preparing urine sediment for
microscopical examination as opposed to traditional means. While these
disposable products help somewhat to overcome manipulative imprecision, most of
them do so at the added expense of an increased number of disposable parts and
offer little in time savings. One exception is the CenSlide 1500 System
acquired by the Company in March of 1996. This system uses a combination
centrifuge tube and microscope slide, thereby actually eliminating much of the
manipulation required in preparing the urine specimen for microscopic
observation. The Company views these types of products as better suited for
laboratories performing a lower volume of urinalysis tests.
BMC, Behring Diagnostics, Inc., a subsidiary of Hoechst AG, and the
Bayer Diagnostics division of Bayer AG sell lines of urine test strips which
are useful in determining the concentration of various chemical substances
often found in urine. While some claims have been made that the absence of
certain results determined with these test strips can preclude the need for
microscopic examinations of some specimens, the Company cites evidence to the
contrary in its promotional activities.
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Hematology
The Company's product for the hematology market will be The White IRIS
leukocyte differential analyzer. The principal competitive factors in this
market are accuracy, precision, labor savings and ease of use. The Company
believes The White IRIS will compete favorably with regard to these factors.
Intelligent Medical Imaging, Inc. ("IMI") presently manufactures an
IVD imaging system, the Micro 21, for performing certain aspects of white blood
cell differential analysis and certain other analyses. Unlike The White IRIS,
which uses imaging flow cytometry, the Micro 21 is a slide-based system. The
Company believes The White IRIS has certain performance advantages over the
Micro 21. In comparison to the Micro 21, the Company believes The White IRIS
(i) is safer and more convenient because it uses a closed-tube sampling
procedure which does not require slide preparation, (ii) is more sensitive and
precise because it counts significantly more white blood cells, (iii) allows an
easier-to-obtain and more complete answer because it automatically classifies
variant, immature and other abnormal cells whereas the Micro 21 is capable only
of automated classification of normal cells, and (iv) is more cost effective
because it requires less attended time. Nonetheless, there can be no assurance
of the actual competitiveness of The White IRIS until the Company begins
marketing the workstation.
While other automated blood smear reading instruments capable of
varying degrees of white blood cell differential analysis exist, they are
relatively expensive. There is at least one such instrument currently in
production (made by Omron, a Japanese company), but, to the Company's
knowledge, it is not marketed outside of Japan. The Company is not aware of
any current plans by Omron to market its white blood cell slide readers in the
United States. TOA, Abbott Laboratories and Coulter Corporation, all
manufacturers of blood cell counters, have begun displaying devices which
automate the blood smear preparation process and are attachable to their
respective analyzers but do not provide for automation of white blood cell
differential analysis.
Genetics
The Company's product for the genetics market is the PowerGene
analyzer. The principal competitive factors in this market are product
features, software upgrades, clarity of output and customer service. The
Company believes the PowerGene analyzers compete favorably with regard to these
factors.
The Company's primary competitor in this market is Applied Imaging
which markets IVD imaging systems for prenatal and other genetic testing.
Vysis Inc., a subsidiary of AMOCO Technology Company, also sells IVD imaging
systems for this market. Its strategy has been to offer systems at a discount
as a vehicle for selling its DNA probes, mostly into the genetics research
market in the United States.
Other Potential Competitors
The Company is aware of at least three other companies that sell IVD
imaging systems for cervical cytology application. They include Neuromedical
Systems, Inc. and NeoPath, Inc., both of whom have begun marketing IVD imaging
systems they have developed for PAP smear screening, and, AutoCyte, Inc., a new
venture sponsored by F. Hoffman-La Roche, Inc. and certain venture capitalists.
INTELLECTUAL PROPERTY
The Company's commercial success depends in large part on its ability
to protect and maintain its proprietary rights. As such, the Company pursues
broad protection of its proprietary technology through the filing of various
patent applications. The Company has received numerous United States patents
for its AIM technology and related applications as well as a number of
corresponding foreign patents. These patents also cover developments in image
analysis and blood processing. A number of additional patent applications are
pending in the United States and abroad. Also, numerous patents relating to
digital refractometers, centrifuges, automated slide handling and disposable
urinalysis products were acquired in its recent acquisitions.
-8-
<PAGE> 11
The Company has an exclusive license from Cytocolor, Inc. for the
patented 2-MPM cytoprobe to be used in The White IRIS. Cytocolor has pursued
patent protection of this unique reagent through the filing of patent
applications in the United States and abroad. Under the terms of the license,
the Company will pay Cytocolor royalties of $1,000 per system for the first
1,000 sales of The White IRIS plus 8% of the net sales price of all consumable
products containing 2-MPM.
The Company has granted TOA a royalty-bearing license to use pre-1989
technology for urine sediment analyzers. See "--Competition--Urinalysis."
Other companies have filed applications for, or have been issued,
patents relating to products or processes that may be competitive with certain
of the Company's products or processes. The Company has received a letter from
Coulter Corporation informing the Company that the specimen sampling device
used on The White IRIS might infringe one of its patents. Coulter Corporation
offered the Company a license to the patent. However, the Company does not
believe it is infringing the patent and declined the offer. The Company notes
that Coulter Corporation is the distributor for IMI, a competitor in the
hematology market, and has not pursued the matter further. As part of an
arbitration settlement, Coulter and IMI recently terminated the exclusive
nature of Coulter Corporation's distribution rights.
In 1994, the Company notified IMI that its Micro 21 system infringed
upon at least two of the Company's patents. The parties entered into
negotiations regarding the licensing to IMI of these and possibly other Company
patents but were unable to reach an agreement. IMI filed a complaint in the
United States District Court for the Southern District of Florida in 1995, and
the parties recently settled the case. As part of the settlement, IMI
acknowledged the validity of the patents and agreed to pay the Company
royalties on certain sales of the Micro 21. See "--Competition--Hematology"
and "Legal Proceedings."
The Company has trade secrets and unpatented technology and
proprietary knowledge related to the sale, promotion, operation, development
and manufacturing of its products. To protect these rights, the Company enters
into confidentiality agreements with its employees and consultants.
The Company claims copyright in its software and the ways in which it
assembles and displays images, but it has not filed copyright registrations
with the United States Copyright Office or any comparable state or foreign
agency. The Company also owns various federally registered trademarks,
including "IRIS," "The Yellow IRIS," "The White IRIS" and "PowerGene." The
Company owns numerous other registered and unregistered trademarks. The
Company also has certain trademark rights in foreign jurisdictions. The
Company intends to aggressively protect its copyrights and trademarks.
GOVERNMENT REGULATION
Most of the Company's products are subject to stringent government
regulation in the United States and other countries which govern the testing,
manufacture, labeling, storage, record-keeping, distribution, sale, marketing,
advertising and promotion of such products. The regulatory process can be
lengthy, expensive and uncertain, and securing clearances or approvals may
require the submission of extensive official data and other supporting
information. Failure to comply with applicable requirements can result in
fines, recall or seizure of products, total or partial suspension of
production, withdrawal of existing product approvals or clearances, refusal to
approve or clear new applications or notices and criminal prosecution.
In the United States, the FDA regulates medical devices under the
Food, Drug, and Cosmetic Act (the "FDC Act"). Before a new medical device can
be commercially introduced in the United States, the manufacturer usually must
obtain FDA clearance by filing a pre-market notification under Section 510(k)
of the FDC Act (a "510(k) Notification") or obtain FDA approval by filing a
pre-market approval application (a "PMA Application"). The 510(k) Notification
process can be lengthy, expensive and uncertain, but the PMA Application
process is significantly more complex, expensive, time-consuming and uncertain.
To date, the Company has cleared all of its regulated products with the FDA
through the 510(k) Notification process including, most recently, The White
IRIS and the Model 900UDx.
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<PAGE> 12
The Company's business strategy includes the development of additional
products for which FDA clearance or approval may be required, and no assurance
can be given that the Company can secure any necessary FDA clearance to market
these products or that the FDA will not require the filing of a PMA Application
for these products. Furthermore, FDA clearance of a 510(k) Notification or
approval of a PMA Application is subject to continual review, and the
subsequent discovery of previously unknown facts may result in restrictions on
a product's marketing or withdrawal of the product from the market.
The Company is also required to register as a medical device
manufacturer with the FDA and comply with FDA regulations concerning good
manufacturing practices for medical devices ("GMP Standards"). The FDA
recently expanded the scope of the GMP Standards with new regulations requiring
medical device manufacturers to maintain control procedures for the design
process, component purchases and instrument servicing. The FDA periodically
inspects the Company's manufacturing facilities for compliance with GMP
Standards. Based in part upon the results of prior FDA inspections, the
Company believes that it can achieve substantial compliance with GMP Standards.
The Company also believes that it can achieve substantial compliance with the
expanded GMP Standards prior to the FDA's announced deadline of June 1998 and
that achieving compliance will not require significant capital expenditures or
have a material adverse effect on its business.
The FDA also regulates computer software of the type used in the
Company's IVD imaging systems and is currently reevaluating the regulation of
such software. The Company cannot predict the extent to which the FDA will
regulate such software in the future.
Labelling, advertising and promotional activities for medical devices
are subject to scrutiny by the FDA and, in certain instances, by the Federal
Trade Commission. The FDA also enforces statutory and policy prohibitions
against promoting or marketing medical devices for unapproved uses.
Many states have also enacted statutory provisions regulating medical
devices. The State of California's requirements in this area, in particular,
are extensive, and require registration with the state and compliance with
regulations similar to the GMP Standards established by the FDA. While the
impact of such laws and regulations has not been significant to date, there can
be no assurance that future developments in this area will not have a material
adverse effect on the Company.
In addition to domestic regulation of medical devices, many of the
Company's products are subject to regulations in the foreign jurisdictions in
which it operates or sells products. The requirements for the sale of medical
devices in foreign markets vary widely from country to country, ranging from
simple product registrations to detailed submissions similar to those required
by the FDA. Although the Company distributes the PowerGene analyzer in more
than 35 foreign countries, it has not yet applied for regulatory clearances or
approvals to market The Yellow IRIS or The White IRIS in most of these foreign
countries. The Company's business strategy includes expanding the geographic
distribution of these and other products, and there can be no assurance that
the Company can secure the necessary clearances and approvals in the relevant
foreign jurisdictions. Furthermore, the regulations in certain foreign
jurisdictions continue to develop and there can be no assurance that new laws
or regulations will not have a material adverse effect on the Company's
existing business or future plans. Among other things, CE Mark certifications
are, or may soon be, required for the sale of many products in certain
international markets such as the European Community. The Company is actively
pursuing CE Mark certification for many of its products, but there can be no
assurance that the Company will be successful in securing such certification.
In addition, the Company's products are subject to regulation by the
United States Department of Commerce export controls, primarily as they relate
to the associated computers and peripherals. The Company has not experienced
any material difficulties in obtaining necessary export licenses to date.
Any change in existing federal, state or foreign laws or regulations,
or in the interpretation or enforcement thereof, or the discussion or
promulgation of any additional laws or regulations could have a material
adverse effect on the Company.
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<PAGE> 13
RECENT ACQUISITIONS AND OTHER SIGNIFICANT DEVELOPMENTS
The Company has experienced substantial developments during the past
year, and the following summarizes the more significant events occurring since
January 1, 1996.
StatSpin Acquisition
The Company acquired StatSpin, Inc. ("StatSpin") in February 1996, in
a transaction accounted for as a pooling-of-interests, for approximately
340,000 shares of Common Stock and the assumption of options and warrants to
purchase an additional 126,000 shares of Common Stock. Through this
acquisition, the Company acquired sample preparation technologies useful for
future IVD imaging applications, a complementary line of products for smaller
laboratories, as well as access to key distributors for small laboratory
instruments and supplies. StatSpin had net sales of $4.3 million, $3.1 million
and $2.9 million in 1996, 1995 and 1994, respectively.
CenSlide Acquisition
In March 1996, the Company purchased the CenSlide 1500 System and
related products for manual microscopic examination from UroHealth Systems,
Inc. for $850,000. Among other things, the Company acquired several United
States and foreign patents, as well as the design for the unique centrifuge
used in the CenSlide 1500 System. The Company recently transferred production
of the CenSlide product line to StatSpin and currently markets it through its
distribution channels. The CenSlide product line generated net sales of
approximately $432,000 and $550,000 for 1996 and 1995, respectively.
PSI Acquisition and Related Financing
In July 1996, the Company acquired the digital imaging business of PSI
for approximately $16.1 million plus a five-year warrant to purchase 875,000
shares of Common Stock at $8.00 per share. PSI's principal product is the
PowerGene cytogenetic analyzer. The Company financed the purchase price with
(i) a $7.0 million subordinated note issued to the seller, (ii) a $7.8 million
term loan from City National Bank and (iii) $1.3 million drawn under a new $1.5
million revolving line of credit with City National Bank. The Company
accounted for the PSI Acquisition using the purchase method of accounting.
Total revenues for this business were $6.1 million, $5.4 million and $4.3
million in 1996, 1995 and 1994, respectively.
Prior to the PSI Acquisition, the Company did not have significant
international sales. With the acquisition, the Company acquired an overseas
operation headquartered in Chester, England supporting agents and distributors
in more than 35 countries. International sales of the PowerGene line accounted
for 64%, 56% and 54% of total sales for this product line in 1996, 1995 and
1994, respectively.
The Company also acquired additional research and development
resources through this acquisition. See "--Research and Development."
Stock Repurchase
In September 1996, as compensation to the Company for potentially
missed business opportunities in hematology resulting from an amendment to the
Company's joint development agreements with BMC and BMG, their affiliate agreed
to the Company's repurchase of 469,413 shares of Common Stock and a warrant to
purchase 250,000 shares of Common Stock held by the affiliate at their original
aggregate purchase price of $2.1 million, or $4.54 per share, a substantial
discount from the then current market price of $7.75 per share. The purchase
price is payable in four installments, and the Company has paid two
installments to date. The two remaining payments are due in the second half of
1997 and total $1.0 million. The Company has the right, if necessary, to
extend the due dates of the remaining installments one year each, paying 8%
interest during the extension periods. See "--Research and Development."
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<PAGE> 14
Restructuring
In response to a third quarter operating loss, the Company
restructured its workforce during the fourth quarter of 1996. The
restructuring reduced manpower by approximately 18% and is expected to reduce
annual operating expenses by more than $1.9 million as compared to expenditure
levels immediately prior to the restructuring. The Company incurred a one-time
earnings charge in the fourth quarter of 1996 of approximately $300,000 for
severance and other incremental costs associated with the restructuring.
Proposed Public Offering
In September 1996, the Company filed a registration statement with the
Securities and Exchange Commission for an underwritten public offering by the
Company of 3,000,000 shares of its Common Stock which was expected to generate
net proceeds of at least $20 million based upon the price of the Common Stock
at that time. The net proceeds of the public offering were to be used
primarily to reduce outstanding indebtedness incurred to finance the PSI
Acquisition and to repurchase the securities from the affiliate of BMC and BMG.
Following the third quarter operating loss, the Company elected not to pursue
the public offering at such time and, as an alternative, to pursue one or more
smaller financing transactions. Most of the expenses of the offering were
charged to operations in the third quarter of 1996.
Amendment to Bank Loan Agreements
As a result of the decision not to pursue the public offering and its
recent operating losses, the Company was unable to comply with the financial
covenants under the term loan and credit facility with City National Bank on
September 30 and December 31, 1996. The inability to comply with these
covenants constituted an event of default under the terms of the loan
documents. In April 1997, the bank agreed to waive the default, amend the
financial covenants and extend the maturity of both loans to April 15, 1998.
In exchange, the Company agreed to increase the interest rates on both loans
and to issue the bank a three-year warrant to purchase 50,000 shares of Common
Stock at $3.875 per share. The Company also agreed to issue additional
warrants to purchase 25,000 shares of Common Stock at prevailing market prices
on each of June 1 and July 1, 1997 if the term loan is still outstanding on
those dates. See "Managements Discussion and Analysis of Financial Condition
and Results of Operations."
Issuance of Preferred Stock
On December 31, 1996, the Company completed a sale of equity
securities for approximately $3 million in a private placement to Thermo Amex
Convertible Growth Fund I, L.P. Specifically, the Company sold (i) 3,000
shares of a new Series A Convertible Preferred Stock ("Series A Preferred
Stock") with a liquidation value of $1,000 per share and (ii) a warrant to
purchase 84,270 shares of the Common Stock at an exercise price of $3.56 per
share. The initial conversion price of the Series A Preferred Stock and the
warrant exercise price were based on the average closing price of the Common
Stock for the five trading days immediately preceding the closing of the sale.
Each share of Series A Preferred Stock is convertible into a number of
shares of Common Stock equal to (i) the liquidation value of a share of Series
A Preferred Stock divided by (ii) a variable conversion price (discussed
below). Any shares of Series A Preferred Stock not voluntarily converted
during the three years following their initial sale will be automatically
converted into Common Stock on December 31, 1999. The Series A Preferred Stock
is non-voting, is not entitled to any preferred dividends and is not subject to
any mandatory or optional redemption provisions. The Company may not pay cash
dividends on the Common Stock or repurchase any shares of the Common Stock
without the written consent of the holders of a majority of the outstanding
shares of Series A Preferred Stock.
The conversion price of the Series A Preferred Stock was fixed at
$3.56 per share of Common Stock until April 1, 1997. Based on this conversion
price, each share of Series A Preferred Stock would be convertible into
approximately 281 shares of Common Stock, and the Company would have issued
approximately 843,000 shares of
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<PAGE> 15
Common Stock if the holder elected to convert all the outstanding shares of
Series A Preferred Stock. The conversion price is currently variable and
equals the lower of (i) 85% of the average closing bid price of the Common
Stock for the five consecutive trading days immediately preceding the
conversion date (but in no event less than $1.50) or (ii) $3.56. The
conversion price is subject to downward adjustments in the event that a
registration statement is not declared effective by May 30, 1997 permitting
public resale of the shares of Common Stock issuable upon conversion of the
Series A Preferred Stock.
If the Company obtains additional financing prior to July 1, 1997
through a private placement of equity securities (or debt securities
convertible into or coupled with equity securities), the holder of the Series A
Preferred Stock will have the right to exchange some or all of the Series A
Preferred Stock and Warrants then owned by it for the new securities offered by
the Company at an exchange price equal to the purchase price of such new
securities.
The Company obtained written representations from the investor that,
among other things, it was (i) an "accredited investor" as defined in Rule 501
and (ii) acquiring the Series A Preferred Stock for its own account for
investment purposes and not with a view to resale or distribution of such
securities in violation of the Securities Act of 1933. The Company did not
engage in any form of general solicitation or advertising, and the securities
bear appropriate restrictive legends. Based on these representations, the
Company believes the sale of securities in this transaction was exempt from
registration under the Securities Act of 1933 based on Regulation D.
FORWARD LOOKING STATEMENTS
The foregoing description of the Company's business, as well as the
remaining sections of this Annual Report on Form 10-K, contain various
forward-looking statements which reflect the Company's current views with
respect to future events and financial results. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Forward Looking
Statements."
GLOSSARY OF SELECTED TERMS
The following glossary defines certain technical terms used to describe
the Company's business.
AUTOMATED INTELLIGENT MICROSCOPY (AIM). The synthesis of visual
microscopy, digital image processing and automated image interpretation/pattern
recognition to analyze microscopic specimens. The Yellow IRIS, The White IRIS
and PowerGene are all examples of instruments which are based on AIM
technology.
AUTOMATIC KARYOTYPING. A procedure to capture and digitize an image
of a spread of chromosomes from a dividing nucleus (metaphase) which may be
further enhanced by image processing. The individual chromosomes in the
enhanced image are then automatically separated and matched into their
respective pairs (karyotype).
COMPARATIVE GENOMIC HYBRIDIZATION (CGH). A molecular biology method
to globally view DNA for gain or loss (amplifications or deletions) of genetic
material using a FISH procedure.
CYTOPROBE. A chemical reagent which reacts with enzymatic granules
within a cell to produce unique color characteristics which are useful in
identifying the cell.
DNA. Deoxyribonucleic acid, the chemical composition of chromosomes
in the nuclei of living cells, consisting of two long chains of alternating
phosphate and deoxyribose units twisted into a double helix and joined by
hydrogen bonds between the complementary bases adenine and thymine or cytosine
and guanine bound in unique sequences that determine genetic characteristics.
DNA PROBE ANALYSIS. A molecular biology method using synthesized
unique short sequences of DNA (deoxyribonucleotides) to locate their exact
template along the DNA chain in the nucleus of a cell.
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<PAGE> 16
FLUORESCENT IN-SITU HYBRIDIZATION (FISH). A procedure which allows
microscopic observation of the location of a unique sequence of DNA by using a
DNA probe with a molecule attached to it which emits a distinctive color when
illuminated.
IN VITRO DIAGNOSTIC (IVD) TESTING. Testing conducted outside of the
body in a laboratory apparatus using a specimen obtained from the patient
(blood, urine, tissue, etc.) to identify or monitor a disease.
LEUKOCYTE DIFFERENTIAL ANALYZER. An automated, high-speed laboratory
instrument for classifying the white blood cells (or leukocytes) in a blood
specimen into different categories and determining the relative proportion of
each category.
MULTIPLEX FLUORESCENT IN-SITU HYBRIDIZATION (M-FISH). A procedure
which allows the combination of microscopic observations of the locations of a
multiplicity of unique DNA sequences by using a multiplicity of DNA probes,
each specific for one of the unique sequences, and each with one of several
fluorescent molecules attached such that each location is observed to have a
distinguishable color when illuminated.
REFERENCE LABORATORY. A commercial clinical laboratory which performs
general IVD testing of specimens referred from physician offices and more
specialized IVD testing for physician offices and hospitals.
REFRACTOMETER. A device which measures the index of refraction of a
solution, typically to determine its concentration or specific gravity.
SLIDELESS MICROSCOPY. The process of presenting a microscopic
specimen to the optical portion of a microscope without using a conventional
microscope slide. Slideless microscopy is implemented in The Yellow IRIS and
The White IRIS using a patented flowcell through which the specimen literally
flows past a microscope objective.
ITEM 2. PROPERTIES.
The Company leases all of its facilities. The leases expire at
various times over the next four years. The Company's headquarters are located
at 9162 Eton Avenue, Chatsworth, California 91311. The table below sets forth
certain information regarding the Company's leaseholds as of December 31, 1996:
<TABLE>
<CAPTION>
Approximate
Floor Space Monthly
Location (Sq. Ft.) Rent Use
---------------- ------------- -------- ---------------------------------------------------
<S> <C> <C> <C>
Chatsworth, CA 26,000 $13,600 Sales and Marketing, Research and Development,
Manufacturing and Corporate Administration
League City, TX 7,000 $8,400 Sales and Marketing, Research and Development and
Manufacturing
Norwood, MA 11,000 $7,200 Sales and Marketing, Research and Development and
Manufacturing
Chester, England 5,000 [Pounds] 4,200 Sales and Marketing and Manufacturing
</TABLE>
The Company believes that its facilities are adequate to meet its
current needs. Although it has limited expansion space at its Chatsworth
facility, the Company believes that it can accommodate planned growth at this
facility for the near term by leasing additional office space for certain
non-manufacturing related activities, making modifications to the Chatsworth
facility and adding a second shift to its manufacturing operations.
ITEM 3. LEGAL PROCEEDINGS.
In 1994, the Company became aware that IMI was demonstrating a new
slide-based microscopic imaging system called the Micro 21. See
"Business--Competition--Hematology." After further examination of the IMI
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<PAGE> 17
system, the Company notified IMI that the Micro 21 infringed upon at least two
of the Company's patents. The parties then entered into negotiations regarding
the licensing to IMI of these and possibly other Company patents. The parties
were unable to reach an agreement, and IMI subsequently filed a complaint in
the United States District Court for the Southern District of Florida (Case No.
95-8594CIV).
The Company and IMI settled their dispute during the first quarter of
1997. Under the terms of the settlement, IMI acknowledged the validity of the
two patents in question, and the Company granted IMI a nonexclusive license to
use the patents for sales of the Micro 21 in the United States. IMI will pay
the Company a royalty on distributor sales of the Micro 21 but not on direct
sales. The license does not apply to international sales of the Micro 21.
In 1995, TOA began displaying the UF-100 urine sediment analyzer in
the United States. See "Business--Competition--Urinalysis." The Company
subsequently asserted its rights under an existing agreement between the two
companies to distribute the UF-100 in North America. TOA disputed the right of
the Company to distribute the product and commenced an arbitration proceeding
in March 1996 before the International Chamber of Commerce. Based on the
existing agreement, the arbitrators ruled that the Company was indeed entitled
to exclusive distribution rights in North America for the UF-100 and to
royalties on sales of the UF-100 outside of North America. No damages were
awarded, and each party will bear its own attorneys fees.
As part of the purchase price for the PSI Acquisition, the Company
issued to the seller a five-year warrant to purchase 875,000 shares of Common
Stock at $8.00 per share. Following the Company's restatement in the third
quarter of 1996 of financial results for certain prior periods, the Company
received a request from the seller for a reduction in the exercise price of the
warrant. In its request, the seller asserted that it had relied on the prior
financial information and suffered material damage as a result. The Company
has declined to consider the seller's request until the Company has evaluated
its claims against the seller.
The Company is involved in routine litigation arising in the ordinary
course of its business, and, while the results of the proceedings cannot be
predicted with certainty, the Company believes that the final outcome of such
matters will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
("Amex") under the symbol "IRI." The closing price of the Common Stock on
March 25, 1997 was $3.875 per share. The table below sets forth high and low
closing prices reported by Amex for the period January 1, 1995 through December
31, 1996:
<TABLE>
<CAPTION>
High Low
-------- -------
<S> <C> <C>
FISCAL 1995
First Quarter . . . . . . . . . . . . . . . . . . . . . $ 8 7/8 $ 5 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . 8 5/8 6
Third Quarter . . . . . . . . . . . . . . . . . . . . . 8 6 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . 8 6 3/8
FISCAL 1996
First Quarter . . . . . . . . . . . . . . . . . . . . . 7 7/8 6 1/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . 12 3/4 6 5/8
Third Quarter . . . . . . . . . . . . . . . . . . . . . 9 1/2 7 1/4
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . 7 1/2 3 3/8
</TABLE>
As of March 25, 1997, IRIS had approximately 4,500 holders of record
of its Common Stock.
The Company intends to employ all available funds in the development
of its business and the repayment of indebtedness and, as a result, does not
expect to pay any cash dividends for the foreseeable future. Furthermore, the
Company may not pay any cash dividends on the Common Stock, or repurchase any
shares of the Common Stock, without the written consent of the holders of a
majority of the outstanding shares of Series A Preferred Stock.
On December 31, 1996, the Company completed a private sale of Series A
Preferred Stock and warrants to purchase Common Stock for approximately $3.0
million to the Thermo Amex Convertible Growth Fund I, L.P. See
"Business--Recent Acquisitions and Other Significant Developments--Issuance of
Preferred Stock."
ITEM 6. SELECTED FINANCIAL DATA.
This information is derived in part from, and should be read in
conjunction with, the Company's Financial Statements, including the Notes
thereto, as included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues . . . . . . . . $10,823 $12,393 $12,469 $14,392 $20,554
Interest and other income, net 129 68 206 378 (409)
Net income (loss) . . . . . . 929 1,323 1,622 2,126 (7,428)
Net income (loss) per share . .18 .25 .28 .33 (1.21)
Working capital . . . . . . . 5,339 6,812 7,779 11,234 1,914
Total assets . . . . . . . . 9,290 11,181 13,282 22,203 37,860
Long term debt, including
current portion . . . . . . . 676 603 367 311 13,000
Total liabilities . . . . . . 2,981 3,415 3,122 3,261 24,096
Shareholders' equity . . . . 6,310 7,766 10,160 18,942 13,765
Cash dividends per share . . -- -- -- -- --
</TABLE>
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company generates revenues from sales of IVD imaging systems based
on its patented and proprietary AIM technology. Following the initial sale,
these systems become part of the "installed base" and generate follow-on sales
of supplies and service necessary for their operation. The Company also
generates revenues from sales of ancillary lines of small laboratory
instruments and supplies.
Until recently, the Company generated most of its revenues from sales
of two models of The Yellow IRIS urinalysis workstation and related supplies
and services. These two models differ mainly by their speed and price. In
1996, the Company introduced a third model of The Yellow IRIS. The Model
900UDx urine pathology system, the latest in The Yellow IRIS family, is a
higher capacity automated urinalysis workstation designed especially for the
high-volume testing requirements of large hospitals and reference laboratories.
The Company received FDA clearance to market the Model 900UDx in March 1996 and
began sales in May of that year. The Company also received FDA clearance to
market The White IRIS leukocyte differential analyzer in May 1996 and expects
to start sales of this system in 1997. Finally, the Company began selling the
PowerGene family of genetic analyzers in August 1996 after completing the PSI
Acquisition.
The Company invests in research and development for new products and
enhancements to existing products. The following table summarizes total
product technology expenditures for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1994 1995 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Research and development expense, net . . . . . . . . . . . . . . . . . . $ 663 $1,220 $1,978
Capitalized software development costs . . . . . . . . . . . . . . . . . 25 299 577
Reimbursed costs for research and development grants and contracts . . . 1,111 843 1,780
------- ------- -------
Total product technology expenditures . . . . . . . . . . . . . $1,799 $2,362 $ 4,335
====== ====== =======
</TABLE>
The Company has in the past partially funded its research and
development programs through (i) grants from NASA and NIH, (ii) joint
development programs with strategic partners and (iii) Company-sponsored
research and development entities. See "Business--Research and Development."
RECENT ACQUISITIONS AND OTHER SIGNIFICANT DEVELOPMENTS
Since January 1, 1996, the Company has completed several important
acquisitions and announced several other significant developments. The
following is a brief summary of those developments.
(1) The Company acquired StatSpin in February 1996 in a
pooling-of-interests transaction. StatSpin manufacturers and markets
special-purpose centrifuges and related supplies for the clinical laboratory
market.
(2) In March 1996, the Company purchased the CenSlide 1500 System
and related products for centrifugal urine sedimentation and manual microscopic
examination from UroHealth Systems, Inc. for $850,000.
(3) The Company completed the PSI Acquisition in July 1996 for
approximately $16.1 million plus a five-year warrant to purchase 875,000 shares
of Common Stock at $8.00 per share, thereby adding the PowerGene genetic
analyzer to its line of IVD imaging systems. The Company financed the
acquisition with (i) a $7.0 million subordinated note (the "Subordinated
Note"), (ii) a $7.8 million term loan (the "Term Loan") and (iii) $1.3 million
drawn under a new $1.5 million revolving line of credit (the "Credit
Facility").
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<PAGE> 20
(4) In September 1996, the Company repurchased 469,413 shares of
Common Stock and a warrant to purchase 250,000 shares of Common Stock for $2.1
million from an affiliate of BMC. The Company has paid the first two
installments of the purchase price, and the remaining payments, totaling $1.0
million, are due in the second half of 1997 (the "Stock Repurchase Debt"). The
Company has the right, if necessary, to extend the due dates of the remaining
installments by one year each, but must pay 8% interest during the extension
periods.
(5) In response to a third quarter operating loss, the Company
restructured its workforce during the fourth quarter of 1996 and reduced the
number of employees by approximately 18%.
(6) In September 1996, the Company filed a registration statement
with the Securities and Exchange Commission for an underwritten public
offering. The net proceeds of the public offering were to be used primarily to
reduce outstanding indebtedness incurred to finance the PSI Acquisition and to
pay the Stock Repurchase Debt. Following the third quarter operating loss, the
Company elected not to pursue the public offering and, as an alternative, to
pursue one or more smaller financing transactions. Most of the expenses of the
offering, totaling $686,000, were charged to operations in the third quarter of
1996.
(7) On December 31, 1996, the Company completed a private sale of
Series A Preferred Stock and warrants to purchase Common Stock for
approximately $3.0 million to the Thermo Amex Convertible Growth Fund I, L.P.
(8) As a result of the decision not to pursue the public offering
and its recent operating losses, the Company was unable to comply with the
financial covenants in the Term Loan and the Credit Facility on September 30
and December 31, 1996. The inability to comply with these covenants
constituted an event of default under the terms of the loan documents. In
April 1997, the bank agreed to waive the default, amend the financial covenants
and extend the maturity of both loans to April 15, 1998.
For a detailed description of the above events, see "Business--Recent
Acquisitions and Other Significant Developments."
RESULTS OF OPERATIONS
The consolidated financial statements of the Company contained in this
report have been retroactively restated for all periods presented to include
the financial position, results of operations and cash flows of StatSpin in
accordance with the pooling-of-interests method of accounting. The
consolidated financial statements also reflect the consummation of the PSI
Acquisition on July 31, 1996 which was accounted for using the purchase method
of accounting. Accordingly, the consolidated statements of operations for the
year ended December 31, 1996 include the financial results of PSI from the date
of acquisition, July 31, 1996.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Net sales for the year ended December 31, 1996 increased to $20.6
million from $14.4 million, an increase of $6.2 million or 43% over the prior
year. Sales of IVD imaging systems increased to $6.4 million from $4.2
million, an increase of $2.2 million or 50% over the prior year. The increase
was due primarily to the addition of the PowerGene family of genetic analyzers
to the Company's product line in August 1996 as a result of the PSI
Acquisition. The Company believes that the ongoing consolidation in the
healthcare industry may be adversely affecting sales of The Yellow IRIS as some
hospitals and reference laboratories appear to be postponing large capital
investment decisions due to the resulting uncertainty. The Company also
believes that there is a growing trend among potential customers for The Yellow
IRIS toward leasing these systems on a cost-per-test basis rather than
purchasing them. This trend is expected to spread the revenue from system
placements over several years.
Sales of IVD imaging system supplies and service increased to $9.1
million from $6.7 million, an increase of $2.4 million or 35% over the prior
year, due to the larger installed base of IVD imaging systems and the
conversion of The Yellow IRIS installed base to the new CHEMSTRIP/IRIStrip
urine test strips marketed
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<PAGE> 21
exclusively by the Company. As of December 31, 1996, the Company had converted
more than 90% of this installed base from test strips marketed by various
distributors to the new strips. Sales of small instruments and supplies
increased to $5.1 million from $3.4 million, an increase of $1.7 million or
48%, over the prior year. The increase reflects generally higher sales levels
of the StatSpin products, as well as the addition of the CenSlide product line
in March 1996.
Cost of goods for IVD imaging systems increased as a percentage of
sales of IVD imaging systems to 51% for the year ended December 31, 1996 from
48% for the prior year due primarily to the addition of the Model 900UDx to the
product line and amortization of increased fixed costs for IVD imaging systems.
These factors were partially offset by the addition of the higher-margin
PowerGene family of genetic analyzers to the Company's product line in August
1996. Although the Model 900UDx currently has a lower gross margin than other
models of The Yellow IRIS due to an OEM component on which the Company
recognizes minimal gross margin, the Company expects the Model 900UDx to
generate higher sales of CHEMSTRIP/IRIStrips and other supplies. Cost of goods
for IVD imaging system supplies and service increased as a percentage of sales
of such products to 56% for the year ended December 31, 1996 from 47% for the
prior year primarily due to relatively lower gross margins on sales of
CHEMSTRIP/IRIStrip urine test strips which accounted for a greater proportion
of sales of system supplies, as well as a decline in gross margins on service
of IVD imaging systems. Cost of goods for small instruments and supplies
decreased as a percentage of sales of small instruments and supplies to 53% for
the year ended December 31, 1996 from 57% for the prior year due to an overall
change in product mix toward higher gross margin items. The net result of
these changes was a decrease in aggregate gross margin to 46% for the year
ended December 31, 1996 from 50% for the prior year.
Marketing and selling expenses consist primarily of salaries,
commissions and related travel expenses of the Company's direct sales force, as
well as salaries for the marketing and distributor relations departments.
Marketing and selling expenses increased to $4.6 million for the year ended
December 31, 1996 from $2.9 million, an increase of $1.7 million or 61% over
the prior period, and increased as a percentage of net sales to 23% from 20%,
due to the addition of the sales force from the PSI Acquisition and increased
spending on promotions, telemarketing and customer support.
General and administrative expenses consist primarily of payroll costs
associated with the Company's management and support personnel, facilities
related costs and legal and accounting fees. General and administrative
expenses increased to $3.3 million for the year ended December 31, 1996 from
$2.0 million, an increase of $1.3 million or 60% over the prior year, and
increased as a percentage of net sales from 14% to 16%.
Net research and development expenses consist of costs incurred for
the development of new products and improvements to existing products less
third-party reimbursements under joint development programs, grants and
research and development contracts. Net research and development expenses
increased to $2.0 million for the year ended December 31, 1996 from $1.2
million, an increase of $758,000 or 62% over the prior year, and increased as a
percentage of net sales to 10% from 8%. Reimbursements under joint development
programs increased to $1.8 million from $843,000. Total product technology
expenditures increased to $4.3 million from $ 2.4 million, an increase of $1.9
million or 84% over the prior year, due primarily to work on the Model 900UDx
and The White IRIS, as well as the addition of research and development staff
from the PSI Acquisition.
Amortization of intangible assets reflects the amortization of
deferred expenses for warrants issued in connection with joint development
projects and intangible assets arising from acquisitions and patents.
Amortization of intangible assets for the year ended December 31, 1996
increased to $794,000 from $127,000, an increase of $667,000 or 524% over the
prior year, primarily as a result of the acquisition of intangible assets in
the PSI Acquisition, as further described below.
The results of operations for the year ended December 31, 1996 include
certain unusual charges to earnings of $2.0 million primarily for the write-off
of deferred offering costs ($686,000), litigation expenses ($617,000),
restructuring charges ($298,000) and merger related expenses ($244,000).
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<PAGE> 22
Acquisition of in-process research and development for the year ended
December 31, 1996 reflects the PSI Acquisition which resulted in a
non-recurring charge of $7.3 million. Acquisition of in-process research and
development for the year ended December 31, 1995 reflects the acquisition of
LDA which resulted in a non-recurring, non-cash charge of $2.9 million. The
FDA cleared The White IRIS, acquired from LDA, in May 1996.
Interest income consists of income from investments and decreased to
$222,000 for the year ended December 31, 1996 from $310,000 for the comparable
period, primarily as the result of decreased amounts of invested cash during
1996.
Interest expense increased to $681,000 for the year ended December 31,
1996 from $43,000 for the comparable period due to the indebtedness incurred to
finance the PSI Acquisition.
The income tax benefit for the year ended December 31, 1996 was $3.5
million as compared to an income tax benefit of $3.6 million for 1995. The
Company recognized a deferred tax benefit of $3.6 million in 1995 due to a
significant 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. At December 31, 1996, the
Company increased the valuation allowance by $437,000 based on an assessment of
operating results and other factors. Although realization is not assured,
management believes it is more likely than not that the remaining net deferred
tax asset will be realized. The amount of the deferred tax assets considered
realizable, however, could be reduced in the future if estimates of taxable
income during the carryforward period decrease.
The above factors contributed to a net loss of $7.4 million, or $1.21
per share, for the year ended December 31, 1996 as compared to net income of
$2.1 million, or $0.33 per share, for the year ended December 31, 1995.
Excluding the charges for the acquisition of in-process research and
development from the PSI Acquisition and the $2.0 million of unusual charges
discussed above, the Company would have had a net loss of approximately $ 1.5
million, or $0.25 per share, for the year ended December 31, 1996. Excluding
the charges for the acquisition of in-process research and development from LDA
and the recognition of the tax benefit due to the reduction in the deferred tax
asset valuation allowance, the Company would have had net income of
approximately $1.4 million, or $0.22 per share, for the year ended December 31,
1995.
The staff of the Securities and Exchange Commission recently announced
a new position on accounting for convertible preferred stock which is
potentially convertible at a discount to the market price of the common stock,
even if the potential for a discount is only a possibility. The staff has
taken the position that, solely for purposes of calculating earnings per share,
the potential discount is an embedded dividend to the preferred stockholders
which reduces the amount of income available to common stockholders. As a
result of the staff's new accounting position, the issuance of the Series A
Preferred Stock could result in a reduction in earnings per share of up to
$0.08 in the first quarter of 1997. The staff's position is limited to the
calculation of earnings per share and will not have any effect on the Company's
net income or cash flow.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Net sales increased to $14.4 million for 1995 from $12.5 million for
1994, an increase of $1.9 million or 15%. Sales of IVD imaging systems
decreased to $4.2 million in 1995 from $4.6 million in 1994, a decrease of
$318,000 or 7% from the prior year due to the sale of fewer systems in 1995.
Sales of IVD imaging system supplies and service increased to $6.7 million from
$5.0 million, an increase of $1.7 million or 34% over the prior year, due to
the larger installed base of IVD imaging systems and the introduction of the
new CHEMSTRIP/IRIStrip urine test strips in late 1994. Sales of small
instruments and supplies increased to $3.4 million from $2.9 million, an
increase of $528,000 or 18%. The increase reflects generally higher sales of
the StatSpin product line and the addition of the Biovation product line in
March 1995.
Cost of goods for IVD imaging systems as a percentage of sales of IVD
imaging systems totaled 48% for 1995, the same as for 1994. Cost of goods for
IVD imaging system supplies and service decreased as a
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<PAGE> 23
percentage of sales of IVD imaging system supplies and service to 47% for 1995
from 50% for 1994 due to a decrease in service costs, offset to some extent by
lower gross margins on the CHEMSTRIP/IRIStrip urine test strips. Cost of goods
for small instruments and supplies decreased as a percentage of sales of small
instruments and supplies to 57% for 1995 from 63% for 1994 due to higher gross
margins on the recently added Biovation product line as well as improved gross
margins on the StatSpin product lines due to increased sales volume. The net
result of these changes and the overall change in product mix was an increase
in gross margin to 50% for 1995 from 48% for 1994.
Marketing and selling expenses increased to $2.9 million for 1995 from
$2.1 million for 1994, an increase of $789,000 or 38%, due to increased
spending on direct sales and after-sales support, and increased as a percentage
of net sales to 20% from 17%.
General and administrative expenses increased to $2.0 million for 1995
from $1.6 million for 1994, an increase of $396,000 or 24%, and increased as a
percentage of net sales from 13% in 1994 to 14% in 1995.
Net research and development expenses increased to $1.2 million for
1995 from $663,000 for 1994, an increase of $557,000 or 84%, and also increased
as a percentage of net sales to 8% from 5%. The increase in net research and
development expenses was due principally to a decrease in reimbursements under
research and development contracts and increased spending by the Company on the
continued development of The White IRIS. Reimbursements under research and
development contracts and joint development programs decreased to $843,000 from
$1.1 million, a decrease of $268,000 or 24%, due to the acquisition of LDA.
Total product technology expenditures increased to $2.4 million from $1.8
million, an increase of $563,000 or 31%, reflecting the addition of two new
research projects, a modest increase in general research and development
activity and continuing expenditures by the Company on The White IRIS to
complete its development and pursue FDA clearance.
Amortization of intangible assets for the year ended December 31, 1995
increased to $127,000 from $81,000, an increase of $46,000 or 57% over the
prior year, primarily as a result of the acquisition of the digital
refractometer product line of Biovation, Inc. during the first quarter of 1995.
Interest income increased to $310,000 for 1995 from $168,000 for the
prior year, primarily the result of increased amounts of invested cash during
1995 as a result of the exercise of outstanding warrants issued in connection
with the formation of LDA and stock sales to employees under the Company's
stock option and purchase plans.
Interest expense consisted of interest incurred on notes issued by
StatSpin and decreased to $43,000 for 1995 from $73,000 for the prior year due
to a reduction in the outstanding principal balances.
Other income consisted principally of royalties for sales of licensed
products and remained constant at $111,000 for 1995 and 1994.
Acquisition of in-process research and development in 1995 reflects
the acquisition of LDA which resulted in a non-recurring, non-cash charge of
$2.9 million.
The income tax benefit for 1995 was $3.6 million as compared to a
$79,000 provision in 1994. The Company recognized a deferred tax benefit of
$3.6 million in 1995 due to a significant 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. The amount
of the deferred tax assets considered realizable, however, could be reduced in
the future if estimates of taxable income during the carryforward period
decrease.
Net income increased to $2.1 million, or $0.33 per share, for 1995 as
compared to net income of $1.6 million, or $0.28 per share, for 1994.
Excluding the effects of the non-recurring charge for the acquisition of
in-process research and development and the recognition of the tax benefit due
to the reduction in the deferred
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tax asset valuation allowance, the Company would have had net income of
approximately $1.4 million, or $0.22 per share, for 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased to $4.3
million at December 31, 1996 from $6.2 million at December 31, 1995. The
decrease is primarily attributable to operating losses, acquisition expenses,
increased levels of inventory and accounts receivable and additions to plant
and equipment. Inventory levels during 1996 increased to $4.8 million from
$2.9 million. This increase was primarily due to the increase in raw materials
and finished goods associated with the introduction of the Model 900UDx and
anticipated sales increases. Total accounts receivable increased to $5.2
million at December 31, 1996 from $3.8 million at December 31, 1995. This
increase was primarily the result of acquisitions.
In 1996, the Company expended $1.2 million for capital equipment and
$577,000 in capitalized software development. The Company expended $821,000
and $266,000 for capital equipment and $299,000 and $25,000 in capitalized
software development in 1995 and 1994, respectively. The Company does not
presently have any material commitments for capital expenditures.
During 1996, the Company generated cash of $350,000 from stock sales
to employees under the Company's stock option and purchase plans and from
exercises of stock options assumed in connection with acquisitions. The
Company generated cash of $1.7 million and $356,000 in 1995 and 1994,
respectively, from exercises of outstanding warrants issued in connection with
joint development programs and stock sales to employees under the Company's
stock option and purchase plans.
On December 31, 1996, the Company completed a private sale of Series A
Preferred Stock and warrants to purchase Common Stock for approximately $3.0
million to the Thermo Amex Convertible Growth Fund I, L.P. See
"Business--Recent Acquisitions and Other Significant Developments--Issuance of
Preferred Stock."
The Company financed the purchase price for the PSI Acquisition with
the Subordinated Note ($7.0 million), the Term Loan ($7.8 million) and the
Credit Facility ($1.3 million). The Term Loan and Credit Facility impose
certain operating and financial covenants on the Company. Due to an inability
to comply with these financial covenants, the Company was in default on both
loans at September 30 and December 31, 1996. During the first quarter of 1997,
the bank waived the default, amended the financial covenants and extended the
maturity of both loans. In exchange, the Company agreed to increase the
interest rates on both loans and to issue the bank a three-year warrant to
purchase 50,000 shares of Common Stock at $3.875 per share. The Company also
agreed to issue additional warrants to purchase 25,000 shares of Common Stock
at prevailing market prices on each of June 1 and July 1, 1997 if the Term Loan
is still outstanding on those dates. (The following discussion reflects the
amendments to the Term Loan and Credit Facility). See "Business--Recent
Acquisitions and Other Significant Developments--Amendment to Bank Loan
Agreements."
On December 31, 1996, the outstanding principal balance of the Term
Loan was $6.0 million. Since that date, the Company has reduced the
outstanding principal balance of the Term Loan to $4.2 million, in large part
with the net proceeds from the sale of the Series A Preferred Stock. See
"Business--Recent Acquisitions and Other Significant Developments--Issuance of
Preferred Stock." The Term Loan is collateralized by a first priority lien on
all the assets of the Company and bears interest monthly at the bank's prime
rate (8.50% on April 1, 1997) plus 1.5%. The interest rate increases an
additional 0.25 percentage points on each of June 1 and July 1, 1997. The
Company is required to pay $100,000 of principal each month, and the balance is
due April 15, 1998. The Company may prepay the Term Loan at any time without
premium or penalty.
The outstanding principal balance on the Credit Facility was $1.3
million on December 31, 1996. Under the terms of the Credit Facility, the
Company can borrow and reborrow up to a maximum principal amount of $1.5
million at a variable interest rate equal to the bank's prime rate plus 1.5%.
The interest rate increases an additional 0.25 percentage points on each of
June 1 and July 1, 1997 if the Term Loan is still outstanding on those dates.
The Credit Facility, collateralized by a first priority lien on all assets,
matures April 15, 1998.
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The outstanding principal balance on the Subordinated Note was $7.0
million on December 31, 1996. The Subordinated Note bears interest at a fixed
rate of 8.5% per annum payable in quarterly installments. The entire principal
is due on or before July 31, 2001. The Company may prepay the Subordinated
Note at any time without premium or penalty. Upon the issuance by the Company
of equity securities generating net proceeds in excess of $14.5 million, the
Company must apply fifty percent of the excess to the prepayment of the
Subordinated Note. The payment of principal and interest on the Subordinated
Note is subordinated in right of payment, to the extent and in the manner
provided therein, to the prior payment in full of all indebtedness to City
National Bank. The default under the Term Loan and Credit facility did not
cause a default under the Subordinated Note because the bank did not accelerate
the maturity of the Term Loan or the Credit Facility.
On December 31, 1996, the outstanding balance of the Stock Repurchase
Debt was approximately $1.6 million. The Company has since paid the second of
four installments, and the remaining installments, due in the second half of
1997, total $1.0 million. The Company has the right, if necessary, to extend
the due dates of the remaining installments by one year each, but must pay 8%
interest during the extension periods. See "Business--Recent Acquisitions and
Other Significant Developments--Stock Repurchase."
In March 1996, the Company purchased the CenSlide 1500 System and
related products for manual microscopic examination for $850,000. See
"Business--Recent Acquisitions--CenSlide Acquisition."
The Company believes that its current cash on hand plus short-term
investments, together with cash generated by operations, will be sufficient to
fund normal operations and pay interest on outstanding debt obligations for at
least the next year. However, there can be no assurance that these goals will
be achieved.
The Company is presently pursuing additional financing to repay
outstanding principal on its long-term indebtedness and to fund its long-term
business strategy. There can be no assurance that the Company can secure
adequate additional financing on favorable terms, if at all. If the Company is
unable to obtain the necessary financing during the next twelve months, the
Company will have to pursue an arrangement with its creditors to restructure
its long-term indebtedness and revise its long-term business strategy.
Additional outside financing (or a restructuring of existing indebtedness)
could result in dilution to holders of Common Stock and significant financial
and operational restrictions on the Company.
In September 1995, the Company and Poly entered into a research and
development agreement to develop the Poly Products using the Company's
technology. The Company is funding the first $15,000 per month (up to a
maximum of $500,000) of the cost of the project, and Poly is reimbursing the
Company for the excess. The Company has an option until 121 days after
termination of the agreement with Poly to acquire all of the common stock of
Poly for an aggregate price increasing on August 1, 1997 from $4.4 million to
$5.1 million payable in cash or shares of Common Stock of the Company. If the
Company elects to exercise its option, the portion of the net cost of the
acquisition allocated to completed products would be capitalized and its
subsequent amortization would impact future earnings. For the portion of the
net cost of the acquisition allocated to in-process research and development,
the Company would record a nonrecurring, noncash (if purchased with Common
Stock), charge against then current earnings. See "Business--Research and
Development."
INFLATION
The Company does not foresee any material impact on its operations
from inflation.
HEALTHCARE REFORM POLICIES
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, nationally, at the state
level or both. Future legislation, regulation or payment policies of Medicare,
Medicaid, private health insurance plans, health maintenance organizations and
other third-party payors could adversely affect the demand for the Company's
current or future products and its ability to sell its products on a profitable
basis. Moreover,
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healthcare legislation is an area of extensive and dynamic change, and the
Company cannot predict future legislative changes in the healthcare field or
their impact on its business.
RECENTLY-ISSUED ACCOUNTING STANDARDS
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 requires dual presentation of newly defined basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structures. This method is considered more compatible
with International Accounting Standards. SFAS No. 128 is effective for all
fiscal years ending after December 15, 1997. The Company has not yet
determined the impact of SFAS No. 128.
FORWARD-LOOKING STATEMENTS
The foregoing discussion, as well as the other sections of this Annual
Report on Form 10-K, contain various forward-looking statements which reflect
the Company's current views with respect to future events and financial
results. Forward-looking statements usually include the verbs "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "projects,"
"understands" and other verbs suggesting uncertainty. The Company reminds
stockholders that forward-looking statements are merely predictions and
therefore inherently subject to uncertainties and other factors which could
cause the actual results to differ materially from the forward-looking
statement. These uncertainties and other factors include, among other things,
(i) the ability of the Company to secure additional financing to repay the
remaining principal balance of its long-term debt and to fund its long-term
business strategy, (ii) the degree to which the Company's recent restructuring
will reduce future operating expenses, (iii) unexpected technical and marketing
difficulties inherent in the introduction of sophisticated, capital-intensive
new medical instruments such as The White IRIS and other planned instrument
introductions, (iv) the potential need for changes in the Company's long-term
strategy in response to future developments, (v) future advances in diagnostic
testing methods and procedures, as well as potential changes in government
regulations and healthcare policies, both of which could adversely affect the
economics of the diagnostic testing procedures automated by the Company's
products, (vi) rapid technological change in the microelectronics and software
industries, (vii) increasing competition from imaging and non-imaging based
in-vitro diagnostic products and (viii) difficulties in assimilating acquired
companies and product lines such as PSI.
The Company has attempted to identify additional significant
uncertainties and other factors affecting forward-looking statements in Exhibit
99 to this Form 10-K ("Additional Information Regarding Forward-Looking
Statements"). The Company will provide copies of Exhibit 99 to registered
stockholders free of charge upon receipt of a written request submitted to the
Company's Controller at 9162 Eton Avenue, Chatsworth, California 91311.
Stockholders may also obtain copies of Exhibit 99 for a nominal charge from the
Public Reference Section of the Securities and Exchange Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its Regional Office at 5757
Wilshire Boulevard, Los Angeles, California 90036. Exhibit 99 is also
available through the SEC's World Wide Web site located at http://www.sec.gov.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are listed in the Index to Financial
Statements in Part IV, Item 14(a)1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from "Directors and Executive Officers" in
the Proxy Statement to be filed with the Securities and Exchange Commission for
the 1997 Annual Meeting of IRIS Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference from "Executive Compensation" in the Proxy
Statement to be filed with the Securities and Exchange Commission for the 1997
Annual Meeting of IRIS Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement to be filed with the
Securities and Exchange Commission for the 1997 Annual Meeting of IRIS
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference from "Certain Relationships and Related
Transactions" in the Proxy Statement to be filed with the Securities and
Exchange Commission for the 1997 Annual Meeting of IRIS Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
<TABLE>
<S> <C>
1. Index to Financial Statements
Page
----
Report of Independent Public Accountants. F-1
Independent Auditors' Report. F-1
Consolidated Balance Sheets at December 31, 1996 and 1995. F-2
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1995, and 1994. F-3
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994. F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994. F-7
Notes to Consolidated Financial Statements. F-8
2. Financial Statement Schedules Covered by the Foregoing Report of
Independent Public Accountants.
Schedule II-Valuation and Qualifying Accounts F-24
</TABLE>
Other financial statement schedules have been omitted since they are
not required, are not applicable, or the required information is shown in the
Financial Statements or Related Notes.
-25-
<PAGE> 28
3. EXHIBITS
<TABLE>
<CAPTION>
No. Description
-- -----------
<S> <C> <C>
3.1(a) -- Certificate of Incorporation, as amended (1)
3.1(b) -- Certificate of Designations of Series A Convertible Preferred Stock (2)
3.2 -- Restated Bylaws (3)
4.1 -- Specimen of Common Stock Certificate (4)
4.1 -- Certificate of Designations of Series A Convertible Preferred Stock (2)
10.1 -- Lease of the Company's headquarters facility, as amended (5)
10.2(a) -- 1982 Stock Option Plans and form of Stock Option Agreement (6)
10.2(b) -- 1983 and 1986 Stock Option Plans, and forms of Stock Option Agreements for each Plan (7)
10.2(c) -- Amended and Restated 1986 Stock Option Plan (8)
10.2(d) -- 1994 Stock Option Plan and forms of Stock Option Agreements (9)
10.2(e) -- Certificate of Officer With Respect to Amendment of 1994 Stock Option Plan (10)
10.2(f) -- Key Employee Stock Purchase Plan (11)
10.3 -- Various Agreements with TOA Medical Electronics (12)
10.4(a) -- Agreement for a Strategic Alliance in Urinalysis dated January 7, 1994 between the Company
and Boehringer Mannheim Corporation (13)
10.4(b) -- Research and Development and Distribution Agreement dated February 6, 1995 by and among the
Company, LDA Systems, Inc. and Corange International Limited (13)
10.4(c) -- Amendment to Distribution Agreements (14)
10.5 -- Warrant Certificate dated March 20, 1995 issued to Biovation, Inc. (13)
10.6(a) -- Technology License Agreement dated as of September 29, 1995 between the Company and Poly U/A
Systems, Inc. (15)
10.6(b) -- Research and Development Agreement dated as of September 29, 1995 between the Company and
Poly U/A Systems, Inc. (15)
10.6(c) -- $100 Class "A" Note dated September 29, 1995 issued by Poly U/A Systems, Inc. in favor of
the Company (15)
10.6(d) -- Certificate of Incorporation of Poly U/A Systems, Inc. (See Article FOUR regarding the
IRIS Option) (15)
10.7(a) -- Agreement and Plan of Merger dated January 31, 1996 between the Company and StatSpin, Inc. (16)
10.7(b) -- Registration Rights Agreement dated January 31, 1996 between the Company and StatSpin
Stockholders (16)
10.8(a) -- Asset Purchase Agreement dated as of July 15, 1996 by and among the Company, Digital Imaging
Technologies, Inc., Perceptive Scientific Instruments, Inc. and Perceptive Scientific
Technologies, Inc. (17)
10.8(b) -- Registration Rights and Standstill Agreement dated July 31, 1996 between the Company and
Digital Imaging Technologies, Inc. (10)
10.8(c) -- Warrant Certificate dated July 31, 1996 issued to Digital Imaging Technologies, Inc. (10)
10.8(d) -- Stockholder Guaranty Agreement dated July 31, 1996 between Edward Randall, III and PSII
Acquisition Corp., a wholly-owned subsidiary of the Company (now known as Perceptive
Scientific Instruments, Inc.) (10)
10.8(e) -- Non-Competition Agreement dated as of July 15, 1996 between Edward Randall, III and PSII
Acquisition Corp., a wholly-owned subsidiary of the Company (now known as Perceptive
Scientific Instruments, Inc.) (10)
10.8(f) -- Technology License Agreement dated July 31, 1996 between Perceptive Scientific Imaging
Systems, Inc. and PSII Acquisition Corp., a wholly-owned subsidiary of the Company
(now known as Perceptive Scientific Instruments, Inc.) (10)
10.9 -- $7,000,000 Subordinated Note dated July 29, 1996 issued by the Company in favor of Digital
Imaging Technologies, Inc. (10)
10.10(a) -- $1,500,000 Promissory Note dated July 29, 1996 (Revolving Credit Facility) (10)
10.10(b) -- Change in Terms Agreement dated as of January 3, 1997 (Revolving Credit Facility)
</TABLE>
-26-
<PAGE> 29
<TABLE>
<S> <C> <C>
10.10(c) -- Supplemental Terms letter dated July 29, 1996 (Revolving Credit Facility) (10)
10.10(d) -- Supplemental Terms Letter dated as of January 3, 1997 (Revolving Credit Facility)
10.10(e) -- $4,900,000 Amended and Restated Promissory Note dated as of January 3, 1997 (Term Loan)
10.10(f) -- Supplemental Terms Letter dated as of January 3, 1997 (Term Loan)
10.10(g) -- Waiver of Default dated as of January 3, 1997
10.10(h) -- Warrant to Purchase Common Shares
10.10(i) -- Commercial Security Agreement dated July 29, 1996 (10)
10.10(j) -- Commercial Pledge Agreement dated July 29, 1996 (10)
10.10(k) -- Various Additional Security Agreements dated as of January 3, 1997
10.11(a) -- Securities Purchase Agreement dated December 31, 1996 by and between the Company and
Thermo Amex Convertible Growth Fund I, L.P. (2)
10.11(b) -- Common Stock Purchase Warrant dated December 31, 1996 issued to Thermo Amex Convertible
Growth Fund I, L.P. (2)
10.11(c) -- Registration Rights Agreement dated December 31, 1996 by and between the Company and
Thermo Amex Convertible Growth Fund I, L.P. (2)
11 -- Statement re: Computation of Per Share Earnings
24.1 -- Consent of Coopers & Lybrand L.L.P.
24.2 -- Consent of KPMG Peat Marwick LLP
27 -- Financial Data Schedule
99 -- Additional Information Regarding Forward Looking Statements
- -------------------
</TABLE>
The following items are incorporated by reference to the Company's documents
cited below.
(1) 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) Current Report on Form 8-K dated January 15, 1997.
(3) Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(4) Registration Statement on Form S-3, as filed with the Securities and
Exchange Commission on March 27, 1996 (File No. 333-002001).
(5) Annual Report on Form 10-K for the year ended 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.
(6) Registration Statement on Form S-2, as filed with the Securities and
Exchange Commission on September 4, 1985 (File No. 2-99240).
(7) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on May 10, 1982 (File No. 2-77496).
(8) Annual Report on Form 10-K for the year ended December 31, 1992.
(9) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on August 8, 1994 (File No. 33-82560).
(10) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(11) Registration Statement on Form S-8 filed January 3, 1997.
(12) 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.
(13) Annual Report on Form 10-K for the year ended December 31, 1994.
(14) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(15) Quarterly Report on Form 10-Q for the quarter ended September 31, 1995.
(16) Annual Report on Form 10-K for the year ended December 31, 1995.
(17) Current Report on Form 8-K filed July 17, 1996.
(b) Reports on Form 8-K
During the quarter ended December 31, 1996, the Company filed a report on
Form 8-K: (i) on October 1, 1996 to report a press release announcing an
amendment to a series of agreements with Boehringer Mannheim Corporation and
its affiliates which modifies the relationship of IRIS with these companies;
(ii) on October 2, 1996 to report a press release announcing that IRIS had
filed a registration statement with the
-27-
<PAGE> 30
Securities and Exchange Commission for a public offering of 3,000,000 shares of
its Common Stock; and (iii) on October 31, 1996 to report a press release
announcing a workforce restructuring. The Company also filed a report on Form
8-K on January 15, 1997 to report the sale of 3,000 shares of Series A
Convertible Preferred Stock and Warrants to the Thermo Amex Convertible Growth
Fund I, L.P.
(c) See (a)(3) above.
(d) See (a)(1) and (2) above.
-28-
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report on Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized, in Chatsworth,
California, on April 14, 1997.
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
By: /s/ Fred H. Deindoerfer
------------------------------------------
Fred H. Deindoerfer, Chairman of the Board
of Directors, President, and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Fred H. Deindoerfer Chairman of the Board of Directors, April 14, 1997
- ------------------------------- President, and Chief Executive Officer
Fred H. Deindoerfer
/s/ Martin S. McDermut Vice President, Finance and April 14, 1997
- ------------------------------- Administration and Chief Financial
Martin S. McDermut Officer
/s/ E. Eduardo Benmaor Secretary, Controller, and April 14, 1997
- ------------------------------- Principal Accounting Officer
E. Eduardo Benmaor
/s/ John A. O'Malley Director April 14, 1997
- -------------------------------
John A. O'Malley
/s/ Steven M. Besbeck Director April 14, 1997
- -------------------------------
Steven M. Besbeck
/s/ Thomas F. Kelley Director and Vice President April 14, 1997
- ------------------------------
Thomas F. Kelley
</TABLE>
-29-
<PAGE> 32
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of International Remote Imaging
Systems, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of International Remote Imaging Systems, Inc. and its
subsidiaries, as listed in the index on page 25 of this Form 10-K. These
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not
audit the financial statements of StatSpin, Inc., a wholly owned subsidiary,
for the year ended March 31, 1995. The financial statements of StatSpin, Inc.
reflect total revenues of 22% in 1994, of the related consolidated totals. The
financial statements of StatSpin, Inc. for the year ended March 31, 1995 were
audited by other auditors whose report was furnished to us, and our opinion,
insofar as it relates to the amounts included for StatSpin, Inc. for the year
ended December 31, 1994, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The consolidated financial statements give retroactive effect to the
merger of International Remote Imaging Systems, Inc. and StatSpin, Inc. on
February 1, 1996, which has been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of International Remote Imaging Systems, Inc. and its subsidiaries at December
31, 1996 and 1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles. In addition, in
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
March 21, 1997, (except for Note 8 and Note 14,
for which the dates are April 10, 1997 and April 6, 1997, respectively.)
INDEPENDENT AUDITORS' REPORT
The Board of Directors of StatSpin, Inc:
We have audited the statements of income and accumulated deficit, and cash
flows of StatSpin, Inc. for the year ended March 31, 1995. These financial
statements, which are not presented separately herein, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of StatSpin, Inc.'s operations and its cash
flows for the year ended March 31, 1995, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
May 26, 1995
Boston, Massachusetts
F-1
<PAGE> 33
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1995 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,511,395 $3,602,535
Short-term investments 4,736,727 667,589
Accounts receivable net of allowance for doubtful
accounts of $87,759 in 1995 and $328,766 in 1996 3,786,119 5,207,933
Inventories 2,941,021 4,838,206
Prepaid expenses and other current assets 285,683 163,465
Deferred tax asset 919,489 936,500
------------ ------------
Total current assets 14,180,434 15,416,228
Property and equipment, at cost, net of accumulated depreciation 995,044 1,947,713
Purchased intangibles 915,649 10,324,760
Software development costs, net of accumulated amortization of
$667,425 in 1995 and $847,880 in 1996 298,030 920,972
Long-term investments 100,000 --
Deferred warrant costs 1,574,780 1,155,452
Deferred tax asset 3,594,100 7,276,250
Other assets 544,508 818,870
------------ ------------
Total assets $ 22,202,545 $ 37,860,245
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 1,334,755
Current portion of long term debt 185,633 2,600,000
Accounts payable 810,819 4,587,407
Accrued expenses 1,238,599 3,901,071
Deferred income - service contracts 710,907 799,523
Deferred income - other -- 279,591
------------ ------------
Total current liabilities 2,945,958 13,502,347
Subordinated note payable -- 7,000,000
Deferred income - service contracts and other 190,045 193,219
Notes payable, long-term portion 125,000 3,400,000
------------ ------------
Total liabilities 3,261,003 24,095,566
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value
Authorized: 3,000,000 shares
Convertible Series A,
Shares issued and outstanding : 1995 - none, 1996 - 3,000
($3,000,000 liquidation preference) -- 30
Common stock, $.01 par value
Authorized: 15,600,000 shares
Shares issued and outstanding:
1995 - 6,292,408, 1996 - 5,911,890 62,924 59,118
Additional paid-in capital 34,154,116 36,311,535
Treasury stock, at cost (96,473 shares in 1995 and 26,240 shares in 1996) (453,386) (103,500)
Unearned compensation (95,884) (385,879)
Foreign currency translation adjustment -- 37,791
Accumulated deficit (14,726,228) (22,154,416)
------------ ------------
Total shareholders' equity 18,941,542 13,764,679
------------ ------------
Total liabilities and shareholders' equity $ 22,202,545 $ 37,860,245
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 34
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------
1994 1995 1996
----------------------------------------------------------------
<S> <C> <C> <C>
Sales of IVD imaging systems . . . $ 4,559,044 $ 4,240,627 $ 6,370,346
Sales of IVD imaging system
supplies and service . . . . . . 5,024,521 6,737,444 9,117,493
Sales of small instruments and
supplies . . . . . . . . . . . . 2,885,712 3,414,087 5,066,292
----------- ----------- -----------
Net sales . . . . . . . . . . . . . 12,469,277 14,392,158 20,554,131
---------- ---------- ----------
Cost of goods- IVD imaging systems 2,178,318 2,014,873 3,278,140
Cost of goods - IVD imaging system
supplies and service . . . . . . 2,495,797 3,174,290 5,114,538
Cost of goods - small instruments
and supplies . . . . . . . . . . 1,824,913 1,937,653 2,693,900
----------- ----------- -----------
Cost of goods sold . . . . . . . . 6,499,028 7,126,816 11,086,578
----------- ----------- -----------
Gross margin . . . . . . . . . . . 5,970,249 7,265,342 9,467,553
Marketing and selling . . . . . . . 2,085,022 2,874,442 4,627,089
General and administrative . . . . 1,645,678 2,041,281 3,258,700
Research and development, net . . . 663,231 1,220,028 1,978,326
Amortization of intangibles . . . . 81,224 127,142 793,916
Unusual charges . . . . . . . . . . -- -- 2,036,592
Acquisition of in-process research
and development . . . . . . . . . -- 2,900,430 7,250,000
----------- ----------- -----------
Total operating expenses . . . . . 4,475,155 9,163,323 19,944,623
Operating income (loss) . . . . . . 1,495,094 (1,897,981) (10,477,070)
Other income (expense):
Interest income . . . . . . . . 167,924 309,929 221,935
Interest expense . . . . . . . . (73,238) (42,699) (681,114)
Other income . . . . . . . . . . 111,240 110,530 50,134
----------- ----------- -----------
Income (loss) before provision
(benefit) for income taxes . . . 1,701,020 (1,520,221) (10,886,115)
Provision (benefit)
for income taxes . . . . . . . . 79,456 (3,646,633) (3,457,927)
----------- ----------- -----------
Net income (loss) . . . . . . . . . $ 1,621,564 $ 2,126,412 $(7,428,188)
----------- ----------- -----------
Net income (loss) per share . . . . $.28 $.33 $(1.21)
---- ---- ------
Weighted average number of
common shares and common
share equivalents outstanding
for the period . . . . . . . . . 5,698,620 6,418,518 6,141,657
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 35
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Shareholders'
------------ Paid-In Treasury Notes Unearned Accumulated
Shares Amount Capital Stock Receivable Compensation Deficit Total
------ ------ ------- ----- ---------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1993 . . . . . 5,138,346 $51,384 $26,327,059 $(142,016) $(6,667) $(76,803) $(18,386,685) $7,766,272
Common stock issued
on exercise of stock options 200,832 2,008 445,015 -- -- -- -- 447,023
Common stock issued under
Employee Stock Purchase
Plan:
for Cash . . . . . . . . . 22,811 228 100,559 -- -- -- -- 100,787
for Services . . . . . . . 22,811 228 100,559 -- -- (100,787) -- --
Common stock issued for cash
on exercise of warrants . . 15,800 158 59,092 -- -- -- -- 59,250
Issuance of warrants . . . -- -- 385,285 -- -- -- -- 385,285
Principal payments received
on shareholders' notes
receivable . . . . . . . . -- -- -- -- 6,667 -- -- 6,667
Amortization of unearned
compensation . . . . . . . -- -- -- -- -- 84,460 -- 84,460
Repurchase of common stock (70,273) (702) 702 (311,370) -- -- -- (311,370)
Net income . . . . . . . . -- -- -- -- -- -- 1,621,564 1,621,564
--------- -------- ---------- --------- -------- --------- ------------ -----------
Balance,
December 31, 1994 . . . . 5,330,327 $53,304 $27,418,271 $(453,386) -- $(93,130) $(16,765,121) $10,159,938
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 36
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-In Treasury Unearned Accumulated
Shares Amount Capital Stock Compensation Deficit Total
------ ------ ------- ----- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance forward . . . . . . 5,330,327 $53,304 $27,418,271 $(453,386) $(93,130) $(16,765,121) $10,159,938
Common stock issued
on exercise of stock
options . . . . . . . . . . 21,900 219 44,231 -- -- -- 44,450
Common stock issued under
Employee Stock Purchase
Plan:
for Cash. . . . . . . . . . 9,997 100 67,141 -- -- -- 67,241
for Services. . . . . . . . 16,976 170 112,219 -- (89,915) -- 22,474
Common stock issued for
cash on exercise of
warrants. . . . . . . . . . 414,749 4,147 1,551,161 -- -- -- 1,555,308
Issuance of warrants. . . . -- -- 1,774,733 -- -- -- 1,774,733
Common stock issued in
exchange for LDA Systems,
Inc. callable common
stock . . . . . . . . . . . 498,459 4,984 2,972,360 -- -- -- 2,977,344
Amortization of unearned
compensation. . . . . . . . -- -- -- -- 87,161 -- 87,161
Income tax benefit
related to exercise of
nonqualified stock
options . . . . . . . . . . -- -- 214,000 -- -- -- 214,000
Adjustment to reflect
change in StatSpin, Inc.
fiscal year. . . . . . . . -- -- -- -- -- (87,519) (87,519)
Net income. . . . . . . . . -- -- -- -- -- 2,126,412 2,126,412
--------- ------- ----------- --------- -------- ------------ -----------
Balance,
December 31, 1995 . . . . 6,292,408 $62,924 $34,154,116 $(453,386) $(95,884) $(14,726,228) $18,941,542
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 37
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Series A
Preferred Stock Common Stock Additional
--------------- ------------ Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C>
Balance forward . . . . . . . . -- -- 6,292,408 $62,924 $34,154,116
Issuance of convertible
preferred stock for cash . . . 3,000 30 -- -- 2,928,291
Common stock issued on
exercise of stock options . . . -- -- 137,924 1,379 333,315
Common stock issued or issued
from treasury under Employee
Stock Purchase Plan:
for Cash . . . . . . . . . . . -- -- 13,297 133 81,369
for Services . . . . . . . . . -- -- 22,136 221 150,159
Stock option compensation . . . -- -- -- -- 437,770
Issuance of warrants in
connection with acquisition of
Perceptive Scientific
Instruments, Inc. . . . . . . . -- -- -- -- 927,000
Repurchase of shares of common
stock and warrants . . . . . . -- -- -- -- (273,216)
Retire treasury stock . . . . . -- -- (553,875) (5,539) (2,504,582)
Amortization of unearned
compensation . . . . . . . . . -- -- -- -- --
Income tax benefit related to
exercise of nonqualified stock
options . . . . . . . . . . . . -- -- -- -- 77,313
Foreign currency translation
adjustment . . . . . . . . . . -- -- -- -- --
Stock tendered as payment for
options exercised . . . . . . . -- -- -- -- --
Net income (loss) . . . . . . . -- -- -- -- --
----- --- --------- ------- -----------
Balance,
December 31, 1996 . . . . . . 3,000 $30 5,911,890 $59,118 $36,311,535
===== === ========= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Foreign
Currency
Treasury Unearned Translation Accumulated
Stock Compensation Adjustment Deficit Total
----- ------------ ---------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance forward . . . . . . . . $(453,386) $(95,884) -- $(14,726,228) $18,941,542
Issuance of convertible
preferred stock for cash . . . -- -- -- -- 2,928,321
Common stock issued
on exercise of stock options. . -- -- -- -- 334,694
Common stock issued or issued
from treasury under Employee
Stock Purchase Plan:
for Cash . . . . . . . . . . . 37,703 -- -- -- 119,205
for Services . . . . . . . . . 37,703 (153,190) -- -- 34,893
Stock option compensation . . . -- (270,925) -- -- 166,845
Issuance of warrants in
connection with acquisition of
Perceptive Scientific
Instruments, Inc. . . . . . . . -- -- -- -- 927,000
Repurchase of shares of common
stock and warrants . . . . . . (2,132,141) -- -- -- (2,405,357)
Retire treasury stock . . . . . 2,510,121 -- -- -- --
Amortization of unearned
compensation . . . . . . . . . -- 134,120 -- -- 134,120
Income tax benefit related to
exercise of nonqualified stock
options . . . . . . . . . . . . -- -- -- -- 77,313
Foreign currency translation
adjustment . . . . . . . . . . -- -- 37,791 -- 37,791
Stock tendered as payment for
options exercised . . . . . . . (103,500) -- -- -- (103,500)
Net income (loss) . . . . . . . -- -- -- (7,428,188) (7,428,188)
---------- ---------- ------- ------------- -----------
Balance,
December 31, 1996 . . . . . . $(103,500) $(385,879) $37,791 $(22,154,416) $13,764,679
========== ========== ======= ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 38
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------
1994 1995 1996
-------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $1,621,564 $2,126,412 $(7,428,188)
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Deferred tax benefit . . . . . . . . . . . . . . . . . . . . . -- (3,705,589) (3,456,920)
Acquisition of in-process research and development . . . . . . -- 2,882,858 7,250,000
Depreciation and amortization . . . . . . . . . . . . . . . . 548,420 635,048 1,769,896
Common stock and stock option compensation . . . . . . . . . . 84,460 109,635 335,858
Gain on disposal of property and equipment . . . . . . . . . . -- -- (51,401)
Allowance for doubtful accounts . . . . . . . . . . . . . . . -- -- 252,037
Changes in assets and liabilities:
Accounts receivable - trade and other . . . . . . . . . . . . (555,586) (356,739) (131,240)
Service contracts, net . . . . . . . . . . . . . . . . . . . . 23,715 (95,586) (475,034)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 390,479 (875,295) (1,433,834)
Prepaid expenses and other current assets . . . . . . . . . . (79,561) (80,230) 176,061
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . (106,270) 47,239 (132,992)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 266,325 (87,673) 2,851,805
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . (151,224) 199,735 375,793
Deferred income - other . . . . . . . . . . . . . . . . . . . -- -- 279,591
---------- ---------- ----------
Net cash provided by operating activities . . . . . . . . . . . 2,042,322 799,815 181,432
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . (266,360) (820,838) (1,171,621)
Sales of property and equipment . . . . . . . . . . . . . . . -- -- 85,000
Acquisition of business and product line, net of cash acquired -- (886,800) (10,311,041)
Software development costs . . . . . . . . . . . . . . . . . . (25,411) (299,016) (577,421)
Maturities of certificates of deposit . . . . . . . . . . . . 210,000 215,000 200,000
Purchases of certificates of deposit . . . . . . . . . . . . . (100,000) -- --
Maturities of held-to-maturity debt securities . . . . . . . . 1,000,000 2,700,000 3,969,138
Purchases of held-to-maturity debt securities . . . . . . . . (3,441,062) (4,295,664) --
---------- ---------- ----------
Net cash used by investing activities . . . . . . . . . . . . . (2,622,833) (3,387,318) (7,805,945)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of common and preferred stock for cash . . . . . . . 254,823 1,599,758 3,159,515
Repurchase of common stock . . . . . . . . . . . . . . . . . . (59,920) -- (553,148)
Principal payments received on shareholders' notes receivable 4,569 -- --
Increase (decrease) in line of credit borrowings . . . . . . . (160,000) -- 1,334,755
Repayments of notes payable . . . . . . . . . . . . . . . . . (373,605) (256,351) (2,110,633)
Proceeds from notes payable . . . . . . . . . . . . . . . . . 166,660 -- 7,800,000
Issuance of common stock for cash under Employee Stock
Purchase Plan . . . . . . . . . . . . . . . . . . . . . . . 100,787 67,241 119,205
Deferred offering costs . . . . . . . . . . . . . . . . . . . . -- -- (35,049)
---------- ---------- ----------
Net cash provided (used) by financing activities . . . . . . . (66,686) 1,410,648 9,714,645
---------- ---------- ----------
Effect of foreign currency rate fluctuation on cash
and cash equivalents . . . . . . . . . . . . . . . . . . . . -- -- 1,008
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . (647,197) (1,176,855) 2,091,140
Cash and cash equivalents at beginning of year . . . . . . . . 3,220,581 2,573,384 1,511,395
Adjustment to cash to reflect change in StatSpin
Technologies fiscal year -- 114,866 --
---------- ---------- ----------
Cash and cash equivalents at end of year . . . . . . . . . . . $2,573,384 $1,511,395 $3,602,535
========== ========== ==========
Supplemental schedule of non-cash financing activities:
Issuance of common stock in exchange for services . . . . . . $ 100,787 $109,635 $153,190
Stock option compensation . . . . . . . . . . . . . . . . . . -- -- 437,770
Issuance of common stock under a stock for
stock exercise . . . . . . . . . . . . . . . . . . . . . . 251,450 -- 103,500
Issuance of warrants in connection
with development agreements . . . . . . . . . . . . . . . . 385,285 1,774,733 --
Issuance of warrants and subordinated note for asset purchase -- -- 7,927,000
Accrual for common stock and warrant repurchase . . . . . . . -- -- 1,587,084
Issuance of common stock to acquire shares of LDA . . . . . . -- 2,977,344 --
Tax benefit related to exercise of nonqualified stock options -- 214,000 77,313
Supplemental disclosure of cash flow information:
Cash paid for income taxes . . . . . . . . . . . . . . . . . . 112,921 21,456 64,100
Cash paid for interest . . . . . . . . . . . . . . . . . . . . 118,379 42,698 526,182
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 39
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY.
International Remote Imaging Systems, Inc. was incorporated in California
in 1979 and reincorporated during 1987 in Delaware. International Remote
Imaging Systems, Inc. and its subsidiaries (collectively "IRIS" or the
"Company") operate primarily in one segment. The Company designs, develops,
manufactures and markets in vitro diagnostic ("IVD") imaging equipment,
including IVD imaging systems based on patented and proprietary automated
intelligent microscopy ("AIM") technology, and special purpose centrifuges and
other small instruments for automating microscopic procedures performed in
clinical laboratories. AIM combines the Company's capabilities in automated
specimen presentation, including its patented slideless microscope, and
proprietary high-speed digital processing hardware and software to classify and
visually present images of microscopic particles in easy-to-use displays. The
Company's IVD imaging systems are designed to provide customers with better and
more rapid results and labor cost-savings over manual methods of performing
microscopy. The Company also provides on-going service and supplies to support
equipment sold. The Company's products are sold directly and through
distributors primarily to clinical, hospital, veterinary, physicians offices
and research laboratories in North America.
On February 1, 1996, a newly formed subsidiary of IRIS completed its
merger with StatSpin, Inc. ("StatSpin"), which became a wholly owned subsidiary
of IRIS. StatSpin manufactures special purpose centrifuges and other small
instruments. 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 an additional 126,000 shares of IRIS common
stock. This represented an exchange ratio of 4.095 shares of IRIS common stock
for each common share and stock appreciation right of StatSpin. This
transaction was accounted for as a pooling-of-interests. Accordingly, the
consolidated financial statements have been retroactively restated for all
periods presented to include the financial position, results of operations and
cash flows of StatSpin.
StatSpin previously used the fiscal year ended March 31 for its financial
reporting. To conform to the Company's December 31 fiscal year end, StatSpin's
operating results for the period January 1, 1995 through March 31, 1995 have
been included in the operating results of the Company for the fiscal years
ended December 31, 1995 and 1994. The resulting duplication of revenue and net
income of StatSpin for the period from January 1, 1995 through March 31, 1995
amounted to $710,000 and $87,519, respectively, which has been adjusted by a
$87,519 charge to accumulated deficit during the year ended December 31, 1995.
Combined and separate results of IRIS and StatSpin are as follows:
<TABLE>
<CAPTION>
IRIS StatSpin Combined
--------------- ------------- -------------
Year ended December 31, 1994 (StatSpin year (unaudited) (unaudited)
ended March 31, 1995)
- ---------------------
<S> <C> <C> <C>
Net sales $9,583,565 $2,885,712 $12,469,277
Net income 1,472,886 148,678 1,621,564
Year ended December 31, 1995
- ----------------------------
Net sales 11,292,559 3,099,599 14,392,158
Net income 1,861,228 265,184 2,126,412
Year ended December 31, 1996
- ----------------------------
Net sales 16,264,790 4,289,341 20,554,131
Net income (loss) (7,624,931) 196,743 (7,428,188)
</TABLE>
On July 31, 1996, the Company, through a wholly owned subsidiary, PSI
Acquisition Corp., acquired the IVD imaging business of Perceptive Scientific
Instruments, Inc. ("Old PSI") for $9.5 million in cash (including $400,000 in
acquisition costs), issuance of a $7.0 million 8.25% subordinated note
("Subordinated Note") and a five year warrant to purchase 875,000 shares of the
Company's common stock at $8.00 per share (valued for accounting purposes at
$927,000). The cash portion of the purchase price was paid primarily with
funds obtained from a bank under a $7.8 million term loan ("Term Loan") and a
new $1.5 million revolving line of credit ("Credit Facility").
F-8
<PAGE> 40
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company subsequently changed the name of PSI Acquisition Corp. to
Perceptive Scientific Instruments, Inc. ("PSI").
PSI designs, develops, manufactures and markets IVD imaging systems for
biological, clinical and research applications. PSI's primary business is
providing cytogenetic analysis instrumentation and related services through
worldwide sales of its proprietary PowerGene product line. The PowerGene
product line is used in various procedures for chromosome analysis, including
karyotyping, DNA probe analysis via fluorescent in-situ hybridization methods
and comparative genomic hybridization analysis. The PowerGene system is
marketed in North America from PSI's Houston headquarters and internationally
through its U.K. subsidiary.
The PSI acquisition has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon their estimated fair
value at the date of acquisition. The excess of the purchase price over the
fair values of the net assets acquired was $16.8 million, of which $7.3 million
has been expensed as in-process research and development related to technology
for which the technological feasibility had not been established and does not
have an alternative use. The remainder has been allocated to acquired
technology and know-how and the international distribution channel which are
being amortized over six years and twenty-five years, respectively. The net
purchase price was allocated as follows:
<TABLE>
<S> <C>
Working capital other than cash $ (324,009)
Property, plant, and equipment 514,648
Other assets 391,110
Intangibles 9,532,668
In-process research & development 7,250,000
-----------
Total $17,364,417
===========
</TABLE>
The operating results of the acquired business of PSI are included in the
Consolidated Statement of Operations from the date of acquisition, August 1,
1996. The following unaudited summary, prepared on a pro forma basis, combines
the consolidated results of operations as if PSI had been acquired as of the
beginning of fiscal 1995. The pro forma information excludes the write-offs of
in-process research and development, but includes the impact of certain
adjustments, such as amortization of intangibles, increased interest on the
acquisition debt, and related income tax effects.
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------------
1995 1996
---- ----
(unaudited) (unaudited)
<S> <C> <C>
Sales $19,786,000 $24,229,000
Net income (loss) 2,392,000 (3,890,629)
Net income (loss) per share $0.37 $(0.63)
</TABLE>
The unaudited pro forma information is provided for informational purposes
only. This information is based on historical information and is not
necessarily indicative of what the actual consolidated results of operations
might have been if the acquisition had been in effect for the entire period
presented, nor is it indicative of future results of operations of the combined
entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
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 revenues and expenses during the
reporting periods. The significant estimates in the preparation of the
F-9
<PAGE> 41
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated financial statements relate to the assessment of the carrying
value of accounts receivables, inventories, purchased intangibles, estimated
provisions for warranty costs and deferred tax asset. Actual results could
differ from those estimates.
Principles of Consolidation:
The financial statements include the accounts of International Remote
Imaging Systems, Inc. and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Foreign Currency:
The financial statements of the Company's foreign subsidiary are
translated into U.S. dollars using the exchange rate prevailing at each balance
sheet date for assets and liabilities and average exchange rates for each
reporting period for revenues and expenses. Translation adjustments are
recorded directly to a separate component of shareholders' equity. Gains and
losses resulting from foreign currency transactions are included in operations
currently.
Cash Equivalents, Short-Term Investments, and Long-Term Investments:
Short term investments principally include certificates of deposit and
debt instruments of the United States Government with maturities greater than
three months and less than one year. Long term investments represent
certificates of deposit and debt instruments of the United States Government
with maturities greater than one year. For purposes of the statement of cash
flows, IRIS considers all highly liquid debt instruments purchased with a
remaining maturity of three months or less when purchased to be cash
equivalents. IRIS places its cash and investments with high credit quality
financial 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 its customers, primarily hospitals, clinical
and research laboratories, and distributors. IRIS performs ongoing credit
evaluations of its customers before granting uncollateralized credit.
Inventories:
Inventories are carried at the lower of cost or market on a first in,
first out basis.
Property and Equipment and Depreciation:
Property and equipment are recorded at cost, less accumulated depreciation
and amortization. Depreciation is generally computed using the straight-line
method over three to five years, the estimated useful lives of the 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.
Purchased Intangibles:
Purchased intangibles are comprised of goodwill, acquired technology and
know-how and international distribution channel, and are being amortized on a
straight-line basis over ten years, six years and twenty-five years,
respectively. The realizability of purchased intangibles is evaluated
periodically as events or circumstances indicate a possible inability to
recover the carrying amount. Such evaluation is based on various analysis,
including cash flow and profitability projections. The analysis necessarily
involves significant management judgement to evaluate the capacity of an
acquired business to perform within projections. In the event the projected
undiscounted cash flows are less than net book value of the assets, the
carrying value of the assets will be written down to their fair value.
F-10
<PAGE> 42
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Software Development Costs:
IRIS capitalizes certain software development costs for new products and
product enhancements once technological feasibility has been established. IRIS
amortizes capitalized software costs using the greater of the straight line
method over the estimated product life of generally one to three years, or a
percentage of total units sold over the projected unit sales. Amortization
expense of software development costs was approximately $108,000, $41,600 and
$180,500 for 1994, 1995, and 1996, respectively.
Deferred Warrant Costs:
Deferred warrant costs result from the issuance of warrants in conjunction
with various development, distribution and technology license agreements.
These costs are being amortized over the estimated term of the related
agreements, or with respect to perpetual technology license agreements, over
the expected life of the related technology of, generally, ten years.
Long-Lived Assets:
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," was issued. SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles to be held and used or disposed of by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. During
1996, the Company adopted this statement and the effect of adoption was not
material.
Stock Based Compensation:
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 defines a fair value
based method of accounting for an employee stock option. Fair value of the
stock option is determined considering factors such as the exercise price, the
expected life of the option, the current price of the underlying stock and its
volatility, expected dividends on the stock, and the risk-free interest rate
for the expected term of the option. Under the fair value based method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period. Pro forma disclosures for
entities that elect to continue to measure compensation cost under the
intrinsic method provided by Accounting Principles Board Opinion No. 25 must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994.
Revenue Recognition:
IRIS derives revenue from the sale of IVD imaging systems, sales of
supplies and service for its IVD imaging systems and sales of small laboratory
instruments and related supplies. IRIS generally recognizes product revenues
once all of the following conditions have been met: a) an authorized purchase
order has been received in writing, b) customer credit worthiness has been
established, and c) shipment of the product to the customer designated location
has occurred. Estimated installation expense is recognized as part of the
accrual for warranty expense 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.
Warranties:
IRIS recognizes the full estimated cost of warranty expense, including
installation costs, at the time of product shipment.
F-11
<PAGE> 43
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Net research and
development expense includes total research and development costs incurred,
including costs incurred under research and development grants and contracts,
less costs reimbursed under research and development contracts (see Note 18).
Income Taxes:
IRIS accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 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 differences between the financial statement
and the tax bases 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.
Marketing Costs:
All costs related to marketing and advertising the Company's products are
expensed in the period incurred.
Reclassifications:
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform with the 1996 presentation.
Recently Issued Accounting Standard:
In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 " Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 requires dual presentation of newly defined
basic and diluted earnings per share on the face of the income statement for
all entities with complex capital structures. This method is considered more
compatible with International Accounting Standards. SFAS No. 128 is effective
for all fiscal years ending after December 15, 1997. The Company has not yet
determined the impact of SFAS No. 128.
Certain Risks and Uncertainties:
Reliance on Unique Products: The Company has derived, and expects to
continue to derive, in the near term, a substantial portion of its revenues
from sales of The Yellow IRIS family of urinalysis workstations and related
supplies and service. Relatively modest declines in sales or gross margins for
these workstations could have a material adverse effect on the Company's
revenues and profits.
Reliance on Single Source Suppliers: Certain key components of the
Company's instruments are manufactured according to the Company's
specifications or are available only from single suppliers. Some single source
suppliers have notified the Company that they have discontinued, or will soon
discontinue, production of key components. Although, in the past, the Company
has successfully transitioned to new components to replace discontinued
components, there can be no assurance that the Company can successfully
transition to satisfactory replacement components or that the Company will have
access to adequate supplies of discontinued components on satisfactory terms
during the transition period. The Company's inability to transition
successfully to replacement components or to secure adequate supplies of
discontinued components on satisfactory terms could have a material adverse
effect on the Company.
3. MARKETABLE DEBT SECURITIES.
At December 31, 1995, the carrying value of marketable debt securities,
classified as "held-to-maturity" are carried at amortized cost, which
approximates fair value, and is included in short-term and long-term
investments:
F-12
<PAGE> 44
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, 1995 Expected Maturity Value and Date
----------------- ----------------------------------------
Amortized Cost Within One Year One to Five Years
-------------- --------------- -----------------
<S> <C> <C> <C>
U.S. Treasury Bills $3,236,725 $3,318,000 $ --
U.S. Treasury Notes 803,376 800,000 --
</TABLE>
No material gains or losses were realized from the sale of marketable debt
securities in 1994, 1995 and 1996.
4. INVENTORIES.
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996
----------------------------------
<S> <C> <C>
Finished goods . . . . . . . . . . . $422,115 $631,116
Work-in-process . . . . . . . . . . 276,115 646,031
Raw materials, parts and
sub-assemblies . . . . . . . . . . 2,242,791 3,561,059
---------- ----------
$2,941,021 $4,838,206
========== ==========
</TABLE>
5. PROPERTY AND EQUIPMENT.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1996
----------------------------------
<S> <C> <C>
Leasehold improvements . . . . . . . $327,178 $402,537
Furniture and fixtures . . . . . . . 115,544 251,617
Machinery and equipment . . . . . . 2,422,835 3,204,361
Tooling, dies and molds . . . . . . 532,070 891,472
Rental units . . . . . . . . . . . . 330,220 577,610
----------- -----------
3,727,847 5,327,597
Less accumulated depreciation (2,732,803) (3,379,884)
----------- -----------
$ 995,044 $ 1,947,713
=========== ===========
</TABLE>
Property and equipment includes $1,284,488 and $2,015,694, respectively,
at December 31, 1995 and 1996, of fully depreciated assets which remain in
service. Depreciation expense was $327,293, $449,653 and $830,914, for 1994,
1995, and 1996, respectively.
The Company is the lessor of IVD imaging systems under operating leases
for periods from one to five years. Under these leases the Company also
provides supplies and services. Generally, operating leases contain provisions
for early termination. The cost of the rental units is depreciated on a
straight line basis over five years. Rental units are carried at cost less
accumulated depreciation of $163,952 and $98,523 at December 31, 1995 and 1996,
respectively. Minimum rentals receivable, net of estimated costs for supplies
and service, under existing operating leases as of December 31, 1996 are as
follows: 1997 - $424,000, 1998 - $243,000, 1999 - $177,000, 2000 - $136,000,
2001 - 114,000, and thereafter - $21,000.
F-13
<PAGE> 45
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PURCHASED INTANGIBLES
Purchased intangibles, at cost, consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996
---- ----
<S> <C> <C>
Goodwill . . . . . . . . . . . . . . . $994,799 $1,377,973
International distribution channel . . -- 5,571,728
Acquired technology and know-how . . . -- 3,960,904
-------------- -------------
994,799 10,910,605
Less accumulated amortization . . . . . (79,150) (585,845)
---------- --------------
Total . . . . . . . . . . . . . . . . . $915,649 $10,324,760
======== ===========
</TABLE>
7. ACCRUED EXPENSES.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996
---- ----
<S> <C> <C>
Accrued bonuses . . . . . . . . . . . . $366,372 $186,985
Accrued commissions . . . . . . . . . . 76,079 237,422
Accrued payroll . . . . . . . . . . . . 88,228 203,574
Accrued vacation . . . . . . . . . . . 135,832 207,947
Accrued taxes and other . . . . . . . . 70,642 28,755
Accrued professional fees . . . . . . . 155,552 254,577
Accrued warranty expense . . . . . . . 269,823 278,563
Accrued interest . . . . . . . . . . . -- 154,932
Accrued amount due BMC . . . . . . . . -- 1,587,084
Accrued - other . . . . . . . . . . . . 76,071 761,232
------ -------
$1,238,599 $3,901,071
========== ==========
</TABLE>
8. SHORT TERM BORROWINGS AND NOTES PAYABLE.
The Company financed the purchase price for the PSI acquisition with the
Subordinated Note ($7.0 million), the Term Loan ($7.8 million) and the Credit
Facility ($1.3 million). The Term Loan and Credit Facility impose certain
operating and financial convenants on the Company. Due to an inability to
comply with these financial covenants, the Company was in default on both loans
at September 30 and December 31, 1996. In April of 1997, the bank waived the
default, amended the financial covenants and extended the maturity of both
loans. In exchange, the Company agreed to increase the interest rates on both
loans and to issue the bank a three year warrant to purchase 50,000 shares of
Common Stock at $3.875 per share. The Company also agreed to issue additional
warrants to purchase 25,000 shares of Common Stock at prevailing market prices
on each of June 1 and July 1, 1997 if the Term Loan is still outstanding on
those dates.
On December 31, 1996, the outstanding principal balance of the Term Loan was
$6.0 million. Since that date, the Company has reduced the outstanding
principal balance of the Term Loan to $4.2 million, in large part with the net
proceeds from the sale of the Series A Preferred Stock (see Note 14). The Term
Loan is collateralized by a first priority lien on all the assets of the
Company and bears interest monthly at the bank's prime rate (8.25% on December
31, 1996) plus 1.5%. The interest rate increases an additional 0.25 percentage
points on each of June 1 and July 1, 1997. The Company is required to pay
$100,000 of principal each month, and the balance is due April 15, 1998. The
Company may prepay the Term Loan at any time without premium or penalty.
The outstanding principal balance on the Credit Facility was $1.3 million on
December 31, 1996. Under the terms of the Credit Facility, the Company can
borrow and reborrow up to a maximum principal amount of $1.5 million at a
variable interest rate equal to the bank's prime rate plus 1.5%. The interest
rate increases an additional 0.25 percentage points on each of June 1 and July
1, 1997 if the Term Loan is still outstanding on those dates. The Credit
Facility matures April 15, 1998 and is collateralized by a first priority lien
on all of the assets of the Company.
F-14
<PAGE> 46
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The outstanding principal balance on the Subordinated Note was $7.0 million
on December 31, 1996. The Subordinated Note bears interest at a fixed rate of
8.5% per annum, payable in quarterly installments. The entire principal is due
on or before July 31, 2001. The Company may prepay the Subordinated Note at
any time without premium or penalty. Upon the issuance by the Company of
equity securities generating net proceeds in excess of $14.5 million, the
Company must apply fifty percent of the excess to the prepayment of the
Subordinated Note. The payment of principal and interest on the Subordinated
Note is subordinated in right of payment, to the extent and in the manner
provided therein, to the prior payment in full of the Term Loan and Credit
Facility. The default under the Term Loan and Credit facility did not cause a
default under the Subordinated Note because the bank did not accelerate the
maturity of the Term Loan or the Credit Facility.
The Company is presently pursuing additional financing to repay principal on
its outstanding indebtedness and to fund its long-term business strategy.
There can be no assurance that the Company can secure adequate additional
financing on favorable terms, if at all.
Annual maturities of bank and other long term debt are $2,600,000 (1997),
$3,400,000 (1998) and $7,000,000 (2001).
9. INCOME TAXES.
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal..................................... $30,000 $26,000 $(22,161)
State....................................... 49,456 32,956 21,154
------- ------- --------
79,456 58,956 (1,007)
------- ------- --------
Deferred:
Federal..................................... -- (3,655,589) (3,197,790)
State....................................... -- (50,000) (259,130)
------- ------- --------
-- (3,705,589) (3,456,920)
------- ------- --------
$79,456 $ (3,646,633) $ (3,457,927)
======= ============ ============
</TABLE>
The provision (benefit) for income taxes differs from the amount obtained
by applying the federal statutory income tax rate to income before income taxes
for the years ended December 31, 1994, 1995 and 1996 as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-----------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) computed at
Federal statutory rate ................ $578,347 ($ 516,875) ($3,701,280)
Increase (decrease) in taxes due to:
Change in valuation allowance ......... -- (3,587,000) 437,000
Utilization of net
operating loss carryforward ......... (583,316) (662,819) --
Write-off of in-process research
and development ..................... -- 1,089,962 --
State taxes, net of federal benefit 36,979 26,156 (195,807)
Nondeductible expenses ................ 21,952 (22,057) 44,220
Other ................................. 25,494 26,000 (42,060)
-------- ------------ -----------
$ 79,456 ($ 3,646,633) ($3,457,927)
======== ============ ===========
</TABLE>
In 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 reassessment of the
realizability of its net operating loss carryforwards based on recent operating
history. Realization of the deferred tax assets is dependent upon generation
of sufficient taxable income prior to expiration of the loss carryforwards. At
December 31, 1996, the Company increased the valuation allowance by $437,000
based on its current assessment of operating results and other factors.
Although realization is not assured,
F-15
<PAGE> 47
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $18.8 million and state net operating loss
carryforwards of approximately $2.5 million which expire in fiscal years ending
in 1999 through 2011. As of December 31, 1996, IRIS had investment tax and
research and experimentation credit carryforwards of $71,719 expiring in fiscal
years through 2003.
The primary components of temporary differences which give rise to the
Company's net deferred tax asset at December 31, 1994, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1994 1995 1996
--------------------------------------------------
<S> <C> <C> <C>
Depreciation and amortization ................ $ 129,200 $ 146,200 $ 200,300
Allowance for doubtful accounts .............. 32,600 32,400 101,700
Accrued liabilities .......................... 189,100 256,600 338,700
Deferred revenue-service contracts ........... 202,200 145,800 82,800
Deferred research and development ............ -- 537,000 2,857,000
Net operating loss carryforwards ............. 5,135,800 4,840,000 6,423,900
Other ........................................ 98,100 118,589 208,350
Valuation allowance .......................... (5,787,000) (1,563,000) (2,000,000)
----------- ---------- -----------
$ - $4,513,589 $ 8,212,750
=========== ========== ==========
</TABLE>
10. 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. These funds were used throughout 1993 to engage IRIS
to conduct research and development, clinical evaluations and pre-market
testing of The White IRIS, a proposed new product, in accordance with a
research and development contract. In addition, IRIS committed to fund
$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
International 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 International Limited 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 of LDA common stock at $20 per share. The option
expired 121 days after termination of the research and development agreement,
which was to conclude no later than July 31, 1995. In June 1995, IRIS
completed the acquisition of LDA for approximately 498,000 shares of IRIS
Common Stock. IRIS acquired LDA 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. Accordingly, IRIS tendered 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 in 1995 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).
11. POLY DEVELOPMENT AGREEMENT.
On September 29, 1995, Poly U/A Systems, Inc. ("Poly") 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,
Poly 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. Poly
F-16
<PAGE> 48
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Poly will reimburse IRIS for the excess. IRIS has an option until 121 days
after termination of the project (which terminates no later than July 31, 1998)
to acquire all of the Common Stock of Poly at prices rising over time from $14
to $20 per share of Poly 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 Poly at cost.
Poly, 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, Poly, in 1995, raised net proceeds of $2.0
million through the sale of 128 units at a price of $20,000 per unit. Each
unit consists of 2,000 shares of Poly'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 Poly'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 Poly's sale of units, IRIS also issued warrants
to the placement agent and 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.
12. REFERENCE LAB AGREEMENT.
During the first quarter of 1995, IRIS and Boehringer Mannheim GmbH
("BMG"), a German affiliate of Boehringer Mannheim Corporation ("BMC"),
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 was jointly funded by both
companies. In addition to designing specific components on the new system, BMG
agreed to pay IRIS a fixed amount of $640,000 for its research and development
of the project. In connection with this project and certain distribution
considerations, IRIS issued Corange International Limited (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 International Limited certain
registration rights with respect to the shares of IRIS Common Stock issuable
upon exercise of these warrants.
13. PRODUCT LINE ACQUISITIONS.
During the first quarter of 1995, IRIS acquired the digital refractometer
product line of Biovation, Inc. for $850,000 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 CenSlide product line of UroHealth
Sciences, Inc., for $850,000. The product line consists of the CenSlide 1500
System and related products for centrifugal urine sedimentation and manual
microscopic examination.
14. CAPITAL STOCK.
Issuance of Preferred Stock:
On December 31, 1996, the Company completed a sale of equity securities
for approximately $3 million in a private placement. Specifically, the Company
sold (i) 3,000 shares of a new Series A Convertible Preferred Stock ("Preferred
Stock") with a liquidation value of $1,000 per share and (ii) a warrant (the
"Warrant") to purchase 84,270 shares of the Company's common stock at an
exercise price of $3.56 per share. The Warrant exercise price was based on the
average closing price of the common stock for the five trading days immediately
preceding the closing of the sale.
Each share of Preferred Stock is convertible into a number of shares of
common stock equal to the liquidation value of a share of Preferred Stock
divided by (ii) a variable conversion price (discussed below). Any shares of
Preferred Stock not voluntarily converted during the three years following
their initial sale will be automatically converted into common stock on
December 31, 1999. The Preferred Stock is non-voting, is not entitled to any
F-17
<PAGE> 49
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
preferred dividends and is not subject to any mandatory or optional redemption
provisions. As long as any of the shares of Preferred Stock are outstanding,
the Company may not pay dividends on, or repurchase any shares of, the common
stock without the written consent of the holders of a majority of the
outstanding shares of Preferred Stock.
The conversion price of the Preferred Stock (the "Conversion Price") was
fixed at $3.56 per share of Common Stock until April 1, 1997. Based on this
Conversion Price, each share of Preferred Stock would be convertible into
approximately 281 shares of common stock, and the Company would issue
approximately 843,000 shares of common stock if the holder elected to convert
all of the outstanding shares of Preferred Stock. Commencing April 1, 1997,
the Conversion Price was equal to the lower of (i) 85% of the average closing
bid price of the common stock for the five consecutive trading days immediately
preceding the conversion date (but in no event less than $1.50) or (ii) $3.56.
The Company has agreed to file with the Securities and Exchange Commission a
registration statement for resale of the shares of common stock issuable upon
conversion of the Preferred Stock and exercise of the Warrant, and the
Conversion Price is subject to certain adjustments in the event that the
registration statement is not declared effective by May 30, 1997. The Company
has reserved 2,000,000 shares of common stock for issuance upon conversion of
the Preferred Stock.
Furthermore, if the Company obtains additional financing prior to July 1,
1997 through a private placement of equity securities (or debt securities
convertible into or coupled with equity securities), the holder will have the
right to exchange some or all of the Preferred Stock and Warrants then owned by
it for the new securities offered by the Company at an exchange price equal to
the purchase price of such new securities.
The staff of the Securities and Exchange Commission recently announced a
new position on accounting for convertible preferred stock which is potentially
convertible at a discount to the market price of the common stock, even if the
potential for a discount is only a possibility. The staff has taken the
position that, solely for purposes of calculating earnings per share, the
potential discount is an embedded dividend to the preferred stockholders which
reduces the amount of income available to common stockholders. As a result of
the staff's new accounting position, the issuance of the Preferred Stock could
result in a reduction in earnings per share. The staff's position is limited
to the calculation of earnings per share and will not have any effect on the
Company's net income or cash flow.
Repurchase of Common Stock and Warrant:
As described above, Corange International Limited sold to the Company the
469,413 shares of common stock and the warrant to purchase 250,000 shares of
common stock previously acquired from the Company in connection with various
joint development projects at their original aggregate purchase price of $2.1
million or $4.54 per share of common stock. The unamortized cost of $273,216
related to the repurchased warrant has been offset against additional paid in
capital.
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 two years. Payment 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
salary during any year. The remaining 50% portion is recorded as deferred
compensation and amortized over the vesting period. The shares purchased
pursuant to this plan may not be transferred, except following the death of the
employee or a change in control, for a period of two years following the date
of purchase. During the period of the limitation on transfer, the Company has
the option to repurchase the shares at the employee's purchase price if the
employee terminates employment with the Company either voluntarily or as a
result of termination for cause. During 1994, 1995 and 1996, IRIS issued
45,622, 26,973, and 35,433 shares of common stock, respectively, in exchange
for $201,574, $179,630, and $307,288 in cash and services, respectively, under
this plan.
F-18
<PAGE> 50
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans and Employee Benefit Plans:
As of December 31, 1996, the Company had one stock option plan under which
it may grant non-qualified stock options, incentive stock options and stock
appreciation rights. Options remain outstanding under the other plans,
although no new options may be granted thereunder. No stock appreciation
rights or incentive stock options have been granted under these plans. During
1996, the Company exhausted the remaining options under the 1994 Plan and
issued approximately 205,500 additional options subject the adoption of a new
stock option plan.
In April 1997, the Company adopted a new stock option plan under which it
may grant non-qualified stock options, incentive stock options and stock
appreciation rights. Under the 1997 Plan, the Company is authorized to issue
options up to an aggregate of 600,000 shares of common stock. However, in
accordance with the rules of the American Stock Exchange, the Company may not
issue options under the plan aggregating more than 5% of the outstanding common
stock in any one year, or more than 10% of the outstanding common stock in any
five-year period.
The following schedule sets forth options authorized, exercised,
outstanding and available for grants under the Company's five stock option
plans as of December 31, 1996.
<TABLE>
<CAPTION>
Options
Options Options Options Available
Plan Authorized Exercised Outstanding for Grant
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1982 84,000 75,034 4,000 --
1983 100,000 90,435 1,000 --
1986 360,000 229,568 117,701 --
1994 700,000 2,100 696,833 2,067
1997 600,000 -- 205,500 394,500
--------- ------- --------- -------
1,844,000 397,137 1,025,034 396,567
========= ======= ========= =======
</TABLE>
The exercise price of the above options was determined by the Compensation
Committee. Payment of the exercise price may be made in cash or with shares of
common stock. The options generally vest over three years and expire either
five or ten years from the date of grant. On December 29, 1996, the
Compensation Committee approved the repricing of certain outstanding stock
options to $3.03 per option, excluding lower priced options.
IRIS has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation." If
compensation expense for the stock options had been determined using "fair
value" at the grant date for awards in 1995 and 1996, consistent with the
provisions of Statement of Financial Accounting Standards No. 123, the
Company's net earnings and earnings per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net earnings (loss) as reported $2,126,412 $(7,428,188)
Net earnings (loss) pro forma 2,052,090 $(7,890,943)
Earnings per share (loss) as reported .33 (1.21)
Earnings per share (loss) pro forma .32 (1.28)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1995 and 1996.
<TABLE>
<CAPTION>
1995 1996
------- ---------
<S> <C> <C>
Risk free interest rate 6.11% 5.98%
Expected lives (years) 5 5
Expected volatility 55% 55%
Expected dividend yield -- --
</TABLE>
F-19
<PAGE> 51
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The pro forma calculations above are for informational purposes only.
Future calculations of the pro forma effects of stock options may vary
significantly due to changes in the assumptions described above as well as
future grants, and for forfeitures of stock options.
The following table sets forth certain information relative to stock options
during the years ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
Weighted Avg Fair
Weighted Avg. Value at Grant
Shares Option Price Exercise Price Date
------ ------------ -------------- ----
<S> <C> <C> <C> <C>
Outstanding at January 1, 1994 472,367 $1.10 to $4.25
Granted 192,600 $3.72 to $5.42 $4.14 $1.44
Exercised (200,832) $1.10 to $3.75 $2.23 --
Canceled or expired (28,234) $1.55 to $4.25 $2.39 --
---------- -----
Outstanding at December 31, 1994 435,901 $1.10 to $5.42 $3.39 --
Granted 217,500 $4.25 to $7.87 $5.71 $3.16
Exercised (21,900) $1.10 to $4.00 $2.03 --
Canceled or expired (9,700) $1.57 to $4.00 $2.75 --
----------- -----
Outstanding at Dececember 31, 1995 621,801 $1.16 to $7.37 $4.22
Granted 650,300 $3.61 to $8.29 $5.55 $4.41
Exercised (116,133) $1.75 to $5.00 $2.19 --
Canceled or expired (131,934) $2.90 to $8.29 $5.98 --
--------- -----
Outstanding at December 31, 1996 1,024,034 $1.90 to $6.22 $3.02 --
========= =====
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Outstanding at December 31, 1996 Shares Option Price
------ ------------
<S> <C> <C>
Weighted average life - 3 months 1,000 $1.90
Weighted average life - 72 months 1,023,034 $3.03
Outstanding at December 31, 1995
Weighted average life - 10 months 114,134 $1.98
Weighted average life - 78 months 342,667 $4.02
Weighted average life - 117 months 165,000 $6.10
Outstanding at December 31, 1994
Weighted average life - 5 months 11,700 $1.50
Weighted average life - 21 months 128,134 $2.00
Weighted average life - 83 months 284,467 $4.02
Weighted average life - 87 months 11,600 $5.29
Exercisable at December 31, 1996
Weighted average life - 3 months 1,000 $1.90
Weighted average life - 72 months 271,773 $3.03
Exercisable at December 31, 1995
Weighted average life - 10 months 114,134 $1.98
Weighted average life - 72 months 70,334 $3.86
Weighted average life - 117 months 6,267 $5.18
Exercisable at December 31, 1994
Weighted average life - 5 months 11,700 $1.50
Weighted average life - 21 months 105,423 $2.00
Weighted average life - 83 months 35,775 $3.81
Weighted average life - 87 months 3,600 $5.00
</TABLE>
F-20
<PAGE> 52
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the merger with StatSpin, each outstanding option and
warrant of StatSpin was converted into an option to purchase IRIS common stock
at a ratio of 4.095 shares of IRIS common stock for each share of StatSpin
common stock, resulting in options to purchase an aggregate of 126,000 shares
of IRIS common stock. The exercise price ranges from $3.66 to $7.32 per share
of IRIS common stock. During 1996, options to purchase 19,050 shares at $7.32
per share expired, and options to purchase 21,791 shares at $3.66 per share
were exercised. At December 31, 1996, options to purchase 85,213 shares at
prices ranging from $3.66 to $4.58 remained outstanding. Certain of these
options were scheduled to expire in March 1997, but were extended an additional
year.
In 1996, the Company adopted a deferred compensation plan. All employees
are eligible to participate in the plan. Contributions by the Company are
discretionary. Employees vest in amounts contributed by the Company over five
years. The Company contributed $44,751 to the plan for 1996.
Warrants:
At December 31, 1996, there were warrants outstanding and exercisable to
purchase 75,000 shares at $8.125 per share until March 30, 1998; 512,000 shares
at $6.50 per share until September 29, 1998; 150,000 shares at $7.80 per share
until September 28, 2000; and 875,000 shares at $8.00 per share until July 31,
2000.
15. COMMITMENTS.
Leases:
The Company leases real property under agreements which expire at various
times over the next four years. Certain leases contain renewal options and
generally require the Company to pay utilities, insurance, taxes and other
operating expenses.
Future minimum rental payments required under operating leases that have
an initial term is excess of one year as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
------------------------------------------------------
<S> <C>
1997 $436,596
1998 405,328
1999 207,992
2000 21,483
----------
$1,071,399
==========
</TABLE>
Rent expense under all operating leases during 1994, 1995 and 1996 was
$290,294, $453,762 and $347,925, respectively.
Other:
IRIS has consulting and licensing agreements with Cytocolor, Inc. relating
to the use of its patented leukocyte stain in The White IRIS. Under the terms
of the agreements, IRIS is subject to the following future minimum royalty
payments:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------------------------------------
<S> <C>
1997 $20,000
1998 20,000
1999 20,000
2000 20,000
Years thereafter 260,000
--------
$340,000
========
</TABLE>
In connection with the development agreement with Poly, IRIS has agreed to
fund $15,000 per month (up to a maximum of $500,000) of the cost of the
development project for several new products to enhance automation in the
urinalysis field (see Note 11).
F-21
<PAGE> 53
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the purchase price for the PSI acquisition, the Company issued
the seller a five year warrant to purchase 875,000 shares of common stock at
$8.00 per share. Following the Company's restatement in the third quarter of
1996 of financial results for certain prior periods, the Company received a
request from the seller for a reduction in the exercise price of the warrant.
In its request, the seller asserts that it had relied on the prior financial
information and suffered material damage as a result. The Company has declined
to consider the seller's request until the Company has evaluated its claims
against the seller.
16. EARNINGS PER SHARE.
The computation of per share amounts for 1994, 1995 and 1996 is based on
the weighted average number of common shares and common share equivalents
outstanding for the period, unless antidilutive. Fully diluted and primary
earnings (loss) per share were $.28, $.33 and ($1.21) for the years ended
December 31, 1994, 1995 and 1996, respectively. As described in Note 14,
future calculations of earnings per share may be adversely impacted by the
issuance of the Preferred Stock.
17. LICENSE.
TOA Medical Electronics Co., Ltd. has developed several urine sediment
analyzers under license from IRIS using pre-1989 IRIS technology. IRIS
received royalties under this license of $111,000, $98,000, and $65,000 in
1994, 1995 and 1996, respectively.
18. RESEARCH AND DEVELOPMENT GRANTS AND CONTRACTS.
The Company has in the past partially funded its research and development
programs through (i) grants from NASA and National Institute of Health (ii)
joint development programs with strategic partners and (iii) Company-sponsored
research and development entities. In recent years, the Company has entered
into four significant externally-funded projects, two joint development
projects with strategic partners and two projects with Company-sponsored
research and development entities. From 1994 to 1996, the Company collaborated
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, in the
development of (I) the CHEMSTRIP/IRIStrip urine test strips for The Yellow IRIS
and (ii) the Model 900UDx, the latest model in The Yellow IRIS family. The
Company entered into a project in October 1992 with LDA, a Company-sponsored
research and development entity, for development of The White IRIS leukocyte
differential analyzer. In June 1995, the Company acquired LDA for
approximately 498,000 shares of common stock. As a result of the LDA
acquisition, the Company incurred a non-recurring, non-cash charge of $2.9
million for the year ended December 31, 1995 for the acquisition of in-process
research and development since The White IRIS had not yet received FDA
clearance. The White IRIS received FDA clearance in May 1996, and the Company
expects to begin marketing The White IRIS in 1997. The Company entered into a
similar project in September 1995 with Poly U/A Systems, Inc., another
Company-sponsored research and development entity, for development of several
new products to enhance automated urinalysis ("the Poly Products"). The
program with Poly is currently ongoing.
BMC and BMG recently agreed to several amendments to their contracts with
the Company, strengthening their ties in the supply and distribution of
CHEMSTRIP/IRIStrips urine test strips while withdrawing from longer term mutual
commitments in the areas of hematology and urine microscopy. Among other
things, BMC agreed to supply the Company with CHEMSTRIP/IRIStrips urine test
strips at a reduced price and extended the term of the underlying supply
agreement. In return, the Company relieved BMC of its obligation to purchase a
minimum number of Model 900UDx systems and to supply certain technology and
components.
The Company will continue to manufacture the Model 900UDx with BMG
providing certain components on a OEM basis at cost. The Company retained
exclusive marketing rights to the Model 900UDx in Taiwan and secured
non-exclusive rights for the rest of the world outside of Germany and Italy.
As compensation to the Company for potentially missed business
opportunities in hematology, Corange International Limited sold to the Company
the 469,413 shares of Common Stock and the warrant to purchase 250,000 shares
of common stock previously acquired from the Company in connection with various
joint development projects at their original aggregate purchase price of $2.1
million, or $4.54 per share of Common Stock. On December 31, 1996, the
outstanding balance of the purchase price was approximately $1.6 million.
F-22
<PAGE> 54
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has the right, if necessary, to extend the due date of the last two
installments by one year but must pay 8% interest during the extension period.
Reimbursements are recognized under research and development grants and
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.
Reimbursements and direct costs connected with research and development
grants and agreements were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Reimbursements $1,110,878 $ 842,663 1,779,820
Costs 1,258,405 1,494,873 1,498,165
--------- --------- ---------
Net costs $ 147,527 $ 652,210 $(281,655)
========== ========== ==========
</TABLE>
Net costs incurred under research and development grants and contracts
have been included in research and development expense in the statements of
operations.
19. UNUSUAL CHARGES
The results of operations for the year ended December 31, 1996 included
unusual charges totaling $2,036,592. Due to the Company's decision not to
pursue a previously announced public offering, the Company recognized $685,721
of expenses associated with the offering. The charge also included $617,266
for expenses related to recently completed litigation and arbitration matters.
In the fourth quarter of 1996, the Company incurred a charge of $298,113 for
severance and other incremental costs associated with a restructuring of the
Company's personnel. Legal and accounting expenses for the Company's merger
with StatSpin totaled $244,492. Reductions in the net realizable value of
inventory and other assets totaled $191,000.
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes certain financial information by quarter for
1995 and 1996:
<TABLE>
<CAPTION>
1995
--------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $3,167,277 $3,715,883 $3,743,641 $3,765,357
Gross margin on net revenues 1,535,808 1,908,864 1,931,560 1,889,110
Other income net 118,137 87,207 65,597 106,819
Net income (loss) 397,494 (2,916,490) 563,818 4,081,590
Net income (loss) per share 0.07 (0.53) 0.09 0.61
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $3,904,096 $4,823,455 $5,543,448 $6,283,132
Gross margin on net revenues 1,862,847 2,400,628 2,343,007 2,694,226
Other income (expense), net 82,248 80,753 (166,612) (405,434)
Net income (loss) 206,912 351,116 (6,250,834) (1,735,382)
Net income (loss) per share .03 .05 (.98) (.30)
</TABLE>
The quarters ended June 30, 1995 and September 30, 1996 include the
write-off of acquired in-process research and development of $3,175,645 and
$7,250,000, respectively.
F-23
<PAGE> 55
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
Additions
----------------------------------
Charged to Cost Charged to Ending
Beginning Balance and Expenses Other Accounts Deductions Balance
----------------- --------------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for Doubtful Accounts $ 87,759 $252,037 $10,000 $ (31,030)(1) $ 328,700
Reserve for Inventory Obsolescence $ 380,845 -- -- $ (208,860)(1) $ 171,985
Deferred Tax Asset Valuation Allowance $1,563,000 $437,000 -- -- $2,000,000
Year Ended December 31, 1995
Allowance for Doubtful Accounts $ 89,335 -- -- $ (1,576)(1) $ 87,750
Reserve for Inventory Obsolescence $ 332,926 $ 47,919 -- -- $ 380,840
Deferred Tax Asset Valuation Allowance $5,787,000 -- -- $(4,224,000)(2) $1,563,000
Year Ended December 31, 1994
Allowance for Doubtful Accounts $ 93,842 $ 11,000 -- $ (15,507)(1) $ 89,335
Reserve for Inventory Obsolescence $ 212,989 $131,105 -- $ (11,168)(1) $ 332,926
Deferred Tax Asset Valuation Allowance $6,414,352 -- -- $ (627,352)(2) $5,787,000
- ------------------------
(1) Relates to the write-off of accounts receivable or disposal of obsolete inventory.
(2) Relates to change and/or utilization in valuation allowance.
</TABLE>
F-24
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description
-- -----------
<S> <C> <C>
3.1(a) -- Certificate of Incorporation, as amended (1)
3.1(b) -- Certificate of Designations of Series A Convertible Preferred Stock (2)
3.2 -- Restated Bylaws (3)
4.1 -- Specimen of Common Stock Certificate (4)
4.1 -- Certificate of Designations of Series A Convertible Preferred Stock (2)
10.1 -- Lease of the Company's headquarters facility, as amended (5)
10.2(a) -- 1982 Stock Option Plans and form of Stock Option Agreement (6)
10.2(b) -- 1983 and 1986 Stock Option Plans, and forms of Stock Option Agreements for each Plan (7)
10.2(c) -- Amended and Restated 1986 Stock Option Plan (8)
10.2(d) -- 1994 Stock Option Plan and forms of Stock Option Agreements (9)
10.2(e) -- Certificate of Officer With Respect to Amendment of 1994 Stock Option Plan (10)
10.2(f) -- Key Employee Stock Purchase Plan (11)
10.3 -- Various Agreements with TOA Medical Electronics (12)
10.4(a) -- Agreement for a Strategic Alliance in Urinalysis dated January 7, 1994 between the Company
and Boehringer Mannheim Corporation (13)
10.4(b) -- Research and Development and Distribution Agreement dated February 6, 1995 by and among the
Company, LDA Systems, Inc. and Corange International Limited (13)
10.4(c) -- Amendment to Distribution Agreements (14)
10.5 -- Warrant Certificate dated March 20, 1995 issued to Biovation, Inc. (13)
10.6(a) -- Technology License Agreement dated as of September 29, 1995 between the Company and Poly U/A
Systems, Inc. (15)
10.6(b) -- Research and Development Agreement dated as of September 29, 1995 between the Company and
Poly U/A Systems, Inc. (15)
10.6(c) -- $100 Class "A" Note dated September 29, 1995 issued by Poly U/A Systems, Inc. in favor of
the Company (15)
10.6(d) -- Certificate of Incorporation of Poly U/A Systems, Inc. (See Article FOUR regarding the
IRIS Option) (15)
10.7(a) -- Agreement and Plan of Merger dated January 31, 1996 between the Company and StatSpin, Inc. (16)
10.7(b) -- Registration Rights Agreement dated January 31, 1996 between the Company and StatSpin
Stockholders (16)
10.8(a) -- Asset Purchase Agreement dated as of July 15, 1996 by and among the Company, Digital Imaging
Technologies, Inc., Perceptive Scientific Instruments, Inc. and Perceptive Scientific
Technologies, Inc. (17)
10.8(b) -- Registration Rights and Standstill Agreement dated July 31, 1996 between the Company and
Digital Imaging Technologies, Inc. (10)
10.8(c) -- Warrant Certificate dated July 31, 1996 issued to Digital Imaging Technologies, Inc. (10)
10.8(d) -- Stockholder Guaranty Agreement dated July 31, 1996 between Edward Randall, III and PSII
Acquisition Corp., a wholly-owned subsidiary of the Company (now known as Perceptive
Scientific Instruments, Inc.) (10)
10.8(e) -- Non-Competition Agreement dated as of July 15, 1996 between Edward Randall, III and PSII
Acquisition Corp., a wholly-owned subsidiary of the Company (now known as Perceptive
Scientific Instruments, Inc.) (10)
10.8(f) -- Technology License Agreement dated July 31, 1996 between Perceptive Scientific Imaging
Systems, Inc. and PSII Acquisition
Corp., a wholly-owned subsidiary of the Company (now known as Perceptive Scientific
Instruments, Inc.) (10)
10.9 -- $7,000,000 Subordinated Note dated July 29, 1996 issued by the Company in favor of
Digital Imaging Technologies, Inc. (10)
10.10(a) -- $1,500,000 Promissory Note dated July 29, 1996 (Revolving Credit Facility) (10)
</TABLE>
<PAGE> 57
<TABLE>
<S> <C> <C>
10.10(b) -- Change in Terms Agreement dated as of January 3, 1997 (Revolving Credit Facility)
10.10(c) -- Supplemental Terms letter dated July 29, 1996 (Revolving Credit Facility) (10)
10.10(d) -- Supplemental Terms Letter dated as of January 3, 1997 (Revolving Credit Facility)
10.10(e) -- $4,900,000 Amended and Restated Promissory Note dated as of January 3, 1997 (Term Loan)
10.10(f) -- Supplemental Terms Letter dated as of January 3, 1997 (Term Loan)
10.10(g) -- Waiver of Default dated as of January 3, 1997
10.10(h) -- Warrant to Purchase Common Shares
10.10(i) -- Commercial Security Agreement dated July 29, 1996 (10)
10.10(j) -- Commercial Pledge Agreement dated July 29, 1996 (10)
10.10(k) -- Various Additional Security Agreements dated as of January 3, 1997
10.11(a) -- Securities Purchase Agreement dated December 31, 1996 by and between the Company and
Thermo Amex Convertible Growth Fund I, L.P. (2)
10.11(b) -- Common Stock Purchase Warrant dated December 31, 1996 issued to Thermo Amex Convertible
Growth Fund I, L.P. (2)
10.11(c) -- Registration Rights Agreement dated December 31, 1996 by and between the Company and
Thermo Amex Convertible Growth Fund I, L.P. (2)
11 -- Statement re: Computation of Per Share Earnings
24.1 -- Consent of Coopers & Lybrand L.L.P.
24.2 -- Consent of KPMG Peat Marwick LLP
27 -- Financial Data Schedule
99 -- Additional Information Regarding Forward Looking Statements
- -------------------
</TABLE>
The following items are incorporated by reference to the Company's documents
cited below.
(1) 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) Current Report on Form 8-K dated January 15, 1997.
(3) Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(4) Registration Statement on Form S-3, as filed with the Securities and
Exchange Commission on March 27, 1996 (File No. 333-002001).
(5) Annual Report on Form 10-K for the year ended 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.
(6) Registration Statement on Form S-2, as filed with the Securities and
Exchange Commission on September 4, 1985 (File No. 2-99240).
(7) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on May 10, 1982 (File No. 2-77496).
(8) Annual Report on Form 10-K for the year ended December 31, 1992.
(9) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on August 8, 1994 (File No. 33-82560).
(10) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(11) Registration Statement on Form S-8 filed January 3, 1997.
(12) 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.
(13) Annual Report on Form 10-K for the year ended December 31, 1994.
(14) Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
(15) Quarterly Report on Form 10-Q for the quarter ended September 31, 1995.
(16) Annual Report on Form 10-K for the year ended December 31, 1995.
(17) Current Report on Form 8-K filed July 17, 1996.
<PAGE> 1
Exhibit 10.10(b)
CITY NATIONAL
BANK
CHANGE IN TERMS AGREEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PRINCIPAL Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$1,500,000.00 04-15-1998 25749 036540813 BEC
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not
limit the applicability of this document to any particular loan or item.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
BORROWER: INTERNATIONAL REMOTE IMAGING SYSTEMS, Lender: City National Bank, a National Banking Association
INC., A DELAWARE CORPORATION San Fernando Valley Commercial Banking Center #048000
9162 ETON AVENUE 16133 Ventura Boulevard
CHATSWORTH, CA 91311 Encino, CA 91436
=========================================================================================================================
</TABLE>
PRINCIPAL AMOUNT: $1,500,000.00 AS OF DATE OF AGREEMENT: JANUARY 3, 1997
DESCRIPTION OF EXISTING INDEBTEDNESS. Promissory Note ("Note") dated July 29,
1996, in favor of City National Bank, a national banking association ("Lender"),
executed by INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware corporation
("Borrower") in the original principal amount of $1,500,000.00, payable in full
on June 1, 1997, subject to any instalment maturities in the Note. The principal
balance on the Note as of January 3, 1997 is $1,334,755.00, on which interest is
paid to January 1, 1997.
DESCRIPTION OF COLLATERAL. All inventory, chattel paper, accounts, equipment and
general intangibles and Securities delivered to Lender, described in collateral
receipts issued by Lender from time to time to owner.
DESCRIPTION OF CHANGE IN TERMS. Interest on the unpaid principal shall be
payable monthly commencing February 15, 1997, and continuing up to and including
April 15, 1998, on which day the balance of principal and interest then unpaid
shall become due and payable.
Effective January 15, 1997 the interest rate is hereby amended from the "Prime
Rate" of CNB, to the "Prime Rate" of CNB, plus one and one-half of one percent
(1.50%) per year, to be increased to the "Prime Rate" plus one and three
quarters of one percent (1.75%) per year on June 1, 1997 and again increased to
the "Prime Rate" plus two percent (2.00%) per year on July 1, 1997, through the
maturity of April 15, 1998. If full payment of principal and interest on the
$4,900,000.00 Amended and Restated Promissory Note-Fixed Maturity dated as of
January 3, 1997 is received by June 1, 1997, the interest rate on the Note will
be decreased to the Prime Rate plus one percent (1.00%) through its maturity of
April 15, 1998.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligations(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT.
BORROWER:
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., A DELAWARE CORPORATION
By: /s/ Martin S. McDermut
----------------------------------------------------
MARTIN S. MCDERMUT, VICE PRES., FINANCE & ADMIN., CFO
<PAGE> 1
Exhibit 10.10(d)
SUPPLEMENTAL TERMS LETTER
As of January 3, 1997
International Remote Imaging Systems, Inc.
9162 Eton Avenue
Chatsworth, CA 91311
Attention: Martin S. McDermut, Vice President, Finance & Administration & CFO
RE: CHANGE IN TERMS AGREEMENT ("CHANGE IN TERMS AGREEMENT") DATED
AS OF JANUARY 3, 1997, RELATING TO A PROMISSORY NOTE (THE
"NOTE") IN THE ORIGINAL PRINCIPAL AMOUNT OF $1,500,000.00
EXECUTED BY INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., A
DELAWARE CORPORATION ("BORROWER") IN FAVOR OF CITY NATIONAL
BANK, A NATIONAL BANKING ASSOCIATION ("CNB")
Dear Mr. McDermut:
This is to confirm that CNB will extend the credit facility more
completely described in the enclosed Note, subject to the additional terms and
conditions set forth herein and in the Change in Terms Agreement. Capitalized
terms not defined in this letter have the meanings given them in the Note. This
letter is hereby incorporated into the Note (this letter, the Note, the Terms
Letter and in the Change in Terms Agreement, collectively, the "Note").
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS. Capitalized terms used in this Amendment without
definition shall have the meanings set forth in the Supplemental Terms Letter
dated July 29, 1996 related to the Note ("Terms Letter").
2. AMENDMENTS. The Terms Letter is amended as follows:
2.1 Section 2. of the Terms Letter is hereby deleted in its
entirely, and shall be added and inserted a new Section 2. as follows:
"2. Failure of Borrower to furnish CNB, within the times
specified, the following statements:
2.1 Within forty-five (45) days after the end of
each monthly accounting period of each
fiscal year, a financial statement
consisting of not less than a balance sheet
and income
<PAGE> 2
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 2
statement, prepared in accordance with
generally accepted accounting principles
consistently applied, which financial
statement may be internally prepared;
2.2 Within sixty (60) days after the end of each
quarterly accounting period of each fiscal
year, a financial statement consisting of
not less than a Form 10-Q.;
2.3 Within ninety (90) days after the close of
each fiscal year, a copy of the annual
report, on Form 10-K for such year for
Borrower and the Subsidiaries; and
2.4 Such additional information, reports and/or
statements as CNB may, from time to time,
reasonably request;"
2.2 Section 3. of the Terms Letter is hereby deleted in its
entirely, and shall be added and inserted a new Section 3. as follows:
"3. Failure of Borrower to maintain the following:
3.1 Tangible Net Worth plus Subordinated Debt of
not less than the following amounts as of
the stated effective date;
<TABLE>
<CAPTION>
Effective Date Minimum Amount
-------------- ----------------
<S> <C>
3/31/97 $ (1,300,000.00)
6/30/97 $ (1,000,000.00)
9/30/97 $ (750,000.00)
12/31/97 $ (50,000.00)
3/31/98 $ 550,000.00
</TABLE>
3.2 A ratio of Total Senior Liabilities to
Tangible Net Worth plus Subordinated Debt of
not more than 21.50 to 1 as of March 31,
1998;
<PAGE> 3
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 3
3.3 A ratio of Current Assets to Current
Liabilities of not less than the following
amounts as of the stated effective date; and
<TABLE>
<CAPTION>
Effective Date Minimum Ratio
-------------- -------------
<S> <C>
3/31/97 0.76 to 1
6/30/97 0.76 to 1
9/30/97 0.77 to 1
12/31/97 0.83 to 1
3/31/98 0.87 to 1
</TABLE>
3.4 A ratio of Cash Flow from Operations to Debt
Service of not less than the following
amounts as of the stated effective date.
<TABLE>
<CAPTION>
Effective Date Minimum Ratio
-------------- -------------
<S> <C>
3/31/97 0.60 to 1
6/30/97 0.90 to 1
9/30/97 1.00 to 1
12/31/97 1.25 to 1
3/31/98 1.25 to 1"
</TABLE>
2.3 Section 4. of the Terms Letter is hereby deleted in its
entirely, and there shall be added and inserted a new Section 4. as follows:
"4. Failure of Borrower within five (5) days after
execution and delivery of this Supplemental Terms
Letter to grant CNB a duly perfected security
interest, with the exception of the existing TOA
lien, in all patents, copyrights and trademarks held
by borrower."
2.4 There shall be added and inserted a definition as follows:
"DEBT SERVICE" shall mean (a) the $1,200,000.00 annual
principal payments under the Amended and Restated Note dated
January 3, 1997 in the original principal amount of
$4,900,000.00, prorated per the appropriate period, plus (b)
all interest incurred on borrowed money during the twelve
month period ending on the date of determination."
<PAGE> 4
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 4
2.5 The definition "TANGIBLE NET WORTH" contained in the Terms
Letter is hereby deleted in its entirely, and there shall be added and inserted
a definition as follows:
"TANGIBLE NET WORTH" shall mean the total of all assets
appearing on a balance sheet prepared in accordance with
generally accepted accounting principles consistently applied
for Borrower and the Subsidiaries on a consolidated basis,
minus (a) all intangible assets, including, without
limitation, unamortized debt discount, affiliate, employee and
officer receivables or advances, goodwill, research and
development costs, patents, trademarks, the excess of purchase
price over underlying values of acquired companies, any
covenants not to compete, deferred charges, copyrights,
franchises and appraisal surplus; minus (b) all obligations
which are required by generally accepted accounting principles
consistently applied to be reflected as a liability on the
consolidated balance sheet of Borrower and the Subsidiaries;
minus, (c) the amount, if any, at which shares of stock of a
non-wholly owned Subsidiary appear on the asset side of
Borrower's consolidated balance sheet, as determined in
accordance with generally accepted accounting principles
consistently applied; minus (d) minority interests; and minus
(e) deferred income and reserves not otherwise reflected as a
liability on the consolidated balance sheet of Borrower and
the Subsidiaries."
2.6 There shall be added and inserted a definition as follows:
"CASH FLOW FROM OPERATIONS" shall be determined on a
consolidated basis for Borrower and the Subsidiaries and shall
mean the sum of (a) net income after taxes earned, plus (b)
amortization of intangible assets, plus (c) interest expense,
plus (d) depreciation expensed, plus (e) any other non-cash
charges, in each case, as adjusted for (f) change in deferred
taxes."
3. EXISTING AGREEMENTS. Except as expressly amended herein, the Terms
Letter shall remain in full force and effect, and in all other respects is
affirmed.
4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and all such counterparts taken together shall be deemed to
constitute one and the same instrument.
<PAGE> 5
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 5
5. GOVERNING LAW. This Amendment and the rights and obligations of the
parties hereto shall be construed in accordance with, and governed by the laws
of the State of California.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
"Borrower" INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.,
a Delaware corporation
By: /s/ Martin S. McDermut
--------------------------
Martin S. McDermut, Vice President,
Finance and Administration/CFO
"CNB" CITY NATIONAL BANK, a national
banking association
By: /s/ Charles Solomon
--------------------------
Charles Solomon, Senior Vice
President/Manager
By: /s/ Bruce E. Corey
--------------------------
Bruce E. Corey, Vice President
<PAGE> 1
Exhibit 10.10(e)
[GRAPHIC OMITTED] CITY NATIONAL AMENDED AND RESTATED
BANK PROMISSORY NOTE - FIXED MATURITY
(INTEREST TIED TO PRIME)
Note No. 25750
$4,900,000.00 San Fernando Valley CBC
16133 Ventura Boulevard
Encino, California 91436
As of January 3, 1997
FOR VALUE RECEIVED, the undersigned, INTERNATIONAL REMOTE IMAGING
SYSTEMS, INC. ("Borrower"), promises to pay to the order of CITY NATIONAL BANK,
a national banking association ("CNB"), at its office in this city, in lawful
money of the United States of America and in immediately available funds, the
principal sum of FOUR MILLION NINE HUNDRED THOUSAND DOLLARS ($4,900,000.00),
with interest thereon from the date of disbursement at a rate computed on the
basis of a 360-day year, actual days elapsed, equal to the "Prime Rate" of CNB,
as it exists from time to time, plus one and one-half percent (1.50%) per year,
to be increased to the Prime Rate plus one and three quarters percent (1.75%)
per year on June 1, 1997 and again increased to the Prime Rate plus two percent
(2.00%) per year on July 1, 1997, through the maturity of April 15, 1998. If
full payment of principal and interest on this facility is received by June 1,
1997, the interest rate on the $1,500,000 Revolving Facility will be decreased
to the Prime Rate plus one percent (1.00%) through its maturity of April 15,
1998. To the extent the net proceeds of any secondary offering of its capital
stock ("Private Placement Offering") are less than the full principal plus
accrued interest as of the date of payment, CNB shall consider, at its sole
discretion, a reduction of the interest rate, if any. "Prime Rate" shall mean
the rate most recently announced by CNB at its principal office in Beverly Hills
as its "Prime Rate." Any change in the Prime Rate shall become effective on the
same business day on which the Prime Rate shall change, without prior notice to
Borrower.
Interest accrued on this Note shall be payable on the first (1st) day
of each month, commencing February 1, 1997. The minimum interest charge or the
term of this Note shall in no event be less than One Hundred Dollars ($100.00).
Principal shall be payable on this note in the amount of (a) the net
proceeds from the Private Placement Offering if and when such offering is
closed; and (b) $100,000.00 per month with each payment of interest commencing
January 1, 1997. Prepayments of principal may be made, without penalty, and
shall be applied to principal payments due in order of maturity.
Principal and any interest remaining unpaid shall be payable in full on
April 15, 1998.
Provided, however, if Borrower completes a firm underwritten secondary
public offering of Borrower's capital stock ("Public Offering"), repayment of
all principal plus accrued interest shall be made at such time as Borrower
receives the proceeds from the Public Offering of its capital stock; provided,
however that, if an event of default has occurred and is continuing, the
Borrower shall pay to CNB the total principal plus accrued interest on all
indebtedness outstanding to CNB.
CNB will be entitled to one-half (1/2) of any and all sums awarded to
Borrower from the arbitration with TOA Medical Electronics Co., Ltd., a Japanese
corporation ("TOA"), to the extent of the principal and accrued interest
outstanding to CNB, or, if in default, on the total principal and accrued
interest on all indebtedness outstanding to CNB. The arbitration funds will be
applied to the principal balance of the Borrower's loan with CNB, and will not
affect the $100,000 per month scheduled payments.
<PAGE> 2
CNB will be entitled to any and all funds from the sale of the
common stock repurchased from Corange International, an affiliate of
Boehringer Mannheim Corp., to the extent of the principal and accrued
interest outstanding to CNB, or, if in default, on the total principal
and accrued interest on all indebtedness to CNB. These funds will be
applied to the principal balance and will not affect the $100,000 per
month scheduled payments.
Borrower hereby agrees to defer any and all payments to Corange
International, for the repurchase of IRIS stock while there is any indebtedness
owed to CNB under this Note.
Borrower will execute a security agreement and a UCC-1 Financing
Statement granting CNB a security interest on Borrower's Patents and other
intangibles, at Borrower's sole cost and expense.
Borrower will pledge the stock from Borrower's subsidiaries as
additional collateral to CNB. Borrower will execute a Stock Warrant Agreement
granting CNB warrants to purchase 50,000 shares of Borrower's stock on the terms
set forth in said agreement. In the event payment in full of this Amended and
Restated Promissory Note ("Note") does not occur on or before June 1, 1997,
Borrower will grant CNB additional warrants to purchase 25,000 shares of
Borrower's stock at the prevailing stock price as of June 1, 1997, and CNB will
be granted additional warrants to purchase 25,000 shares of Borrower's stock at
the prevailing stock price as of July 1, 1997 in the event this Note is not paid
in full by July 1, 1997. Said additional Stock Warrant Agreements will be in
form and substance on the same terms and conditions as in the Stock Warrant
Agreement for 50,000 shares, except as otherwise stated herein.
The occurrence of any of the following with respect to any Borrower or
any guarantor of this Note or any general partner of such Borrower or guarantor,
shall constitute an "Event of Default" hereunder:
1. The failure to make any payment of principal or interest within 10 days
when due under this Note;
2. The filing of a petition by or against any of such parties under any
provisions of the Bankruptcy Code;
3. The appointment of a receiver or an assignee for the benefit of
creditors;
4. The commencement of dissolution or liquidation proceedings or the
disqualification of any such parties which is a corporation,
partnership, joint venture or any other type of entity;
5. The death or incapacity of any of such parties who is an individual;
6. Any financial statement provided by any of such parties to CNB is false
or misleading In any material respect;
7. Any default in the payment or performance of any obligation, contract,
loan document, agreement, the Stock Warrant Agreement, Security
Agreement and/or any default under any provisions of any contract or
instrument pursuant to which any of such parties has incurred any
obligation for borrowed money, if the principal amount of such
obligation exceeds $100,000.00, to any person or entity, including CNB;
8. Any sale or transfer of all or a substantial or material part of the
assets of any of such parties other than in the ordinary course of
business; or
9. Any violation, breach or default under any letter agreement, guaranty,
security agreement, deed of trust or any other contract or instrument
executed in connection with this Note or securing this Note.
10. The failure of Borrower to complete a private placement offering of
Borrower's capital stock on or before May 1, 1997.
Upon the occurrence of any Event of Default, the holder of this Note,
at the holder's option, may declare all sums of principal and interest
outstanding hereunder to be immediately due and payable without presentment,
demand, protest or notice of dishonor all of which are expressly waived by each
Borrower. Each Borrower agrees to pay all costs and expenses, including
reasonable attorneys' fees, expended or incurred by the holder (or allocable to
the holder's in-house counsel) in connection with the enforcement of this Note
or the collection of any sums due hereunder and irrespective of whether suit is
filed. Any principal or interest not paid within ten days of when due hereunder
shall thereafter bear
<PAGE> 3
additional interest from its due date at a rate of five percent (5.0%) per year
higher than the interest rate as determined and computed above, and continuing
thereafter until paid.
This Note supersedes and replaces the Promissory Note from Borrower to
CNB dated July 29, 1996 in the original principal amount of $7,800,000 (Note No.
25750) and CNB has returned such Note to Borrower for cancellation.
This Note and all matters relating thereto, shall be governed by the
laws of the State of California.
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
By: /s/ Martin S. McDermut
--------------------------
MARTIN S. MCDERMUT
VICE PRESIDENT, FINANCE AND ADMINISTRATION AND
CHIEF FINANCIAL OFFICER
- ---------------------------
BANK USE ONLY
- ---------------------------
3
<PAGE> 1
Exhibit 10.10(f)
SUPPLEMENTAL TERMS LETTER
As of January 3, 1997
International Remote Imaging Systems, Inc.
9162 Eton Avenue
Chatsworth, CA 91311
Attention: Martin S. McDermut, Vice President, Finance &
Administration & CFO
RE: AMENDED AND RESTATED PROMISSORY NOTE DATED JANUARY 3, 1997, IN
THE ORIGINAL PRINCIPAL SUM OF $4,900,000.00 ("NOTE") EXECUTED
BY INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., A DELAWARE
CORPORATION ("BORROWER") IN FAVOR OF CITY NATIONAL BANK, A
NATIONAL BANKING ASSOCIATION ("CNB")
Dear Mr. McDermut:
This is to confirm that CNB will extend the credit facility more
completely described in the enclosed Note, subject to the additional terms and
conditions set forth herein. Capitalized terms not defined in this letter have
the meanings given them in the Note. This letter is hereby incorporated into the
Note (this letter and the Note, collectively, the "Note").
A. ADDITIONAL EVENTS OF DEFAULT.
The following shall constitute additional Events of Default under the
Note:
1. Any obligee of Subordinated Debt shall fail to comply with the
subordination provisions of the documents or instruments, including,
without limitation, any subordination agreement, evidencing or relating
to such Subordinated Debt;
2. Failure of Borrower to furnish CNB, within the times specified, the
following statements:
2.1 Within forty-five (45) days after the end of each monthly
accounting period of each fiscal year, a financial statement
consisting of not less than a balance sheet and income
statement, prepared in accordance with generally accepted
accounting principles consistently applied, which financial
statement may be internally prepared;
<PAGE> 2
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 2
2.2 Within sixty (60) days after the end of each quarterly
accounting period of each fiscal year, a financial statement
consisting of not less than a Form 10-Q.;
2.3 Within ninety (90) days after the close of each fiscal year, a
copy of the annual report, on Form 10-K for such year for
Borrower and the Subsidiaries; and
2.4 Such additional information, reports and/or statements as CNB
may, from time to time, reasonably request;
3. Failure of Borrower to maintain the following:
3.1 Tangible Net Worth plus Subordinated Debt of not less
than the following amounts as of the stated effective
date;
<TABLE>
<CAPTION>
Effective Date Minimum Amount
-------------- ----------------
<S> <C>
3/31/97 $ (1,300,000.00)
6/30/97 $ (1,000,000.00)
9/30/97 $ (750,000.00)
12/31/97 $ (50,000.00)
3/31/98 $ 550,000.00
</TABLE>
3.2 A ratio of Total Senior Liabilities to Tangible Net
Worth plus Subordinated Debt of not more than 21.50
to 1 as of March 31, 1998;
3.3 A ratio of Current Assets to Current Liabilities of
not less than the following amounts as of the stated
effective date; and
<TABLE>
<CAPTION>
Effective Date Minimum Ratio
-------------- -------------
<S> <C>
3/31/97 0.76 to 1
6/30/97 0.76 to 1
9/30/97 0.77 to 1
12/31/97 0.83 to 1
3/31/98 0.87 to 1
</TABLE>
<PAGE> 3
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 3
3.4 A ratio of Cash Flow from Operations to Debt Service,
cumulative from the beginning of each calendar year,
of not less than the following amounts as of the
stated effective date.
<TABLE>
<CAPTION>
Effective Date Minimum Ratio
-------------- -------------
<S> <C>
3/31/97 0.60 to 1
6/30/97 0.90 to 1
9/30/97 1.00 to 1
12/31/97 1.25 to 1
3/31/98 1.25 to 1"
</TABLE>
4. Failure of Borrower within five (5) days after execution and delivery of this
letter to grant CNB a duly perfected security interest, with the exception of
the existing TOA lien, in all patents, copyrights and trademarks held by
borrower.
B. DEFINITIONS.
For purposes of the Note, the following terms have the following
meanings:
"CASH FLOW FROM OPERATIONS" shall be determined on a consolidated basis
for Borrower and the Subsidiaries and shall mean the sum of (a) net income after
taxes earned, plus (b) amortization of intangible assets, plus (c) interest
expense, plus (d) depreciation expensed, plus (e) any other non-cash charges, in
each case, as adjusted for (f) change in deferred taxes.
"CURRENT ASSETS" shall be determined on a consolidated basis for
Borrower and the Subsidiaries in accordance with generally accepted accounting
principles consistently applied, including deposits and securities held by CNB
as collateral, but excluding, however, from the determination of Current Assets,
loans to shareholders, management or employees, amounts due from Subsidiaries or
affiliates, deferred costs, and other intangible assets.
"CURRENT LIABILITIES" shall be determined on a consolidated basis for
Borrower and the Subsidiaries in accordance with generally accepted accounting
principles consistently applied, and shall include without limitation (a) all
principal and accrued interest payments on Subordinated Debt required to be made
within one (1) year after the date on which the determination is made; and (b)
all indebtedness payable to stockholders, affiliates, Subsidiaries or officers
regardless of maturity, unless such indebtedness shall have been subordinated to
CNB, on terms satisfactory to CNB.
<PAGE> 4
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 4
"DEBT SERVICE" shall mean (a) the $1,200,000.00 annual principal
payments under this note, prorated per the appropriate period, plus (b) all
interest incurred on borrowed money during the twelve month period ending on the
date of determination.
"SUBORDINATED DEBT" shall mean indebtedness of Borrower or any
Subsidiary, the repayment of principal and interest of which is subordinated to
CNB, on terms satisfactory to CNB (including, without limitation, the
indebtedness owing to Digital Imaging Technologies, Inc. ("DITI") evidenced by
that certain Seven Million & 00/100 Dollars ($7,000,000.00), eight and one half
percent (8.50%) Subordinated Note due 2001, dated July 29, 1996 by Borrower in
favor if DITI.
"SUBSIDIARY" shall mean any corporation, the majority of whose voting
shares are at any time owned, directly or indirectly by Borrower and/or by one
or more Subsidiaries.
"TANGIBLE NET WORTH" shall mean the total of all assets appearing on a
balance sheet prepared in accordance with generally accepted accounting
principles consistently applied for Borrower and the Subsidiaries on a
consolidated basis, minus (a) all intangible assets, including, without
limitation, unamortized debt discount, affiliate, employee and officer
receivables or advances, goodwill, research and development costs, patents,
trademarks, the excess of purchase price over underlying values of acquired
companies, any covenants not to compete, deferred charges, copyrights,
franchises and appraisal surplus; minus (b) all obligations which are required
by generally accepted accounting principles consistently applied to be reflected
as a liability on the consolidated balance sheet of Borrower and the
Subsidiaries; minus, (c) the amount, if any, at which shares of stock of a
non-wholly owned Subsidiary appear on the asset side of Borrower's consolidated
balance sheet, as determined in accordance with generally accepted accounting
principles consistently applied; minus (d) minority interests; and minus (e)
deferred income and reserves not otherwise reflected as a liability on the
consolidated balance sheet of Borrower and the Subsidiaries.
"TOTAL SENIOR LIABILITIES" shall mean, as of any date of determination,
the amount of all obligations that should be reflected as a liability on a
consolidated balance sheet of Borrower and the Subsidiaries prepared in
accordance with generally accepted accounting principles consistently applied,
less Subordinated Debt.
<PAGE> 5
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 5
C. ADDITIONAL TERMS AND CONDITIONS.
The following additional terms and conditions shall also apply to the
Note:
1. FEES. Borrower shall pay to CNB a non-refundable modification fee
for the following Legal Expenses of $15,000.00; Appraisal Fee/ABL Audit Fee of
$7,290.00; Documentation Fee/ABL Valuation Service Fee of $1,500.00 and Loan Fee
of $25,000.00, plus reimbursement of all expenses associated with completion of
this modification and costs associated with the perfection of the lien on
intangible assets, plus outside legal counsel agreed to by Borrower of
approximately $5,000.00, due and payable in full upon execution of this letter
and the Note.
2. SUBORDINATION OF DEBT. All obligations of Borrower to Digital
Imaging Technologies, Inc., a Delaware corporation shall be subordinated in
right of repayment to all obligations of Borrower to CNB, as evidenced by and
subject to the terms and provisions of draft eight and one half percent (8.50%)
Senior Subordinated Note due 2001 provided under cover of letter dated July 15,
1996.
3. ENVIRONMENTAL INDEMNIFICATION. Due to the environmentally sensitive
nature of the industry in which Borrower is principally engaged and upon which
CNB will rely as its primary source of repayment, and in consideration of CNB
extending credit to Borrower, Borrower has agreed to indemnify CNB against any
claims that may arise as a result of Borrower's business activities that are
environmental in nature and for which CNB may be named as a liable party.
Borrower agrees that it shall indemnify and hold harmless CNB, its
parent company, subsidiaries and all of their respective directors, officers,
employees, agents, successors, attorneys, and assigns from and against any loss,
damage, cost, expense, or liability directly of indirectly arising out of or
attributable to the use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal, or presence of a hazardous substance
on, under, or about Borrower's property or operations or property leased to
Borrower, including but not limited to attorneys' fees (including the reasonable
estimate of the allocated cost of in-house counsel and staff). For these
purposes, the term "hazardous substances" means any substance which is or
becomes designated as "hazardous" or "toxic" under any Federal, state, or local
law. This indemnity shall survive repayment of Borrower's obligations to CNB.
Except for documents and instruments specifically referenced herein or
in the Note, this letter and the Note constitute the entire agreement of the
parties hereto and
<PAGE> 6
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 6
supersedes any prior or contemporaneous oral or written agreements,
understandings, representations, warranties and negotiations, if any, which are
merged into this letter and the Note. If you agree to accept the terms of this
letter and the Note, please sign the
<PAGE> 7
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 7
enclosed acknowledgement copy of this letter, as well as the enclosed Note, and
return them to me on or before April 15, 1997.
Sincerely,
CITY NATIONAL BANK, a national
banking association
By: /s/ Charles Solomon
----------------------------------------------
Charles Solomon, Senior Vice President/Manager
By: /s/ Bruce E. Corey
----------------------------------------------
Bruce E. Corey, Vice President
Accepted and Agreed this 9th day of April, 1997.
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.,
a Delaware corporation
By: /s/ Martin S. McDermut
---------------------------------------------
Martin S. McDermut, Vice President
Finance and Administration/CFO
<PAGE> 1
EXHIBIT 10.10(g)
WAIVER OF DEFAULT UNDER PROMISSORY NOTE
As of January 3, 1997
International Remote Imaging Systems, Inc.
9162 Eton Avenue
Chatsworth, CA 91311
Attention: Martin S. McDermut, Vice President, Finance &
Administration & CFO
RE: WAIVER OF DEFAULT UNDER PROMISSORY NOTE DATED JULY 29, 1996 IN THE
ORIGINAL PRINCIPAL SUM OF $1,500,000.00 (TOGETHER WITH THE RELATED
SUPPLEMENTAL TERMS LETTER, "NOTE") AND PROMISSORY NOTE DATED JULY 29,
1996 IN THE ORIGINAL PRINCIPAL SUM OF $7,800,000.00 (TOGETHER WITH
THE RELATED SUPPLEMENTAL TERMS LETTER, "NOTE") EXECUTED BY
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., A DELAWARE CORPORATION
("BORROWER") IN FAVOR OF CITY NATIONAL BANK, A NATIONAL BANKING
ASSOCIATION ("CNB")
Dear Mr. McDermut:
Section 3.1 of each Note requires that Borrower maintain a Tangible Net
Worth plus Subordinated Debt of not less than $9,500,000.00 at all times. Based
on Borrower's financial statements for the periods ending September 30, 1996 and
December 31, 1996, Borrower is out of compliance of this covenant.
Section 3.2 of each Note requires that Borrower maintain a ratio of
Total Senior Liabilities to Tangible Net Worth plus Subordinated Debt of not
more than 1.5 to 1 at all times. Based on Borrower's financial statements for
the periods ending September 30, 1996 and December 31, 1996, Borrower is out of
compliance of this covenant.
Section 3.3 of each Note requires that Borrower maintain a ratio of
Current Assets to Current Liabilities of not less than 1.0 to 1 at all times.
Based on Borrower's financial statements for the periods ending September 30,
1996 and December 31, 1996, Borrower is out of compliance of this covenant.
Section 3.4 of the $7,800,000.00 Note requires that Borrower maintain a
ratio of Cash Flow from Operations to Debt Service of not less than 1.1 to 1
from and after
<PAGE> 2
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 2
December 1, 1996. Based on Borrower's financial statement for the period ending
December 31, 1996, Borrower is out of compliance of this covenant.
Under the terms of the Note, Borrower's failure to comply with or
observe the provisions of the foregoing Sections constitutes an Events of
Default. You have requested that CNB waive the provisions of such Sections in
connection with such Events of Default. CNB represents that it does not have
knowledge of any other facts which constitute an Event of Default under either
Note or any related Security Agreement.
Subject to the terms and conditions hereof, CNB hereby waives the
specific Events of Default set forth in the above paragraphs only for the
quarters ending September 30, 1996 and December 31, 1996. This waiver shall be
effective solely with respect to the matters described above and shall not be
deemed or construed to be a waiver of any other term or condition of either Note
or any other term or condition of any of the instruments or agreements referred
to therein or executed in connection therewith, or to prejudice any right or
rights that CNB may now have or may have in the future under or in connection
with either Note or the instruments or agreements referred to therein or
otherwise executed in connection therewith with respect to any other Events of
Default that may exist or arise. Except as expressly waived herein or amended by
other written agreements executed concurrently herewith, all of the terms and
conditions of each Note shall remain unchanged and in full force and effect.
Capitalized terms not defined herein shall have the respective meanings given
them in the Notes.
<PAGE> 3
Martin S. McDermut, VP, Finance & Administration, CFO
International Remote Imaging Systems, Inc.
As of January 3, 1997
Page 3
This waiver shall become effective only upon receipt by CNB of
counterparts hereof acknowledged by you.
Very truly yours,
CITY NATIONAL BANK, a
national banking association
By: /s/ Charles Solomon
--------------------------
Charles Solomon, Senior Vice
President/Manager
By: /s/ Bruce E. Corey
--------------------------
Bruce E. Corey, Vice President
ACKNOWLEDGED BY BORROWER:
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.,
a Delaware corporation
By: /s/ Martin S. McDermut
-----------------------------------
Martin S. McDermut, Vice President,
Finance & Administration & CFO
Date: April 9, 1997
---------------------------------
RECEIVED BY CITY NATIONAL BANK:
Date: April 9, 1997
------------------------
By: /s/ Bruce E. Corey
--------------------------
Bruce E. Corey, Vice President
<PAGE> 1
EXHIBIT 10.10(h)
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED, SOLD, ASSIGNED,
PLEDGED OR OTHERWISE DISPOSED OF UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, SHALL HAVE BECOME EFFECTIVE WITH RESPECT
THERETO AND ALL APPLICABLE QUALIFICATIONS UNDER STATE SECURITIES LAWS SHALL HAVE
BEEN OBTAINED WITH RESPECT THERETO; OR (ii) A WRITTEN OPINION FROM COUNSEL FOR
THE HOLDER REASONABLY SATISFACTORY TO THE ISSUER HAS BEEN OBTAINED STATING THAT
NO SUCH REGISTRATION OR QUALIFICATION IS REQUIRED.
WARRANT TO PURCHASE COMMON SHARES OF
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is hereby
acknowledged, INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware corporation
(the "Company"), hereby grants to CITY NATIONAL BANK, a national banking
association, its successors and assigns (collectively, the "Bank"), an
irrevocable warrant (the "Warrant") to purchase up to 50,000 fully paid and
nonassessable common shares, $.01 par value per share, of the Company (the
"Shares"), adjusted as set forth below, at the Warrant Price, as defined below,
at any time beginning on the date hereof and ending on January 15, 2000 or the
date its indebtedness to the Bank under that certain Amended and Restated
Promissory Note dated as of January 3, 1997 in the principal amount of
$4,900,000, and that certain Promissory Note dated July 29, 1996 in the
principal amount of $1,500,000, is paid in full, whichever is later, all subject
to the provisions, terms and conditions set forth below.
1. Exercise; Issuance of Certificates; Payment for Shares. This
Warrant may be exercised by the holder hereof, in whole or in part (but not as
to a fractional Share), and on one or more occasions, by written notice to the
Company at its principal office at 9162 Eton Avenue, Chatsworth, California
91311 (or such other office or agency of the Company as it may designate by
notice in writing to the holder hereof at the address of such holder appearing
on the books of the Company) at any time within the period above named and by
payment to the Company by cashier's check or wire transfer of the Warrant Price
for the number of Shares designated by the holder (but not more than the number
of Shares for which this Warrant then remains unexercised). The Company agrees
that the Shares so purchased will be deemed to have been issued to the holder
hereof as the record owner of such Shares as of the close of business on the
date on which such notice is received and payment made as aforesaid.
Certificates for the Shares so purchased will be delivered to the holder hereof
within a reasonable time, not
<PAGE> 2
exceeding fifteen (15) business days, after this Warrant has been exercised,
and, unless this Warrant has expired, it will continue in effect with respect to
the number of Shares, if any, as to which it has not then been exercised.
2. Shares to be Fully Paid; Reservation of Shares. The Company
covenants and agrees as follows:
2.1 All Shares issued upon the exercise of this Warrant
will, upon issuance, be fully paid and nonassessable and free from all taxes,
liens and charges with respect to the issue thereof.
2.2 The Company will from time to time take all actions
required to assure that the par value (if any) per Share issuable pursuant to
this Warrant is at all times equal to or less than the Warrant Price per Share.
2.3 During the period within which this Warrant may be
exercised, the Company will at all times have authorized and reserved for the
purpose of issuance or transfer upon exercise of this Warrant a sufficient
number of Shares to provide for the exercise of this Warrant.
2.4 The Company will take all actions necessary to assure
that the Shares issuable upon the exercise of this Warrant may be so issued
without violation of any applicable law or regulation, or of any requirements of
any securities exchange upon which the shares of the Company may be listed.
2.5 The Company will not take any action that would
result in an adjustment of the Warrant Price if the total number of Shares
issuable after such action upon exercise of this Warrant, together with all
Shares then outstanding and all Shares then issuable upon exercise of all
rights, options or warrants (other than this Warrant) and upon conversion of all
securities convertible into or exchangeable for shares of common stock of the
Company, would exceed the total number of Shares then authorized by the
Company's Articles of Incorporation.
3. Warrant Price.
3.1 Initial Warrant Price; Subsequent Adjustment of Price
and Number of Purchasable Shares. The Initial Warrant Price will be Three and
7/8 Dollars ($3.875) per Share, and will be adjusted from time to time as
provided below. The Initial Warrant Price or, if such price has been adjusted,
the price per Share as last adjusted pursuant to the terms hereof is referred to
as the "Warrant Price" herein. Upon each adjustment of the Warrant Price, the
holder of this Warrant will thereafter be entitled to purchase, at the Warrant
Price resulting from such adjustment, the number of Shares obtained by
multiplying the Warrant Price in effect immediately before such adjustment by
the number of Shares purchasable pursuant to this Warrant immediately before
such adjustment and dividing the product by the Warrant Price resulting from
such adjustment.
-2-
<PAGE> 3
3.2 Liquidating Dividends. The Company will not declare a
dividend upon the Shares payable otherwise than out of consolidated earnings or
consolidated earned surplus, determined in accordance with generally accepted
accounting principles, including the making of appropriate deductions for
minority interests, if any, in subsidiaries, and otherwise in Shares, unless the
holders hereof have consented to such dividend in writing. In the event the
Company declares such a dividend with such consent, the Company will pay the
holder of this Warrant, on the dividend payment date, the case, Shares or other
securities and other property which the holder would have received if the holder
had exercised this Warrant in full to purchase Shares and had been the record
holder of such Shares on the record date for such dividend, or, if a record is
not taken, the date as of which the holders of Shares of record entitled to such
dividend are determined. For the purposes of the foregoing, a dividend other
than in cash will be considered payable out of earnings or surplus (other than
revaluation or paid-in surplus) only to the extent that such earnings or surplus
are charged an amount equal to the fair value of such dividend as determined in
good faith by the Board of Directors of the Company.
3.3 Subdivision or Combination of Shares. If the Company
at any time while this Warrant, or any portion hereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which purchase
rights under this Warrant exist, into a different number of securities of the
same class, the Warrant Price for such securities shall be proportionately
decreased in the case of a split or subdivision or proportionately increased in
the case of a combination.
3.4 Reclassification. If the Company, at any time while
this Warrant, or any portion hereof, remains outstanding and unexpired, by
reclassification of securities or otherwise shall change any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Warrant Price
therefor shall be appropriately adjusted.
3.5 Adjustments for Dividends in Stock or Other
Securities or Property. If while this Warrant, or any portion hereof, remains
outstanding and unexpired the holders of the securities as to which purchase
rights under this Warrant exist at the time shall have received, or, on or after
the record date fixed for the determination of eligible stockholders, shall have
become entitled to receive, without payment therefor, other or additional stock
or other securities or property (other than cash) of the Company by way of
dividend, then and in each case, this Warrant shall represent the right to
acquire, in addition to the number of shares of the security receivable upon
exercise of this Warrant, and without payment of any additional consideration
therefor, the amount of such other or additional stock or other securities or
property (other than cash) of the Company that such holder would hold on the
date of such exercise had it been the holder of record of the security
receivable upon exercise of
-3-
<PAGE> 4
this Warrant on the date hereof and had thereafter, during the period from the
date hereof to and including the date of such exercise, retained such shares
and/or all other additional stock available by it as aforesaid during such
period, giving effect to all adjustments called for during such period.
3.6 Reorganization, Reclassification, Consolidation,
Merger or Sale. If any capital reorganization or reclassification of the Shares
of the Company, or any consolidation or merger of the Company with another
corporation or entity, or the sale of all or substantially all of the Company's
assets to another corporation will be effected in such a way that holders of
Shares will be entitled to receive Shares, securities or assets with respect to
or in exchange for Shares, then, upon exercise of this Warrant, the holder will
thereafter have the right to receive such Shares, securities or assets as may be
issued or payable with respect to or in exchange for a number of outstanding
Shares equal to the number of Shares immediately theretofore purchasable and
receivable upon the exercise of this Warrant. If a purchase, tender or exchange
offer is made to and accepted by the holders of more than 50% of the outstanding
Shares of the Company, the Company will not effect any consolidation, merger or
sale with the Person, as defined below, making such offer or with any Affiliate,
as defined below, of such Person, unless, before the consummation of such
consolidation, merger or sale, the holder of this Warrant is given at least ten
(10) business days notice prior to the scheduled closing date (the "Closing
Date") of such transaction (which notice shall specify the material terms of
such transaction and the proposed Closing Date). In the event the holder elects
to exercise this Warrant or any portion thereof following such notice and such
consolidation, merger or sale is not consummated within ten (10) days of the
proposed Closing Date (or any subsequent proposed Closing Date), then the Holder
may rescind its exercise of this Warrant by providing written notice thereof to
the Company, the Company shall take all actions consistent therewith (including
without limitation the immediate return of the Warrant Price paid with respect
to such rescinded exercise) and this Warrant shall continue in full force and
effect. As used in this paragraph, the term "Person" includes an individual, a
partnership, a corporation, a trust, a joint venture, a limited liability
company, an unincorporated organization and a government or any department or
agency thereof, and an "Affiliate" of a Person means any Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with, such other Person. A Person will be deemed to control a corporation or
other business entity if such Person possesses, directly or indirectly, the
power to direct or cause the direction of the management and policies of such
corporation, whether through the ownership of voting securities, by contract or
otherwise.
3.7 Notice of Adjustment. Upon any adjustment of the
Warrant Price, the Company will give written notice thereof, by first-class
mail, postage prepaid, addressed to the holder of this Warrant at the address of
such holder as shown on the books of the Company, which notice will state (i)
the Warrant Price resulting from such adjustment and the increase or decrease,
if any, in the number of Shares purchasable at such price upon the exercise of
this Warrant, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based, and
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(ii) whether, after giving effect to such adjustment, the maximum number of
Shares issuable upon the exercise of this Warrant will constitute more than 5%
of the total number of then issued and outstanding Shares (including in such
total number the maximum number of Shares issuable upon the exercise of this
Warrant).
3.8 Other Notices. If at any time:
3.8.1 The Company declares a cash dividend on its
Shares payable at a rate in excess of the rate of the last cash dividend
theretofore paid;
3.8.2 The Company declares a dividend on its Shares
payable in Shares or pays a special dividend or other distribution (other than
regular cash dividends) to the holders of its Shares;
3.8.3 The Company offers for subscription to the
holders of any of its Shares additional Shares of any class or other rights;
3.8.4 There is a capital reorganization, or
reclassification of the Shares of the Company, or consolidation or merger of the
Company with, or sale of all or substantially all of its assets to, another
corporation or other entity; or
3.8.5 There is a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
Then the Company will give, by first-class mail,
postage prepaid, addressed to the holder of this Warrant at the address of such
holder as shown on the books of the Company, (i) at least twenty (20) days'
prior written notice of the date on which the books of the Company will close or
a record will be taken for such dividend, distribution or subscription rights or
for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, and (ii) in the case of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
twenty (20) days' prior written notice of the date when the same will take
place. Any notice required by clause (i) will also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Shares will be entitled thereto, and any notice required by (ii) will
also specify the anticipated date on which the holders of Shares will be
entitled to exchange their Shares for securities or other property deliverable
upon such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, as the case may be.
4. Listing. If any Shares required to be reserved for the purpose
of issue upon the exercise of this Warrant require registration with or approval
of any governmental authority under any federal or state law (other than the
filing of a Registration Statement under the Securities Act of 1933, as then in
effect (the "Securities Act"), or any similar law then in effect), or listing on
any securities exchange, before such Shares may be issued upon such exercise,
the Company will, at its expense and as
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expeditiously as possible, use its best efforts to cause such Shares to be duly
registered or approved or listed on the relevant securities exchange, as the
case may be.
5. Closing of Books. The Company will at no time close
its transfer books against the transfer of this Warrant or of any Shares issued
or issuable upon the exercise of this Warrant in any manner which interferes
with the timely exercise of this Warrant.
6. Definition of Shares. As used in this Warrant the term
"Shares" includes the Company's authorized common stock, $.01 par value per
share, as constituted on the date hereof and also includes any shares of any
class of stock or other equity securities of the Company thereafter authorized
which will not be limited to a fixed sum or percentage of par value in respect
of the rights of the holders thereof to participate in dividends or in the
distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Company; provided that, except as provided in
paragraph 3.6, the Shares purchasable pursuant to this Warrant will include only
Shares designated as "common shares" of the Company or, in the case of any
reclassification of the outstanding Shares, the Shares, securities or assets
provided for in paragraph 3.6.
7. No Participating Preferred Shares. So long as this Warrant
remains outstanding, the Company will not issue any Shares of any class
preferred as to dividends or as to the distribution of assets upon voluntary or
involuntary liquidation, dissolution or winding up, unless the rights of the
holders thereof will be limited to a fixed sum or percentage of par value in
respect of participation in dividends and in the distribution of such assets.
8. No Voting Rights. This Warrant will not entitle the holder
hereof to any voting rights or other rights as a Shareholder of the Company.
9. Registration Rights.
9.1 Certain Definitions. The following terms shall have
the respective meanings set forth below:
9.1.1 "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
9.1.2 "Holder" shall mean any person who at a given
time is the holder of record of any Registrable Securities and has agreed in
writing to be bound by the provisions of Section of this Agreement.
9.1.3 "Registrable Securities" shall mean those
shares of Common Stock acquired upon exercise of the Warrant but excluding any
shares which may be resold to the public without registration pursuant to Rule
144 or another comparable rule under the Securities Act.
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9.1.4 "Registration Period" shall mean the period of
time beginning on the date hereof and ending on the third anniversary of such
date; provided, however, that the Registration Period shall be extended as
required under the last sentence of Section 9.9 if the Company elects to
exercise its right to postpone a demand registration.
9.1.5 "Registration Statement" shall mean any
registration statement or comparable document under the Securities Act through
which a public sale or disposition of the Warrant Shares may be registered or
exempted from registration (except a form exclusively for the sale or
distribution of securities by the Company or to employees of the Company or its
subsidiaries or for use exclusively in connection with a business combination).
9.1.6 "SEC" shall mean the Securities and Exchange
Commission.
9.1.7 "Selling Holder" shall mean, with respect to
any Registration Statement, any Holder whose securities are included therein.
9.1.8 "Sellers' Underwriter" shall mean, with respect
to any Registration Statement, the underwriter, if any, designated in writing by
the Selling Holders as underwriting the Registrable Securities involved.
9.1.9 "Securities Act" shall mean the Securities Act
of 1933, as amended.
9.1.10 "Significant Holders" shall mean, at any time,
Holders together holding more than two-thirds (2/3) of the then outstanding
Registrable Securities held by the Holders.
9.2 Demand Registration.
9.2.1 Notice of Demand. The Significant Holders may
at any time during the Registration Period by written notice request that the
Company register Registrable Securities under the Securities Act. The maximum
number of such demands shall be one (1). Each notice shall set forth (i) the
number of shares to be included; (ii) the names of the Selling Holders and the
amounts to be sold by each; and (iii) the proposed manner of sale. Within 10
days after receipt of such notice, the Company shall notify all other Holders
and offer to them the opportunity to include their Registrable Securities in
such registration. Each of the other Holders shall have twenty (20) days from
the mailing of such notice to notify the Company of the number of Registrable
Securities such Holder desires be included in the Registration Statement, but
the Company shall have no obligation to include the Registrable Securities of
any such Holder in the Registration Statement if the Company does not receive
the required notice within such 20-day period.
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9.2.2 Holder and Registration. Promptly, but in any
event within 60 days after receipt of any demand pursuant to Section 9.2.1, the
Company shall prepare and file with the SEC a Registration Statement on any
applicable form with respect to all the Registrable Securities specified in all
notices received in a timely manner pursuant to Section 9.2.1, and use its best
efforts to cause such Registration Statement to become effective. Each of the
Selling Holders (other than the Holders exercising demand registration rights
with respect to such registration) shall accept a reduction (including a total
elimination) in the number of securities to be included in such registration on
a pro rata basis (based on the number of Registrable Securities held by each) if
the Sellers' Underwriter reasonably deems that without such reduction (or
elimination) the demanding Holders might be substantially hindered in the terms
or number of securities which they could sell in such registration.
9.2.3 Required Minimum. The Company may decline to
prepare or file any Registration Statement under this Section 9.2 unless the
Registrable Securities to be sold thereunder constitute at least fifty (50%) of
the then outstanding Registrable Securities held by all Holders.
9.3 Incidental Registration. Whenever during the
Registration Period the Company proposes to file a Registration Statement for an
offering of securities for its own account, the Company shall take the following
steps with respect to such Registration Statement:
9.3.1 Mail a written notice to each Holder at the
address shown on the books and records of the Company at least thirty (30) days
prior to the effective date of any such Registration Statement; and
9.3.2 Include in such Registration Statement any and
all Registrable Securities specified in a notice by the Holder which is received
by the Company not less than twenty (20) days following the mailing of the
notice specified in Section 9.3.1. In connection with any such registration, the
Selling Holder must: (i) if the Holder desires to sell such Registrable
Securities, sell such Registrable Securities in the manner and on the terms
adopted by or through the underwriter(s) acting on behalf of the Company in
connection with such registration, if such underwriter(s) so requests; and (ii)
accept a reduction (including a total elimination) in the number of shares to be
included in such registration on a pro rata basis (based on the number of
securities held by each) with any other selling securityholders if the
underwriter(s) deem that without such reduction (or elimination) the Company
might be substantially hindered in the terms or number of securities which it
could sell in such registration.
9.4 Registration Procedures. Whenever the Company shall
register any securities pursuant to this Warrant, the parties agree as follows:
9.4.1 Selling Holder Information. Each Selling Holder
shall provide the Company with such information about such Selling Holder and
its intended manner of distributing the Registrable Securities, and shall
otherwise cooperate with the
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<PAGE> 9
Company and the underwriter(s) as may be needed or helpful in the reasonable
opinion of the Company to complete any obligation of the Company hereunder.
Failure to comply with this requirement shall excuse the Company from any
further obligation to a Selling Holder to include its shares in a Registration
Statement;
9.4.2 Consultation. The Company shall supply copies
of the Registration Statement and any amendments thereto to each Selling Holder
and to the Sellers' Underwriter at least three (3) business days prior to filing
such document with the SEC, and shall reasonably consult with such persons and
their counsel with respect to the form and content of such filing. The Company
will immediately amend such Registration Statement to include such reasonable
changes as the Selling Holders and the Sellers' Underwriter reasonably agree
should be included therein. Any Selling Holder requesting a change refused by
the Company may withdraw his or her shares from the Registration Statement;
9.4.3 Provision of Prospectuses. The Company shall
furnish to each Selling Holder and any Sellers' Underwriter such number of
copies of a summary prospectus or other prospectus (including any amendments and
supplements thereto and a preliminary prospectus in conformity with the
requirements of the Securities Act) and such other documents as such Selling
Holder may reasonably request in order to facilitate the public sale or other
disposition of such securities;
9.4.4 Blue Sky Compliance. The Company shall use its
best efforts to register or qualify the securities covered by such Registration
Statement under the securities or "blue sky" laws of such jurisdictions as any
Selling Holder shall reasonably request (provided, however, that the Company
shall not be required (i) to consent to, or take any action which would subject
it to, general service of process for all purposes or (ii) to qualify to do
business in any jurisdiction where it is not then subject or qualified) and do
any and all other acts or things which may be reasonably necessary or advisable
to enable the Selling Holders to consummate the public sale or other disposition
of such securities in such jurisdictions;
9.4.5 Amendments. The Company shall use its best
efforts to prepare and file promptly with the SEC such amendments and
supplements to the Registration Statement filed with the SEC in connection with
such registration, and the prospectus used in connection therewith, as may be
necessary to keep such Registration Statement continuously effective and in
compliance with the Securities Act for up to six (6) months or until all
Registrable Securities registered in that Registration Statement are sold,
whichever is earlier;
9.4.6 Prospectus Delivery. At any time when a sale or
other public disposition pursuant to a Registration Statement is subject to a
prospectus delivery requirement, the Company shall immediately notify each
Selling Holder and the Seller's Underwriter of the occurrence of any event as a
result of which the prospectus included in such Registration Statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to
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<PAGE> 10
make the statements therein not misleading in the light of the circumstances
then existing. Upon receipt of such a notice, each Selling Holder shall
immediately discontinue sales or other dispositions of Registrable Securities
pursuant to the Registration Statement. The Selling Holders may resume sales
only upon receipt of amended prospectuses or after such Holders have been
advised by the Company that the use of the previous prospectus may be legally
resumed;
9.4.7 Opinions. At the request of the Company, each
Selling Holder shall furnish on the date that the Registrable Securities are
delivered to the underwriter for sale in connection with a registration pursuant
to this Agreement an opinion of the counsel in form and substance as is
customarily given by counsel for the selling securityholders in an underwritten
public offering;
9.4.8 Stop-Orders. The Company agrees to immediately
notify each Selling Holder (i) of the issuance by the SEC of any stop order or
order suspending the effectiveness of any Registration Statement or the
initiation of any proceedings for that purpose, or (ii) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Registrable Securities for sale in any jurisdiction, or the initiation of
any proceedings for such purpose. The Company, with the reasonable cooperation
of the Selling Holders, shall make every reasonable effort to contest any such
proceedings and to obtain the withdrawal of any such order at the earliest
possible moment;
9.4.9 Review of Records. The Company shall make
available all financial and other records, pertinent corporate documents and
properties of the Company for inspection by any Seller's Underwriter and its
counsel and accountants, and shall cause the Company's officers, directors and
employees to supply all information reasonably requested by any such person in
connection with any Registration Statement filed or to be filed hereunder so
long as such person agrees to keep confidential any records, information or
documents designated by the Company in writing as confidential;
9.4.10 Earnings Statements. The Company shall make
earning statements satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 thereunder generally available to its security holders as soon
as reasonably practicable, but in no event later than 45 days, after the end of
any 12-month period commencing at the end of any fiscal quarter in which
Registrable Securities are sold; and
9.4.11 Compliance With Laws. In all actions taken
under this Agreement, the Company and each Selling Holder agree to use their
best efforts to comply with all provisions of the Securities Act, the Exchange
Act and any other law applicable to them.
9.5 Registration Not Required. The Company shall have no
obligation to any Holder under this Agreement with respect to whom the Company
has obtained an opinion of counsel, in form reasonably satisfactory to such
Holder, to the effect that the
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<PAGE> 11
Registrable Securities involved may be immediately sold to the public without
registration thereof, whether pursuant to Rule 144 under the Securities Act or
otherwise.
9.6 Delay of Registration. No Holder shall have any right
to take any action to restrain, enjoin or otherwise delay the filing or
effectiveness of any Registration Statement on the basis of any controversy
which might arise with respect to the interpretation or implementation of this
Agreement.
9.7 Indemnity.
9.7.1 The Company Indemnity. The Company agrees that
it will indemnify each Selling Holder and Sellers' Underwriter (and any of its
officers, directors and persons who control such Holder or underwriter within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) against all claims, losses, damages, liabilities and expenses (including
those relating to settlements approved by the Company, which consent shall not
be unreasonably withheld) resulting from any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement (or in any
other document incident to that registration) or from any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
the Company shall not be liable in any such case to any such indemnified person
to the extent that any such loss, claim, damage, liability or action (including
any legal or other expenses incurred) arises out of or is based upon an untrue
statement or allegedly untrue statement or omission or alleged omission made in
such Registration Statement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such indemnified person
or underwriter specifically for use in the preparation thereof; provided
further, however, that the foregoing indemnity agreement is subject to the
condition that, insofar as it relates to any untrue statement, allegedly untrue
statement, omission or alleged omission made in any prospectus but eliminated or
remedied in a subsequent prospectus, such indemnity agreement shall not inure to
the benefit of any indemnified person from whom the person asserting any loss,
claim, damage, liability or expense purchased the shares which are the subject
thereof, if a copy of such subsequent prospectus had been made available to such
indemnified person and such subsequent prospectus was not delivered to such
person with or prior to the written confirmation of the sale of such Registrable
Securities to such person.
9.7.2 The Holder's Indemnity. Each Selling Holder
will indemnify the Company, any underwriter, and any other person selling under
the applicable Registration Statement (and any of the officers and directors and
persons who control any of the foregoing within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) against all claims, losses,
damages, liabilities and expenses (including those relating to settlements
approved by the Selling Holder, which consent shall not be unreasonably
withheld) resulting from any untrue statement or alleged untrue statement of a
material fact contained in any registration statement (or in any other document
incident to that registration) or from any omission or alleged omission to state
a material fact required to be stated or necessary to make the
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<PAGE> 12
information therein not misleading, but only to the extent based upon or arising
from any information furnished in writing to the Company by that Selling Holder
expressly for inclusion in that Registration Statement (or such other document
incidental to that registration); provided, however, that the maximum amount of
liability in respect of such indemnification shall be limited, in the case of
each Selling Holder, to an amount equal to the net proceeds actually received by
such Selling Holder from the sale of Registrable Securities effected pursuant to
such registration.
9.7.3 Notice. Promptly after receipt by an
indemnified party of notice of the commencement of any action involving a claim
referred to in Section 9.7.1 or 9.7.2, such indemnified party will, if a claim
in respect thereof is made against an indemnified party, give written notice to
the indemnifying party of the commencement of such action; provided, however,
that the indemnified party's failure to give such notice shall not release,
relieve or in any, way affect the indemnifying party's obligation hereunder to
indemnify the indemnified party unless and to the extent that the rights of the
indemnifying party are prejudiced thereby. In case any such action is brought
against an indemnified party, the indemnifying party will be entitled to
participate in and to assume the defense thereof, jointly with any other
indemnifying party similarly notified to the extent that it may wish, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party shall not be responsible for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof; provided, however, that if any indemnified
party shall have reasonably concluded (based on the written advice of counsel)
that there may be one or more legal or equitable defenses available to such
indemnified party which are additional to or conflict with those available to
the indemnifying party, or that such claim or litigation involves or could have
an effect upon matters beyond the scope of the indemnity agreement provided in
this Section 9, the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party and such indemnifying
party shall reimburse such indemnified party and any person controlling such
indemnified party for that portion of the fees and expenses of any counsel
retained by the indemnified party which is reasonably related to the matters
covered by the indemnity agreement provided in this Section 9.
9.7.4 If the indemnification provided for in this
Section 9 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, claim, damage, liability or action
referred to herein (other than as a result of the applicability of the two
provisos in Section 9.7.1)), then the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall contribute to the amounts
paid or payable by such indemnified party as a result of such loss, claim,
damage, liability or action in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the statements or omissions which resulted
in such loss, claim, damage, liability or action as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a
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material fact or the omission or alleged omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties, relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
9.7.5 Underwriting Agreement. As a condition of
inclusion of any securities in any Registration Statement, at the request of the
Company, each Selling Holder shall enter into an underwriting agreement with the
Company and the underwriter(s) with respect to the registration of any of their
respective Registrable Securities hereunder in such form as may be reasonably
agreed upon by the Company and such underwriter(s), so long as such form is
consistent with those then currently in use by major underwriters and with the
provisions of this Agreement.
9.8 Expenses of Registration. The Company shall bear all
expenses (other than the Selling Holders' pro rata share of any brokerage or
underwriting fees, expenses or commissions) incurred in connection with any
Registration Statement, including, without limitation, all registration and
filing fees (including all expenses incident to filing with the National
Association of Securities Dealers, Inc.), fees and expenses of complying with
securities and blue sky laws, printing expenses and fees and disbursements of
the independent certified public accountants and of the Company's counsel. Each
Selling Holder shall bear its pro rata share of any brokerage or underwriting
fees, expenses or commissions and the cost of any lawyers, accountants, experts
and other consultants retained by it.
9.9 Exception as to Timing. Notwithstanding any other
provision of this Agreement, the Company may postpone or suspend for a
reasonable period of time (not to exceed 180 days) the filing or effectiveness
of any Registration Statement demanded under Section 9.2 if (a) the Company is
conducting or is about to conduct a primary offering of securities of the
Company and is advised by its investment banker that such offering would be
materially adversely affected by such demanded registration or (b) the board of
directors of the Company shall in good faith determine that such demand
registration would materially adversely affect any financing, merger, sale of
assets, recapitalization or other material transaction involving the Company,
which, in each case, is either pending or under active and continuing
negotiation. If any demanded registration is so postponed, then, as between the
Company and the Selling Holders, it shall be deemed withdrawn, unless a majority
in interest of Holders elect in writing not to withdraw such registration
demand. A registration demand that is deemed to have been withdrawn by operation
of the preceding sentence shall not count as a demanded registration for
purposes of Section 9.2.1. Furthermore, the length of the Registration Period
(as defined in Section 9.1.4) shall be increased by the length of any
postponement taken by the Company hereunder.
9.10 Exchange Act Reports. With a view to making available
to the Holders the benefits of Rule 144 under the Securities Act and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
securities of the Company to the public without registration under the
Securities Act, the Company agrees
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to (i) make and keep public information available, as those terms are understood
and defined in Rule 144, (ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act, and (iii)
furnish to any Holder, so long as the Holder holds any Registrable Securities,
forthwith upon request (a) a written statement by the Company that it has
complied with the reporting requirements of Rule 144, the Securities Act and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested in availing any Holder of
any rule or regulation of the SEC which permits the selling of any such
securities without registration under the Securities Act.
9.11 Termination. The Holders shall have no further rights
under Sections 9.2 and 9.3 at any time after such time as no further Registrable
Securities remain outstanding.
10. Warrant Transferable. This Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the holder hereof, by
written notice to the Company at the address referred to in Article 1 by the
holder hereof in person or by duly authorized attorney; provided that (i) a
written opinion of counsel for the holder reasonably satisfactory to the Company
has been obtained stating that such transfer will not violate the registration
requirements of the Securities Act or any applicable state securities laws, and
(ii) the transferee has delivered to the Company a written agreement to be bound
by the terms and conditions hereof. Each holder of this Warrant, by taking the
same, agrees that after such notice, the holder hereof may be treated by the
Company and all other persons dealing with this Warrant as the absolute owner
hereof for any purpose and as the person entitled to exercise the rights
represented by this Warrant, or to further assign this Warrant, any notice to
the contrary notwithstanding; but until receipt of any such notice of
assignment, the Company may treat the holder hereof as shown on its records as
the owner for all purposes.
11. Rights and Obligations Survive Exercise of Warrant. The rights
and obligations of the Company, of the holder of this Warrant, and of the holder
of Shares issued upon exercise of this Warrant, contained in Articles 9 and 10
will survive the exercise of this Warrant.
12. Descriptive Headings and Governing Law. The descriptive
headings of the several Articles and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant is
being delivered and is intended
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to be performed in the State of California and will be construed and enforced in
accordance with, and the rights of the parties will be governed by, the law of
such State.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by its duly authorized officers, as of March 19, 1997.
INTERNATIONAL REMOTE IMAGING
SYSTEMS, INC., a Delaware corporation
By: /s/ Martin S. McDermut
--------------------------
Martin S. McDermut
Its: Vice President and Chief Financial
Officer
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Exhibit 10.10(k)
MEMORANDUM OF SECURITY INTEREST IN PATENTS
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware Corporation,
whose address is 9162 Eton Avenue, Chatsworth, California 91311 ("Debtor"), does
hereby grant to CITY NATIONAL BANK, a national banking association, whose
address is 400 N. Roxbury Drive, Suite 500, Beverly Hills, California 90210,
("Secured Party"), pursuant to an Amended and Restated Promissory Note and
Supplemental Terms Letter, Change in Terms Agreement and Supplemental Terms
Letter and Security Agreement and any and all loan documents between the parties
hereto, (hereinafter collectively referred to as "Loan Documents"), a security
interest in and to all of Debtor's right, title and interest in all patents and
rights and interests of every kind or nature in patents and inventions
protectable by patent, whether now owned or hereafter created or acquired and
all renewals and extensions thereof, including without limitation in and to (i)
the patents which are identified on Schedule I attached hereto and herein
incorporated by this reference, (ii) the applications for patents which are
identified on Schedule II attached hereto and herein incorporated by this
reference, together with any and all patents issued with respect thereto, (iii)
all inventions owned by Debtor based upon, incorporated in, derived from,
incorporating or relating to the items identified on said schedules, together
with any and all counterpart patents in the United States and any and all
improvement patents reissues, reexaminations, continuations,
continuations-in-part and divisions respecting such inventions (collectively,
the "Patents"), and (iv) all actions for past, present and future infringement
concerning the foregoing.
Debtor agrees that if any person, firm or corporation shall do or
perform any acts which Secured Party believes to constitute an infringement of
any Patent, or violate or infringe any rights of Debtor in any Patent, or if any
person, firm or corporation shall do or perform any acts which Secured Party
believes to constitute an unauthorized or unlawful manufacture, sale or use of
any invention protected by any Patent, then and in any such event, upon, and
during the continuance of, an Event of Default (as defined in the Loan
Documents) Secured Party may and shall have the right to take such steps and
institute such suits or proceedings as Secured Party may deem advisable or
necessary to prevent such acts and conduct and to secure damages and other
relief by reason thereof, and generally to take such steps as may be advisable
or necessary or proper for the full protection of the rights of the parties.
Secured Party may take such steps or institute such suits or proceedings in its
own name or in the name of Debtor or in the names of the parties jointly.
The terms and conditions of the security interest granted hereby are
contained in the Loan Documents, between Debtor and Secured Party. The security
interest granted hereby is as security for Debtor's performance of Debtor's
obligations identified in the Loan Documents as being secured thereby. Nothing
contained in this Memorandum of Security Interest in Patents shall be construed
as (i) limiting any interest which Secured
<PAGE> 2
Party may have in any other collateral described in the Loan Documents or
otherwise or (ii) a present assignment of patents, patent applications or any of
the other aforementioned property rights listed.
Upon and during the occurrence of an Event of Default as defined in the
Loan Documents, Secured Party may exercise all rights and remedies described
therein, and Debtor hereby authorizes Secured Party to make, constitute and
appoint any officer or agent of Secured Party as Secured Party may select, in
its sole discretion, as Debtor's true and lawful attorney-in-fact, with power
(upon Secured Party's notice to Debtor of its intention to do so) to (a) enforce
its security against any of the Patents, (b) grant or issue any exclusive or
non-exclusive license under the Patents to anyone, or (c) assign, pledge, convey
or otherwise transfer title in or dispose of the Patents to anyone. Debtor
hereby ratifies all that such attorney shall lawfully do or cause to be done by
virtue hereof. Secured Party shall have, in addition to all other rights and
remedies given it by the terms of the Security Agreement and this Memorandum of
Security Interest in Patents, all rights and remedies allowed by law.
IN WITNESS WHEREOF the undersigned have duly executed hereunto this
Memorandum of Security Interest in Patents as of the 3rd day of January, 1997.
"Secured Party:" "Debtor:"
CITY NATIONAL BANK, INTERNATIONAL REMOTE
a national banking SYSTEMS, INC., a California
association corporation
By: /s/ Bruce Corey By: /s/ Martin S. McDermut
-------------------- --------------------------
Bruce Corey Martin S. McDermut
Its: Vice President Its: Vice President, Finance and
Administration and Chief Financial
Officer
-2-
<PAGE> 3
EXHIBIT 10.10(k)
MEMORANDUM OF SECURITY INTEREST IN PATENTS
PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC., a Delaware Corporation,
formerly known as PSII Acquisition Corp. whose address is 9162 Eton Avenue,
Chatsworth, California 91311 ("Debtor"), does hereby grant to CITY NATIONAL
BANK, a national banking association, whose address is 400 N. Roxbury Drive,
Suite 500, Beverly Hills, California 90210, ("Secured Party"), pursuant to an
Amended and Restated Promissory Note and Supplemental Terms Letter, Change in
Terms Agreement and Supplemental Terms Letter and Security Agreement and any and
all loan documents between the parties hereto, (hereinafter collectively
referred to as "Loan Documents"), a security interest in and to all of Debtor's
right, title and interest in all patents and rights and interests of every kind
or nature in patents and inventions protectable by patent, whether now owned or
hereafter created or acquired and all renewals and extensions thereof, including
without limitation in and to (i) the patents which are identified on Schedule I
attached hereto and herein incorporated by this reference, (ii) the applications
for patents which are identified on Schedule II attached hereto and herein
incorporated by this reference, together with any and all patents issued with
respect thereto, (iii) all inventions owned by Debtor based upon, incorporated
in, derived from, incorporating or relating to the items identified on said
schedules, together with any and all counterpart patents in the United States
and any and all improvement patents reissues, reexaminations, continuations,
continuations-in-part and divisions respecting such inventions (collectively,
the "Patents"), and (iv) all actions for past, present and future infringement
concerning the foregoing.
Debtor agrees that if any person, firm or corporation shall do or
perform any acts which Secured Party believes to constitute an infringement of
any Patent, or violate or infringe any rights of Debtor in any Patent, or if any
person, firm or corporation shall do or perform any acts which Secured Party
believes to constitute an unauthorized or unlawful manufacture, sale or use of
any invention protected by any Patent, then and in any such event, upon, and
during the continuance of, an Event of Default (as defined in the Loan
Documents) Secured Party may and shall have the right to take such steps and
institute such suits or proceedings as Secured Party may deem advisable or
necessary to prevent such acts and conduct and to secure damages and other
relief by reason thereof, and generally to take such steps as may be advisable
or necessary or proper for the full protection of the rights of the parties.
Secured Party may take such steps or institute such suits or proceedings in its
own name or in the name of Debtor or in the names of the parties jointly.
The terms and conditions of the security interest granted hereby are
contained in the Loan Documents, between Debtor and Secured Party. The security
interest granted hereby is as security for Debtor's performance of Debtor's
obligations identified in the Loan Documents as being secured thereby. Nothing
contained in this Memorandum of Security Interest in Patents shall be construed
as (i) limiting any interest which Secured
<PAGE> 4
Party may have in any other collateral described in the Loan Documents or
otherwise or (ii) a present assignment of patents, patent applications or any of
the other aforementioned property rights listed.
Upon and during the occurrence of an Event of Default as defined in the
Loan Documents, Secured Party may exercise all rights and remedies described
therein, and Debtor hereby authorizes Secured Party to make, constitute and
appoint any officer or agent of Secured Party as Secured Party may select, in
its sole discretion, as Debtor's true and lawful attorney-in-fact, with power
(upon Secured Party's notice to Debtor of its intention to do so) to (a) enforce
its security against any of the Patents, (b) grant or issue any exclusive or
non-exclusive license under the Patents to anyone, or (c) assign, pledge, convey
or otherwise transfer title in or dispose of the Patents to anyone. Debtor
hereby ratifies all that such attorney shall lawfully do or cause to be done by
virtue hereof. Secured Party shall have, in addition to all other rights and
remedies given it by the terms of the Security Agreement and this Memorandum of
Security Interest in Patents, all rights and remedies allowed by law.
IN WITNESS WHEREOF the undersigned have duly executed hereunto this
Memorandum of Security Interest in Patents as of the 3rd day of January, 1997.
"Secured Party:" "Debtor:"
CITY NATIONAL BANK, a national PERCEPTIVE SCIENTIFIC
banking association INSTRUMENTS, INC., a
Delaware Corporation
By: /s/ Bruce Corey By: /s/ Martin S. McDermut
------------------------ ----------------------------
Bruce Corey Martin S. McDermut
Its: Vice President Its: Vice President and Chief Financial
Officer
-2-
<PAGE> 5
Exhibit 10.10(k)
MEMORANDUM OF SECURITY INTEREST IN PATENTS
STATSPIN, INC., a Massachusetts Corporation, formerly known as Statspin
Technologies and Norfolk Scientific, Inc. whose address is 9162 Eton Avenue,
Chatsworth, California 91311 ("Debtor"), does hereby grant to CITY NATIONAL
BANK, a national banking association, whose address is 400 N. Roxbury Drive,
Suite 500, Beverly Hills, California 90210, ("Secured Party"), pursuant to an
Amended and Restated Promissory Note and Supplemental Terms Letter, Change in
Terms Agreement and Supplemental Terms Letter and Security Agreement and any and
all loan documents between the parties hereto, (hereinafter collectively
referred to as "Loan Documents"), a security interest in and to all of Debtor's
right, title and interest in all patents and rights and interests of every kind
or nature in patents and inventions protectable by patent, whether now owned or
hereafter created or acquired and all renewals and extensions thereof, including
without limitation in and to (i) the patents which are identified on Schedule I
attached hereto and herein incorporated by this reference, (ii) the applications
for patents which are identified on Schedule II attached hereto and herein
incorporated by this reference, together with any and all patents issued with
respect thereto, (iii) all inventions owned by Debtor based upon, incorporated
in, derived from, incorporating or relating to the items identified on said
schedules, together with any and all counterpart patents in the United States
and any and all improvement patents reissues, reexaminations, continuations,
continuations-in-part and divisions respecting such inventions (collectively,
the "Patents"), and (iv) all actions for past, present and future infringement
concerning the foregoing.
Debtor agrees that if any person, firm or corporation shall do or
perform any acts which Secured Party believes to constitute an infringement of
any Patent, or violate or infringe any rights of Debtor in any Patent, or if any
person, firm or corporation shall do or perform any acts which Secured Party
believes to constitute an unauthorized or unlawful manufacture, sale or use of
any invention protected by any Patent, then and in any such event, upon, and
during the continuance of, an Event of Default (as defined in the Loan
Documents) Secured Party may and shall have the right to take such steps and
institute such suits or proceedings as Secured Party may deem advisable or
necessary to prevent such acts and conduct and to secure damages and other
relief by reason thereof, and generally to take such steps as may be advisable
or necessary or proper for the full protection of the rights of the parties.
Secured Party may take such steps or institute such suits or proceedings in its
own name or in the name of Debtor or in the names of the parties jointly.
The terms and conditions of the security interest granted hereby are
contained in the Loan Documents, between Debtor and Secured Party. The security
interest granted hereby is as security for Debtor's performance of Debtor's
obligations identified in the Loan Documents as being secured thereby. Nothing
contained in this Memorandum of Security Interest in Patents shall be construed
as (i) limiting any interest which Secured
<PAGE> 6
Party may have in any other collateral described in the Loan Documents or
otherwise or (ii) a present assignment of patents, patent applications or any of
the other aforementioned property rights listed.
Upon and during the occurrence of an Event of Default as defined in the
Loan Documents, Secured Party may exercise all rights and remedies described
therein, and Debtor hereby authorizes Secured Party to make, constitute and
appoint any officer or agent of Secured Party as Secured Party may select, in
its sole discretion, as Debtor's true and lawful attorney-in-fact, with power
(upon Secured Party's notice to Debtor of its intention to do so) to (a) enforce
its security against any of the Patents, (b) grant or issue any exclusive or
non-exclusive license under the Patents to anyone, or (c) assign, pledge, convey
or otherwise transfer title in or dispose of the Patents to anyone. Debtor
hereby ratifies all that such attorney shall lawfully do or cause to be done by
virtue hereof. Secured Party shall have, in addition to all other rights and
remedies given it by the terms of the Security Agreement and this Memorandum of
Security Interest in Patents, all rights and remedies allowed by law.
IN WITNESS WHEREOF the undersigned have duly executed hereunto this
Memorandum of Security Interest in Patents as of the 3rd day of January, 1997.
"Secured Party:" "Debtor:"
CITY NATIONAL BANK, STATSPIN, INC.,
a national banking association a Massachusetts Corporation
By: /s/ Bruce Corey By: /s/ Martin S. McDermut
------------------------ -----------------------------
Bruce Corey Martin S. McDermut
Its: Vice President Its: Vice President and Chief Financial
Officer
-2-
<PAGE> 7
Exhibit 10.10(k)
[GRAPHIC OMITTED](R) CITY NATIONAL SECURITY AGREEMENT
BANK STOCK/BOND COLLATERAL
In consideration of the covenants and agreements contained
herein, and financial accommodations given, to be given or continued, the
undersigned Debtor hereby, pursuant to the California Uniform Commercial Code
("Code"), grants to CITY NATIONAL BANK, a national banking association ("CNB"),
as secured party, a security interest in all of the Collateral described in the
Collateral Description below. The security interest created by this Agreement
attaches immediately upon execution hereof, or as soon as Debtor acquires rights
to the Collateral, and secures payment of any and all of (a) Debtor's
indebtedness (including all debts, obligations, or liabilities now or hereafter
existing, absolute or contingent, direct or indirect, matured or unmatured and
including undisbursed future advances) to CNB; (b) amounts due CNB for its
performance of Debtor's obligations under this Agreement; and (c) amounts due
CNB in its enforcement of its rights and remedies under this Agreement
(collectively, the "Indebtedness").
DEBTOR(S)
a. PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC., a Delaware
Corporation; formerly known as PSII Acquisition Corp. Name
b. 9162 Eton Avenue, Chatsworth, California 91311
Mailing Address
SECURED PARTY--CITY NATIONAL BANK (Transit and A.B.A. No.: 16-1606/1220)
Mailing Address: City National Bank
400 North Roxbury Drive, Fifth Floor
Beverly Hills, California 90210
COLLATERAL DESCRIPTION: Securities delivered to CNB, consisting of the
following:(i) 250 `A' shares of ordinary stock of Perceptive Scientific
International Limited, a United Kingdom company, (ii) 750 `B' shares of ordinary
stock of Perceptive Scientific International Limited, (iii) 399,000 Preference
shares of Perceptive Scientific International Limited, (all of the foregoing
shares of stock collectively, the "Stock").
I. WARRANTIES AND REPRESENTATIONS. Debtor warrants and represents:
1. DEBTOR'S TITLE. Debtor owns directly, or indirectly through a
wholly-owned subsidiary, all Collateral; all Collateral is genuine;
and, except as CNB has expressly consented to in writing, no other
person, entity, agency or government has or purports to have any right,
title, lien, encumbrance, claim or interest in any Collateral and there
is no financing statement on file anywhere covering or affecting the
Collateral.
2. DEBTOR'S AUTHORITY. Debtor has authority to enter into this Agreement.
3. VALIDITY AND ENFORCEABILITY. All Collateral is bona fide, enforceable
according to its terms and free from all defenses, claims, defaults,
prepayments, setoffs and conditions precedent. All persons obligated on
Collateral have authority and capacity to contract. All Collateral
complies with all applicable laws concerning form, content, manner of
preparation and execution.
<PAGE> 8
4. INFORMATION. Any and all information related to the Collateral now or
hereafter supplied to CNB by Debtor or at Debtor's request or
instruction is complete, true and correct.
II. COVENANTS AND AGREEMENTS. Debtor covenants and agrees:
1. GENERAL POWERS OVER COLLATERAL. Debtor shall retain all voting rights
and other corporate powers relating to the Stock unless and until (i)
an Event of Default occurs and (ii) CNB declares all Indebtedness
immediately due and payable. Thereafter, Debtor is authorized CNB to
transfer the Collateral to its own or nominee's name, and to perform
any and all acts which CNB believes in good faith to be necessary or
desirable to protect or preserve the Collateral, its value or CNB's
security interest therein. These acts include, but are not limited to,
voting, exercising options, warrants or conversion rights, tendering
Collateral, entering into extension, reorganization, deposit, merger or
consolidation agreements, compromising disputes and repledging the
Collateral.
2. NOTICE OF CHANGES IN INFORMATION, NAME, STRUCTURE OR LITIGATION. Debtor
shall immediately notify CNB of (a) any adverse changes in Debtor's
financial condition or operations or in any financial or other
information provided to CNB; (b) any change in Debtor's residence,
chief executive office, mailing address, name, trade name, and, if
Debtor is an organization, its identity or corporate structure; (c) any
new openings of places of business by Debtor; (d) any material
litigation pending or threatened against Debtor or affecting the
Collateral or having a material adverse effect upon Debtor's business
or financial condition or its properties; and (e) any unpaid taxes of
Debtor which are more than fifteen (15) days delinquent.
3. REPORTS; VERIFICATION; INSPECTION. Debtor shall provide CNB with such
reports, accountings, documents and information as may be reasonably
requested by CNB from time to time concerning the Collateral. Debtor
shall mark its books and records as requested by CNB to show CNB's
security interest in the Collateral therein. Debtor shall permit CNB,
when requested, to inspect Debtor's locations and the Collateral and to
inspect, examine, audit and copy any of Debtor's books, records,
statements, correspondence and other data relating to Debtor's business
and the Collateral. Debtor shall assemble and make such Collateral and
data available to CNB as requested by CNB.
4. DEFENSE OF TITLE. Debtor shall (a) appear in and defend any actions or
proceedings purporting to affect CNB's security interest in or Debtor's
or CNB's rights, powers or title to any Collateral; (b) take such
actions which CNB deems reasonably necessary to keep the Collateral
free and clear from all liens, encumbrances, claims, rights,
counterclaims or defenses of others; and (c) pay such costs, expenses
and attorneys' fees related to such actions.
5. MAINTAIN WARRANTIES. Debtor shall maintain all of the Warranties and
Representations stated above on an ongoing basis for all Collateral
which Debtor hereafter acquires or creates until all of the
Indebtedness, and any rights of Debtor to future advances from CNB, are
fully discharged.
6. DIVIDENDS, INTEREST, AND DISTRIBUTIONS. Debtor assigns and agrees to
deliver to CNB promptly upon receipt all increases, profits, proceeds,
interest, dividends, distributions, stock splits, substitutions and
replacements with respect to the Collateral, as well as any securities
or other rights into which the Collateral may be converted or for which
the Collateral may be tendered or exercised, all of which shall be held
by CNB as additional Collateral hereunder. Pending Debtor's delivery of
any such additional Collateral to CNB, Debtor shall not commingle such
additional Collateral with any of Debtor's other funds or property, but
shall hold it separate and apart expressly in trust for CNB.
Notwithstanding the foregoing, during any time when no Event of Default
has occurred and is continuing, Debtor shall be entitled to receive and
retain cash dividends (other than liquidating or other capital
distributions), interest payments and like cash payments and
distributions with respect to the Collateral which do not represent a
payment or return of capital.
7. TAXES, ASSESSMENTS, CHARGES, LIENS. Debtor shall pay and discharge when
due all taxes, assessments, charges, liens and encumbrances now or
hereafter affecting the Collateral.
8. ADDITIONAL DOCUMENTS. Debtor shall execute, acknowledge and deliver to
CNB any additional documents, assignments, or agreements that CNB, from
time to time, deems necessary or advisable respecting the Collateral.
2
<PAGE> 9
9. GENERAL BUSINESS OPERATION. Debtor shall keep accurate and complete
records regarding its business and the Collateral. Debtor shall conduct
its business without voluntary interruption, except in the event of an
emergency, and shall maintain all privileges, franchises, licenses and
permits required to conduct its business.
10. POWER OF ATTORNEY. In order to preserve and protect CNB's rights under
this Agreement and in the Collateral, Debtor appoints CNB as its true
and lawful attorney in fact, with full power of substitution, to
perform any and all acts which Debtor is obligated to do or CNB is
entitled to do under this Agreement. This power of attorney includes,
but is not limited to, the right to collect the proceeds and profits of
Collateral as Debtor might collect; release Collateral; receive, open
and dispose of all mail addressed to Debtor; notify the Post Office to
change the address for delivery of mail addressed to Debtor to such
address as CNB shall designate; and endorse Debtor's name on all
checks, drafts and other items remitted for payment with respect to the
Collateral. Nothing herein shall obligate CNB to exercise any of the
rights granted by this power of attorney. Debtor shall immediately
reimburse CNB for any and all costs, attorneys' fees or expenses made
or incurred by CNB (including attorneys' fees allocable to CNB's
in-house counsel) while acting under this power of attorney.
11. REIMBURSEMENT. Debtor shall reimburse and pay CNB upon demand any and
all expenses, costs and attorneys' fees incurred by CNB, or allocable
to CNB's in-house counsel, whether or not a lawsuit is filed, in the
enforcement or exercise of any of CNB's rights, powers or remedies or
performance of any of Debtor's obligations under this Agreement or the
protection, preservation or disposition of the Collateral, with
interest from the date of expenditure or when the fee became allocable
at the rate set forth in the Indebtedness (and if this Agreement
secures more than one Indebtedness, at the highest of the interest
rates), or if the Indebtedness does not specify a rate of interest, at
a rate of interest equal to CNB's Prime Rate, as it may exist from time
to time, plus three percent (3.0%) per year, but in no event less than
ten percent (10.0%) per year.
12. DEBTOR'S WAIVERS. Debtor waives any rights to require CNB to proceed
against any other person, to exhaust the Collateral or any other
property securing the Indebtedness or to pursue any other remedies
available to CNB.
13. PURCHASE MONEY. If proceeds of any loan from CNB to Debtor are to
enable Debtor to acquire rights in or the use of Collateral, Debtor
shall use the loan proceeds for such purpose, and deliver the
Collateral to CNB when requested by CNB.
III. EVENTS OF DEFAULT. Debtor agrees that the occurrence of any of the
following shall constitute an "Event of Default" under this Agreement:
1. Debtor's failure to pay when due any principal, interest or other
amount due under any of the Indebtedness.
2. Debtor's failure to perform or observe any of the terms, provisions,
covenants, agreements or obligations contained in this Agreement,
including but not limited to Section 7 of Article II, above,
notwithstanding any subsequent satisfaction of that Section caused by
an increase in the value of the Collateral.
3. Any Warranty or Representation made in this Agreement is false or
misleading.
4. There shall occur an Event of Default under any promissory note,
instrument or agreement evidencing any of the Indebtedness or executed
in connection with any of the Indebtedness.
IV. REMEDIES. Upon the occurrence of an Event of Default, in addition to
any other rights or remedies provided or allowed by law, Debtor understands and
agrees that CNB may, at its sole option, and without notice to Debtor, take one
or more of the following actions:
1. ACCELERATION OF MATURITY. Declare all of Debtor's Indebtedness
immediately due and payable.
2. PERFORMANCE OF DEBTOR'S OBLIGATIONS BY CNB. Perform any of Debtor's
obligations under this Agreement.
3
<PAGE> 10
3. POSSESSION AND PROTECTION. Take possession of that Collateral not
already in CNB's possession; require Debtor or other persons in
possession or control of Collateral to assemble it and make it
available to CNB at such places as designated by CNB which are
reasonably convenient to Debtor and CNB; enter upon such properties
where the Collateral might be located; and take such actions as CNB
deems necessary or appropriate to protect its interest in the
Collateral.
4. EXPENSES. Incur any expenses which CNB deems necessary in exercising
any rights, remedies or powers under this Agreement or applicable law,
including reasonable attorneys' fees and legal costs and expenses,
whether or not a lawsuit is filed.
5. ADDITIONAL COLLATERAL. Demand that Debtor provide enough additional
Collateral to satisfy CNB.
6. SETOFF. Exercise all rights of setoff to the same effect and in the
same manner as if no Collateral had been given.
7. NOTICE. Notify other interested persons or entities of the default,
acceleration and other actions by CNB.
8. SUIT, RETENTION OR DISPOSITION OF COLLATERAL. Sue the Debtor or any
other person or entity liable for the Indebtedness; retain the
Collateral in satisfaction of the Indebtedness and pay Debtor in cash
for the fair value in excess of the debt; dispose of the Collateral and
apply the proceeds of disposition to the Indebtedness and the costs,
expenses and attorneys' fees which CNB has incurred pursuant to this
Agreement (including attorneys' fees allocable to CNB's in-house
counsel) in such order and manner as CNB desires.
V. RULES TO CONSTRUE AGREEMENT. Debtor understands and agrees that:
1. DEFINITIONS. All terms used to describe the Collateral which are
defined in the Code, shall have the respective meanings as such terms
are so defined.
2. TIME OF ESSENCE. Time is of the essence of this Agreement.
3. WAIVER. CNB's acceptance of partial or delinquent payments or failure
of CNB to exercise any right or remedy shall not be a waiver of any
obligation of Debtor or right of CNB nor constitute a modification of
this Agreement, nor constitute a waiver of any other similar default
subsequently occurring.
4. COMPLETE AGREEMENT. This Agreement, together with any exhibits, is
intended by CNB and Debtor as a final expression of their agreement and
is intended as a complete statement of the terms and conditions of
their agreement.
5. ASSIGNMENTS, ETC. The provisions of this Agreement are hereby made
applicable to and shall inure to the benefit of CNB's successors and
assigns and bind Debtor's heirs, legatees, devisees, administrators,
executors, successors and assigns.
6. LAW GOVERNING. This Agreement shall be construed and governed by the
laws of the State of California.
7. MULTIPLE DEBTORS. When more than one Debtor signs this Agreement all
agree that:
a. Construction - whenever the word "Debtor" appears in this
Agreement, it shall mean "each Debtor."
b. Breach - breach of any Covenant or Warranty by any Debtor may,
at CNB's option, be treated as a breach by all Debtors.
c. Liability - the liability of each Debtor is joint and several
and the discharge of any Debtor, for any reason other than
full payment, or any extension, forbearance, change of rate of
interest, or acceptance,
4
<PAGE> 11
release or substitution of security or any impairment or
suspension of CNB's remedies or rights against one Debtor,
shall not affect the liability of any other Debtor.
d. Waiver - all Debtors waive the right to require CNB to proceed
against one Debtor before any other or to pursue any other
remedy in CNB's power.
8. NOTICE. All notices to be provided under this Agreement shall be in
writing and delivered, if to Debtor, at the address of its Chief
Executive Office stated in this Agreement, and if to CNB, at its
address stated in this Agreement, or such other address as one party
shall give notice of to the other party as provided herein.
9. SEVERABILITY. If any provision of this Agreement shall be held to be
prohibited or unenforceable under applicable law, such provision shall
be ineffective only to the extent of such prohibition or
unenforceability, without invalidating the remainder of such provisions
or any remaining provisions of this Agreement.
10. HEADINGS. Section and subsection headings in this Agreement are
included for convenience of reference only and shall not be a part of
this Agreement for any purpose or be given any substantive effect.
11. AMENDMENT OR MODIFICATION. No provision or term of this Agreement may
be modified, amended or waived without the prior written consent of
CNB.
Dated: As of January 3, 1997
PERCEPTIVE SCIENTIFIC INSTRUMENTS, INC.
By: /s/ Martin S. McDermut
--------------------------------
Martin S. McDermut
Its: Vice President and Chief Financial Officer
By: ________________________________
(Signature and Title)
By: ________________________________
(Signature and Title)
5
<PAGE> 12
Exhibit 10.10(k)
[GRAPHIC OMITTED](R) CITY NATIONAL SECURITY AGREEMENT
BANK STOCK/BOND COLLATERAL
In consideration of the covenants and agreements contained
herein, and financial accommodations given, to be given or continued, the
undersigned Debtor hereby, pursuant to the California Uniform Commercial Code
("Code"), grants to CITY NATIONAL BANK, a national banking association ("CNB"),
as secured party, a security interest in all of the Collateral described in the
Collateral Description below. The security interest created by this Agreement
attaches immediately upon execution hereof, or as soon as Debtor acquires rights
to the Collateral, and secures payment of any and all of (a) Debtor's
indebtedness (including all debts, obligations, or liabilities now or hereafter
existing, absolute or contingent, direct or indirect, matured or unmatured and
including undisbursed future advances) to CNB; (b) amounts due CNB for its
performance of Debtor's obligations under this Agreement; and (c) amounts due
CNB in its enforcement of its rights and remedies under this Agreement
(collectively, the "Indebtedness").
DEBTOR(S)
a. INTERNATIONAL REMOTE IMAGING SYSTEMS, INC., a Delaware
Corporation Name
b. 9162 Eton Avenue, Chatsworth, California 91311
Mailing Address
SECURED PARTY--CITY NATIONAL BANK (Transit and A.B.A. No.: 16-1606/1220)
Mailing Address: City National Bank
400 North Roxbury Drive, Fifth Floor
Beverly Hills, California 90210
COLLATERAL DESCRIPTION: Securities delivered to CNB, consisting of the
following:(i) 1,000 shares of common stock of PSII Acquisition Corp., a Delaware
corporation currently known as Perceptive Scientific Instruments, Inc. and (ii)
100 shares of common stock of Statspin Acquisition Corporation, a Massachusetts
corporation currently known as Statspin, Inc. (all of the foregoing shares of
stock collectively, the "Stock").
I. WARRANTIES AND REPRESENTATIONS. Debtor warrants and represents:
I. DEBTOR'S TITLE. Debtor owns directly, or indirectly through a
wholly-owned subsidiary, all Collateral; all Collateral is genuine;
and, except as CNB has expressly consented to in writing, no other
person, entity, agency or government has or purports to have any right,
title, lien, encumbrance, claim or interest in any Collateral and there
is no financing statement on file anywhere covering or affecting the
Collateral.
II. DEBTOR'S AUTHORITY. Debtor has authority to enter into this Agreement.
III. VALIDITY AND ENFORCEABILITY. All Collateral is bona fide, enforceable
according to its terms and free from all defenses, claims, defaults,
prepayments, setoffs and conditions precedent. All persons obligated on
Collateral have authority and capacity to contract. All Collateral
complies with all applicable laws concerning form, content, manner of
preparation and execution.
<PAGE> 13
IV. INFORMATION. Any and all information related to the Collateral now or
hereafter supplied to CNB by Debtor or at Debtor's request or
instruction is complete, true and correct.
<PAGE> 14
II. COVENANTS AND AGREEMENTS. Debtor covenants and agrees:
1. GENERAL POWERS OVER COLLATERAL. Debtor shall retain all voting rights
and other corporate powers relating to the Stock unless and until (i)
an Event of Default occurs and (ii) CNB declares all Indebtedness
immediately due and payable. Thereafter, Debtor is authorized CNB to
transfer the Collateral to its own or nominee's name, and to perform
any and all acts which CNB believes in good faith to be necessary or
desirable to protect or preserve the Collateral, its value or CNB's
security interest therein. These acts include, but are not limited to,
voting, exercising options, warrants or conversion rights, tendering
Collateral, entering into extension, reorganization, deposit, merger or
consolidation agreements, compromising disputes and repledging the
Collateral.
2. NOTICE OF CHANGES IN INFORMATION, NAME, STRUCTURE OR LITIGATION. Debtor
shall immediately notify CNB of (a) any adverse changes in Debtor's
financial condition or operations or in any financial or other
information provided to CNB; (b) any change in Debtor's residence,
chief executive office, mailing address, name, trade name, and, if
Debtor is an organization, its identity or corporate structure; (c) any
new openings of places of business by Debtor; (d) any material
litigation pending or threatened against Debtor or affecting the
Collateral or having a material adverse effect upon Debtor's business
or financial condition or its properties; and (e) any unpaid taxes of
Debtor which are more than fifteen (15) days delinquent.
3. REPORTS; VERIFICATION; INSPECTION. Debtor shall provide CNB with such
reports, accountings, documents and information as may be reasonably
requested by CNB from time to time concerning the Collateral. Debtor
shall mark its books and records as requested by CNB to show CNB's
security interest in the Collateral therein. Debtor shall permit CNB,
when requested, to inspect Debtor's locations and the Collateral and to
inspect, examine, audit and copy any of Debtor's books, records,
statements, correspondence and other data relating to Debtor's business
and the Collateral. Debtor shall assemble and make such Collateral and
data available to CNB as requested by CNB.
4. DEFENSE OF TITLE. Debtor shall (a) appear in and defend any actions or
proceedings purporting to affect CNB's security interest in or Debtor's
or CNB's rights, powers or title to any Collateral; (b) take such
actions which CNB deems reasonably necessary to keep the Collateral
free and clear from all liens, encumbrances, claims, rights,
counterclaims or defenses of others; and (c) pay such costs, expenses
and attorneys' fees related to such actions.
5. MAINTAIN WARRANTIES. Debtor shall maintain all of the Warranties and
Representations stated above on an ongoing basis for all Collateral
which Debtor hereafter acquires or creates until all of the
Indebtedness, and any rights of Debtor to future advances from CNB, are
fully discharged.
6. DIVIDENDS, INTEREST, AND DISTRIBUTIONS. Debtor assigns and agrees to
deliver to CNB promptly upon receipt all increases, profits, proceeds,
interest, dividends, distributions, stock splits, substitutions and
replacements with respect to the Collateral, as well as any securities
or other rights into which the Collateral may be converted or for which
the Collateral may be tendered or exercised, all of which shall be held
by CNB as additional Collateral hereunder. Pending Debtor's delivery of
any such additional Collateral to CNB, Debtor shall not commingle such
additional Collateral with any of Debtor's other funds or property, but
shall hold it separate and apart expressly in trust for CNB.
Notwithstanding the foregoing, during any time when no Event of Default
has occurred and is continuing, Debtor shall be entitled to receive and
retain cash dividends (other than liquidating or other capital
distributions), interest payments and like cash payments and
distributions with respect to the Collateral which do not represent a
payment or return of capital.
7. TAXES, ASSESSMENTS, CHARGES, LIENS. Debtor shall pay and discharge when
due all taxes, assessments, charges, liens and encumbrances now or
hereafter affecting the Collateral.
8. ADDITIONAL DOCUMENTS. Debtor shall execute, acknowledge and deliver to
CNB any additional documents, assignments, or agreements that CNB, from
time to time, deems necessary or advisable respecting the Collateral.
3
<PAGE> 15
9. GENERAL BUSINESS OPERATION. Debtor shall keep accurate and complete
records regarding its business and the Collateral. Debtor shall conduct
its business without voluntary interruption, except in the event of an
emergency, and shall maintain all privileges, franchises, licenses and
permits required to conduct its business.
10. POWER OF ATTORNEY. In order to preserve and protect CNB's rights under
this Agreement and in the Collateral, Debtor appoints CNB as its true
and lawful attorney in fact, with full power of substitution, to
perform any and all acts which Debtor is obligated to do or CNB is
entitled to do under this Agreement. This power of attorney includes,
but is not limited to, the right to collect the proceeds and profits of
Collateral as Debtor might collect; release Collateral; receive, open
and dispose of all mail addressed to Debtor; notify the Post Office to
change the address for delivery of mail addressed to Debtor to such
address as CNB shall designate; and endorse Debtor's name on all
checks, drafts and other items remitted for payment with respect to the
Collateral. Nothing herein shall obligate CNB to exercise any of the
rights granted by this power of attorney. Debtor shall immediately
reimburse CNB for any and all costs, attorneys' fees or expenses made
or incurred by CNB (including attorneys' fees allocable to CNB's
in-house counsel) while acting under this power of attorney.
11. REIMBURSEMENT. Debtor shall reimburse and pay CNB upon demand any and
all expenses, costs and attorneys' fees incurred by CNB, or allocable
to CNB's in-house counsel, whether or not a lawsuit is filed, in the
enforcement or exercise of any of CNB's rights, powers or remedies or
performance of any of Debtor's obligations under this Agreement or the
protection, preservation or disposition of the Collateral, with
interest from the date of expenditure or when the fee became allocable
at the rate set forth in the Indebtedness (and if this Agreement
secures more than one Indebtedness, at the highest of the interest
rates), or if the Indebtedness does not specify a rate of interest, at
a rate of interest equal to CNB's Prime Rate, as it may exist from time
to time, plus three percent (3.0%) per year, but in no event less than
ten percent (10.0%) per year.
12. DEBTOR'S WAIVERS. Debtor waives any rights to require CNB to proceed
against any other person, to exhaust the Collateral or any other
property securing the Indebtedness or to pursue any other remedies
available to CNB.
13. PURCHASE MONEY. If proceeds of any loan from CNB to Debtor are to
enable Debtor to acquire rights in or the use of Collateral, Debtor
shall use the loan proceeds for such purpose, and deliver the
Collateral to CNB when requested by CNB.
4
<PAGE> 16
III. EVENTS OF DEFAULT. Debtor agrees that the occurrence of any of the
following shall constitute an "Event of Default" under this Agreement:
1. Debtor's failure to pay when due any principal, interest or other
amount due under any of the Indebtedness.
2. Debtor's failure to perform or observe any of the terms, provisions,
covenants, agreements or obligations contained in this Agreement,
including but not limited to Section 7 of Article II, above,
notwithstanding any subsequent satisfaction of that Section caused by
an increase in the value of the Collateral.
3. Any Warranty or Representation made in this Agreement is false or
misleading.
4. There shall occur an Event of Default under any promissory note,
instrument or agreement evidencing any of the Indebtedness or executed
in connection with any of the Indebtedness.
IV. REMEDIES. Upon the occurrence of an Event of Default, in addition to
any other rights or remedies provided or allowed by law, Debtor understands and
agrees that CNB may, at its sole option, and without notice to Debtor, take one
or more of the following actions:
1. ACCELERATION OF MATURITY. Declare all of Debtor's Indebtedness
immediately due and payable.
2. PERFORMANCE OF DEBTOR'S OBLIGATIONS BY CNB. Perform any of Debtor's
obligations under this Agreement.
3. POSSESSION AND PROTECTION. Take possession of that Collateral not
already in CNB's possession; require Debtor or other persons in
possession or control of Collateral to assemble it and make it
available to CNB at such places as designated by CNB which are
reasonably convenient to Debtor and CNB; enter upon such properties
where the Collateral might be located; and take such actions as CNB
deems necessary or appropriate to protect its interest in the
Collateral.
4. EXPENSES. Incur any expenses which CNB deems necessary in exercising
any rights, remedies or powers under this Agreement or applicable law,
including reasonable attorneys' fees and legal costs and expenses,
whether or not a lawsuit is filed.
5. ADDITIONAL COLLATERAL. Demand that Debtor provide enough additional
Collateral to satisfy CNB.
6. SETOFF. Exercise all rights of setoff to the same effect and in the
same manner as if no Collateral had been given.
7. NOTICE. Notify other interested persons or entities of the default,
acceleration and other actions by CNB.
8. SUIT, RETENTION OR DISPOSITION OF COLLATERAL. Sue the Debtor or any
other person or entity liable for the Indebtedness; retain the
Collateral in satisfaction of the Indebtedness and pay Debtor in cash
for the fair value in excess of the debt; dispose of the Collateral and
apply the proceeds of disposition to the Indebtedness and the costs,
expenses and attorneys' fees which CNB has incurred pursuant to this
Agreement (including attorneys' fees allocable to CNB's in-house
counsel) in such order and manner as CNB desires.
V. RULES TO CONSTRUE AGREEMENT. Debtor understands and agrees that:
1. DEFINITIONS. All terms used to describe the Collateral which are
defined in the Code, shall have the respective meanings as such terms
are so defined.
2. TIME OF ESSENCE. Time is of the essence of this Agreement.
5
<PAGE> 17
3. WAIVER. CNB's acceptance of partial or delinquent payments or failure
of CNB to exercise any right or remedy shall not be a waiver of any
obligation of Debtor or right of CNB nor constitute a modification of
this Agreement, nor constitute a waiver of any other similar default
subsequently occurring.
4. COMPLETE AGREEMENT. This Agreement, together with any exhibits, is
intended by CNB and Debtor as a final expression of their agreement and
is intended as a complete statement of the terms and conditions of
their agreement.
5. ASSIGNMENTS, ETC. The provisions of this Agreement are hereby made
applicable to and shall inure to the benefit of CNB's successors and
assigns and bind Debtor's heirs, legatees, devisees, administrators,
executors, successors and assigns.
6. LAW GOVERNING. This Agreement shall be construed and governed by the
laws of the State of California.
7. MULTIPLE DEBTORS. When more than one Debtor signs this Agreement all
agree that:
a. Construction - whenever the word "Debtor" appears in this
Agreement, it shall mean "each Debtor."
b. Breach - breach of any Covenant or Warranty by any Debtor may,
at CNB's option, be treated as a breach by all Debtors.
c. Liability - the liability of each Debtor is joint and several
and the discharge of any Debtor, for any reason other than
full payment, or any extension, forbearance, change of rate of
interest, or acceptance, release or substitution of security
or any impairment or suspension of CNB's remedies or rights
against one Debtor, shall not affect the liability of any
other Debtor.
d. Waiver - all Debtors waive the right to require CNB to proceed
against one Debtor before any other or to pursue any other
remedy in CNB's power.
8. NOTICE. All notices to be provided under this Agreement shall be in
writing and delivered, if to Debtor, at the address of its Chief
Executive Office stated in this Agreement, and if to CNB, at its
address stated in this Agreement, or such other address as one party
shall give notice of to the other party as provided herein.
9. SEVERABILITY. If any provision of this Agreement shall be held to be
prohibited or unenforceable under applicable law, such provision shall
be ineffective only to the extent of such prohibition or
unenforceability, without invalidating the remainder of such provisions
or any remaining provisions of this Agreement.
10. HEADINGS. Section and subsection headings in this Agreement are
included for convenience of reference only and shall not be a part of
this Agreement for any purpose or be given any substantive effect.
11. AMENDMENT OR MODIFICATION. No provision or term of this Agreement may
be modified, amended or waived without the prior written consent of
CNB.
Dated: As of January 3, 1997
INTERNATIONAL REMOTE IMAGING SERVICES, INC.:
By: /s/ Martin S. McDermut
------------------------------
Martin S. McDermut
Its: Vice President and Chief Financial Officer
6
<PAGE> 18
By: ______________________________
(Signature and Title)
By: ______________________________
(Signature and Title)
<PAGE> 1
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1994 1995 1996
----------------------------------------------
<S> <C> <C> <C>
Actual Weighted Average Shares Outstanding for the Period . . . . . . . 5,383,849 5,994,739 6,141,657
Dilutive Effects of Stock Options and Warrants Using Average
Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292,741 356,066 antidilutive
------- ------------ ------------
Total Shares Based on Shares Outstanding and the Assumption
that All Share Equivalents Are Exercised at Average Stock
Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,676,590 6,350,805 6,141,657
Additional dilutive effect of Stock Options and Warrants Being
Exercised Using Ending Market Price . . . . . . . . . . . . . . . . . 22,030 67,713 antidilutive
------ ------------ ------------
Total Shares Based on Shares Outstanding and the Assumption
That All Stock Options and Warrants are Exercised At Ending
Market Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,698,620 6,418,518 6,141,657
========= =========== =========
Net Income (Loss) Applicable to Fully Diluted Earnings Per Share . . . $ 1,621,564 $2,126,412 $ (7,428,188)
=========== ========== ============
Fully Diluted Net Income (Loss) Per Share . . . . . . . . . . . . . . . $ 0.28 $ 0.33 $ (1.21)
=========== ========== ============
</TABLE>
<PAGE> 1
EXHIBIT 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-K for the
period ended December 31, 1996, and to the incorporation by reference in the
Registration Statements on Forms S-8 (File Nos. 2-77496, 33-10631, 33-82560 and
333-19265) and Form S-3 (File No. 333-02001) of our report dated March 21, 1997
(except for Note 8 and Note 14, for which the dates are April 10, 1997 and April
6, 1997, respectively) on our audits of the consolidated balance sheets of
International Remote Imaging Systems, Inc. and subsidiaries as of December 31,
1996 and 1995, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
April 11, 1997
<PAGE> 1
EXHIBIT 24.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in the Form 10-K for the fiscal year ended December
31, 1996 of International Remote Imaging Systems, Inc. ("IRIS"), and to the
incorporation by reference in the Registration Statements on Forms S-8 (File
Nos. 2-77496, 33-10631, 33-82560 and 333-19265) and Form S-3 (File No.
333-02001) of our report dated May 26, 1995, with respect to statements of
income and accumulated deficit and cash flows of StatSpin, Inc. for the year
ended March 31, 1995.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
April 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,602,535
<SECURITIES> 667,589
<RECEIVABLES> 5,207,933
<ALLOWANCES> 328,766
<INVENTORY> 4,838,206
<CURRENT-ASSETS> 15,416,228
<PP&E> 5,327,597
<DEPRECIATION> 3,379,884
<TOTAL-ASSETS> 37,860,245
<CURRENT-LIABILITIES> 13,502,347
<BONDS> 0
0
30
<COMMON> 59,118
<OTHER-SE> 13,705,531
<TOTAL-LIABILITY-AND-EQUITY> 37,860,245
<SALES> 17,655,700
<TOTAL-REVENUES> 20,554,131
<CGS> 11,086,578
<TOTAL-COSTS> 11,086,578
<OTHER-EXPENSES> 19,944,623
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 681,114
<INCOME-PRETAX> (10,886,115)
<INCOME-TAX> (3,457,927)
<INCOME-CONTINUING> (7,428,188)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,428,188)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
<PAGE> 1
EXHIBIT 99
ADDITIONAL INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The Company's Annual Report on Form 10-K for the year ended December 31,
1996 (the "Annual Report") contains various forward-looking statements which
reflect the Company's current views with respect to future events and financial
results. Forward-looking statements usually include the verbs "anticipates,"
"believes," "estimates," "expects," "intends," "plans," "projects,"
"understands" and other verbs suggesting uncertainty. The Company reminds
stockholders that forward-looking statements are merely predictions which are
inherently subject to uncertainties and other factors which could cause the
actual results to differ materially from the forward-looking statement. Some
of these uncertainties and other factors are discussed in the Annual Report.
See "Management Discussion and Analysis of Financial Condition and Results of
Operations--Forward Looking Statements." In this Exhibit 99, the Company has
attempted to identify additional uncertainties and other factors which may
affect its forward-looking statements.
Stockholders should understand that the uncertainties and other factors
identified in the Annual Report and this Exhibit 99 do not constitute a
comprehensive list of all the uncertainties and other factors which may affect
forward-looking statements. The Company has merely attempted to identity those
uncertainties and other factors which, in its view at the present time, have
the highest likelihood of significantly affecting its forward-looking
statements. In addition, the Company does not undertake any obligation to
update or revise any forward-looking statements or the list of uncertainties
and other factors which could affect such statements.
Capitalized terms not otherwise defined below have been defined in the
Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
The Company's forward-looking statements assume, among others, that (i)
the Company will meet its planned goals for increased sales and (ii) the
Company will secure significant additional outside financing during the next
twelve months to repay outstanding principal on its long- term indebtedness and
to fund its long-term business strategy. Additional outside financing (or a
restructuring of existing obligations) could result in dilution to holders of
Common Stock and significant financial and operational restrictions on the
Company. See the Annual Report, "Business--Recent Acquisitions and Other
Significant Developments" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RELIANCE ON UNIQUE PRODUCTS
The Company expects to continue to derive a substantial portion of its
revenues from sales of The Yellow IRIS family of urinalysis workstations and
related supplies and service. The Company believes that it is the only
supplier of laboratory systems which fully automate a complete urinalysis, and
that this has enabled it to achieve a certain level of gross margins on sales
of The Yellow IRIS family. Relatively modest declines in sales or gross
margins for these workstations could have a material adverse effect on the
Company's revenues and profits.
COMPETITION
There are numerous companies engaged in active research and development
programs within and outside of the clinical laboratory imaging systems field
that have considerable experience in areas of interest to the Company. The
Company cannot determine if other firms are currently engaged in potentially
competitive research. However, any one or more of these firms could develop
and introduce products comparable or superior to The Yellow IRIS, The White
IRIS, the PowerGene or any other product ultimately developed or acquired by
the Company. See the Annual Report, "Business--Competition."
<PAGE> 2
RELIANCE ON SINGLE SOURCE SUPPLIERS
Certain key components of the Company's instruments are manufactured
according to the Company's specifications or are available only from single
suppliers. Some of these suppliers have notified the Company that they have
discontinued, or will soon discontinue, production of key components.
Although, in the past, the Company has successfully transitioned to new
components to replace discontinued components, there can be no assurance that
the Company can successfully transition to satisfactory replacement components
or that the Company will have access to adequate supplies of discontinued
components on satisfactory terms during the transition period. The Company's
inability to transition successfully to replacement components or to secure
adequate supplies of discontinued components on satisfactory terms could have a
material adverse effect on the Company.
OPTION TO ACQUIRE POLY U/A SYSTEMS, INC.
In September 1995, the Company and Poly entered into a research and
development agreement to develop the Poly Products using the Company's
technology. The Company has an option until 121 days after termination of the
agreement with Poly to acquire all of the common stock of Poly for an aggregate
price increasing on August 1, 1997 from $4.4 million to $5.1 million payable in
cash or shares of Common Stock of the Company. If the Company elects to
exercise its option, the portion of the net cost of the acquisition allocated
to completed products would be capitalized and its subsequent amortization
would impact future earnings. For the portion of the net cost of the
acquisition allocated to in- process research and development, the Company
would record a nonrecurring, noncash (if purchased with Common Stock), charge
against then current earnings. See the Annual Report, "Business--Research and
Development" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The Company has not reached a decision whether to exercise its option to
acquire Poly and is under no obligation to do so. However, the Company will
periodically review the merits of acquiring Poly and may elect to exercise the
option in the future based on factors which are subject to change, including
(i) the progress of research and development of the Poly Products, (ii) the
Company's assessment of the commercial feasibility of the Poly Products, (iii)
the cost to acquire Poly and (iv) the market price of the Company's Common
Stock at the time the Company considers exercising the option.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends in significant part upon the continued
service of certain key personnel, and its continuing ability to attract,
assimilate and retain such personnel. Competition for such personnel is
intense and there can be no assurance that the Company can retain its key
personnel or that it can attract, assimilate or retain other highly qualified
personnel in the future. While the Company generally enters into agreements
with its employees regarding patents, confidentiality and related matters, the
Company does not have employment agreements with most of its key employees.
The Company does not maintain life insurance polices on such employees. The
loss of key personnel, especially without advance notice, or the inability to
hire or retain qualified personnel could have a material adverse effect on the
Company.
DEPENDENCE ON COMPUTER PLATFORM
The Company currently uses the Macintosh computer, manufactured by Apple
Computer, as the platform for its PowerGene product line. Apple Computer
recently announced its intention to switch the Macintosh to a new operating
system in 1998. The Company is evaluating whether to continue use of the
Macintosh platform, switch to a Macintosh-compatible platform, or pursue the
use of a different platform, such as Windows NT, for the PowerGene product
line. In the event that the Company decides to use a Macintosh or a
Macintosh-compatible platform, there can be no assurance of Apple Computer's
successful and timely transition to a new Macintosh operating system or of the
Company's ability to secure adequate supplies and service from Apple Computer
or a Macintosh-compatible manufacturer. Any delay or disruption in platform
supply or service could adversely affect future sales of the PowerGene product
line. Furthermore, if the Company decides to pursue a
2
<PAGE> 3
different platform for its products, there can be no assurance of a successful
and timely transition to a new platform, and any delay or disruption in supply
or service of the new platforms could also adversely affect future sales of the
PowerGene product line.
DIFFICULTIES ASSOCIATED WITH INTRODUCTION OF FUTURE PRODUCTS
The commercial success of the future products and systems planned by the
Company depends upon their acceptance by the medical community.
Capital-intensive laboratory instruments such as The White IRIS and the
Company's other future products can significantly reduce labor costs, improve
precision and offer other distinctive benefits. However, often there is
resistance to products which require significant capital expenditures or which
eliminate jobs through automation.
There can be no assurance that the Company's new products and systems will
achieve significant market acceptance in the future or that sales of such
future products and systems will grow at the rates expected by management.
Furthermore, new product introductions or product enhancements by the Company's
competitors or the use of other technologies could cause a decline in sales or
gross margins on sales or loss of market acceptance of the Company's systems.
INTELLECTUAL PROPERTY RIGHTS
The Company's commercial success depends in part on its ability to protect
and maintain its proprietary technology. The Company has received patents with
respect to certain of its technologies. Receipt of such patents may not
insulate the Company from damaging competition. The validity and breadth of
claims in clinical laboratory instrumentation patents involve complex legal and
factual questions and, therefore, are highly uncertain. There can be no
assurance that the claims allowed under patents held by the Company or under
patents based on pending or future patent applications by the Company will be
sufficiently broad to protect what the Company believes to be its proprietary
rights, that issued patents will not be circumvented by competitors, or that
the rights granted under such patents will provide competitive advantages to
the Company. There also can be no assurance that other parties will not take,
or threaten to take, legal action against the Company, alleging infringement of
such parties' patents by current and proposed products of the Company or that
any of the Company's patents, or patents in which it has licensed rights, will
be held valid and enforceable if subsequently challenged.
The Company also has trade secrets and unpatented technology and
proprietary knowledge related to the sale, promotion, operation, development
and manufacturing of its products. While the Company generally enters into
confidentiality agreements with its employees and consultants, there can be no
assurance that the Company's trade secrets or proprietary technology will not
become known or be independently developed by competitors in such a manner that
the Company has no practical recourse. Nor can there be any assurance that
others will not develop or acquire equivalent expertise or develop products
which render the Company's current or future products noncompetitive or
obsolete.
The Company also claims copyrights in its software and the ways in which
it assembles and displays images and certain trademark rights in the United
States and other foreign countries. There can be no assurance that copyright
and trademark protection can be obtained, or if obtained, can or will be
enforced or will provide significant commercial advantage to the Company.
Litigation regarding patent and other intellectual property rights,
whether with or without merit, could be time-consuming and expensive and could
divert the Company's technical and management personnel. There can be no
assurance that the Company's litigation expenses will not increase in the
future. Any change in the Company's ability to protect and maintain its
proprietary rights could have a material adverse effect on the Company.
3
<PAGE> 4
TECHNOLOGICAL CHANGE
The market for the Company's systems is characterized by rapid
technological advances, changes in customer requirements and frequent new
product introductions and enhancements. The Company's future success depends
upon its ability to enhance its current product lines, to introduce new
products that keep pace with technological developments and to respond to
evolving customer requirements. Any failure by the Company to anticipate or
respond adequately to technological developments by its competitors or to
changes in customer requirements, or significant delays in product
introduction, could result in a loss of competitiveness and revenues. There
can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely or cost-effective
basis, and such failure could have a material adverse effect on the Company.
GOVERNMENT REGULATION
Most of the Company's products are subject to stringent government
regulation in the United States and other countries. The regulatory process
can be lengthy, expensive and uncertain, and securing clearances or approvals
may require the submission of extensive official data and other supporting
information. Failure to comply with applicable requirements can result in
fines, recall or seizure of products, total or partial suspension of
production, withdrawal of existing product approvals or clearances, refusal to
approve or clear new applications or notices and criminal prosecution, any of
which could have a material adverse effect on the Company. Furthermore,
changes in existing federal, state or foreign laws or regulations, or in the
interpretation or enforcement thereof, or the discussion or promulgation of any
additional laws or regulations could have a material adverse effect on the
Company. See the Annual Report, "Business--Government Regulation."
ACQUISITIONS AND EXPANSION
As part of the Company's strategy to enhance and maintain its competitive
position, the Company may from time to time consider potential acquisitions of
complementary products, technologies and other businesses. The Company has
completed a number of acquisitions in the past two years. The evaluation,
negotiation and integration of acquisitions may consume significant time and
resources of the Company. There can be no assurance that acquisitions will not
have a material adverse effect upon the Company due to, among other things,
operational disruptions, integration issues, unexpected expenses and accounting
charges associated with such acquisitions.
HEALTHCARE REFORM POLICIES
Future legislation, regulation or payment policies of Medicare, Medicaid,
private health insurance plans, health maintenance organizations and other
third-party payors could adversely affect the demand for the Company's current
or future products and its ability to sell its products on a profitable basis.
Moreover, healthcare legislation is an area of extensive and dynamic change,
and the Company cannot predict future legislative changes in the healthcare
field or their impact on its business. See the Annual Report, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Healthcare Reform Policies."
PRODUCT LIABILITY
The Company's products are used to gather information for medical
decisions and diagnosis. Accordingly, the manufacture and sale of the
Company's products entails an inherent risk of product liability arising from
an inaccurate, or allegedly inaccurate, test result. The Company has product
liability insurance coverage of $1.0 million per incident and $2.0 million in
the aggregate per year, and an umbrella policy of $5.0 million. There can be
no assurance that the Company's product liability insurance will be sufficient
to protect the Company in the event of a product liability claim.
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CURRENCY FLUCTUATIONS
The Company acquired a foreign subsidiary in the PSI Acquisition which
conducts business in various foreign currencies. Consequently, fluctuations in
exchange rates will affect the Company's future consolidated operating results
and such fluctuations could have an adverse effect on the Company. The impact
of future fluctuations in exchange rates cannot be predicted with any measure
of accuracy and will depend on the percentage of international sales. The
Company is not currently seeking to hedge the risks associated with
fluctuations in exchange rates and therefore continues to be subject to such
risks. In the future, the Company may undertake such transactions. If any
hedging techniques are implemented by the Company, there can be no assurance
that such techniques can be successful in eliminating or reducing the effects
of currency fluctuations.
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