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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 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 20, 1998, the aggregate market value of the shares of Common
Stock held by non-affiliates of the Registrant was approximately $25.0 million
based upon the closing price of $4.25 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 6,339,265 shares of Common Stock outstanding on
March 20, 1998.
Part III incorporates information by reference from the Proxy Statement
for the Registrant's 1998 Annual Meeting of Stockholders.
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INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1997
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PART I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 12
Item 3. Legal Proceedings......................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders....................................... 12
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters................................................................................... 13
Item 6. Selected Financial Data................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 14
Item 8. Financial Statements and Supplementary Data............................................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 21
Item 11. Executive Compensation.................................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 21
Item 13. Certain Relationships and Related Transactions............................................ 21
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K........................ 21
</TABLE>
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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, and special purpose centrifugal 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 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. The
Company's products are sold directly and through distributors primarily to
hospital and reference clinical laboratories, as well as veterinary and
physician offices and research 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 introduced its fourth
generation models in 1996 which incorporate significant advancements in speed,
utility and ease of use. In 1996, the Company also 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 an initial one-year warranty
period, the majority of customers purchase annual service contracts. The FDA
cleared The White IRIS leukocyte differential analyzer in May 1996, but its
commercial release has been delayed by other priorities. The Company also
anticipates selling supplies and service for The White IRIS comparable to those
sold for The Yellow IRIS. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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 line is
the PowerGene family of genetic analyzers -- IVD imaging systems for
karyotyping, DNA probe analysis and comparative genomic hybridization. The
Company also acquired international operations from PSI.
In February 1996, the Company acquired StatSpin, Inc. ("StatSpin"), in
a pooling-of-interests transaction. Through StatSpin, the Company manufactures
and markets a variety of benchtop centrifuges, small instruments and supplies
for the laboratory market. These products are used primarily for manual specimen
preparation and dedicated applications in cytology, hematology and urinalysis.
They appeal to smaller laboratories and physician offices performing too few
tests to justify the cost of an automated IVD imaging system.
THE INDUSTRY
As a result of cost containment pressures from third-party payors,
healthcare providers are focusing on the most 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
automated microscopy has a number of potential applications in
the clinical laboratory and is expanding beyond the field of
urinalysis. 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. The Company completed
development of The White IRIS leukocyte differential analyzer
for hematology in 1997, but its commercial release has been
delayed by other priorities.
See "--Overview."
o Continuing Market Penetration for Current Applications of IVD
Imaging Technology. Although The Yellow IRIS urinalysis
workstation is used in hospital laboratories affiliated with
more than 75% of United States medical schools, 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 newest
generation models of The Yellow IRIS family and the Model
900UDx Urine Pathology System 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. The Company's growth
strategy also calls for the successful penetration of overseas
markets, where its PowerGene systems have already achieved a
strong market presence with sales in 40 countries. Neither The
Yellow IRIS line nor the StatSpin products, however, have been
marketed to a significant degree outside the United States.
International markets have witnessed the same trend toward
consolidation and emphasis on labor productivity that has
characterized the US market for the past 15 years. From a
strategic standpoint, management intends to proceed with the
introduction of The Yellow IRIS in selected markets where
consolidation has already been a factor, by developing
relationships with distributors in those countries capable of
selling both its clinical systems and small instruments.
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. The Company also hopes
to introduce specific DNA probe kits and other consumables for
chromosome analysis to its PowerGene line and to sell the
patented 2-methylpolymethine (2- MPM) cytoprobe for The White
IRIS.
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.
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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 nineteen years
created and developed its patented and proprietary AIM technology to address
both of these requirements.
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 currently markets two families of AIM systems -- The Yellow
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 of urinalysis workstations are widely used nationwide,
including hospitals affiliated with over 75% of all 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 of
urine specimens. The Yellow IRIS family of IVD imaging systems currently has
list prices ranging from $100,000 to $195,000.
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 from
$20,000 to over $100,000 depending upon the selected options and configuration.
OTHER SYSTEMS
In the fourth quarter of 1997, the Company began marketing the UF-100
urine cell analyzer in the United States. The UF-100, developed in Japan by
TOA Medical Electronics Co., Ltd. ("TOA"), utilizes flow
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cytometric laser scanning principles to screen large volumes of urine specimens
for the presence of abnormal sediment compositions. The UF-100 is not an AIM
system, and many abnormal specimens require subsequent microscopic analysis
through manual methods or with an automated IVD imaging system such as The
Yellow IRIS. The Company is the exclusive distributor for the UF-100 in North
America and receives royalties from TOA on sales of the UF-100 outside of North
America. The UF-100 currently has a list price in the United States of $115,000.
It provides only the sediment portion of a complete urinalysis. Laboratories
desiring to completely automate urinalysis testing can purchase The Yellow IRIS
which, in addition to microscopy, automates the chemistry and specific gravity
portions of a complete urinalysis.
SYSTEM SUPPLIES AND SERVICE
In addition to sales of IVD imaging systems and the UF-100, 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 include the sheath fluid used to position the particles and
cleanse the system in slideless microscopy and "controls" used in calibrating
and monitoring the performance quality of the systems. The Company also sells
the CHEMSTRIP/IRIStrip for testing urine chemistry on The Yellow IRIS. The
Company introduced the CHEMSTRIP/IRIStrip urine test strips in late 1994 and has
converted over 95% of the installed base of systems to these new test strips.
CHEMSTRIP/IRIStrips urine test strips are produced through an agreement with the
Boehringer Mannheim Group of companies, recently bought by Hoffman-LaRoche,
reorganized and now operated as Roche Diagnostics.
SMALL INSTRUMENTS AND SUPPLIES
The Company also manufactures 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. StatSpin's
technologically-advanced small benchtop centrifuges are designed to prepare
certain biological specimens for instrumental or microscopic examination in a
fraction of the time required by larger, common laboratory centrifuges. They
have proven ideal for on-demand, point-of-use testing in hospitals, physician's
offices and veterinary laboratories. The basic StatSpin centrifuge unit is
adaptable to a variety of uses by means of application-specific rotors and
consumables. Noted for their compact design and simple, quiet and unobtrusive
operation, they are particularly well-suited to laboratories in which
technicians are located in close proximity to the equipment. 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
System for manual microscopic examination of urine and other supplies intended
primarily for specimen preparation.
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, 1996 and 1997, the Company
focused its research and development efforts on the following major projects, as
well as numerous other smaller projects:
o Developing the Model 900UDx. The Company completed development
of its newest model in The Yellow IRIS family, the Model
900UDx. 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 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.
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o Developing 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 leuckocyte differential analyzer. The White IRIS is
an automated high-speed workstation used to classify normal,
as well as immature and other abnormal white blood cells. The
White IRIS performs 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 White IRIS, FDA cleared in 1996, is
undergoing additional refinements pending its commercial
launch which has been delayed by other priorities. See
"--Overview."
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 also performs
market research and experiments to identify future
applications of its technology. The Company believes its AIM
technology may have a number of other potential IVD imaging
applications such as cytology, microbiology and histology.
The Company has in the past partially funded its research and
development programs through (i) grants from NASA and National Institutes 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 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. BMC supplies the Company with CHEMSTRIP/IRIStrip urine test strips and
has agreed to supply the Company with certain raw materials should the Company
elect to manufacture its own urine test strips, subject to royalty payments. The
Company was granted the non-exclusive right to distribute certain other BMC
urinalysis products to hospitals and commercial laboratories in the United
States. The Company manufactures the Model 900UDx with BMG providing certain
components on an OEM basis at cost. The Company has exclusive marketing rights
to the Model 900UDx in Taiwan and non-exclusive rights for the rest of the world
outside of Germany and Italy. During 1997, Hoffman-LaRoche acquired the
Boehringer Mannheim Group of companies, and BMC and BMG are now operated as
Roche Diagnostics.
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 the Company's common stock. 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"). The
Company has an option to acquire all the common stock of Poly for $5.1 million
payable, at the Company's discretion, in cash or shares of the Company's Common
Stock.
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MARKETING AND SALES
In the United States, the Company's IVD imaging systems are sold and
serviced through the Company's 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. The Company has an overseas sales office and staff based in
Chester, England that supports agents and distributors and promotes the products
in more than forty foreign countries.
The Company also maintains a rental program under which it has a number
of 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 a one-year warranty period) is
generally sold under an annual service contract or, less frequently, on a
per-call basis.
COMPETITION
URINALYSIS
The Company's primary products for the urinalysis market are The Yellow
IRIS family of urinalysis workstations and the UF-100 urine cell analyzer. 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.
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 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. Roche Diagnostics, Dade Behring Corporation and
Bayer Diagnostics sell lines of urine test strips which are useful in
determining the concentration of various chemical substances often found in
urine. 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. IRIS recently obtained FDA clearance of its claims of improved
performance of The Yellow IRIS over reagent strip measures in detecting
microscopic abnormalities in urine.
GENETICS
The Company's products for the genetics market are the PowerGene family
of analyzers. The principal competitive factors in this market are comparative
product features, such as ease-of-use, software utility and user friendliness,
clarity of visual output and the quality and responsiveness of customer service.
The Company believes the PowerGene analyzers compete favorably with regard to
these factors.
The Company's primary competitors in this worldwide market are Applied
Imaging and Vysis, Inc. which market IVD imaging systems for prenatal and other
genetic testing. Vysis utilizes a strategy of offering its systems as a vehicle
for selling its DNA probes, a strategy that has made it the fastest growing
competitor. Leica (a German microscope manufacturer), MetaSystems and ASI (an
Israeli camera manufacturer) also sell systems for genetic analysis.
<PAGE> 9
HEMATOLOGY
The Company's proposed product for the hematology market is The White
IRIS leukocyte differential analyzer. See "Research and Development."
Intelligent Medical Imaging, Inc. ("IMI") is presently manufacturing an IVD
imaging system, called 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. For example, The White IRIS (1) uses a closed-tube sampling procedure
which is safer and more convenient because it does not require slide
preparation, (2) is more sensitive and precise because it counts significantly
more white blood cells, (3) allows an easier-to-obtain and more complete answer
because it automatically classifies variant, immature and other abnormal cells,
as compared only to automated classification of normal cells by the Micro 21,
and (4) is more cost effective because it has higher throughput and requires
less attended time. See "Overview".
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. IMI has
also displayed a prototype blood smear preparation device it is developing.
OTHER POTENTIAL COMPETITORS
The Company is aware of at least four other companies that sell IVD
imaging systems, all for cytology and/or histology applications. Neuromedical
Systems, Inc. and NeoPath, Inc. offer IVD imaging systems for PAP smears.
Auto-Cyte, Inc. and ChromaVision Medical Systems, two newer ventures, recently
obtained significant funding through initial public offerings. AutoCyte plans to
compete in the PAP smear arena. ChromaVision sells a system for rare event
finding for applications similar in concept to the PowerGene automated rare
event finder recently delivered to the Johnson Space Center of NASA.
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.
The Company has an exclusive license from Cytocolor, Inc. for the
patented 2-MPM cytoprobe used in the operation of 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 and non-medical industrial instruments.
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.
<PAGE> 10
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.
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.
Labeling, 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
39 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.
<PAGE> 11
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.
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.
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.
<PAGE> 12
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, 1997:
<TABLE>
<CAPTION>
Approximate Floor Monthly
Location Space (Sq. Ft.) Rent Use
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Chatsworth, CA 26,000 $14,100 Sales and Marketing, Research and Development,
Manufacturing and Corporate Administration
League City, TX 7,000 $8,300 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 (pound)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 July 1996, the Company acquired PSI from Digital Imaging
Technologies, Inc. ("DITI"). As part of the purchase price, the Company issued
to DITI a five-year warrant to purchase 875,000 shares of Common stock at $8.00
per share. In August 1997, the Company filed a demand for arbitration against
DITI with the American Arbitration Association. The Company's demand for
arbitration alleges material breaches of the representations, warranties and
covenants in the purchase agreement governing the PSI acquisition. DITI
subsequently filed a counterclaim in the arbitration proceeding alleging that
the Company misrepresented or omitted to disclose material facts in connection
with the PSI acquisition. DITI had previously requested a reduction in the
exercise price of the warrant but elected to seek unspecified monetary damages
in the counterclaim. Although the Company does not presently anticipate any
material adverse effect as a result of this arbitration proceeding, there can be
no assurance that it will not have such an effect on the Company or result in
additional dilution to holders of the Common Stock.
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.
<PAGE> 13
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
20, 1998 was $4.25 per share. The table below sets forth high and low closing
prices reported by Amex for the period January 1, 1996 through December 31,
1997:
<TABLE>
<CAPTION>
Price per share
---------------
High Low
<S> <C> <C>
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
FISCAL 1997
First Quarter.............................................. 5-1/4 3-9/16
Second Quarter............................................. 4-3/16 3-3/8
Third Quarter.............................................. 4-15/16 3-11/16
Fourth Quarter............................................. 5-3/16 3-1/4
</TABLE>
As of March 20, 1998, IRIS had approximately 4,300 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.
As partial consideration for renegotiating the Company's loan
agreements in March 1997, the Company issued to City National Bank warrants to
purchase (1) 50,000 shares until January 15, 2000 at $3.875 per share, (2)
25,000 shares until June 1, 2000 at $4.375 per share and (3) 25,000 shares until
July 1, 2000 at $4.0625 per share. The warrant certificates bear appropriate
restrictive legends concerning the registration requirements of the Securities
Act. The Company believes this transaction was exempt from the registration
requirements of the Securities Act based on Section 4(2) of the Securities Act.
In May 1997, the Company amended an existing agreement with M. Kane &
Company, Inc., an investment banker, to provide ongoing financial advisory
services. Under the terms of the amendment, the Company agreed to issue to M.
Kane & Company a warrant to purchase 10,000 shares of Common Stock until May 15,
2001 at $4.3125 per share. The Company has not yet issued the warrant
certificate, but it will bear an appropriate restrictive legend concerning the
registration requirements of the Securities Act. The Company believes this
transaction was exempt from the registration requirements of the Securities Act
based on Section 4(2) of the Securities Act.
Between February and May 1997, the Company issued a total of 75,376
shares of Common Stock to Irell & Manella, LLP, as partial payment for legal
services. The certificates bear appropriate restrictive legends concerning the
registration requirements of the Securities Act. The Company believes these
transactions were exempt from the registration requirements of the Securities
Act based on Section 4(2) of the Securities Act.
In November 1997, the Company offered to reduce the exercise price of
its outstanding Series D Warrants from $6.50 to $4.00 per share for holders
exercising their warrants during a one-week period. The holders that accepted
the offer and exercised their Series D Warrants during that period also received
a new Series F Warrant exercisable until March 29, 2000 at an exercise price of
$4.00 per share of Common Stock. The Company received gross proceeds of
approximately $783,000 through the exercise of Series D Warrants and issued
Series F Warrants to purchase an aggregate of 205,633 shares of Common Stock.
The Company also sold to two Series D Warrant holders for $35,000 additional
Series F Warrants covering an aggregate of 75,000 shares of Common Stock.
Concurrently with making the offer, the Company provided the Series D
Warrant holders with copies of its most recent Annual Report (Form 10K),
Quarterly Report (Form 10Q) and Proxy Statement. The Company also obtained
written representations from the participants in the offer confirming their
status as "accredited investors" under Regulation D and confirming their intent
to acquire the securities for their own account and not with a view to resale or
distribution in violation of the Securities Act. The Company did not engage in
general solicitation or advertising, and the securities issued in the
transaction bear appropriate restrictive legends concerning the registration
requirements of the Securities Act. The Company believes this transaction was
exempt from the registration requirements of the Securities Act based on
Regulation D and Section 4(2) of the Securities Act.
In February 1998, the Company issued Series F Warrants covering 27,000
shares of Common Stock to Alan Stone & Co., a former financial consultant, and
his attorney to settle litigation between the parties. As part of the
settlement, Alan Stone & Co. also surrendered for cancellation Series E Warrants
(exercisable at $7.80 per share) to purchase an equal number of shares of Common
Stock. The Company obtained written representations from the recipients
confirming their status as "accredited investors" under Regulation D and
confirming their intent to acquire the securities for their own account and not
with a view to resale or distribution in violation of the Securities Act. The
securities issued in the transaction bear appropriate restrictive legends
concerning the registration requirements of the Securities Act. The Company
believes this transaction was exempt from the registration requirements of the
Securities Act based on Section 4(2) of the Securities Act.
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.
This information as of December 31, 1996 and 1997 and for the years
ended December 31, 1995, 1996 and 1997 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,
------------------------------------------------------------------
1993 1994 1995(1) 1996(1) 1997(1)
------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
FINANCIAL STATEMENT DATA
Net revenues.................................. $12,428 $12,580 $14,488 $20,597 $27,495
Operating income (loss)....................... 1,313 1,495 (1,802) (10,434) 284
Interest and other income (expense), net...... 33 95 282 (452) (1,080)
Net income (loss)............................. 1,323 1,622 2,126 (7,428) (503)
Net income (loss) per share - basic........... .26 .30 .35 (1.21) (.16)
Net income (loss) per share - diluted......... .25 .28 .34 (1.21) (.16)
Working capital............................... 6,812 7,779 11,234 1,914 1,650
Total assets.................................. 11,181 13,282 22,203 37,860 32,735
Long term debt, including current portion..... 603 367 311 13,000 10,942
Total liabilities............................. 3,415 3,122 3,261 24,096 17,942
Shareholders' equity.......................... 7,766 10,160 18,942 13,765 14,792
Cash dividends per share...................... -- -- -- -- --
OTHER FINANCIAL DATA
Operating income (loss) - as adjusted(3) ..... 1,313 1,495 1,098 (1,147) 1,622
EBITDA (2).................................... 2,044 2,407 2,150 (849) 4,050
</TABLE>
(1) The years ended December 31, 1995 and 1996 include write-offs of acquired in
process research and development totaling $2.9 million and $7.3 million,
respectively. The year ended December 31, 1996 also includes unusual charges
totaling $2.0 million relating primarily to pooling-of-interest expenses, the
write-off of deferred public offering costs, expenses relating to litigation and
arbitration matters, severance and other incremental costs associated with a
restructuring of the Company's personnel. The year ended December 31, 1997
includes unusual charges totaling $1.3 million relating to expenses relating to
litigation and arbitration matters, the write-down of deferred private offering
costs and the write-off of goodwill no longer considered recoverable.
(2) EBITDA represents earnings before taxes, interest expense, write-off of
acquired in process research and development, depreciation and amortization,
including common stock and stock option compensation amortization. The Company
believes that EBITDA serves as a financial analysis tool for measuring financial
information such as operating performance leverage ratios. EBITDA should not be
considered by the reader as an alternative to net income, as an indicator of the
Company's performance or as an alternative to cash flows as a measure of
liquidity.
(3) Operating Income (Loss) - as adjusted represents operating income (loss)
before the write-off of acquired in process research and development totaling
$2.9 million and $7.3 million in the years ended December 31, 1995 and 1996,
respectively, and before unusual charges of $2.0 million and $1.3 million in
the years ended December 31, 1996 and 1997, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company generates revenues primarily 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 1996, the Company generated most of its revenues from sales of
just 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 which is a higher capacity automated urinalysis workstation
designed especially for the high-volume testing requirements of large hospitals
and reference laboratories. Finally, the Company began selling the PowerGene
family of genetic analyzers in August 1996 after completing the PSI Acquisition.
See "Business - Overview."
The Company invests significant amounts in research and development for
new products and enhancements to existing products. The following table
summarizes total product technology expenditures for the periods indicated:
<PAGE> 15
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
------------------------------------
(in thousands)
<S> <C> <C> <C>
Research and development expense, net........................................... $1,220 $1,978 $2,125
Capitalized software development costs.......................................... 299 577 535
Reimbursed costs for research and development grants and contracts.............. 843 1,780 1,015
------- ------- -------
Total product technology expenditures................................... $2,362 $4,335 $3,675
====== ====== ======
</TABLE>
The Company has in the past partially funded its research and
development programs through (i) grants from NASA and the National Institutes of
Health, (ii) joint development programs with strategic partners and (iii)
Company-sponsored research and development entities. See "Business--Research and
Development."
RESULTS OF OPERATIONS
The consolidated financial statements 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
include the financial results of PSI for the entire 1997 fiscal year, but only
for the period from August 1 to December 31 for fiscal 1996.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31,
1996
Net revenues for the year ended December 31, 1997 increased to $27.5
million from $20.6 million, an increase of $6.9 million or 33% over the prior
year. Sales of IVD imaging systems increased to $11.8 million from $6.4 million,
an increase of $5.4 million or 86% over the prior year. The increase is 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 and
increased sales of The Yellow IRIS.
Sales of IVD imaging system supplies and services increased to $10.6
million from $9.1 million, an increase of $1.5 million or 16% 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 exclusively by the Company. Sales of small instruments and
supplies decreased to $4.4 million from $5.1 million, a decrease of $619,000 or
12%, over the prior year. The decrease reflects lower sales levels of the
StatSpin products to one of its distributors.
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 revenue from system placements over several years.
Royalties and licensing revenues for the year ended December 31, 1997
increased to $603,000 from $43,000, an increase of $560,000 over the prior year.
The increase is primarily the result of increased royalties received, the
receipt of previously disputed royalties relating to the fourth quarter of 1996
and initial fees earned for the license of certain technology. Amounts are
expected to decrease to historical levels in 1998.
Cost of goods for IVD imaging systems as a percentage of sales of IVD
imaging systems was 51% for the year ended December 31, 1997 and is comparable
to the prior year. Cost of goods for IVD imaging system supplies and services
decreased as a percentage of sales of such products to 50% for the year ended
December 31, 1997 from 56% for the prior year. This decrease is principally due
to decreased costs and increased sales prices. Cost of goods for small
instruments and supplies as a percentage of sales of small instruments and
supplies totaled 53% for the year ended December 31, 1997, and is comparable to
the prior year. The net result of these changes and increased royalties and
licensing revenues was an increase in gross margin for the year ended December
31, 1997 to 50%, as compared to 46% for the year ended December 31, 1996.
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 $5.2 million for the year ended
December 31, 1997 from $4.6 million, an increase of $597,000 or 13% over the
prior year, primarily due to the addition of the sales force from the PSI
Acquisition partially offset by decreased marketing and selling expenses related
to The Yellow IRIS. Marketing and selling expenses as a percentage of net
revenues decreased from 22% in the prior year to 19% in the current year.
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 $3.5 million for the year ended December 31, 1997 from $3.3
million, an increase of $205,000 or 6% over the comparable period in the prior
year. This increase is the result of the addition of administrative functions
following the PSI Acquisition, partially offset by decreased expenses resulting
from the
<PAGE> 16
restructuring implemented in the fourth quarter of 1996 and decreased
acquisition activities in the current year. General and administrative expenses
as a percentage of net revenues decreased from 16% for 1996 to 13% for the
current year.
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
$2.1 million for the year ended December 31, 1997 from $2.0 million, an increase
of $147,000 or 7% over the prior year, and decreased as a percentage of net
revenues from 10% to 8%. Reimbursements under joint development programs
decreased to $1.0 million in 1997 from $1.8 million in 1996. Total product
technology expenditures decreased to $3.7 million from $4.3 million, a decrease
of $660,000 or 15% over the prior year, due primarily to reduced spending on the
development of The White IRIS and decreased expenditures on the Poly Products,
partially offset by 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, 1997 increased to $1.3 million
from $794,000, an increase of $515,000 or 65% over the prior year, primarily as
a result of the acquisition of intangible assets in the PSI Acquisition and a
small product line acquisition.
The results of operations for the year ended December 31, 1997 include
certain unusual charges to earnings of $1.3 million, primarily for the write-off
in the fourth quarter of deferred private offering expenses ($481,000), goodwill
no longer considered recoverable associated with the digital refractometer line
of business ($705,000) and legal expenses ($152,000) relating to a completed
patent litigation matter and the pending arbitration matter against Digital
Imaging Technologies, Inc. See "Legal Proceedings." The unusual charges in the
prior year totaled $2.0 million and related primarily to the write-off of
deferred public offering costs ($686,000), litigation expense ($617,000),
restructuring charges ($298,000) and merger related expenses ($244,000).
Acquisition of in-process research and development charges for the year
ended December 31, 1996 amounted to $7.3 million. No similar charge occurred in
1997.
The net result of the above described charges was an increase in
operating income in fiscal 1997 to $284,000 as compared to an operating loss of
$10.4 million in the prior year. Excluding the effects of the unusual charges
and acquisition of in-process research and development, operating income would
have been $1.6 million in the current year, compared to an operating loss of
$1.1 million in the previous year.
Interest income decreased to $57,000 for the year ended December 31,
1997 from $222,000 for the prior year, primarily as the result of decreased
amounts of invested cash in 1997.
Interest expense increased to $1.2 million for the year ended December
31, 1997 from $681,000 for the prior year due to the indebtedness incurred to
finance the PSI Acquisition and increased interest rates on bank debt.
Other income increased primarily due to the receipt of government grant
funds for reimbursement of expenses incurred in prior periods.
The income tax benefit for the year ended December 31, 1997 was
$293,000, as compared to an income tax benefit of $3.5 million for 1996. The
income tax benefit for the year ended December 31, 1997 differs from the federal
statutory rate due to state, local and foreign income taxes and permanent
differences between income reported for the financial statement and income tax
purposes.
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 imputed 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 resulted in a one-time reduction in earnings attributable to common
shareholders of $450,000 or $0.08 per share in the first quarter of 1997. The
staff's position is limited to the calculation of earnings per share and did not
have any effect on the Company's net income or cash flow. See "Liquidity and
Capital Resources."
The above factors contributed to a net loss of $503,000. However, due
to the imputed dividend discussed above, the loss per common share based upon
the net loss attributable to common stockholders of $953,000 amounted to $0.16
per share for the year ended December 31, 1997 as compared to a net loss of $7.4
million or
<PAGE> 17
$1.21 per share for the year ended December 31, 1996. Excluding the effect of
unusual charges, adjustment to the deferred tax valuation allowance and charges
for the acquisition of in-process research and development from the PSI
Acquisition, the Company would have had net loss attributable to common
stockholders of $108,000 or $0.02 per share for the year ended December 31,
1997, as compared to a net loss of $1.5 million, or $0.24 per share, for the
year ended December 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 $14.5 million, an increase of $6.1 million or 42% 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.
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 exclusively by the Company. 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. 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 51% for the prior year.
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 22% 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 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 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 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).
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 Systems, Inc.
(a Company- sponsored research and development company) 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, but its commercial release has been delayed by
other priorities. See "--Liquidity and Capital Resources." See
"Business--Research and Development."
<PAGE> 18
Interest income 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 reliability 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 $0.34 per diluted share, for the year ended December 31, 1995.
Excluding the charges for the acquisition of in-process research and development
from the PSI Acquisition, adjustment to the deferred tax valuation allowance and
the $2.0 million of unusual charges discussed above, the Company would have had
a net loss of approximately $1.5 million, or $0.24 per share, for the year ended
December 31, 1996. Excluding the charges for the acquisition of in-process
research and development from LDA Systems, Inc. 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased to $1.5
million at December 31, 1997 from $4.3 million at December 31, 1996. The
decrease is primarily attributable to principal payments on bank debt, an
installment payment for the repurchase of common stock and pay down of accounts
payable. Inventory levels at December 31, 1997 decreased to $3.7 million from
$4.8 million at December 31, 1996. This decrease is primarily due to the
implementation of an inventory reduction program. Total accounts receivable
increased to $5.3 million at December, 1997 from $5.2 million at December 31,
1996 primarily the result of improved collection efforts offset by the effect of
increased sales.
Accounts payable decreased to $2.6 million at December 31, 1997 from
$4.6 million at December 31, 1996, primarily due to the application of the net
proceeds from the sale of the Series A Preferred Stock in late December 1996
(discussed below) and the use of previously invested cash. Cash provided by
operations totaled $2.0 million for the year ended December 31, 1997, as
compared to cash provided by operations totaling $181,000 for the year ended
December 31, 1996.
In the year ended December 31, 1997, the Company expended $950,000 for
capital equipment and $535,000 for capitalized software development. The Company
expended $1.2 million for capital equipment and $577,000 for capitalized
software development in the prior year. The Company does not presently have any
material commitments for capital expenditures.
During the year ended December 31, 1997, the Company generated cash of
$853,000 from stock sales to employees under the Company's stock option and
purchase plans and to warrantholders who exercised in connection with the
exchange offer. See "Market for Registrant's Common Stock and Related
Stockholder Matters."
The Company acquired PSI in July 1996 for $16.1 million and financed
the purchase price with (i) a $7.0 million subordinated note issued to the
seller, (ii) a $7.8 million term loan (the "Term Loan") from City National Bank
and (iii) $1.3 million drawn under a new $1.5 million revolving line of credit
(the "Credit Facility") from City National Bank. On December 31, 1997, the
outstanding principal balance of the Term Loan was $3.4 million. 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 (8.5% on December 31, 1997) plus
2.0%. 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 $350,000 on December 31, 1997. 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
2.0%. The Credit Facility, collateralized by a first priority lien on all
assets, matures April 15, 1998.
<PAGE> 19
On March 30, 1998, the Company received a commitment for a new loan
facility (the "New Facility") from a financial institution to refinance the Term
Loan and Credit Facility. The commitment is subject to completion of definitive
loan documentation and other customary closing conditions. Management believes
that such conditions will be satisfactorily met. The New Facility will provide
for a maximum line of credit of $7.0 million, comprised of a term loan of up to
$3.6 million and revolving line of credit of up to $4.0 million based on a
percentage of eligible accounts receivable. The Company expects to have
approximately $1.7 million available under the revolving line of credit at
inception. The term loan will bear interest at the lender's prime rate (8.5%
on March 30, 1998) plus 3.0% and is payable in 36 equal monthly installments.
The revolving credit line will bear interest at the lender's prime rate plus
1.0%. Interest will be charged on a minimum loan balance of $3.0 million.
Borrowings will be collateralized by a first priority lien on all assets of the
Company. The New Facility will mature in 2001.
The new Facility will contain financial covenants based on tangible net
worth, interest coverage and various operating ratios. It will also restrict
purchases of fixed assets and prohibit the payment of cash dividends. The
Company will pay an initial commitment fee of 0.75% of the total facility, an
unused line fee of 0.375% per annum on the unused portion of the total facility
and certain other administrative fees. The New Facility will be subject to
prepayment penalties of 3.0%, 2.0% and 1.0% of the maximum credit line in the
first, second and third years, respectively.
During 1997, the Company issued two 8.0% promissory notes in the
aggregate amount of approximately $1.0 million due in equal installments in 1998
and 1999 for amounts due relating to the repurchase of common stock from an
affiliate of Boehringer Mannheim Corporation, a former joint venture partner.
Also, the Company issued 75,376 shares of Common Stock and a five-year warrant
to purchase 10,000 shares of Common Stock at $4.3125 in satisfaction of accounts
payable totaling $284,000. In connection with the April 1997 bank loan renewal,
the Company issued three-year warrants to purchase 100,000 shares of Common
Stock at prices ranging from $3.875 to $4.375 per share.
Upon consummation of the New Facility, the Company believes that its
current cash on hand, together with cash generated by operations and cash
available under the New Facility, will be sufficient to fund normal operations
and pay principal and interest on outstanding debt obligations for the next
twelve months. The failure to consummate the New Facility would have a material
adverse effect on the Company and its liquidity.
The Company also plans to pursue equity financing to reduce
indebtedness and to fund its long-term business strategy. While the FDA cleared
The White IRIS leukocyte differential analyzer in May 1996, its commercial
release has been delayed by other priorities such as the introduction of the
UF-100 urine sediment analyzer now underway. See "Business--Research and
Development--Developing the White IRIS" and "-- Products--Other Systems." The
Company anticipates that commercial release of The White IRIS may depend upon
the availability of sufficient funds and that it may be subject to additional
delays if such funds are unavailable.
In September 1995, the Company and Poly entered into a research and
development agreement to develop the Poly Products using the Company's
technology. See "Business - Research and Development." The Company is funding
the first $15,000 per month (up to a maximum of $500,000 of which $80,000
remains outstanding) of the cost of the project, and Poly is reimbursing the
Company for the excess. The Company has an option to acquire all of the common
stock of Poly for an aggregate price of $5.1 million, payable in cash or shares
of Common Stock. 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 may impact future earnings to the
extent profits from products acquired do not cover these costs. For the portion
of the net cost of the acquisition, if any, allocated to in-process research and
development, the Company would record a nonrecurring, noncash (if purchased with
Common Stock) charge against then current earnings.
In December 1996, the Company sold 3,000 shares of Series A Convertible
Preferred Stock ("Preferred Stock") and a warrant to purchase 84,270 shares of
Common Stock to the Thermo Amex Convertible Growth Fund I, L.P. for $3.0
million. The warrant is exercisable at $3.56 per share until December 31, 2001.
Each share of Preferred Stock is convertible into a number of shares of Common
Stock equal to (i) its $1,000 liquidation value divided by (ii) a variable
conversion price. The conversion price equals the lower of (a) $3.56 per share
or (b) 85% of the average closing bid price of the Common Stock for the five
consecutive trading days preceding the conversion (but in no event less than
$1.50). Assuming a conversion price of $3.56 per share, the Preferred Stock is
convertible into approximately 843,000 shares of Common Stock. Any unconverted
shares of Preferred Stock will automatically be converted into Common Stock on
December 31, 1999. The 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
holder of the Preferred Stock.
<PAGE> 20
The Company has conducted a review of its IVD imaging products and
internal computer systems to identify those areas that require Year 2000
compliance. Year 2000 compliance refers to the inability of certain computer
systems to recognize dates commencing on January 1, 2000. The Company currently
believes that by modifying existing software and converting to new software for
certain tasks, Year 2000 compliance will not pose significant marketing or
operational problems and is not anticipated to be material to its future
financial position or results of operations.
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, 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
Recently issued accounting standards are described in Note 2 in the
consolidated financial statements.
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
and are subject to the safe harbor created by that Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, but are not
limited to, the Company's views with respect to future financial results,
financing sources, capital requirements, market growth, new product
introductions and the like, and are generally identified by phrases such as
"anticipates," "believes," "estimates," "expects," "intends," "plans" and words
of similar import. 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
consummate the New Facility by April 18, 1998, the maturity date of the Term
Loan and Credit Facility with City National Bank, (ii) 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, (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.
<PAGE> 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference from "Directors and Executive Officers" in
the Proxy Statement to be filed with the Securities and Exchange Commission for
the 1998 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 1998
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 1998 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 1998 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>
<CAPTION>
1. Index to Financial Statements Page
----
<S> <C>
Report of Independent Public Accountants. 25
Consolidated Balance Sheets at December 31, 1997 and 1996. 26
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996, and 1995. 27
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996, and 1995. 28
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995. 31
Notes to Consolidated Financial Statements. 32
2. Financial Statement Schedules Covered by the Foregoing Report of
Independent Public Accountants.
Schedule II-Valuation and Qualifying Accounts *
</TABLE>
* Omitted in copy distributed to stockholders in connection with the
1998 Annual Meeting of Stockholders.
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.
3. Exhibits
<TABLE>
<CAPTION>
No. Description
--- -----------
<S> <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)
</TABLE>
<PAGE> 22
<TABLE>
<S> <C>
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)
10.2(g) -- 1997 Stock Option Plan and form of Stock Option Agreement (18)
10.3(a) -- Various Agreements with TOA Medical Electronics Company, Ltd. (12)
10.3(b) -- Patent License Agreement dated April 1, 1997 between the Company and TOA Medical
Electronics Company, Ltd.*
10.3(c) -- Termination, Release and Reassignment of Security Interest dated October 30, 1997
executed by TOA Medical Electronics Company, Ltd. in favor of the Company *
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)
10.6(e) -- Form of Series D Warrant *
10.6(f) -- Form of Series E Warrant *
10.6(g) -- Form of Series F Warrant *
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)
10.7(c) -- Employment Agreement dated January 30, 1996 with Thomas F. Kelley (16)
10.7(d) -- Letter Agreement dated October 4, 1997 amending Employment
Agreement of Thomas F. Kelley *
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) (19)
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) (19)
10.10(e) -- $4,900,000 Amended and Restated Promissory Note dated as of January 3, 1997 (Term
Loan) (19)
10.10(f) -- Supplemental Terms Letter dated as of January 3, 1997 (Term Loan) (19)
10.10(g) -- Waiver of Default dated as of January 3, 1997 (19)
10.10(h) -- Warrant to Purchase Common Stock dated March 15, 1997 issued to City National Bank (19)
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 (19)
10.10(l) -- Warrant to Purchase Common Stock dated June 1, 1997 issued to City National Bank *
10.10(m) -- Warrant to Purchase Common Stock dated July 1, 1997 issued to City National Bank *
</TABLE>
<PAGE> 23
<TABLE>
<S> <C>
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)
10.12 Commitment Letter of Foothill Capital Corporation dated March 30, 1998*
24 -- Consent of Coopers & Lybrand L.L.P. *
27.1 -- Financial Data Schedule (1997) *
27.2 -- Financial Data Schedule (Quarter 1997)
27.3 -- Financial Data Schedule (1995 and 1996)*
99 -- Additional Information Regarding Forward Looking Statements *
</TABLE>
- -------------------
* Omitted in copy distributed to stockholders in connection with the 1998
Annual Meeting of Stockholders.
Exhibits followed by a number in parenthesis are incorporated by
reference to the similarly numbered Company document 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) Report on Form 10-Q for the quarter ended September 30, 1996.
(15) Report on Form 10-Q for the quarter ended September 31, 1995.
(16) Report on Form 10-K for the year ended December 31, 1995.
(17) Current on Form 8-K filed July 17, 1996.
(18) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on July 16, 1997 (File No. 333-31393).
(19) Annual Report on Form 10-K for the year ended December 31, 1996.
(b) Reports on Form 8-K
None
(c) See (a)(3) above.
(d) See (a)(1) and (2) above.
<PAGE> 24
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 March 30, 1998.
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, March 30, 1998
Fred H. Deindoerfer President, and Chief Executive Officer
/s/ Martin S. McDermut
- ------------------------------ Vice President Finance and March 30, 1998
Martin S. McDermut Administration, Secretary,
and Chief Financial Officer,
/s/ Donald E. Horacek
- ------------------------------
Donald E. Horacek Assistant Secretary, Controller, and March 30, 1998
Principal Accounting Officer
/s/ John A. O'Malley Director March 30, 1998
- ---------------------------------
John A. O'Malley
/s/ Steven M. Besbeck Director March 30, 1998
- -----------------------------------
Steven M. Besbeck
/s/ Thomas F. Kelley Director March 30, 1998
- -------------------------------------
Thomas F. Kelley
</TABLE>
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders 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 21 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
International Remote Imaging Systems, Inc. and its subsidiaries at December 31,
1997 and 1996, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997, 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 20, 1998, except for Note 8 as to which the date is March 30, 1998.
<PAGE> 26
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1996 1997
-----------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $3,602,535 $1,470,861
Short-term investments 667,589 25,000
Accounts receivable, net of allowance for doubtful
accounts of $274,766 in 1996 and $267,579 in 1997 5,207,933 5,319,539
Inventories 4,838,206 3,739,483
Prepaid expenses and other current assets 163,465 259,822
Deferred tax asset 936,500 993,950
------------ -----------
Total current assets 15,416,228 11,808,655
Property and equipment, at cost, net of accumulated depreciation 1,947,713 1,847,746
Purchased intangibles 10,324,760 8,597,601
Software development costs, net of accumulated amortization of
$847,880 in 1996 and $1,223,601 in 1997 920,972 1,080,106
Deferred tax asset 7,276,250 7,621,800
Other assets 1,974,322 1,778,669
----------- -----------
Total assets $37,860,245 $32,734,577
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $1,334,755 $ 850,000
Current portion of long-term debt 2,600,000 3,400,000
Accounts payable 4,587,407 2,613,297
Accrued expenses 3,901,071 2,383,946
Deferred income - service contracts and other 1,079,114 911,459
----------- -----------
Total current liabilities 13,502,347 10,158,702
Subordinated note payable 7,000,000 7,000,000
Deferred income - service contracts 193,219 241,507
Notes payable, long-term portion 3,400,000 542,027
----------- -----------
Total liabilities 24,095,566 17,942,236
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value
Authorized: 3,000,000 shares
Convertible Series A,
Shares issued and outstanding : 1996 and 1997 - 3,000
($3,000,000 liquidation preference) 30 30
Common stock, $.01 par value
Authorized: 15,600,000 shares
Shares issued and outstanding:
1996 - 5,911,890, 1997 - 6,259,728 59,118 62,597
Additional paid-in capital 36,311,535 37,788,536
Treasury stock, at cost (26,240 shares in 1996 and in 1997) (103,500) (103,500)
Unearned compensation (385,879) (333,495)
Foreign currency translation adjustment 37,791 35,877
Accumulated deficit (22,154,416) (22,657,704)
----------- -----------
Total shareholders' equity 13,764,679 14,792,341
----------- -----------
Total liabilities and shareholders' equity $37,860,245 $32,734,577
=========== ===========
</TABLE>
- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 27
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
<S> <C> <C> <C>
Sales of IVD imaging systems ........................ $ 4,240,627 $ 6,370,346 $ 11,823,443
Sales of IVD imaging system supplies
and service ....................................... 6,737,444 9,117,493 10,621,211
Sales of small instruments and supplies ............. 3,414,087 5,066,292 4,447,418
Royalty and license revenues ........................ 96,023 42,923 603,076
------------ ------------ ------------
Net revenues ........................................ 14,488,181 20,597,054 27,495,148
------------ ------------ ------------
Cost of goods- IVD imaging systems .................. 2,014,873 3,278,140 6,077,391
Cost of goods - IVD imaging system
supplies and service .............................. 3,174,290 5,114,538 5,328,092
Cost of goods - small instruments
and supplies ...................................... 1,937,653 2,693,900 2,345,909
------------ ------------ ------------
Cost of goods sold .................................. 7,126,816 11,086,578 13,751,392
------------ ------------ ------------
Gross margin ........................................ 7,361,365 9,510,476 13,743,756
Marketing and selling ............................... 2,874,442 4,627,089 5,224,513
General and administrative .......................... 2,041,281 3,258,700 3,463,231
Research and development, net ....................... 1,220,028 1,978,326 2,125,095
Amortization of intangibles ......................... 127,142 793,916 1,308,596
Unusual charges ..................................... -- 2,036,592 1,338,338
Acquisition of in-process research
and development ................................... 2,900,430 7,250,000 --
------------ ------------ ------------
Total operating expenses ............................ 9,163,323 19,944,623 13,459,773
Operating income (loss) ............................. (1,801,958) (10,434,147) 283,983
Other income (expense):
Interest income .................................. 309,929 221,935 56,557
Interest expense ................................. (42,699) (681,114) (1,208,138)
Other income ..................................... 14,507 7,211 71,310
------------ ------------ ------------
Loss before
Benefit for income taxes .......................... (1,520,221) (10,886,115) (796,288)
Benefit for income taxes ......................... (3,646,633) (3,457,927) (293,000)
------------ ------------ ------------
Net income (loss) ................................... 2,126,412 (7,428,188) (503,288)
Less imputed preferred stock dividend ............... -- -- (450,000)
------------ ------------
Net income (loss) attributable to common stockholders $ 2,126,412 $ (7,428,188) $ (953,288)
============ ============ ============
Net income (loss) per share - basic ................. $ .35 $ (1.21) $ (.16)
============ ============ ============
Net income (loss) per share - diluted ............... $ .34 $ (1.21) $ (.16)
============ ============ ============
Weighted average number of
common shares outstanding - basic ................... 5,994,739 6,141,657 6,019,041
============ ============ ============
Weighted average number of
common shares outstanding - diluted ............... 6,246,726 6,141,657 6,019,041
============ ============ ============
</TABLE>
- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 28
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Treasury Unearned Accumulated
Shares Amount Capital Stock Compensation Deficit Total
--------- -------- ------------ --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .... 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.
<PAGE> 29
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Series A
Preferred Stock Common Stock Additional Treasury
--------------- --------------------- Paid-In Treasury Unearned
Shares Amount Shares Amount Capital Stock Compensation
------ ------ -------- -------- ------------ ------------ -------------
<S> <S> <C> <C> <C> <C> <C> <C>
Balance forward ...................... -- -- 6,292,408 $ 62,924 $ 34,154,116 $ (453,386) $ (95,884)
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 37,703 --
for Services ......................... -- -- 22,136 221 150,159 37,703 (153,190)
Stock option compensation ............ -- -- -- -- 437,770 -- (270,925)
Issuance of warrants in connection
with acquisition of Perceptive
Scientific Instruments, Inc. ......... -- -- -- -- 927,000 -- --
Repurchase of shares of common
stock and warrants ................... -- -- -- -- (273,216) (2,132,141) --
Retire treasury stock ................ -- -- (553,875) (5,539) (2,504,582) 2,510,121 --
Amortization of unearned ............. -- -- -- -- -- -- 134,120
compensation
Income tax benefit related to exercise
of nonqualified stock options ........ -- -- -- -- 77,313 -- --
Foreign currency translation ......... -- -- -- -- -- -- --
adjustment
Stock tendered as payment for options
exercised ............................ -- -- -- -- -- (103,500) --
Net loss ............................. -- -- -- -- -- -- --
----- ----- --------- -------- ------------ ------------ ------------
Balance,
December 31, 1996 .................. 3,000 $ 30 5,911,890 $ 59,118 $ 36,311,535 $ (103,500) $ (385,879)
<CAPTION>
Foreign Currency
Translation Accumulated
Adjustment Deficit Total
---------------- ------------- ------------
<S> <C> <C> <C>
Balance forward ...................... -- $(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 ............................. -- -- 119,205
for Services ......................... -- -- 34,893
Stock option compensation ............ -- -- 166,845
Issuance of warrants in connection
with acquisition of Perceptive
Scientific Instruments, Inc. ......... -- -- 927,000
Repurchase of shares of common
stock and warrants ................... -- -- (2,405,357)
Retire treasury stock ................ -- -- --
Amortization of unearned ............. -- -- 134,120
compensation
Income tax benefit related to exercise
of nonqualified stock options ........ -- -- 77,313
Foreign currency translation ......... 37,791 -- 37,791
adjustment
Stock tendered as payment for options
exercised ............................ -- -- (103,500)
Net loss ............................. -- (7,428,188) (7,428,188)
------------ ------------ ------------
Balance,
December 31, 1996 .................. $ 37,791 $(22,154,416) $ 13,764,679
</TABLE>
- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 30
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Series A
Preferred Stock Common Stock Additional
--------------- ------------ Paid-In Treasury Unearned
Shares Amount Shares Amount Capital Stock Compensation
------ ------ --------- ------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance forward ...................... 3,000 $30 5,911,890 $59,118 $36,311,535 $(103,500) $(385,879)
Common stock issued
on exercise of stock options ......... -- -- 13,901 139 33,466 -- --
Common stock issued under
Employee Stock Purchase Plan:
for Cash ............................. -- -- 34,964 350 140,458 -- --
for Services ......................... -- -- 34,964 350 140,458 -- (140,808)
Issuance of stock options for services -- -- -- -- 73,680 -- (73,680)
Common stock and warrants to
purchase common stock issued for
cash on exercise of warrants ......... -- -- 188,633 1,886 676,492 -- --
Issuance of common stock and
warrants in satisfaction of accounts . -- -- 75,376 754 282,947 -- --
payable
Issuance of warrants to purchase
common stock in connection with bank
debt renewal ......................... -- -- -- -- 129,500 -- --
Amortization of unearned
compensation ......................... -- -- -- -- -- -- 266,872
Foreign currency translation ......... -- -- -- -- -- -- --
adjustment
Net loss ............................. -- -- -- -- -- -- --
----- --- --------- ------- ----------- --------- ---------
Balance,
December 31, 1997 .................. 3,000 $30 6,259,728 $62,597 $37,788,536 $(103,500) $(333,495)
===== === ========= ======= =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Foreign
Currency
Translation Accumulated
Adjustment Deficit Total
---------- ------------ ------------
<S> <C> <C> <C>
Balance forward ...................... $ 37,791 $(22,154,416) $ 13,764,679
Common stock issued
on exercise of stock options ......... -- -- 33,605
Common stock issued under
Employee Stock Purchase Plan:
for Cash ............................. -- -- 140,808
for Services ......................... -- -- --
Issuance of stock option for services -- -- --
Common stock and warrants to
purchase common stock issued for
cash on exercise of warrants ......... -- -- 678,378
Issuance of common stock and
warrants in satisfaction of accounts . -- -- 283,701
payable
Issuance of warrants to purchase
common stock in connection with bank
debt renewal ......................... -- -- 129,500
Amortization of unearned
compensation ......................... -- -- 266,872
Foreign currency translation ......... (1,914) -- (1,914)
adjustment
Net loss ............................. -- (503,288) (503,288)
-------- ------------ ------------
Balance,
December 31, 1997 .................. $ 35,877 $(22,657,704) $ 14,792,341
======== ============ ============
</TABLE>
- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 31
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------
1995 1996 1997
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................... $ 2,126,412 $ (7,428,188) $ (503,288)
Adjustments to reconcile net income (loss) to net
cash provided by operations:
Deferred tax benefit .................................................... (3,705,589) (3,456,920) (403,000)
Acquisition of in-process research and development ...................... 2,882,858 7,250,000 --
Depreciation and amortization ........................................... 635,048 1,769,896 3,413,125
Common stock and stock option compensation .............................. 109,635 335,858 266,872
(Gain) loss on disposal of property and equipment ....................... -- (51,401) 62,844
Allowance for doubtful accounts ......................................... -- 198,037 (7,187)
Changes in assets and liabilities:
Accounts receivable - trade and other ................................... (356,739) (77,240) (153,983)
Service contracts, net .................................................. (95,586) (475,034) 201,505
Inventories ............................................................. (875,295) (1,433,834) 1,096,724
Prepaid expenses and other current assets ............................... (80,230) 176,061 (66,386)
Other assets ............................................................ 47,239 (132,992) (59,339)
Accounts payable ........................................................ (87,673) 2,851,805 (1,686,728)
Accrued expenses ........................................................ 199,735 375,793 84,071
Deferred income - other ................................................. -- 279,591 (279,591)
------------ ------------ ------------
Net cash provided by operating activities ................................. 799,815 181,432 1,965,639
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment ................................... (820,838) (1,171,621) (949,841)
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 .............................................. (299,016) (577,421) (534,855)
Maturities of securities ................................................ 2,915,000 4,169,138 642,589
Purchases of securities ................................................. (4,295,664) -- --
Acquisition of other assets ............................................. -- -- (30,000)
------------ ------------
Net cash used by investing activities ..................................... (3,387,318) (7,805,945) (872,107)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common and preferred stock for cash ......................... 1,666,999 3,278,720 907,791
Installment payment on repurchase of common stock ....................... -- (553,148) (545,057)
Borrowings under credit facility ........................................ -- 1,334,755 3,895,000
Repayments of credit facility ........................................... -- -- (4,879,755)
Repayments of notes payable ............................................. (256,351) (2,110,633) (2,600,000)
Proceeds from notes payable ............................................. -- 7,800,000 --
Deferred offering costs ............................................... -- (35,049) --
------------ ------------ ------------
Net cash provided (used) by financing activities ......................... 1,410,648 9,714,645 (3,222,021)
------------ ------------ ------------
Effect of foreign currency rate fluctuation on cash and cash equivalents -- 1,008 (3,185)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents .................... (1,176,855) 2,091,140 (2,131,674)
Cash and cash equivalents at beginning of year .......................... 2,573,384 1,511,395 3,602,535
Adjustment to cash to reflect change in StatSpin Technologies fiscal year 114,866 -- --
------------ ------------ ------------
Cash and cash equivalents at end of year ................................ $ 1,511,395 $ 3,602,535 $ 1,470,861
============ ============ ============
Supplemental schedule of non-cash financing activities:
Non cash issuance of common stock and common stock warrants ............. $ 109,635 $ 153,190 $ 562,689
Stock option compensation ............................................... -- 437,770 --
Issuance of common stock under a stock for
stock exercise ....................................................... -- 103,500 --
Issuance of warrants in connection
with development agreements and for other assets ..................... 1,774,733 -- 65,000
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 --
Unpaid common stock issuance costs ...................................... -- -- 55,000
Issuance of notes payable for accrual liabilities ....................... -- -- 1,042,027
Supplemental disclosure of cash flow information:
Cash paid for income taxes .............................................. 21,456 64,100 --
Cash paid for interest .................................................. 42,698 526,182 1,104,605
</TABLE>
- ---------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 32
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 and physician 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
prior to the acquisition to include the financial position, results of
operations and cash flows of StatSpin.
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 8.5% 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"). 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.
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
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 assets. Actual results could
differ from those estimates.
<PAGE> 33
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 and Short-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. 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.
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 $41,600, $180,500 and
$375,721 for 1995, and 1996 and 1997, respectively.
<PAGE> 34
Deferred Warrant Costs:
Deferred warrant costs are included in other assets and result from the
issuance of warrants in conjunction with various development, distribution and
technology license agreements. These costs are generally being amortized over
the estimated term of the related agreements.
Long-Lived Assets:
On January 1, 1996, the Company adopted 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." This statement requires
recognition of impairment losses for long-lived assets whenever events or
changes in circumstances result in the carrying amount of the assets exceeding
the sum of the expected future undiscounted cash flows associated with such
assets. The measurement of the impairment losses to be recognized is to be based
on the difference between the fair values and the carrying amounts of the
assets. During 1996, the Company adopted this policy and determined that no
impairment loss was required for applicable assets; however, as a result of
certain events discussed in Note 6, a $704,579 charge was recorded for
write-down of long-lived assets in the fourth quarter of 1997.
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.
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
<PAGE> 35
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 at the time the advertising takes place.
Fair Value of Financial Instruments:
The amount recorded for financial instruments in the Company's
consolidated financial statements approximates fair value as defined in SFAS.
No. 107.
Earnings Per Share:
In the fourth quarter of 1997, the Company adopted 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 statements of all entities with complex capital
structures. Also, as required by SFAS No. 128, this standard has been
retroactively applied for all periods presented.
Reclassifications:
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform with the 1997 presentation.
Recently Issued Accounting Standards:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for reporting and displaying comprehensive
income and its components (revenue, expenses, gains and losses) in financial
statements. FAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. It is effective for fiscal years beginning after December
15, 1997. The Company intends to disclose the information required by FAS 130
beginning with its 1998 fiscal year.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). This statement requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. Generally, financial information is required
to be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. It is effective
for fiscal years beginning after December 15, 1997. The Company intends to adopt
this new standard in fiscal year 1998, and does not believe that this statement
will have a significant impact on its financial statements.
Certain Risks and Uncertainties:
Dependence on Instrument Sales: The Company derives most of its revenues
from the sale of two, high-priced instruments - The Yellow IRIS urinalysis
workstation and the PowerGene genetic analyzer. These instruments have list
prices ranging from $20,000 to $195,000 depending on the model and
configuration, and relatively modest declines in unit sales or gross margins for
either product line 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 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.
<PAGE> 36
Year 2000: The Company has conducted a review of its IVD imaging
products and internal computer systems to identify those areas that require Year
2000 compliance. Year 2000 compliance refers to the inability of certain
computer systems to recognize dates commencing on January 1, 2000. The Company
currently believes that by modifying existing software and converting to new
software for certain tasks, Year 2000 compliance will not pose significant
marketing or operational problems and is not anticipated to be material to its
future financial position or results of operations.
3. Inventories.
Inventories consist of the following:
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1996 1997
---------- ----------
<S> <C> <C>
Finished goods....................................... $631,116 766,525
Work-in-process...................................... 646,031 788,374
Raw materials, parts and sub-assemblies ............. 3,561,059 2,184,584
---------- ----------
$4,838,206 $3,739,483
========== ==========
</TABLE>
4. Property and Equipment.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1996 1997
---------- ----------
<S> <C> <C>
Leasehold improvements............................... $402,537 $406,308
Furniture and fixtures............................... 251,617 274,828
Machinery and equipment.............................. 3,366,361 3,691,466
Tooling, dies and molds.............................. 729,472 767,355
Rental units......................................... 577,610 930,407
------------ -----------
5,327,597 6,070,364
Less accumulated depreciation........................ (3,379,884) (4,222,618)
------------ -----------
$1,947,713 $1,847,746
========== ==========
</TABLE>
Property and equipment includes $2,015,694 and $2,710,335, respectively,
at December 31, 1996 and 1997, of fully depreciated assets which remain in
service. Depreciation expense was $449,653, $830,914 and $983,003, for 1995,
1996, and 1997, respectively.
5. Equipment Leasing and Third Party Transactions
The Company leases equipment to customers under sales-type leases as
defined in Statement of Financial Accounting Standards No. 13. All sales-type
leases originated by the Company have been sold on a non-recourse basis to a
financial institution ("Third Party"). The Third Party assumes the
administrative responsibility for the collection of the lease receivable and the
credit risk. Also, in connection with these leases the Company agrees to provide
on-going supplies and maintenance service with respect to the equipment. For
these obligations the Company receives its normal supply and maintenance
revenues. The agreements with the Third Party provide the Company with residual
rights in revenues, if any, derived from the equipment after the Third Party has
received a designated return. Equipment sales revenues arising from these
transactions with the Third Party were none, $125,000 and $525,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
Any lease that does not meet the criteria for a sales type or financing
lease is accounted for as an operating lease. Under these leases the Company
also provides supplies and services. Generally operating leases are for periods
less than one year and contain provisions for early termination with a penalty
and renewal. The cost of leased systems is depreciated to a zero value on a
straight-line basis over five years. Accumulated depreciation on leased systems
was $98,523 and $232,302 at December 31, 1996 and 1997, respectively. Minimum
rentals receivables, net of estimated costs for supplies and service, under
existing operating leases as of December 31, 1997 are as follows: 1998-$602,000,
1999-$124,000, 2000-$41,000 and none thereafter.
<PAGE> 37
6. Purchased Intangibles
Purchased intangibles, at cost, consist of the following:
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1996 1997
-------------- ----------
<S> <C> <C>
Goodwill............................................. $1,377,973 $383,108
International distribution channel 5,571,728 5,571,728
Acquired technology and know-how..................... 3,960,904 3,960,904
------------- ----------
10,910,605 9,915,740
Less accumulated amortization........................ (585,845) (1,318,139)
-------------- ----------
Total................................................ $10,324,760 $8,597,601
============== ==========
</TABLE>
In the fourth quarter of 1997, the Company was notified that a certain
distributor would no longer carry the digital refractometer product line. Based
on this development, the Company determined that estimated cash flows
(undiscounted and without interest charges) from this product line would not be
sufficient to recover the associated goodwill, and that it had become impaired.
The Company measured impairment based on a discounted cash flow approach. As a
result, the Company recorded a $704,579 charge to earnings in the fourth quarter
of 1997 as an impairment loss.
7. Accrued Expenses.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
At December 31,
-----------------------------
1996 1997
---------- ----------
<S> <C> <C>
Accrued bonuses........................... $186,985 $194,444
Accrued commissions....................... 237,422 260,296
Accrued payroll........................... 203,574 21,121
Accrued vacation.......................... 207,947 301,337
Accrued taxes and other................... 28,755 101,528
Accrued professional fees................. 254,577 156,321
Accrued warranty expense.................. 278,563 466,569
Accrued interest.......................... 154,932 133,242
Accrued amount due BMC.................... 1,587,084 --
Accrued - other........................... 761,232 749,088
---------- ----------
$3,901,071 $2,383,946
========== ==========
</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 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. 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 and additional warrants if the Term Loan was
still outstanding on June 1 and July 1, 1997. On June 1 and July 1, 1997, the
Company issued three year warrants to purchase 25,000 shares each of common
stock at $4.375 and $4.0625 per share, respectively. The warrants were valued at
an aggregate of $129,500 for accounting purposes.
On December 31, 1997 the outstanding principal balance of the Term Loan was
$3.4 million. 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
(8.5% on December 31, 1997) plus 2.0%. 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.
<PAGE> 38
The outstanding principal balance on the Credit Facility was $350,000 on
December 31, 1997. 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 2.0%. The Credit
Facility matures April 15, 1998 and is collateralized by a first priority lien
on all of the assets of the Company.
On March 30, 1998, the Company received a commitment for a new loan facility
(the "New Facility") from a financial institution to refinance the Term Loan and
Credit Facility. The commitment is subject to definitive loan documentation and
customary closing conditions. Management believes that such conditions will be
satisfactorily met. The New Facility will provide for a maximum line of credit
of $7.0 million, comprised of a term loan of up to $3.6 million and a
revolving line of credit of up to $4.0 million based on a percentage of
eligible accounts receivable. The Company expects to have approximately $1.7
million available under the revolving credit line at inception. The term loan
will bear interest at the lender's prime rate (8.5% on March 30, 1998) plus
3.0% and is payable in 36 equal monthly installments. The revolving credit
line will bear interest at the lender's prime rate plus 1.0%. Interest will be
charged on a minimum loan balance of $3.0 million. Borrowings will be
collateralized by a first priority lien on all assets of the Company. The New
Facility will mature in 2001.
<PAGE> 39
The New Facility will contain financial covenants based on tangible net
worth, interest coverage and various operating ratios. It will also restrict
purchases of fixed assets and prohibit the payment of cash dividends. The
Company will pay an initial commitment fee of 0.75% of the total facility, an
unused line fee of 0.375% per annum on the unused portion of the total facility
and certain other administrative fees. The New Facility will be subject to
prepayment penalties of 3.0%, 2.0% and 1.0% of the maximum credit line in the
first, second and third years, respectively.
The outstanding principal balance on the Subordinated Note was $7.0 million
on December 31, 1997. 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.
In 1996, Corange International Limited, an affiliate of the Boehringer
Mannheim Group of companies, sold to the Company 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, 1997, the outstanding balance of the purchase price was
approximately $1.0 million. On June 30 and September 30, 1997, the Company
exchanged two 8% promissory notes in the aggregate amount of approximately $1.0
million due in equal installments in 1998 and 1999 for amounts due relating to
the repurchase.
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 short term borrowings and long term debt
are $4,250,000 (1998), $542,027 (1999) and $7,000,000 (2001).
9. Income Taxes.
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------
Currently payable: 1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal $ 26,000 $ (22,161) $ --
State . 32,956 21,154 60,000
Foreign -- -- 50,000
----------- ----------- -----------
58,956 (1,007) 110,000
----------- ----------- -----------
Deferred:
Federal (3,655,589) (3,197,790) (325,000)
State . (50,000) (259,130) (78,000)
----------- ----------- -----------
(3,705,589) (3,456,920) (403,000)
-----------
$(3,646,633) $(3,457,927) $ (293,000)
=========== =========== ===========
</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, 1995, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision (benefit) computed at
Federal statutory rate ............ $ (516,875) $(3,701,280) $ (270,738)
Increase (decrease) in taxes due to:
Change in valuation allowance ..... (3,587,000) 437,000 --
Utilization of net
operating loss carryforward ..... (662,819) -- --
Write-off of in-process research
and development ................. 1,089,962 -- --
State taxes, net of federal benefit 26,156 (195,807) (41,903)
Nondeductible expenses ............ (22,057) 44,220 19,641
Other ............................. 26,000 (42,060) --
----------- ----------- -----------
($3,646,633) ($3,457,927) $ (293,000)
=========== =========== -----------
</TABLE>
<PAGE> 40
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, 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, 1997, the Company had federal net operating loss
carryforwards of approximately $17.9 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, 1997, IRIS had investment tax, research
and experimentation and foreign tax credit carryforwards of $121,700 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, 1995, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
At December 31,
1995 1996 1997
-----------------------------------------
<S> <C> <C> <C>
Depreciation and amortization ................... $146,200 $200,300 $960,800
Allowance for doubtful accounts.................. 32,400 101,700 99,000
Accrued liabilities.............................. 256,600 338,700 597,700
Deferred revenue-service contracts 145,800 82,800 138,000
Deferred research and development 537,000 2,857,000 2,549,000
Net operating loss carryforwards 4,840,000 6,423,900 6,112,000
Other............................................ 118,589 208,350 159,250
Valuation allowance.............................. (1,563,000) (2,000,000) (2,000,000)
----------- ----------- ----------
$4,513,589 $8,212,750 $8,615,750
========== ========== ==========
</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.
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. 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,
<PAGE> 41
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 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 an aggregate price of $5.1 million. 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. Capital Stock.
Issuance of Common and Preferred Stock:
During the fourth quarter of 1997, 188,633 shares of common stock were
issued to certain warrant holders who exercised their warrants at a temporarily
reduced price under the terms of an exercise offer made by the Company. As part
of the exercise offer, new warrants with a price of $4.00 per share and an
expiration date of March 29, 2000 were issued to participating warrant holders
to replace those warrants exercised pursuant to the offer.
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 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 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, 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 filed 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. The Company has reserved
2,000,000 shares of common stock for issuance upon conversion of the Preferred
Stock.
<PAGE> 42
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 resulted 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 in Note 8, in 1996 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. The employee's 50% portion of
stock purchases under the plan may not exceed 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 1995, 1996 and 1997, IRIS issued 26,973, 35,433
and 69,928 shares of common stock, respectively, in exchange for $179,630,
$307,288 and $281,616 in cash and services, respectively, under this plan.
Stock Option Plans and Employee Benefit Plans:
As of December 31, 1997, the Company had two stock option plans under
which it may grant non-qualified stock options, incentive stock options and
stock appreciation rights. Options remain outstanding under another plan,
although no new options may be granted thereunder. No stock appreciation rights
or incentive stock options have been granted under these plans.
The following schedule sets forth options authorized, exercised,
outstanding and available for grant under the Company's three stock option plans
as of December 31, 1997.
<TABLE>
<CAPTION>
Number of Option
--------------------------------------------------------
Shares
------ Available
Plan Authorized Exercised Outstanding for Grant
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1986 360,000 242,469 93,600 --
1994 700,000 2,100 656,000 41,900
1997 600,000 -- 516,700 83,300
---------- ------- ---------- -------
1,660,000 244,569 1,266,300 125,200
========= ======= ========= =======
</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.
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, 1996 and 1997, 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:
<PAGE> 43
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------------
1995 1996 1997
-------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) attributable to common stockholders as reported $2,126,412 $(7,428,188) $(953,228)
Net earnings (loss) attributable to common stockholders pro forma 2,052,090 (7,890,943) (1,604,718)
Earnings per diluted share (loss) as reported $.34 $(1.21) $(.16)
Earnings per diluted share (loss) pro forma $.33 (1.28) (.27)
</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, 1996 and 1997.
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------------------
1995 1996 1997
---------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 6.11% 5.98% 6.10%
Expected lives (years) 5 5 5
Expected volatility 55% 55% 54%
Expected dividend yield -- -- --
</TABLE>
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, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
Option Price Fair Value at
Weighted Grant Date
Shares Range Average Weighted Average
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1995 435,901 $1.10to $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 December 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
Granted 325,100 $3.19 to $4.50 $3.73 $3.84
Exercised (13,901) $1.90 to #3.03 $2.64 --
Canceled or expired (68,933) $2.59 to $6.22 $4.04 --
--------------------------------------------------------------------------------------
Outstanding at December 31, 1997 1,266,300 $3.03 to $4.50 $3.21
=========
Outstanding at December 31, 1997
Weighted average life - 95 months 1,266,300 $3.21
Outstanding at December 31, 1996
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
Exercisable at December 31, 1997 537,167 $3.03
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
</TABLE>
<PAGE> 44
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 ranged 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. During 1997, options to purchase 10,283 shares at $3.66 per share
were exercised. At December 31, 1997, options to purchase 74,876 shares at
prices ranging from $3.66 to $4.58 remain outstanding. These options will expire
in March 1998.
In 1996, the Company adopted a 401(k) Plan. All employees are eligible to
participate in the plan. Contributions by the Company are discretionary.
Employees vest in amounts contributed by the Company immediately. The Company
contributed $44,751 and $34,190 to the plan for 1996 and 1997, respectively.
Warrants:
At December 31, 1997, the following warrants were outstanding and
exercisable:
<TABLE>
<CAPTION>
Number of Warrants Price Expiration Date
------------------ ----- ------------------
<S> <C> <C>
75,000 $8.125 March 30, 1998
323,000 6.50 September 29, 1998
150,000 7.80 September 28, 2000
875,000 8.00 July 31, 2001
84,270 3.56 December 31, 2001
50,000 3.875 January 15, 2000
25,000 4.375 June 1, 2000
10,000 4.31 May 15, 2002
25,000 4.0625 July 1, 2000
188,633 4.00 March 29, 2000
</TABLE>
15. Commitments and Contingencies.
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 in excess of one year as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------------------------------
<S> <C>
1998 $453,724
1999 300,583
2000 110,555
2001 84,240
</TABLE>
Rent expense under all operating leases during 1995, 1996 and 1997 was
$453,762, $347,925 and $489,500, respectively.
Other:
IRIS has a licensing agreement with Cytocolor, Inc. relating to the use of
its patented leukocyte stain in The White IRIS. Under the terms of the
agreement, IRIS is subject to the following future minimum royalty payments:
<PAGE> 45
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------------------------------
<S> <C>
1998 $20,000
1999 20,000
2000 20,000
2001 20,000
2002 20,000
Years thereafter 220,000
--------
$320,000
========
</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 which $80,000 remains
outstanding) of the cost of the development project for several new products to
enhance automation in the urinalysis field (see Note 11).
Litigation
In July 1996, the Company acquired PSI from Digital Imaging Technologies,
Inc. ("DITI"). As part of the purchase price, the Company issued to DITI a
five-year warrant to purchase 875,000 shares of Common Stock at $8.00 per share.
In August 1997, the Company filed a demand for arbitration against DITI with the
American Arbitration Association. The Company's demand for arbitration alleges
material breaches of the representations, warranties and covenants in the
purchase agreement governing the PSI acquisition. DITI subsequently filed a
counterclaim in the arbitration proceeding alleging that the Company
misrepresented or omitted to disclose material facts in connection with the PSI
acquisition. DITI had previously requested a reduction in the exercise price of
the warrant but elected to seek unspecified monetary damages in the
counterclaim. Although the Company does not presently anticipate any material
adverse effect as a result of this arbitration proceeding, there can be no
assurance that it will not have such an effect on the Company or result in
additional dilution to holders of the Common Stock.
16. Earnings Per Share.
The computation of per share amounts for 1996 and 1997 is based on the
average number of common shares outstanding for the period. Options and warrants
to purchase 2,636,034 and 3,072,203 shares of common stock outstanding during
1996 and 1997, respectively, were not considered in the computation of diluted
EPS because their inclusion would have been antidilutive.
Preferred stock convertible into 842,697 common shares at December 31,
1996 and 1997 was also not considered in the computation of diluted EPS because
its inclusion would have been antidilutive.
<PAGE> 46
The following is a reconciliation of net income and shares used in
computing basic and diluted earnings per share amounts for 1995.
<TABLE>
<CAPTION>
Income Shares Per Share Amount
------ ------ ----------------
<S> <C> <C> <C>
Basic EPS
Income available to common
shareholders $2,126,412 5,994,739 $.35
Effects of Dilutive Securities
Warrants -- 95,868
Options -- 156,119
Diluted EPS
Income available to common
shareholders plus assumed _________ ________ ____
conversions $2,126,412 6,246,726 $.34
========== ========= ====
</TABLE>
Options and warrants to purchase 475,000 shares of common stock at $7.375
to $8.125 were outstanding during 1995 but were not included in the computation
of diluted EPS because the exercise price was greater than the average market
price of the common shares during the period.
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 $96,000, $43,000, and $513,000 in 1995, 1996 and
1997, 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 the National Institutes 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 -- 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. BMC
supplies the Company with CHEMSTRIP/IRIStrip urine test strips and has agreed
to supply the Company with certain raw materials should the Company elect to
manufacture its own urine test strips, subject to royalty payments. The Company
was granted the non-exclusive right to distribute certain other BMC urinalysis
products to hospitals and commercial laboratories in the United States. The
Company manufactures the Model 900UDx with BMG providing certain components on
an OEM basis at cost. The Company has exclusive marketing rights to the Model
900UDx in Taiwan and non-exclusive rights for the rest of the world outside of
Germany and Italy. During 1997, Hoffman-LaRoche acquired the Boehringer
Mannheim Group of companies, and BMC and BMG are now operated as Roche
Diagnostics.
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 the Company's common stock. The FDA cleared
The White IRIS in May 1996, but its commercial release has been delayed by
other priorities. 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"). The Company has an option to acquire all the
common stock of Poly for $5.1 million payable at the Company's discretion, in
cash or shares of the Company's Common Stock.
<PAGE> 47
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>
For the Year Ended December 31,
-----------------------------------------------------------------
1995 1996 1997
-----------------------------------------------------------------
<S> <C> <C> <C>
Reimbursements $842,663 $1,779,820 $1,014,520
Costs 1,494,873 1,498,165 1,414,113
--------- ---------- ----------
Net costs $ 652,210 $(281,655) $399,593
========== ========= ==========
</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. The results of operations for the year ended
December 31, 1997 include certain unusual charges to earnings of $1,338,338
primarily for the write-off of deferred offering costs ($481,325), goodwill
associated with the digital refractometer line of business ($704,579) and legal
expenses ($152,434) relating to the recently completed Intelligent Medical
Imaging, Inc. patent litigation and the pending arbitration matter against
Digital Imaging Technologies, Inc.
20. The following table summarizes certain financial information by quarter for
1996 and 1997:
<TABLE>
<CAPTION>
1996 Quarter Ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $3,925,931 $4,823,455 $5,564,536 $6,283,132
Gross margin on net revenues 1,884,682 2,458,214 2,364,095 2,694,226
Other income (expense), net 60,413 80,753 (187,700) (405,434)
Net income (loss) 206,912 351,116 (6,250,834) (1,735,382)
Net income (loss) per share - Basic $.03 $.06 $(.98) $(.30)
Net income (loss) per share - Diluted $.03 $.05 $(.98) $(.30)
</TABLE>
<PAGE> 48
The quarters ended March 31 and June 30, 1996 include unusual charges
totaling $199,365 and $70,740, respectively, relating to StatSpin merger
expenses. The quarter ended September 30, 1996 includes unusual charges totaling
$1,047,310 relating to the write-off of deferred offering costs, litigation and
arbitration matters and write-down of fixed assets and inventory and includes
the write-off of acquired in-process research and development of $7,250,000. The
quarter ended December 31, 1996 includes unusual charges totaling $421,064
relating to litigation and arbitration matters and $298,113 for severance and
other incremental costs associated with a restructuring of the Company's
personnel.
<TABLE>
<CAPTION>
1997 Quarter Ended
March 31 June 30 September 30 December 31
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $6,290,035 $6,604,284 $7,196,713 $7,404,116
Gross margin on net revenues 3,029,037 3,402,827 3,612,316 3,699,576
Other income (expense), net (291,062) (269,616) (234,666) (284,927)
Net income (loss) (202,075) 17,330 214,381 (532,924)
Net income (loss) per share - Basic $(.11) $.00 $.04 $(.09)
Net income (loss) per share - Diluted $(.11) $.00 $.03 $(.09)
</TABLE>
The quarters ended March 31, June 30 and September 30, 1997 include
unusual charges totaling $95,129, $2,900 and $31,633 relating to litigation and
arbitration matters. The quarter ended December 31, 1997 includes unusual
charges totaling $1,208,676 primarily relating to the write-off of deferred
private offering costs and the write-off of goodwill no longer considered
recoverable.
<PAGE> 49
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
----------------------------------
Beginning Charged to cost Charged to Ending
Balance and expenses other accounts Deductions Balance
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for Doubtful Accounts $ 274,766 $15,105 $10,714 $(33,006)(1) $267,579
Reserve for Inventory Obsolescence $404,611 $417,787 -- $(232,626)(1) $589,772
Deferred Tax Asset Valuation Allowance $2,000,000 -- -- -- $2,000,000
Year Ended December 31, 1996
Allowance for Doubtful Accounts $87,759 $198,037 $10,000 $(21,030) (1) $274,766
Reserve for Inventory Obsolescence $380,845 232,626 -- $(208,860) (1) $404,611
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) $87,759
Reserve for Inventory Obsolescence $332,926 $47,919 -- -- $380,845
Deferred Tax Asset Valuation Allowance $5,787,000 -- -- $(4,224,000) (2) $1,563,000
</TABLE>
(1) Relates to the write-off of accounts receivable or disposal of obsolete
inventory.
(2) Relates to change and/or utilization in valuation allowance
<PAGE> 50
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)
10.2(g) -- 1997 Stock Option Plan and form of Stock Option Agreement (18)
10.3(a) -- Various Agreements with TOA Medical Electronics Company, Ltd. (12)
10.3(b) -- Patent License Agreement dated April 1, 1997 between the Company and TOA Medical
Electronics Company, Ltd.
10.3(c) -- Termination, Release and Reassignment of Security Interest dated October 30, 1997
executed by TOA Medical Electronics Company, Ltd. in favor of the Company
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)
10.6(e) -- Form of Series D Warrant
10.6(f) -- Form of Series E Warrant
10.6(g) -- Form of Series F Warrant
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)
10.7(c) -- Employment Agreement dated January 30, 1996 with Thomas F. Kelley (16)
10.7(d) -- Letter Agreement dated October 4, 1997 amending Employment
Agreement of Thomas F. Kelley
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)
</TABLE>
<PAGE> 51
<TABLE>
<S> <C> <C>
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) (19)
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) (19)
10.10(e) -- $4,900,000 Amended and Restated Promissory Note dated as of January 3, 1997 (Term
Loan) (19)
10.10(f) -- Supplemental Terms Letter dated as of January 3, 1997 (Term Loan) (19)
10.10(g) -- Waiver of Default dated as of January 3, 1997 (19)
10.10(h) -- Warrant to Purchase Common Stock dated March 15, 1997 issued to City National Bank (19)
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 (19)
10.10(l) -- Warrant to Purchase Common Stock dated June 1, 1997 issued to City National Bank
10.10(m) -- Warrant to Purchase Common Stock dated July 1, 1997 issued to City National Bank
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)
10.12 -- Commitment Letter of Foothill Capital Corporation dated March 30, 1998*
24 -- Consent of Coopers & Lybrand L.L.P.
27.1 -- Financial Data Schedule (1997)
27.2 -- Financial Data Schedule (Quarter 1997)
27.3 -- Financial Data Schedule (1995 and 1996)
99 -- Additional Information Regarding Forward Looking Statements
</TABLE>
- -------------------
Exhibits followed by a number in parenthesis are incorporated by
reference to the similarly numbered Company document 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.
(18) Registration Statement on Form S-8, as filed with the Securities and
Exchange Commission on July 16, 1997 (File No. 333-31393).
(19) Annual Report on Form 10-K for the year ended December 31, 1996.
<PAGE> 1
EXHIBIT 10.3(b)
PATENT LICENSE AGREEMENT
This Patent License Agreement (the "Agreement") is entered into as of
April 1, 1997 by and between International Remote Imaging Systems, Inc., a
Delaware corporation ("IRIS"), and TOA Medical Electronics Co., Ltd., a Japanese
corporation ("TOA"), with reference to the following facts:
A. IRIS and TOA entered into that certain Temporary License Agreement
dated as of June 8, 1995 (the "Temporary License Agreement") which granted TOA a
temporary license until September 30, 1996 to use certain patented and other
technology developed by IRIS prior to April 1, 1988 for developing,
manufacturing and test marketing instruments for non-medical, industrial
applications in Japan.
B. Pursuant to the Temporary License Agreement, and on or before
September 30, 1996, TOA manufactured a limited number of instruments, which it
designated as the FPIA-1000, for non-medical, industrial applications in Japan.
Although TOA stopped manufacturing such instruments on or before such date, it
sold, or will have sold on or before June 30, 1997, its remaining units from
inventory in Japan after September 30, 1996 and paid, or will have paid on or
before July 31, 1997, IRIS a royalty in respect thereof under the Temporary
License Agreement at a rate of 5%;
C. The Temporary License Agreement required that, if TOA so elected by
giving written notice to IRIS on or before June 30, 1996, which notice was in
fact given, that the parties negotiate in good faith mutually acceptable terms
for a permanent license for the development, manufacture and marketing of
industrial instruments.
D. TOA now desires to re-commence manufacture and sale of the FPIA-1000
and successor instruments effective as of April 1, 1997, and thus wishes to
license from IRIS, and IRIS desires to license to TOA, subject to the terms and
conditions hereof, certain of IRIS' patents for use by TOA in the development,
manufacturing, marketing, distribution and sale, on a commercial basis, of the
FPIA-1000 and successor instruments for non-medical, industrial applications.
NOW, THEREFORE, in consideration of the foregoing premises and the
promises, covenants and conditions set forth herein, and for other good valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Definitions.
1.1 "Associated Consumables" means consumables for use with the
Industrial Products.
1.2 "Industrial Products" means products or
<PAGE> 2
instruments for non-medical, industrial uses or applications which incorporate
any part or all of the IRIS Patents. By way of illustration, but not limitation,
the parties acknowledge and agree that those certain products and/or instruments
set forth on Schedule 1.2 attached hereto are deemed to be Industrial Products
within the meaning of this Section 1.2.
1.3 "IRIS Patents" means the United States patents and their
respective foreign counterparts listed on Schedule 1.3.
1.4 "Japanese Customer" means any end-user of an Industrial
Product organized and existing under the laws of Japan (or any political
subdivision thereof) and having its principal business headquarters located in
Japan, and any of its foreign-based subsidiaries or joint ventures in which it
directly or indirectly owns more than 25% of the equity capital.
1.5 "Modifications and Improvements" means any and all
engineering, design or other changes derived from or based on the IRIS Patents
or the Industrial Products.
1.6 "Periodic Payments" has the meaning specified in Section
5.1(b).
1.7 "Revenues" means all revenues received by TOA or its
subsidiaries with regard to Sales of Industrial Products and related parts and
consumables, net of returns, allowances and trade discounts.
1.8 "Sales" means any sale, lease, license or other placement of
an Industrial Product, Associated Consumable or Spare Part by TOA or its
subsidiaries, or any arrangement whereby TOA or its subsidiaries receive
Revenues based on tests using any Industrial Product.
1.9 "Spare Parts" means spare parts used with Industrial Products.
1.10 "Term" will commence on April 1, 1997, and will continue until
the earlier of (a) the expiration of the last to expire of the United States
Patents, which the parties acknowledge and agree is on July 10, 2004 and (b) the
date on which this Agreement is terminated pursuant to Section 6.
2. Grant of Rights and Licenses. In consideration of the payments by
TOA to IRIS pursuant to Section 5.1, IRIS hereby grants to TOA for the Term a
non-exclusive right and license under the IRIS Patents to practice the
inventions covered by the IRIS Patents (a) to make and use Industrial Products
worldwide, (b) to make Sales of
-2-
<PAGE> 3
Industrial Products to any Japanese Customer worldwide and (c) to make Sales of
Industrial Products to any other person or entity in Japan for use solely in
Japan. Sales of Industrial Products may be made directly by TOA or indirectly
through a distributor or agent of TOA. IRIS represents and warrants that it owns
or holds rights to the IRIS Patents necessary to grant the rights conveyed
hereunder, and that the exercise of such rights by TOA as contemplated hereunder
will not conflict with, infringe or otherwise violate the rights of third
parties. This representation is not intended to cover compliance with United
States export laws affecting the transfer of IRIS Patents to Japan or elsewhere,
compliance with which TOA assumes responsibility.
3. Reservation of Rights. TOA hereby acknowledges and agrees that IRIS
reserves all right, title and interest in and to the IRIS Patents not expressly
granted to TOA pursuant to Section 2 of this Agreement or pursuant to that
certain License Agreement, Amended and Restated Distribution Agreement and
Restructuring Agreement, each dated as of July 15, 1988 between TOA and IRIS
(the "1988 Agreements"). TOA hereby acknowledges and agrees that (i) it shall
not use, or permit the use of, the IRIS Patents except as expressly permitted
pursuant to Section 2 or in the 1988 Agreements and (ii) the license granted in
Section 2 does not include the right to use any proprietary rights of IRIS other
than the IRIS Patents, including, without limitation any copyrights which IRIS
may own.
4. Modifications and Improvements. All Modifications and Improvements
of a general or specific nature made by either party, whether or not such
Modifications and Improvements embody patentable subject matter, shall belong
solely to the party making such Modifications and Improvements.
5. Payments; Records and Statements; Audit Rights.
5.1 Payments.
a. Up-front Payment. Within ten (10) business days after
the execution of this Agreement, TOA shall pay to IRIS the amount of Three
Hundred Thousand US Dollars (US$300,000).
b. Periodic Payments. Not later than thirty (30) days
following the end of each calendar quarter throughout the Term, TOA shall pay to
IRIS in immediately available funds in US Dollars royalties in the amount of
five percent (5%) of Revenues received by TOA or its subsidiaries from Sales of
Industrial Products and Associated Consumables and Spare Parts during such
completed calendar quarter (the "Periodic Payments"), net of any payment made
pursuant to Section 5.1(c).
-3-
<PAGE> 4
c. Minimum Payments. For each of the three (3) 12-month
periods commencing July 1, 1998, July 1, 1999 and July 1, 2000 only, TOA shall
make minimum payments to IRIS in the amount of Fifty Thousand US Dollars
(US$50,000). Each such minimum payment shall be payable at the commencement of
each such twelve-month (12-month) period and shall be credited against the
payment of Periodic Payments due in respect of Revenues received by TOA during
such 12-month period.
d. Withholding Taxes. It is understood and agreed that, to
the extent that any present or future income, stamp, sales, transfer, property,
VAT or other levies, imposts, duty, charge, fee, deduction or withholding, now
or hereafter imposed, levied, collected, withheld or assessed by any taxing
authority ("Taxes"), is due and payable by TOA in respect of any payments made
by it pursuant to this Section 5.1, TOA shall pay such Taxes on IRIS' behalf;
provided; however, that each and all such Tax payments shall be deemed included
in and a part of any payments made by TOA to IRIS pursuant to this Section 5.1.
By way of illustration but not limitation, if TOA owes a Periodic Payment to
IRIS in the amount of US$25,000 and the applicable withholding percentage is ten
(10%) percent, TOA will (i) withhold $2,500 from such Periodic Payment and pay
such amount to the relevant taxing authority and (ii) pay over $22,500 in cash
to IRIS; provided that the total Periodic Payment made by TOA shall be deemed to
be US$25,000. TOA shall cooperate with IRIS to provide such records and
documents as IRIS may reasonably request in connection with any application by
IRIS to any taxing authority with respect to (i) Tax credits available to it in
respect of, or (ii) obtaining a refund for, Taxes paid by TOA hereunder.
e. Interest; Late Payment. After the due date, all payments
required to be made hereunder shall bear interest at the lesser of (i) two
percent (2%) over Bank of America NT&SA's prime rate or (ii) the maximum legal
rate.
5.2 Records. TOA shall keep accurate records as to shipment of,
and all transactions relating to, Industrial Products and Associated Consumables
and Spare Parts. Such records shall clearly and separately set forth, without
limitation, as to each Industrial Product, Associated Consumables and Spare
Parts, at least the following information: (i) the kind and number sold to each
customer and (ii) the gross receipts, returns, allowances and trade discounts in
connection with all Sales.
5.3 Statement of Periodic Payments. At the same time that any
Periodic Payment is due under Section 5.1(b), TOA shall submit to IRIS a clearly
itemized statement showing the calculation of such Periodic Payment including
separately
-4-
<PAGE> 5
setting forth the quantity of Industrial Products, Associated Consumables and
Spare Parts shipped or otherwise transferred during the period, the name of each
customer purchasing an Industrial Product during such period and the amount of
Revenues received by TOA and its subsidiaries during such period. TOA shall also
provide to IRIS one copy of each product brochure and each sales literature
document for the Industrial Products concurrently with their availability to
prospective customers.
5.4 Audit Rights. So long as royalties are due and payable
hereunder and for one year thereafter, IRIS and/or any of its agents shall have
the unqualified right to inspect, audit and analyze all of TOA's records as
required as required under Section 5.2, and all of TOA's other books, accounts
and shipping records in each case relating to Sales of Industrial Products,
Associated Consumables and Spare Parts, during business hours, at TOA's regular
place of business. IRIS shall bear the cost of such inspection and audit unless
such audit discloses that TOA has underpaid the Periodic Payments due IRIS under
this Agreement by five percent (5%) or more of the amount actually paid for the
relevant period, in which case such cost shall be borne by TOA. The amount of
any such underpayment, regardless of the percentage, shall be due and payable to
IRIS immediately.
5.5 Confidentiality. Except to the extent necessary for the
enforcement of its rights hereunder, IRIS shall hold in strict confidence any
and all Sales and other information learned or discovered in connection with any
audit conducted by IRIS or any information provided by TOA hereunder and shall
use its best efforts to keep and maintain such information confidential.
6. Termination.
Without prejudice to any other rights such party may have in
law and equity, either party may terminate this Agreement if the other party
fails in any material respect to perform any of its obligations under this
Agreement, and such failure continues for sixty (60) days after its receipt of
notice from the party not in default specifying the nature of the default. The
parties agree that the licenses granted herein are rights in "intellectual
property" within the scope of Section 101 of the United States Bankruptcy Code
(the "Code") and that this Agreement is subject to Section 365(n) of the Code.
Each party hereby acknowledges and agrees that the royalties payable by Licensee
hereunder represent the fair value for the licenses and rights being granted to
Licensee under this Agreement.
-5-
<PAGE> 6
7. General Provisions.
7.1 Assignability. Except as otherwise expressly provided by the
terms of this Agreement, TOA shall not have the right to transfer, sublicense or
assign any of its rights granted hereunder, except to (i) one or more
majority-owned subsidiaries for so long as they remain majority-owned
subsidiaries or (ii) the successor or assignee of all or substantially all of
its business, which successor or assignee expressly assumes the obligations of
this Agreement, but any such transfer, sublicense or assignment shall not
relieve TOA of its obligations hereunder.
7.2 Alterations and Waivers. The waiver, amendment or modification
of any provision of this Agreement or any right, power or remedy thereunder,
whether by agreement of the parties or by custom, course of dealing or trade
practice, shall not be effective unless in writing and signed by the party
against whom enforcement of such waiver, amendment or modification is sought. No
failure or delay by either party in exercising any right, power or remedy with
respect to any of the provisions of this Agreement shall operate as a waiver of
such provisions with respect to such occurrences.
7.3 Validity, Forum, Laws and Construction. The legal relations
between the parties to this Agreement shall be governed by the laws of the State
of California, excluding the conflict of laws provisions thereof. Unless the
parties otherwise agree in writing, any disputes arising in connection with this
Agreement shall be finally settled by arbitration under the Rules of
Conciliation and Arbitration of the International Chamber of Commerce conducted
in the home country and state of the party which did not initiate the
proceedings. Each party shall appoint one arbitrator within ten (10) days of
notice of the proceedings, who together will agree on a third within ten (10)
days, or the International Chamber of Commerce will appoint a suitable third
arbitrator. Appropriate discovery will be allowed, and the provisions of Section
1283.05 of the California Code of Civil Procedure are hereby incorporated by
reference. Judgment on the award of the arbitrators may be entered in any court
having jurisdiction hereof or having jurisdiction over one or more of the
parties or their assets. In the event any provision of this Agreement or the
application of any such provision shall be held to be contrary to law, the
remaining provisions of this Agreement shall remain in full force and effect.
The parties shall use their best efforts to replace the provision that is
contrary to law with a legal one approximating to the extent possible the
original intent of the parties.
7.4 Attorneys' Fees. In the event of any dispute or controversy
arising out of this Agreement, the prevailing party shall be entitled to
reimbursement of its costs,
-6-
<PAGE> 7
including court and arbitration costs and attorneys' and expert witnesses' fees
and costs.
7.5 Parties Independent. Each party is an independent contractor.
Neither of the parties (including its affiliates, agents, sub-distributors,
employees or others acting on its behalf) is a representative of the other for
any purpose, and no such party has any power or authority to represent, act for,
bind, or otherwise create or assume any obligation on behalf of the other party
for any purpose whatsoever. All financial obligations associated with each
party's business are the sole responsibility of such party.
7.6 No Third-Party Beneficiaries. Nothing contained in this
agreement shall be construed to give any person other than IRIS and TOA any
legal or equitable right, remedy or claim under or with respect to this
Agreement other than those expressly provided for under this Agreement.
7.7 Headings. Section headings are included solely for
convenience, are not to be considered a part of this Agreement, and are not
intended to be full and accurate descriptions of their contents.
7.8 Notices. All notices or other communications which shall be or
may be given pursuant to this Agreement shall be in writing, shall be effective
upon receipt, and shall be delivered by certified or registered air mail,
facsimile transmission or telex mail addressed as follows (or as is provided in
the future by written notice):
If to IRIS: INTERNATIONAL IMAGING SYSTEMS, INC.
9162 Eton Avenue
Chatsworth, California 91311-5805
Fax: (818) 700-9661
Attn: Fred H. Deindoerfer,
President and Chairman
If to TOA: TOA MEDICAL ELECTRONICS CO., LTD.
7-2-1 Minanojima-Nakamachi
Chno-kn
Kobe 650, Japan
Fax: 011-81-78-991-1917
Attn: Hisashi Ietsugu,
President and CEO
7.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute on and the same instrument.
7.10 Language Interpretation. This Agreement is in English. In the
interpretation of this Agreement, unless the
-7-
<PAGE> 8
context otherwise requires, words importing the singular shall be deemed to
import the plural and vice versa. Words denoting gender shall include all
genders, and references to persons shall include corporations or other bodies,
and vice versa.
7.11 Further Assurances. Each party hereto agrees to execute and
deliver any and all further documents, and to perform such other acts as may be
necessary or expedient to carry out and make effective this Agreement.
7.12 Complete Agreement; Modifications. This Agreement constitutes
the entire Agreement among the parties with respect to the subject matter
hereof, and may not be surrendered, altered or modified except by a writing
signed by the parties. This Agreement supersedes all agreements,
representations, warranties, statements, promises and understandings, whether
oral or written, with respect to the subject matter hereof. Without limiting the
generality of the foregoing, the 1988 Agreements shall not be construed as
governing the subject matter hereof, and nothing in this Agreement is intended
in any way, by implication or otherwise, to affect the meaning or construction
of the 1988 Agreements.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the date first set forth above.
INTERNATIONAL REMOTE IMAGING
SYSTEMS, INC., a Delaware
corporation
By: /s/ Fred H. Deindoerfer
--------------------------------------
Name: Fred H. Deindoerfer,
Title: President and Chairman
TOA MEDICAL ELECTRONICS CO.
LTD., a Japanese corporation
By: /s/ Kenichi Yukimoto
--------------------------------------
Name: Kenichi Yukimoto
Title: Managing Director
-8-
<PAGE> 1
EXHIBIT 10.3(c)
TERMINATION, RELEASE AND REASSIGNMENT OF SECURITY INTEREST
(United States Patents)
This TERMINATION, RELEASE AND REASSIGNMENT OF SECURITY INTEREST is
executed and delivered to International Remote Imaging Systems, Inc., a Delaware
corporation ("IRIS"), by TOA Medical Electronics Company, Ltd., a Japanese
corporation ("TOA"), with reference to the following facts:
A. Pursuant to a Security Agreement and Collateral Assignment dated as
of July 15, 1988 (the "1988 SECURITY AGREEMENT"), IRIS granted to TOA a security
interest in certain technology, including, but not limited to, certain United
States Patents of IRIS.
B. Pursuant to a Patent and License Agreement dated as of April 1,
1997, IRIS granted to TOA a license to certain IRIS technology for non-medical,
industrial applications. As partial consideration for the Industrial License
Agreement, TOA agreed to release its security interest in the United States
Patents of IRIS created by the 1988 Security Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, TOA hereby (i) releases, transfers
and reassigns to IRIS all of TOA's right, title and interest in and to all of
the United States Patents of IRIS (the "U.S. PATENTS") granted, transferred or
assigned under the 1988 Security Agreement, including, without limitation, the
rights in and to the United States Patents described on Schedule A attached
hereto and incorporated by reference, (ii) terminates its security interest in
the U.S. Patents created by the 1988 Security Agreement and (iii) terminates any
and all other documents evidencing and/or recording such security interest in
the U.S. Patents. Except as set forth above, the 1988 Security Agreement shall
remain in full force and effect and TOA shall retain its security interest
thereunder in the other collateral covered thereby. TOA agrees to execute any
further documents which may be necessary or expedient to effectuate or evidence
this Termination, Release and Reassignment of Security Interest.
IN WITNESS WHEREOF, TOA has caused this Termination, Release and
Reassignment of Security Interest to be executed by its duly authorized officer
as of this 30th day of October, 1997.
TOA MEDICAL ELECTRONICS CO. LTD., a
Japanese corporation
By: Kenichi Yukimoto
-------------------------------------
Name: /s/ Kenichi Yukimoto
-----------------------------------
Title: Managing Director
----------------------------------
<PAGE> 2
SCHEDULE A
United States Patents
(International Remote Imaging Systems, Inc.)
<TABLE>
<CAPTION>
IRIS File No. Serial No. Filing Date Patent Number Issue Date
- ------------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
IRIS-500 06/146,064 05/02/80 4,338,024 07/06/82
IRIS-703 06/327,367 12/04/81 4,502,075 02/26/85
IRIS-1000 06/186,418 09/12/80 4,393,466 09/12/80
IRIS-1301 06/470,208 02/28/83 4,538,299 08/27/85
IRIS-2200 06/286,027 07/22/81 4,476,231 10/09/84
IRIS-2800 06/505,908 06/20/83 4,519,087 05/21/85
IRIS-2804 06/736,432 05/20/85 4,667,335 05/19/87
IRIS-2900 06/512,647 07/11/83 4,612,614 09/16/86
IRIS-3100 06/545,760 10/26/83 4,575,486 03/11/86
</TABLE>
<PAGE> 1
EXHIBIT 10.6(e)
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
STOCK PURCHASE WARRANT
THE WARRANTS EVIDENCED HEREBY AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD WITHOUT
REGISTRATION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER SUCH ACT,
OR THE RULES OR REGULATIONS PROMULGATED THEREUNDER, AND ANY APPLICABLE STATE
SECURITIES LAWS
WARRANT TO PURCHASE _____ SHARES OF COMMON STOCK
AS DESCRIBED HEREIN
Issue Date: ___________ ____, 199___. Series "D" No. ____
Expiration Date: September 29, 1998.
This certifies that, for value received, ____________________ or his, her
or its permitted successors and assigns ("HOLDER") is entitled to purchase from
International Remote Imaging Systems, Inc., a Delaware corporation (the
"COMPANY"), up to and including ____________ fully paid and nonassessable shares
(the "WARRANT SHARES") of the Common Stock, $.01 par value per share, of the
Company (the "COMMON STOCK") on the terms set forth herein at an exercise price
of $6.50 per share (the "PURCHASE PRICE"). The Warrant Shares and the Purchase
Price may be adjusted from time to time as described in this Warrant.
1. EXERCISE.
1.1 TIME FOR EXERCISE. This Warrant may be exercised in whole or in part
at any time, and from time to time, during the period commencing on September
29, 1996 and expiring on September 29, 1998 (the "EXERCISE PERIOD").
1.2 MANNER OF EXERCISE. This Warrant shall be exercised by delivering it
to the Company with the exercise form duly completed and signed, specifying the
number of shares as to which the Warrant is being exercised at that time (the
"EXERCISE NUMBER"). The Holder shall simultaneously deliver to the Company cash
or a certified check in an amount equal to the Exercise Number multiplied by the
Purchase Price.
1.3 EFFECT OF EXERCISE. Promptly after any exercise, the Company shall
deliver to the Holder (i) duly executed certificates in the name or names
specified in the exercise notice representing the aggregate number of shares
issuable upon such exercise, and (ii) if this Warrant is exercised only in part,
a new Warrant of like tenor representing the balance of the Warrant Shares. Such
certificates shall be deemed to have been issued, and the person
<PAGE> 2
receiving them shall be deemed to be a holder of record of such shares, as of
the close of business on the date the actions required in Section 1.2 shall have
been completed or, if on that date the stock transfer books of the Company are
closed, as of the next business day on which the stock transfer books of the
Company are open.
2. TRANSFER OF WARRANTS AND STOCK.
2.1 TRANSFER RESTRICTIONS; REGISTRATION RIGHTS. Neither this Warrant nor
the securities issuable upon its exercise may be sold, transferred or pledged
unless the Company shall have been supplied with reasonably satisfactory
evidence that such transfer is not in violation of the Securities Act of 1933,
as amended, and any applicable state securities laws. The Company may place a
legend to that effect on this Warrant and any replacement Warrant. This Warrant
is one in a series of warrants having the same terms and identified as "Series
D" (the "SERIES D WARRANTS"). Upon the request of the holders of a majority of
the shares issuable upon exercise of the Series D Warrants made anytime during
the Exercise Period, the Company will use all reasonable efforts to register for
resale in accordance with the Securities Act of 1933, as amended, any shares of
Common Stock issued upon exercise of the Warrants which do not qualify for an
exemption from such registration under Rule 144 under the Act or a comparable or
successor exemption from registration. Holder agrees to cooperate with the
Company in all reasonable ways to effect such registration. The Company will use
all reasonable efforts to keep such registration effective until the expiration
of the Exercise Period; provided, however, that the Company will not have any
obligation to amend such registration to add the shares of a Holder that
declines to participate in, or provide adequate information for, the original
registration.
2.2 MANNER OF TRANSFER. Upon delivery of this Warrant to the Company
with the assignment form duly completed and signed, the Company will promptly
execute and deliver to each transferee and, if applicable, the Holder, Warrants
of like tenor evidencing the rights (i) of the transferee(s) to purchase the
number of Warrant Shares specified for each in the assignment forms, and (ii) of
the Holder to purchase any untransferred portion, which in the aggregate shall
equal the number of Warrant Shares of the original Warrant. The Company may
decline to proceed with any partial transfer if any new Warrant would represent
the right to purchase fewer than 500 shares of Common Stock (such number to be
adjusted as provided in Section 4). If this Warrant is properly assigned in
compliance with this Section 2, it may be exercised by an assignee without
having a new Warrant issued.
2.3 LOSS, DESTRUCTION OF WARRANT CERTIFICATES. Upon receipt of (i)
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant and (ii) except in the case of mutilation, an
indemnity or security reasonably satisfactory to the Company, the Company will
promptly execute and deliver a replacement Warrant of like tenor representing
the right to purchase the same number of Warrant Shares.
3. COST OF ISSUANCES. The Company shall pay all expenses, transfer taxes and
other charges payable in connection with the preparation, issuance and delivery
of stock certificates or replacement Warrants, except for any transfer tax or
other charge imposed as a result of (a) any issuance of certificates in any name
other than the name of the Holder, or (b) any
2
<PAGE> 3
transfer of the Warrant. The Company shall not be required to issue or deliver
any stock certificate or Warrant until it receives reasonably satisfactory
evidence that any such tax or other charge has been paid by the Holder.
4. ANTI-DILUTION PROVISIONS
If any of the following events occur at any time hereafter during the life
of this Warrant, then the Purchase Price and the Warrant Shares immediately
prior to such event shall be changed as described in order to prevent dilution:
4.1. STOCK SPLITS AND REVERSE SPLITS. If at any time (i) the outstanding
shares of Common Stock are subdivided into a greater number of shares, then the
Purchase Price will be reduced proportionately and the Warrant Shares will be
increased proportionately, conversely, (ii) if the outstanding Common Stock is
consolidated into a smaller number of shares, then the Purchase Price will be
increased proportionately and the Warrant Shares will be reduced
proportionately.
4.2. DIVIDENDS. In the event the Company declares a dividend upon the
Common Stock payable in its securities, at the time of subsequent exercise of
this Warrant, the Company shall deliver both (i) the Shares for which exercise
is made plus (ii) such securities paid as dividends as would have been
previously distributed to the Holder if such exercise had been made on the date
hereof. If the Company shall declare a dividend payable in cash on its Common
Stock and shall at substantially the same time offer to its stockholders a right
to purchase new Common Stock from the proceeds of such dividend, or for an
amount substantially equal to the dividend, the amount of Common Stock so
offered shall, for the purpose of this Warrant, be deemed to have been issued as
a stock dividend.
4.3. EFFECT OF REORGANIZATION AND ASSET SALES. If any (i) reorganization
or reclassification of the Common Stock, (ii) consolidation or merger of the
Company with or into another corporation, (iii) sale of all or substantially all
of its operating assets to another corporation, or (iv) sale of the Company
substantially as a going concern followed by a liquidation of the Company (any
such occurrence shall be an "EVENT"), is effected in such a way that holders of
Common Stock are entitled to receive securities and/or assets as a result of
their Common Stock ownership, then upon exercise of this Warrant the Holder will
have the right to receive the shares of stock, securities or assets which they
would have received if such rights had been fully exercised as of the record
date for such Event. The Company will not effect any Event unless prior to or
simultaneously with its consummation the successor corporation resulting from
the consolidation or merger (if other than the Company), or the corporation
purchasing the Company's assets, assumes the performance of the Company's
obligations under this Warrant (as appropriately adjusted to reflect such
consolidation, merger or sale such that the Holder's rights under this Warrant
remain, as nearly as practicable, unchanged) by a binding written instrument.
4.4. COMPUTATIONS AND ADJUSTMENTS. Upon each computation of an adjustment
under this Section 4, the Purchase Price shall be computed to the nearest cent
and the number of Warrant Shares shall be calculated to the next lowest whole
share. However,
3
<PAGE> 4
the fractional amount shall be used in calculating any future adjustments. No
fractional shares of Common Stock shall be issued in connection with the
exercise of this Warrant, but the Company shall, in the case of the final
exercise under this Warrant, make a cash payment for any fractional shares based
on the closing price on the date of exercise of a share of Common Stock on the
American Stock Exchange (or, if not then listed or traded thereon, on the
closing price on the principal exchange or system on which the Common Stock is
then listed or traded, or, if not then listed or traded on such exchange or
system, the mean of the closing bid and asked prices on an automated quotation
system, or, if such quotations are not available, such value as may be
determined in good faith by the Company's Board of Directors, which
determination shall be conclusively binding on the parties). Notwithstanding any
changes in the Purchase Price or the number of Warrant Shares, this Warrant, and
any Warrants issued in replacement or upon transfer thereof, may continue to
state the initial Purchase Price and the initial number of Warrant Shares.
Alternatively, the Company may elect to issue a new Warrant or Warrants of like
tenor for the additional shares of Common Stock purchasable hereunder or, upon
surrender of the existing Warrant, to issue a replacement Warrant evidencing all
the Warrant Shares to which the Holder is entitled after such adjustments.
5. COVENANTS. The Company agrees that:
5.1 RESERVATION OF STOCK. During the period in which this Warrant may be
exercised, the Company will reserve sufficient authorized but unissued
securities (and, if applicable, property) to enable it to satisfy its
obligations on exercise of this Warrant. If at any time the Company's authorized
securities shall not be sufficient to allow the exercise of this Warrant, the
Company shall take such corporate action as may be necessary to increase its
authorized but unissued securities to be sufficient for such purpose;
5.2 NO LIENS, ETC. All securities that may be issued upon exercise of
this Warrant will, upon issuance, be validly issued, fully paid, nonassessable
and free from all taxes, liens and charges with respect to the issue thereof,
and shall be listed on any exchanges on which that class of securities is
listed;
5.3 NO DIMINUTION OF VALUE. The Company will not take any action to
terminate this Warrant or to diminish it in value;
5.4 FURNISH INFORMATION. The Company will promptly deliver to the Holder
upon request copies of all financial statements, reports and proxy statements
which the Company shall have sent to its stockholders generally; and
5.5 STOCK AND WARRANT TRANSFER BOOKS. Except upon dissolution,
liquidation or winding up or for ordinary holidays and weekends, the Company
will not at any time close its stock or warrant transfer books so as to result
in preventing or delaying the exercise or transfer of this Warrant.
6. REDEMPTION.
6.1 OPTION TO REDEEM. At any time after commencement of the Exercise
Period,
4
<PAGE> 5
the Company may, at its option, elect to redeem all (but not part) of this
Warrant at $.10 (subject to adjustment in the same manner as provided in Section
4) per Warrant provided that the average closing price of the Common Stock over
30 consecutive business days exceeded $13.00 per share (subject to adjustment as
provided in Section 4). For purposes of this Section 6, "closing price" shall
mean the closing price per share of Common Stock on the American Stock Exchange
or, if not then listed or traded thereon, on the closing price on the principal
exchange or system on which the Common Stock is then listed or traded, or, if
not then listed or traded on such exchange or system, the mean of the closing
bid and asked prices on an automated quotation system. If the Common Stock is
not so traded or listed during such 30-day period, the Company may not exercise
its rights under this Section 6 to redeem the Warrant.
6.2 NOTICE OF REDEMPTION. If the Company elects to redeem the Warrant,
it shall mail a notice of redemption to the registered Holder by first class
mail, postage prepaid, at his last address as reflected on the Company's
records. Any notice mailed in the manner provided herein shall be conclusively
presumed to have been duly given whether or not actually received by the
registered Holder.
6.3 CONTENTS OF NOTICE. The notice of redemption shall specify the
redemption price, a date fixed for redemption at least 15 days after the date
such notice was sent, the place where the Warrant Certificate shall be delivered
and the redemption price shall be paid, and that the right to exercise the
Warrant shall terminate at 5:00 p.m., Los Angeles time, on the business day
immediately preceding the date fixed for redemption. The date fixed for the
redemption of the Warrant shall be the "REDEMPTION DATE."
6.4 EFFECT OF REDEMPTION. Any right to exercise a Warrant shall
terminate at 5:00 p.m., Los Angeles time, on the business day immediately
preceding the Redemption Date. On and after the Redemption Date, the Holder
shall have no further rights except to receive, upon surrender of the Warrant,
the redemption price.
7. STATUS OF HOLDER.
7.1 NOT SHAREHOLDER. Unless the Holder exercises this Warrant in
writing, the Holder shall not be entitled to any rights (i) as a stockholder of
the Company with respect to the shares as to which the Warrant is exercisable
including, without limitation, the right to vote or receive dividends or other
distributions, or (ii) to receive any notice of any proceedings of the Company
except as otherwise provided in this Warrant.
7.2 LIMITATION OF LIABILITY. Unless the Holder exercises this Warrant in
writing, the Holder's rights and privileges hereunder shall not give rise to any
liability for the Purchase Price or as a stockholder of the Company, whether to
the Company or its creditors.
8. GENERAL PROVISIONS.
8.1 COMPLETE AGREEMENT; MODIFICATIONS. This Warrant and any documents
referred to herein or executed contemporaneously herewith constitute the
parties' entire
5
<PAGE> 6
agreement with respect to the subject matter hereof and supersede all
agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof. This Warrant may not be amended, altered or modified except by a writing
signed by the parties hereto.
8.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and
all further documents and writings and to perform such other actions which may
be or become necessary or expedient to effectuate and carry out this Warrant.
8.3 NOTICES. Except as otherwise provided herein, all notices under this
Warrant shall be in writing and shall be delivered by personal service or
telecopy or certified mail (if such service is not available, then by first
class mail), postage prepaid, to the Company's principal business address, and
the Holder's last address as set forth in the Warrant transfer records of the
Company. Any notice sent by certified mail shall be deemed to have been given
three (3) days after the date on which it is mailed. All other notices shall be
deemed given when received. No objection may be made to the manner of delivery
of any notice actually received in writing by an authorized agent of a party.
8.4 NO THIRD-PARTY BENEFITS; SUCCESSORS AND ASSIGNS. None of the
provisions of this Warrant shall be for the benefit of, or enforceable by, any
third-party beneficiary. Except as provided herein to the contrary, this Warrant
shall be binding upon and inure to the benefit of the parties, their respective
successors and permitted assigns.
8.5 GOVERNING LAW. This Agreement will be governed by Delaware
substantive law, regardless of the choice of law provisions of any jurisdiction.
8.6 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or
right provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly contained in a
writing signed by the waiving party; and (ii) no alteration, modification or
impairment shall be implied by reason of any previous waiver, extension of time,
delay or omission in exercise, or other indulgence.
8.7 SEVERABILITY. The validity, legality or enforceability of the
remainder of this Warrant shall not be affected even if one or more of its
provisions shall be held to be invalid, illegal or unenforceable in any respect.
8.8 ATTORNEYS' FEES. Should any litigation or arbitration be commenced
(including any proceedings in a bankruptcy court) between the parties hereto or
their representatives concerning any provision of this Warrant or the rights and
duties of any person or entity hereunder, the party or parties prevailing in
such proceeding shall be entitled, in addition to such other relief as may be
granted, to the attorneys' fees and court costs incurred by reason of such
litigation.
[NEXT PAGE IS SIGNATURE PAGE]
6
<PAGE> 7
Signature Page to Series D Stock Purchase Warrant
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer.
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
Dated: _________ ___, 199___ By:_______________________________
Fred H. Deindoerfer
President
ATTEST:
- -------------------------
Martin S. McDermut
Chief Financial Officer
7
<PAGE> 8
SUBSCRIPTION FORM
(To be executed if Holder desires
to exercise the Warrant Certificate)
The undersigned hereby irrevocably exercises this Warrant to purchase
____________ shares of Common Stock and herewith makes payment of $___________
in payment of the Purchase Price thereof on the terms and conditions specified
in this Warrant Certificate, surrenders this Warrant Certificate and all right,
title and interest herein to the Company and directs that the Warrant Shares
deliverable upon the exercise of such Warrants be registered in the name and at
the address specified below and delivered thereto.
Name____________________________________________
(Please Print or Type)
Address__________________________________________
City, State and Zip Code____________________________
Taxpayer Identification
or Social Security Number_________________________
Dated:________________ ____________________________________
Signature of Registered Holder
NOTICE
The signature to the foregoing Subscription Form must correspond to the
name as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
8
<PAGE> 9
WARRANT ASSIGNMENT FORM
(To be executed by the Holder if such
Holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, ___________________ hereby sells, assigns and
transfers to:
Name____________________________________________
(Please Print)
Address__________________________________________
City, State and Zip Code____________________________
Taxpayer Identification
or Social Security Number_________________________
the right to purchase up to ____________________ Warrant Shares represented by
this Warrant Certificate and does hereby irrevocably constitute and appoint
______________________________________________________________ to transfer said
Warrant on behalf of the Company, with full power of substitution in the
premises.
Dated:________________ ____________________________________
Signature of Registered Holder
NOTICE
The signature to the foregoing Warrant Assignment Form must correspond to
the name as written upon the face of this Warrant Certificate in every
particular, without alteration or enlargement or any change whatsoever.
9
<PAGE> 1
EXHIBIT 10.6(f)
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
STOCK PURCHASE WARRANT
THE WARRANTS EVIDENCED HEREBY AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND MAY NOT BE OFFERED OR SOLD WITHOUT REGISTRATION UNLESS AN EXEMPTION FROM
REGISTRATION IS AVAILABLE UNDER SUCH ACT OR THE RULES OR REGULATIONS PROMULGATED
THEREUNDER
WARRANT TO PURCHASE _________ SHARES OF COMMON STOCK
AS DESCRIBED HEREIN
Issue Date: November 14, 1995. Series "E" No._______
Expiration Date: September 29, 2000.
This certifies that, for value received, _________________or his, her or
its permitted successors and assigns ("HOLDER") is entitled to purchase from
International Remote Imaging Systems, Inc., a Delaware corporation, (the
"COMPANY") up to and including ______________ fully paid and nonassessable
shares (the "WARRANT SHARES") of the Common Stock, $.01 par value per share, of
the Company (the "COMMON STOCK") on the terms set forth herein at an exercise
price of $7.80 per share (the "PURCHASE PRICE"). The Warrant Shares and the
Purchase Price may be adjusted from time to time as described in this Warrant.
1. EXERCISE.
1.1 TIME FOR EXERCISE. This Warrant may be exercised in whole or in part
at any time, and from time to time, during the period commencing on September
29, 1995 and expiring on September 29, 2000 (the "EXERCISE PERIOD").
1.2 MANNER OF EXERCISE. This Warrant shall be exercised by delivering it
to the Company with the exercise form duly completed and signed, specifying the
number of shares as to which the Warrant is being exercised at that time (the
"EXERCISE NUMBER"). The Holder shall simultaneously deliver to the Company cash
or a certified check in an amount equal to the Exercise Number multiplied by the
Purchase Price.
<PAGE> 2
1.3 EFFECT OF EXERCISE. Promptly after any exercise, the Company shall
deliver to the Holder (i) duly executed certificates in the name or names
specified in the exercise notice representing the aggregate number of shares
issuable upon such exercise, and (ii) if this Warrant is exercised only in part,
a new Warrant of like tenor representing the balance of the Warrant Shares. Such
certificates shall be deemed to have been issued, and the person receiving them
shall be deemed to be a holder of record of such shares, as of the close of
business on the date the actions required in Section 1.2 shall have been
completed or, if on that date the stock transfer books of the Company are
closed, as of the next business day on which the stock transfer books of the
Company are open.
2. TRANSFER OF WARRANTS AND STOCK.
2.1 TRANSFER RESTRICTIONS; REGISTRATION RIGHTS. Neither this Warrant nor
the securities issuable upon its exercise may be sold, transferred or pledged
unless the Company shall have been supplied with reasonably satisfactory
evidence that such transfer is not in violation of the Securities Act of 1933,
as amended, and any applicable state securities laws. The Company may place a
legend to that effect on this Warrant and any replacement Warrant. This Warrant
is one in a series of warrants having the same terms and identified as "Series
E" (the "SERIES E WARRANTS"). Upon the request of the holders of a majority of
the shares issuable upon exercise of the Series E Warrants made anytime before
the end of the Exercise Period, the Company will use all reasonable efforts to
register for resale in accordance with the Securities Act of 1933, as amended,
any shares of Common Stock issued upon exercise of the Warrants. Holder agrees
to cooperate with the Company in all reasonable ways to effect such
registration. The Company will use all reasonable efforts to keep such
registration effective until the expiration of the Exercise Period; provided,
however, that the Company will not have any obligation to amend such
registration to add the shares of a Holder that declines to participate in, or
provide adequate information for, the original registration.
2.2 MANNER OF TRANSFER. Upon delivery of this Warrant to the Company
with the assignment form duly completed and signed, the Company will promptly
execute and deliver to each transferee and, if applicable, the Holder, Warrants
of like tenor evidencing the rights (i) of the transferee(s) to purchase the
number of Warrant Shares specified for each in the assignment forms, and (ii) of
the Holder to purchase any untransferred portion, which in the aggregate shall
equal the number of Warrant Shares of the original Warrant. The Company may
decline to proceed with any partial transfer if any new Warrant would represent
the right to purchase fewer than 500 shares of Common Stock (such number to be
adjusted as provided in Section 4). If this Warrant is properly assigned in
compliance with this Section 2, it may be exercised by an assignee without
having a new Warrant issued.
2.3 LOSS, DESTRUCTION OF WARRANT CERTIFICATES. Upon receipt of (i)
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant and (ii) except in the case of mutilation, an
indemnity or security reasonably satisfactory to the Company, the Company will
promptly execute and deliver a replacement Warrant of like tenor representing
the right to purchase the same number of Warrant Shares.
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<PAGE> 3
3. COST OF ISSUANCES. The Company shall pay all expenses, transfer taxes and
other charges payable in connection with the preparation, issuance and delivery
of stock certificates or replacement Warrants, except for any transfer tax or
other charge imposed as a result of (a) any issuance of certificates in any name
other than the name of the Holder, or (b) any transfer of the Warrant. The
Company shall not be required to issue or deliver any stock certificate or
Warrant until it receives reasonably satisfactory evidence that any such tax or
other charge has been paid by the Holder.
4. ANTI-DILUTION PROVISIONS
If any of the following events occur at any time hereafter during the life
of this Warrant, then the Purchase Price and the Warrant Shares immediately
prior to such event shall be changed as described in order to prevent dilution:
4.1. STOCK SPLITS AND REVERSE SPLITS. If at any time (i) the outstanding
shares of Common Stock are subdivided into a greater number of shares, then the
Purchase Price will be reduced proportionately and the Warrant Shares will be
increased proportionately, conversely, (ii) if the outstanding Common Stock is
consolidated into a smaller number of shares, then the Purchase Price will be
increased proportionately and the Warrant Shares will be reduced
proportionately.
4.2. DIVIDENDS. In the event the Company declares a dividend upon the
Common Stock payable in its securities, at the time of subsequent exercise of
this Warrant, the Company shall deliver both (i) the Shares for which exercise
is made plus (ii) such securities paid as dividends as would have been
previously distributed to the Holder if such exercise had been made on the date
hereof. If the Company shall declare a dividend payable in cash on its Common
Stock and shall at substantially the same time offer to its stockholders a right
to purchase new Common Stock from the proceeds of such dividend, or for an
amount substantially equal to the dividend, the amount of Common Stock so
offered shall, for the purpose of this Warrant, be deemed to have been issued as
a stock dividend.
4.3. EFFECT OF REORGANIZATION AND ASSET SALES. If any (i) reorganization
or reclassification of the Common Stock, (ii) consolidation or merger of the
Company with or into another corporation, (iii) sale of all or substantially all
of its operating assets to another corporation, or (iv) sale of the Company
substantially as a going concern followed by a liquidation of the Company (any
such occurrence shall be an "EVENT"), is effected in such a way that holders of
Common Stock are entitled to receive securities and/or assets as a result of
their Common Stock ownership, then upon exercise of this Warrant the Holder will
have the right to receive the shares of stock, securities or assets which they
would have received if such rights had been fully exercised as of the record
date for such Event. The Company will not effect any Event unless prior to or
simultaneously with its consummation the successor corporation resulting from
the consolidation or merger (if other than the Company), or the corporation
purchasing the Company's assets, assumes the performance of the Company's
obligations under this Warrant (as appropriately adjusted to reflect such
consolidation, merger or sale such that the Holder's rights under
-3-
<PAGE> 4
this Warrant remain, as nearly as practicable, unchanged) by a binding written
instrument.
4.4. COMPUTATIONS AND ADJUSTMENTS. Upon each computation of an adjustment
under this Section 4, the Purchase Price shall be computed to the nearest cent
and the number of Warrant Shares shall be calculated to the next lowest whole
share. However, the fractional amount shall be used in calculating any future
adjustments. No fractional shares of Common Stock shall be issued in connection
with the exercise of this Warrant, but the Company shall, in the case of the
final exercise under this Warrant, make a cash payment for any fractional shares
based on the closing price on the date of exercise of a share of Common Stock on
the American Stock Exchange (or, if not then listed or traded thereon, on the
closing price on the principal exchange or system on which the Common Stock is
then listed or traded, or, if not then listed or traded on such exchange or
system, the mean of the closing bid and asked prices on an automated quotation
system, or, if such quotations are not available, such value as may be
determined in good faith by the Company's Board of Directors, which
determination shall be conclusively binding on the parties). Notwithstanding any
changes in the Purchase Price or the number of Warrant Shares, this Warrant, and
any Warrants issued in replacement or upon transfer thereof, may continue to
state the initial Purchase Price and the initial number of Warrant Shares.
Alternatively, the Company may elect to issue a new Warrant or Warrants of like
tenor for the additional shares of Common Stock purchasable hereunder or, upon
surrender of the existing Warrant, to issue a replacement Warrant evidencing all
the Warrant Shares to which the Holder is entitled after such adjustments.
5. COVENANTS. The Company agrees that:
5.1 RESERVATION OF STOCK. During the period in which this Warrant may be
exercised, the Company will reserve sufficient authorized but unissued
securities (and, if applicable, property) to enable it to satisfy its
obligations on exercise of this Warrant. If at any time the Company's authorized
securities shall not be sufficient to allow the exercise of this Warrant, the
Company shall take such corporate action as may be necessary to increase its
authorized but unissued securities to be sufficient for such purpose;
5.2 NO LIENS, ETC. All securities that may be issued upon exercise of
this Warrant will, upon issuance, be validly issued, fully paid, nonassessable
and free from all taxes, liens and charges with respect to the issue thereof,
and shall be listed on any exchanges on which that class of securities is
listed;
5.3 NO DIMINUTION OF VALUE. The Company will not take any action to
terminate this Warrant or to diminish it in value;
5.4 FURNISH INFORMATION. The Company will promptly deliver to the Holder
upon request copies of all financial statements, reports and proxy statements
which the Company shall have sent to its stockholders generally; and
5.5 STOCK AND WARRANT TRANSFER BOOKS. Except upon dissolution,
liquidation or winding up or for ordinary holidays and weekends, the Company
will not at any time
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<PAGE> 5
close its stock or warrant transfer books so as to result in preventing or
delaying the exercise or transfer of this Warrant.
6. REDEMPTION.
6.1 OPTION TO REDEEM. At any time after commencement of the Exercise
Period, the Company may, at its option, elect to redeem all (but not part) of
this Warrant at $.10 (subject to adjustment in the same manner as provided in
Section 4) per Warrant provided that the average closing price of the Common
Stock over 30 consecutive business days exceeded $15.60 per share (subject to
adjustment as provided in Section 4). For purposes of this Section 6, "closing
price" shall mean the closing price per share of Common Stock on the American
Stock Exchange or, if not then listed or traded thereon, on the closing price on
the principal exchange or system on which the Common Stock is then listed or
traded, or, if not then listed or traded on such exchange or system, the mean of
the closing bid and asked prices on an automated quotation system. If the Common
Stock is not so traded or listed during such 30-day period, the Company may not
exercise its rights under this Section 6 to redeem the Warrant.
6.2 NOTICE OF REDEMPTION. If the Company elects to redeem the Warrant,
it shall mail a notice of redemption to the registered Holder by first class
mail, postage prepaid, at his last address as reflected on the Company's
records. Any notice mailed in the manner provided herein shall be conclusively
presumed to have been duly given whether or not actually received by the
registered Holder.
6.3 CONTENTS OF NOTICE. The notice of redemption shall specify the
redemption price, a date fixed for redemption at least 15 days after the date
such notice was sent, the place where the Warrant Certificate shall be delivered
and the redemption price shall be paid, and that the right to exercise the
Warrant shall terminate at 5:00 p.m., Los Angeles time, on the business day
immediately preceding the date fixed for redemption. The date fixed for the
redemption of the Warrant shall be the "REDEMPTION DATE."
6.4 EFFECT OF REDEMPTION. Any right to exercise a Warrant shall
terminate at 5:00 p.m., Los Angeles time, on the business day immediately
preceding the Redemption Date. On and after the Redemption Date, the Holder
shall have no further rights except to receive, upon surrender of the Warrant,
the redemption price.
7. STATUS OF HOLDER.
7.1 NOT SHAREHOLDER. Unless the Holder exercises this Warrant in
writing, the Holder shall not be entitled to any rights (i) as a stockholder of
the Company with respect to the shares as to which the Warrant is exercisable
including, without limitation, the right to vote or receive dividends or other
distributions, or (ii) to receive any notice of any proceedings of the Company
except as otherwise provided in this Warrant.
7.2 LIMITATION OF LIABILITY. Unless the Holder exercises this Warrant in
writing, the Holder's rights and privileges hereunder shall not give rise to any
liability for the Purchase Price or as a stockholder of the Company, whether to
the Company or its
-5-
<PAGE> 6
creditors.
8. GENERAL PROVISIONS.
8.1 COMPLETE AGREEMENT; MODIFICATIONS. This Warrant and any documents
referred to herein or executed contemporaneously herewith constitute the
parties' entire agreement with respect to the subject matter hereof and
supersede all agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof. This Warrant may not be amended, altered or modified except by a writing
signed by the parties hereto.
8.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and
all further documents and writings and to perform such other actions which may
be or become necessary or expedient to effectuate and carry out this Warrant.
8.3 NOTICES. Except as otherwise provided herein, all notices under this
Warrant shall be in writing and shall be delivered by personal service or
telecopy or certified mail (if such service is not available, then by first
class mail), postage prepaid, to the Company's principal business address, and
the Holder's last address as set forth in the Warrant transfer records of the
Company. Any notice sent by certified mail shall be deemed to have been given
three (3) days after the date on which it is mailed. All other notices shall be
deemed given when received. No objection may be made to the manner of delivery
of any notice actually received in writing by an authorized agent of a party.
8.4 NO THIRD-PARTY BENEFITS; SUCCESSORS AND ASSIGNS. None of the
provisions of this Warrant shall be for the benefit of, or enforceable by, any
third-party beneficiary. Except as provided herein to the contrary, this Warrant
shall be binding upon and inure to the benefit of the parties, their respective
successors and permitted assigns.
8.5 GOVERNING LAW. This Agreement will be governed by Delaware
substantive law, regardless of the choice of law provisions of any jurisdiction.
-6-
<PAGE> 7
8.6 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or
right provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly contained in a
writing signed by the waiving party; and (ii) no alteration, modification or
impairment shall be implied by reason of any previous waiver, extension of time,
delay or omission in exercise, or other indulgence.
8.7 SEVERABILITY. The validity, legality or enforceability of the
remainder of this Warrant shall not be affected even if one or more of its
provisions shall be held to be invalid, illegal or unenforceable in any respect.
8.8 ATTORNEYS' FEES. Should any litigation or arbitration be commenced
(including any proceedings in a bankruptcy court) between the parties hereto or
their representatives concerning any provision of this Warrant or the rights and
duties of any person or entity hereunder, the party or parties prevailing in
such proceeding shall be entitled, in addition to such other relief as may be
granted, to the attorneys' fees and court costs incurred by reason of such
litigation.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer.
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
Dated: _________ ___, 1995 By:_______________________________
Fred H. Deindoerfer
President
ATTEST:
- -------------------------
Eduardo Benmaor
Secretary
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<PAGE> 8
SUBSCRIPTION FORM
(To be executed if Holder desires
to exercise the Warrant Certificate)
The undersigned hereby irrevocably exercises this Warrant to purchase
____________ shares of Common Stock and herewith makes payment of $___________
in payment of the Purchase Price thereof on the terms and conditions specified
in this Warrant Certificate, surrenders this Warrant Certificate and all right,
title and interest herein to the Company and directs that the Warrant Shares
deliverable upon the exercise of such Warrants be registered in the name and at
the address specified below and delivered thereto.
Name____________________________________________
(Please Print or Type)
Address__________________________________________
City, State and Zip Code____________________________
Taxpayer Identification
or Social Security Number_________________________
Dated:________________ ____________________________________
Signature of Registered Holder
NOTICE
The signature to the foregoing Subscription Form must correspond to the
name as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE> 9
WARRANT ASSIGNMENT FORM
(To be executed by the Holder if such Holder desires
to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, ___________________ hereby sells, assigns and
transfers to:
Name____________________________________________
(Please Print)
Address__________________________________________
City, State and Zip Code____________________________
Taxpayer Identification
or Social Security Number_________________________
the right to purchase up to ____________________ Warrant Shares represented by
this Warrant Certificate and does hereby irrevocably constitute and appoint
______________________________________________________________ to transfer said
Warrant on behalf of the Company, with full power of substitution in the
premises.
Dated:________________ ____________________________________
Signature of Registered Holder
NOTICE
The signature to the foregoing Warrant Assignment Form must correspond to
the name as written upon the face of this Warrant Certificate in every
particular, without alteration or enlargement or any change whatsoever.
<PAGE> 1
EXHIBIT 10.6(g)
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
STOCK PURCHASE WARRANT
THE WARRANTS EVIDENCED HEREBY AND THE SHARES OF STOCK ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD WITHOUT
REGISTRATION UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER SUCH ACT,
OR THE RULES OR REGULATIONS PROMULGATED THEREUNDER, AND ANY APPLICABLE STATE
SECURITIES LAWS
WARRANT TO PURCHASE ___ SHARES OF COMMON STOCK
AS DESCRIBED HEREIN
Issue Date: _________ ___, 1997. Series "F" No. ___
Expiration Date: March 29, 2000.
This certifies that, for value received, _____________ or his, her or its
permitted successors and assigns ("HOLDER") is entitled to purchase from
International Remote Imaging Systems, Inc., a Delaware corporation (the
"COMPANY"), up to and including ______________ fully paid and nonassessable
shares (the "WARRANT SHARES") of the Common Stock, $.01 par value per share, of
the Company (the "COMMON STOCK") on the terms set forth herein at an exercise
price of $4.00 per share (the "PURCHASE Price"). The Warrant Shares and the
Purchase Price may be adjusted from time to time as described in this Warrant.
1. EXERCISE.
1.1 TIME FOR EXERCISE. This Warrant may be exercised in whole or in part
at any time, and from time to time, during the period commencing on the date
hereof and expiring on March 29, 2000 (the "EXERCISE PERIOD").
1.2 MANNER OF EXERCISE. This Warrant shall be exercised by delivering it
to the Company with the exercise form duly completed and signed, specifying the
number of shares as to which the Warrant is being exercised at that time (the
"EXERCISE NUMBER"). The Holder shall simultaneously deliver to the Company cash
or a certified check in an amount equal to the Exercise Number multiplied by the
Purchase Price.
1.3 EFFECT OF EXERCISE. Promptly after any exercise, the Company shall
deliver to the Holder (i) duly executed certificates in the name or names
specified in the exercise notice representing the aggregate number of shares
issuable upon such exercise, and (ii) if this Warrant is exercised only in part,
a new Warrant of like tenor representing the balance of the Warrant Shares. Such
certificates shall be deemed to have been issued, and
<PAGE> 2
the person receiving them shall be deemed to be a holder of record of such
shares, as of the close of business on the date the actions required in Section
1.2 shall have been completed or, if on that date the stock transfer books of
the Company are closed, as of the next business day on which the stock transfer
books of the Company are open.
2. TRANSFER OF WARRANTS AND STOCK.
2.1 TRANSFER RESTRICTIONS; REGISTRATION RIGHTS. Neither this Warrant nor
the securities issuable upon its exercise may be sold, transferred or pledged
unless the Company shall have been supplied with reasonably satisfactory
evidence that such transfer is not in violation of the Securities Act of 1933,
as amended, and any applicable state securities laws. The Company may place a
legend to that effect on this Warrant and any replacement Warrant. This Warrant
is one in a series of warrants having the same terms and identified as "Series
F" (the "SERIES F WARRANTS"). Upon the request of the holders of a majority of
the shares issuable upon exercise of the Series F Warrants made anytime during
the Exercise Period, the Company will use all reasonable efforts to register for
resale in accordance with the Securities Act of 1933, as amended, any shares of
Common Stock issued upon exercise of the Warrants which do not qualify for an
exemption from such registration under Rule 144 under the Act or a comparable or
successor exemption from registration. Holder agrees to cooperate with the
Company in all reasonable ways to effect such registration. The Company will use
all reasonable efforts to keep such registration effective until the expiration
of the Exercise Period; provided, however, that the Company will not have any
obligation to amend such registration to add the shares of a Holder that
declines to participate in, or provide adequate information for, the original
registration.
2.2 MANNER OF TRANSFER. Upon delivery of this Warrant to the Company
with the assignment form duly completed and signed, the Company will promptly
execute and deliver to each transferee and, if applicable, the Holder, Warrants
of like tenor evidencing the rights (i) of the transferee(s) to purchase the
number of Warrant Shares specified for each in the assignment forms, and (ii) of
the Holder to purchase any untransferred portion, which in the aggregate shall
equal the number of Warrant Shares of the original Warrant. The Company may
decline to proceed with any partial transfer if any new Warrant would represent
the right to purchase fewer than 500 shares of Common Stock (such number to be
adjusted as provided in Section 4). If this Warrant is properly assigned in
compliance with this Section 2, it may be exercised by an assignee without
having a new Warrant issued.
2.3 LOSS, DESTRUCTION OF WARRANT CERTIFICATES. Upon receipt of (i)
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant and (ii) except in the case of mutilation, an
indemnity or security reasonably satisfactory to the Company, the Company will
promptly execute and deliver a replacement Warrant of like tenor representing
the right to purchase the same number of Warrant Shares.
3. COST OF ISSUANCES. The Company shall pay all expenses, transfer taxes and
other charges payable in connection with the preparation, issuance and delivery
of stock
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<PAGE> 3
certificates or replacement Warrants, except for any transfer tax or other
charge imposed as a result of (a) any issuance of certificates in any name other
than the name of the Holder, or (b) any transfer of the Warrant. The Company
shall not be required to issue or deliver any stock certificate or Warrant until
it receives reasonably satisfactory evidence that any such tax or other charge
has been paid by the Holder.
4. ANTI-DILUTION PROVISIONS
If any of the following events occur at any time hereafter during the life
of this Warrant, then the Purchase Price and the Warrant Shares immediately
prior to such event shall be changed as described in order to prevent dilution:
4.1. STOCK SPLITS AND REVERSE SPLITS. If at any time (i) the outstanding
shares of Common Stock are subdivided into a greater number of shares, then the
Purchase Price will be reduced proportionately and the Warrant Shares will be
increased proportionately, conversely, (ii) if the outstanding Common Stock is
consolidated into a smaller number of shares, then the Purchase Price will be
increased proportionately and the Warrant Shares will be reduced
proportionately.
4.2. DIVIDENDS. In the event the Company declares a dividend upon the
Common Stock payable in its securities, at the time of subsequent exercise of
this Warrant, the Company shall deliver both (i) the Shares for which exercise
is made plus (ii) such securities paid as dividends as would have been
previously distributed to the Holder if such exercise had been made on the date
hereof. If the Company shall declare a dividend payable in cash on its Common
Stock and shall at substantially the same time offer to its stockholders a right
to purchase new Common Stock from the proceeds of such dividend, or for an
amount substantially equal to the dividend, the amount of Common Stock so
offered shall, for the purpose of this Warrant, be deemed to have been issued as
a stock dividend.
4.3. EFFECT OF REORGANIZATION AND ASSET SALES. If any (i) reorganization
or reclassification of the Common Stock, (ii) consolidation or merger of the
Company with or into another corporation, (iii) sale of all or substantially all
of its operating assets to another corporation, or (iv) sale of the Company
substantially as a going concern followed by a liquidation of the Company (any
such occurrence shall be an "EVENT"), is effected in such a way that holders of
Common Stock are entitled to receive securities and/or assets as a result of
their Common Stock ownership, then upon exercise of this Warrant the Holder will
have the right to receive the shares of stock, securities or assets which they
would have received if such rights had been fully exercised as of the record
date for such Event. The Company will not effect any Event unless prior to or
simultaneously with its consummation the successor corporation resulting from
the consolidation or merger (if other than the Company), or the corporation
purchasing the Company's assets, assumes the performance of the Company's
obligations under this Warrant (as appropriately adjusted to reflect such
consolidation, merger or sale such that the Holder's rights under this Warrant
remain, as nearly as practicable, unchanged) by a binding written instrument.
4.4. COMPUTATIONS AND ADJUSTMENTS. Upon each computation of an
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<PAGE> 4
adjustment under this Section 4, the Purchase Price shall be computed to the
nearest cent and the number of Warrant Shares shall be calculated to the next
lowest whole share. However, the fractional amount shall be used in calculating
any future adjustments. No fractional shares of Common Stock shall be issued in
connection with the exercise of this Warrant, but the Company shall, in the case
of the final exercise under this Warrant, make a cash payment for any fractional
shares based on the closing price on the date of exercise of a share of Common
Stock on the American Stock Exchange (or, if not then listed or traded thereon,
on the closing price on the principal exchange or system on which the Common
Stock is then listed or traded, or, if not then listed or traded on such
exchange or system, the mean of the closing bid and asked prices on an automated
quotation system, or, if such quotations are not available, such value as may be
determined in good faith by the Company's Board of Directors, which
determination shall be conclusively binding on the parties). Notwithstanding any
changes in the Purchase Price or the number of Warrant Shares, this Warrant, and
any Warrants issued in replacement or upon transfer thereof, may continue to
state the initial Purchase Price and the initial number of Warrant Shares.
Alternatively, the Company may elect to issue a new Warrant or Warrants of like
tenor for the additional shares of Common Stock purchasable hereunder or, upon
surrender of the existing Warrant, to issue a replacement Warrant evidencing all
the Warrant Shares to which the Holder is entitled after such adjustments.
5. COVENANTS. The Company agrees that:
5.1 RESERVATION OF STOCK. During the period in which this Warrant may be
exercised, the Company will reserve sufficient authorized but unissued
securities (and, if applicable, property) to enable it to satisfy its
obligations on exercise of this Warrant. If at any time the Company's authorized
securities shall not be sufficient to allow the exercise of this Warrant, the
Company shall take such corporate action as may be necessary to increase its
authorized but unissued securities to be sufficient for such purpose;
5.2 NO LIENS, ETC. All securities that may be issued upon exercise of
this Warrant will, upon issuance, be validly issued, fully paid, nonassessable
and free from all taxes, liens and charges with respect to the issue thereof,
and shall be listed on any exchanges on which that class of securities is
listed;
5.3 NO DIMINUTION OF VALUE. [intentionally omitted];
5.4 FURNISH INFORMATION. The Company will promptly deliver to the Holder
upon request copies of all financial statements, reports and proxy statements
which the Company shall have sent to its stockholders generally; and
5.5 STOCK AND WARRANT TRANSFER BOOKS. Except upon dissolution,
liquidation or winding up or for ordinary holidays and weekends, the Company
will not at any time close its stock or warrant transfer books so as to result
in preventing or delaying the exercise or transfer of this Warrant.
6. REDEMPTION.
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<PAGE> 5
6.1 OPTION TO REDEEM. At any time after commencement of the Exercise
Period, the Company may, at its option, elect to redeem all (but not part) of
this Warrant at $.10 (subject to adjustment in the same manner as provided in
Section 4) per Warrant provided that the average closing price of the Common
Stock over 30 consecutive business days exceeded $13.00 per share (subject to
adjustment as provided in Section 4). For purposes of this Section 6, "closing
price" shall mean the closing price per share of Common Stock on the American
Stock Exchange or, if not then listed or traded thereon, on the closing price on
the principal exchange or system on which the Common Stock is then listed or
traded, or, if not then listed or traded on such exchange or system, the mean of
the closing bid and asked prices on an automated quotation system. If the Common
Stock is not so traded or listed during such 30-day period, the Company may not
exercise its rights under this Section 6 to redeem the Warrant.
6.2 NOTICE OF REDEMPTION. If the Company elects to redeem the Warrant,
it shall mail a notice of redemption to the registered Holder by first class
mail, postage prepaid, at his last address as reflected on the Company's
records. Any notice mailed in the manner provided herein shall be conclusively
presumed to have been duly given whether or not actually received by the
registered Holder.
6.3 CONTENTS OF NOTICE. The notice of redemption shall specify the
redemption price, a date fixed for redemption at least 15 days after the date
such notice was sent, the place where the Warrant Certificate shall be delivered
and the redemption price shall be paid, and that the right to exercise the
Warrant shall terminate at 5:00 p.m., Los Angeles time, on the business day
immediately preceding the date fixed for redemption. The date fixed for the
redemption of the Warrant shall be the "REDEMPTION DATE."
6.4 EFFECT OF REDEMPTION. Any right to exercise a Warrant shall
terminate at 5:00 p.m., Los Angeles time, on the business day immediately
preceding the Redemption Date. On and after the Redemption Date, the Holder
shall have no further rights except to receive, upon surrender of the Warrant,
the redemption price.
7. STATUS OF HOLDER.
7.1 NOT SHAREHOLDER. Unless the Holder exercises this Warrant in
writing, the Holder shall not be entitled to any rights (i) as a stockholder of
the Company with respect to the shares as to which the Warrant is exercisable
including, without limitation, the right to vote or receive dividends or other
distributions, or (ii) to receive any notice of any proceedings of the Company
except as otherwise provided in this Warrant.
7.2 LIMITATION OF LIABILITY. Unless the Holder exercises this Warrant in
writing, the Holder's rights and privileges hereunder shall not give rise to any
liability for the Purchase Price or as a stockholder of the Company, whether to
the Company or its creditors.
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<PAGE> 6
8. GENERAL PROVISIONS.
8.1 COMPLETE AGREEMENT; MODIFICATIONS. This Warrant and any documents
referred to herein or executed contemporaneously herewith constitute the
parties' entire agreement with respect to the subject matter hereof and
supersede all agreements, representations, warranties, statements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof. This Warrant may not be amended, altered or modified except by a writing
signed by the parties hereto.
8.2 ADDITIONAL DOCUMENTS. Each party hereto agrees to execute any and
all further documents and writings and to perform such other actions which may
be or become necessary or expedient to effectuate and carry out this Warrant.
8.3 NOTICES. Except as otherwise provided herein, all notices under this
Warrant shall be in writing and shall be delivered by personal service or
telecopy or certified mail (if such service is not available, then by first
class mail), postage prepaid, to the Company's principal business address, and
the Holder's last address as set forth in the Warrant transfer records of the
Company. Any notice sent by certified mail shall be deemed to have been given
three (3) days after the date on which it is mailed. All other notices shall be
deemed given when received. No objection may be made to the manner of delivery
of any notice actually received in writing by an authorized agent of a party.
8.4 NO THIRD-PARTY BENEFITS; SUCCESSORS AND ASSIGNS. None of the
provisions of this Warrant shall be for the benefit of, or enforceable by, any
third-party beneficiary. Except as provided herein to the contrary, this Warrant
shall be binding upon and inure to the benefit of the parties, their respective
successors and permitted assigns.
8.5 GOVERNING LAW. This Agreement will be governed by Delaware
substantive law, regardless of the choice of law provisions of any jurisdiction.
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<PAGE> 7
8.6 WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or
right provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly contained in a
writing signed by the waiving party; and (ii) no alteration, modification or
impairment shall be implied by reason of any previous waiver, extension of time,
delay or omission in exercise, or other indulgence.
8.7 SEVERABILITY. The validity, legality or enforceability of the
remainder of this Warrant shall not be affected even if one or more of its
provisions shall be held to be invalid, illegal or unenforceable in any respect.
8.8 ATTORNEYS' FEES. Should any litigation or arbitration be commenced
(including any proceedings in a bankruptcy court) between the parties hereto or
their representatives concerning any provision of this Warrant or the rights and
duties of any person or entity hereunder, the party or parties prevailing in
such proceeding shall be entitled, in addition to such other relief as may be
granted, to the attorneys' fees and court costs incurred by reason of such
litigation.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer.
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
Dated: _________ ___, 1997 By:_______________________________
Fred H. Deindoerfer
President
ATTEST:
- -------------------------
Martin S. McDermut
Secretary
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<PAGE> 8
SUBSCRIPTION FORM
(To be executed if Holder desires
to exercise the Warrant Certificate)
The undersigned hereby irrevocably exercises this Warrant to purchase
____________ shares of Common Stock and herewith makes payment of $___________
in payment of the Purchase Price thereof on the terms and conditions specified
in this Warrant Certificate, surrenders this Warrant Certificate and all right,
title and interest herein to the Company and directs that the Warrant Shares
deliverable upon the exercise of such Warrants be registered in the name and at
the address specified below and delivered thereto.
Name____________________________________________
(Please Print or Type)
Address__________________________________________
City, State and Zip Code____________________________
Taxpayer Identification
or Social Security Number_________________________
Dated:________________ ____________________________________
Signature of Registered Holder
NOTICE
The signature to the foregoing Subscription Form must correspond to the
name as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
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<PAGE> 9
WARRANT ASSIGNMENT FORM
(To be executed by the Holder if such Holder desires
to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, ___________________ hereby sells, assigns and
transfers to:
Name____________________________________________
(Please Print)
Address__________________________________________
City, State and Zip Code____________________________
Taxpayer Identification
or Social Security Number_________________________
the right to purchase up to ____________________ Warrant Shares represented by
this Warrant Certificate and does hereby irrevocably constitute and appoint
______________________________________________________________ to transfer said
Warrant on behalf of the Company, with full power of substitution in the
premises.
Dated:________________ ____________________________________
Signature of Registered Holder
NOTICE
The signature to the foregoing Warrant Assignment Form must correspond to
the name as written upon the face of this Warrant Certificate in every
particular, without alteration or enlargement or any change whatsoever.
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<PAGE> 1
EXHIBIT 10.7(d)
October 4, 1997
Dr. Thomas F. Kelley
StatSpin
85 Morse St.
Norwood, MA 02062
Dear Tom,
Recognizing 1) your desire to scale back your activities now and your eventual
departure from StatSpin, and 2) the desire of both parties to effect a smooth
transition to new, or revised, StatSpin management, IRIS is willing to amend
your Employment Agreement as follows and under these provisions:
1. You agree to help in the identification of potential candidates for a new
general manager and participate in the screening/hiring process as
requested by me.
2. The Agreement will be considered modified to meet the intent of the
following changes and these changes become effective on the date this
letter is ratified by the Board of Directors.
3. Your working time will be at least 24 hours per week (exclusive of travel
to/from and participation at Director's meetings, trade shows, etc.). Your
salary will be reduced to $72,000 on an annual basis. Your general
responsibilities and duties will remain unchanged. Your Benefits
(paragraph 7), Stock Options (paragraph 5), etc. will remain unchanged.
Any Bonus (paragraph 4) will be based on annual compensation. The modified
Agreement will terminate on January 31, 1998. After that date, IRIS would
agree to pay you one-half of the on-going compensation remaining under
your Employment Agreement, in return for the availability of your services
not to exceed, on average, ten (10) hours per week through January 30,
1999. Termination as described in paragraph 8 of the Agreement will remain
unchanged.
4. With respect to your activities at ImagePath, while you are employed by
IRIS or StatSpin, you agree to the following:
- Those activities will not interfere with the discharge of your
duties and responsibilities on behalf of StatSpin and IRIS.
- IRIS will be granted non-exclusive distribution to ImagePath
products on terms no less favorable than those of any other
distributor.
/s/ FHD /s TFK
F.H.D. T.F.K.
Date: 10-4-97 Date: 10/16/97
------- --------
<PAGE> 2
- Should you become aware that an actual rather than potential
conflict arises between ImagePath and IRIS with respect to your
management and fiduciary responsibilities, you agree to bring it to
the immediate attention of the IRIS Board of Directors through
notice to me and be prepared to resign from your participation in
all management and directorship capacities at either ImagePath or
IRIS.
5. You agree to waive any claims you have against IRIS that stem from
previously expressed personal grievances.
If all of the above is acceptable to you, please sign, date and return one copy
of this letter. Also, please initial and date the first page.
I will recommend to the IRIS Board of Directors that they accept and ratify this
letter in its executed form as an amendment to your Employment Agreement at the
forthcoming regular Board of Directors meeting on October 5, 1997.
Sincerely, Accepted by:
/s/ F.H. Deindoerfer /s/ T.F. Kelley
------------------------- ----------------------------
F. H. Deindoerfer Thomas F. Kelley
Chairman
Date: 10/16/97
<PAGE> 1
EXHIBIT 10.10(L)
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 25,000 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 June 1, 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 Four and
3/8 Dollars ($4.375) 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.
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<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
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<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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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 June 1, 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(M)
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 25,000 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 July 1, 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
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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 Four and
1/16 Dollars ($4.0625) 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.
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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
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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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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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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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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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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
-12-
<PAGE> 13
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
-13-
<PAGE> 14
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
-14-
<PAGE> 15
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 July 1, 1997.
INTERNATIONAL REMOTE IMAGING
SYSTEMS, INC., a Delaware corporation
By: /s/ Martin S. McDermut
--------------------------
Martin S. McDermut
Its: Vice President and Chief Financial
Officer
-15-
<PAGE> 1
EXHIBIT 10.12
[FOOTHILL CAPITAL CORP. LETTERHEAD]
March 30, 1998
Mr. Martin S. McDermut
Vice President, CFO
International Remote Imaging Systems
9162 Eton Avenue
Chatsworth, CA 91311
Re: Letter of Intent
Dear Mr. McDermut:
In accordance with our recent discussions, Foothill Capital Corporation
("Lender") is pleased to offer our commitment to the following financing
arrangement for International Remote Imaging Systems, Inc. and subsidiaries
(collectively "Borrower" or "IRIS"), subject to the conditions set forth in this
letter. The financing plan would be as follows:
1. Maximum Credit Line: $7,000,000.
a. Revolving Line: Up to $4,000,000 subject to advances up to 85% of
eligible accounts not older than 60 days past due date, exclusive
of heavily concentrated accounts, government accounts,
contra-accounts, or any other account deemed ineligible by
Lender. The Revolving Line shall include a $250,000 subline for
government accounts without assignment of claims compliance.
b. Term Loan: Up to $3,600,000 secured by the value of the Company's
service and maintenance business segment based on a valuation by
Lender. The Term Loan would be payable in monthly principal
installments equal to 1/36th of the original amount advanced,
plus interest.
<PAGE> 2
IRIS, Inc.
March 30, 1998
Page 2
2. Interest Rates:
The rate of interest charged on the Revolving Loan would be one percent
(1.0%) above the present and future Base Rate ("Prime") which is
publicly announced, from time to time, by Norwest Bank Minnesota,
National Association. The rate of interest charged on the Term Loan
would be Prime plus three percent (3.00%). Interest would be payable
monthly in arrears based on average daily outstandings according to a
360 day year and actual days elapsed. All collections and other proceeds
from the collateral would be directed to a lockbox and would be subject
to a two business day clearance charge. Interest would be charged on
minimum loan balance of $3,000,000. At no time would interest charged be
less than seven percent (7.0%) per annum.
3. Facility Fees:
a. Commitment Fee: A fee of three quarters of one percent (0.75%)
of the Maximum Credit Line would be earned upon issuance of a
commitment for financing.
b. Unused Line Fee: A fee of three eighths of one percent (0.375%)
would be charged annually on the average unused portion of the
Maximum Revolving Line.
4. Loan Maturity and Prepayment:
All loans and advances would mature in three (3) years. Termination of
the loan, prior to maturity, would result in an early termination
premium equal to three percent (3.00%), two percent (2.00%), or one
percent (1.00%) of the Maximum Credit Line if terminated in year one,
two or three, respectively.
5. Covenants:
Borrower would be required to maintain minimum levels of tangible net
worth and EBITDA, a ratio of maximum total loans to supply, service and
maintenance revenues, a ratio of maximum Term Loan to supply, service
and maintenance revenues, as well as a minimum gross margin on supply,
service and maintenance revenues. Further, a limitation for annual
capitalized expenditures would also be established. Each of the
foregoing would be based on a discount, as determined by Lender in its
reasonable discretion, to Borrower's historic and projected operating
performance and based on Lender's due diligence, including its review
of the March 30, 1998 draft of the financial statements for the fiscal
year ended December 31, 1997 and the internal financial statements for
the two month period ended February 28, 1998, Lender believes that
Borrower will be in compliance with each of the foregoing at the closing
date.
<PAGE> 3
IRIS, Inc.
March 30, 1998
Page 3
6. Collateral:
As collateral for all its loans and advances Lender would have a first
priority perfected security interest in all of Borrower's accounts
receivable, inventory, general intangibles, real property, chattel
paper, machinery and equipment, and real property, now owned or
hereafter acquired, and such other assets, tangible or intangible, real
or personal, as may be required, in Lender's opinion to fully secure the
advances contemplated.
7. Purpose:
Loan proceeds would be used to refinance Borrower's existing senior
credit facility, for ongoing working capital needs, and for delinquent
trade accounts payable.
8. Conditions Precedent:
The following are some, but obviously not all, of the conditions
precedent to any loan approval by Lender to Borrower:
a. Borrower shall be a corporation in good standing in the
jurisdiction of its incorporation and qualified to do business in
any other jurisdiction where such qualification is necessary or
appropriate to its business;
b. The Revolving Advances and Term Loans shall be made pursuant to,
and subject to, the terms of loan agreements, notes, and other
financing documents (the "Loan Documents") executed and delivered
by Borrower on or prior to the Closing Date. The Loan Documents
would contain such representations, warranties, covenants
(affirmative and negative), and events of default as are
customary, in Lender's experience, for a transaction of this
type.
c. Borrower shall have executed and delivered, or caused to be
executed and delivered, to Lender prior to the Closing Date,
such security agreements, financing statements, fixture filings
and chattel paper, blocked account agreements, copies of leases,
landlord waivers, bailee agreements, and other agreements
affecting the Collateral, insurance certificates and
endorsements, and other documentation relative to the liens and
security interest in the Collateral as Lender may reasonably
request (the "Security Documents"). Each of the Loan Documents
and the Security Documents (the "Documents") would be governed
by the law of the State of California and shall be in form and
substance reasonably satisfactory to Lender and its counsel;
d. The UCC financing statements, fixture filings, and other
Documents related to perfection of Lender's interests in the
Collateral shall have been filed or recorded
<PAGE> 4
IRIS, Inc.
March 30, 1998
Page 4
in all appropriate jurisdictions and, with respect to financing
statements, Lender would need to have received searches
reflecting its filings of record;
e. No material adverse change shall have occurred in Borrower's
financial condition from the unaudited interim financial
statements for the period ended 2/28/98 or the March 30, 1998
draft financial statements for the fiscal year ended 12/31/97
or the financial projection as provided by Borrower or any
material adverse change in the value of the Collateral from
the date of Lenders Financial Analysis dated 3/24/98.
f. Lender shall have received such opinions of Borrower's counsel
and such advice of Lender's local counsel as Lender would
reasonably require, which opinions and/or advice would need to
be in form and substance satisfactory to Lender and its counsel.
Such opinions of Borrower's counsel would include, but not be
limited to, opinions as to Borrower's corporate existence,
Borrower's power and authority to enter into the Documents, the
validity, binding effect, and enforceability of each of the
Documents, and the perfection of Lender's liens and security
interests in the Collateral;
g. Payment of all accrued and unpaid Lender Expenses which exceed
the original $30,000 good faith deposit;
h. Borrower shall have minimum unused available borrowing capacity
under the credit facility herein proposed of $500,000 at
closing.
10. Brokers Fees:
Any brokerage commission or finders fees payable in connection with the
loan and the transactions in which the Borrower has entered into with a
third party would be payable by Borrower and not by Lender, and Borrower
would agree to indemnify Lender and hold Lender harmless from any such
claim of any broker or finder arising out of any transaction or
commitment by Lender.
11. Periodic Loan Maintenance Charges:
Borrower would be periodically charged for due diligence and loan
maintenance costs consisting of Financial Analysis ($650 per man day
plus out-of-pocket expenses) and Loan Servicing ($3,000 per month).
Lender would reserve the right to hire an independent third party to
appraiser Borrower's supply, service and maintenance business segment
with such cost to be borne by Borrower.
<PAGE> 5
IRIS, Inc.
March 30, 1998
Page 5
12. Loan Origination Costs:
In connection with the request for financing, Borrower understands that
it will be necessary for Lender to make certain financial, legal and
collateral investigations and determinations. Borrower agrees to pay for
all of Lender's costs and expenses incurred in connection with the
proposed financing transaction including costs and expenses incurred by
auditors and appraisers in verifying Borrower's records, Lender's legal
expenses for advice in preparing documents in connection with the
proposed loan, and any filing and search fees.
13. Complete Agreement; No Oral Modifications.
This commitment letter embodies the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all
prior proposals, negotiations, or agreements whether written or oral,
relating to the subject matter hereof including any letter of intent.
This letter may not be modified, amended, supplemented, or otherwise
changed, except by a document in writing signed by the parties hereto.
14. Break Up Fee:
Lender will fully earn a fee of $52,500 which has already been paid to
Lender upon the earlier of (i) acceptance of this commitment letter or
(ii) Borrower declining to consummate the proposed financing as outlined
herein by April 30, 1998 (the "Break Up Fee").
15. Confidentiality
The terms and conditions set forth herein are confidential and are not
to be shared with any third parties prior to or subsequent to the
execution of this letter.
16. GOVERNING LAW; JURY WAIVER.
THIS LETTER SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF CALIFORNIA
AND THE VALIDITY OF THIS LETTER, AND THE CONSTRUCTION, INTERPRETATION,
AND ENFORCEMENT HEREOF, AND THE RIGHTS OF THE PARTIES HERETO RELATING TO
CLAIMS OR CAUSES OF ACTION ARISING IN CONNECTION HEREWITH SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF CALIFORNIA. BORROWER AND LENDER HEREBY EXPRESSLY WAIVE
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION, CAUSE OF
ACTION, OR PROCEEDING ARISING UNDER OR RESPECT TO THIS LETTER, OR IN ANY
WAY RELATED OR INCIDENTAL TO THE DEALINGS OF THE
<PAGE> 6
IRIS, Inc.
March 30, 1998
Page 6
PARTIES HERETO WITH RESPECT TO THIS LETTER, OR THE TRANSACTIONS
CONTEMPLATED HEREBY, IN EACH CASE WHETHER NOW OR HEREAFTER ARISING,
IRRESPECTIVE OF WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE.
BORROWER AND LENDER HEREBY AGREE THAT ANY SUCH CLAIM, DEMAND, ACTION,
CAUSE OF ACTION, OR PROCEEDING SHALL BE DECIDED BY A COURT TRIAL WITHOUT
A JURY AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A
COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT
OF THE OTHER PARTY HERETO TO WAIVE ITS RIGHT TO TRIAL BY JURY.
17. Indemnification
By Borrower's execution hereof Borrower agrees to indemnify and hold
Foothill harmless, together with its affiliates and its and their
respective directors, officers, employees, counsel and agents (each as
"Indemnified Party") from and against any and all expenses, losses,
claims, damages and liabilities arising out of, or in any manner related
to, this letter, but excluding therefrom all expenses, losses, claims
and damages or liabilities which are finally determined in a
non-appealable decision of a court to have resulted from the Indemnified
Party's gross negligence or willful misconduct. Borrower's obligations
under this paragraph shall remain effective whether or not definitive
documentation is executed and notwithstanding any termination of this
Letter.
18. Deposit:
In connection with your request for financing, you understand that it
will be necessary for us to make certain financial, legal and collateral
investigations and determinations. In order for us to commence with this
process, we have required an initial good faith deposit in the amount of
$30,000.
This deposit will be held by us while we are reviewing this transaction.
If we conclude for any reason, that we will not make the loan to you, we
will return the balance of the deposit after deducting all costs and
expenses actually incurred by us in connection with our review of your
application as noted in Section 12 above. If on the other hand, we
conclude that we will make the loan to you on terms consistent with this
letter and you decline, for any reason, to borrow from us, we shall be
entitled to retain the full amount of the deposit, irrespective of the
amount of expenses incurred.
Our retention of the deposit results from the amount of our reasonable
endeavor to estimate the added administrative costs incurred and the
amount of damage sustained by us as a result of your decision to decline
the loan.
<PAGE> 7
IRIS, Inc.
March 30, 1998
Page 7
If the loan is funded, the deposit will be returned to you after
deducting all costs and expenses actually incurred by us. The deposit
will not be segregated and may be commingled with other funds and you
will not be entitled to receive interest on said deposit.
If the foregoing correctly sets forth your understanding of the financing
arrangements which have been previously discussed, please sign below and return
this letter by March 27, 1998. Please retain a copy of this letter which will
serve as your receipt for the $52,500 "Break-Up Fee" and $30,000 good faith
deposit.
Sincerely,
FOOTHILL CAPITAL CORPORATION
Michael Anuszewski
Vice President
Acknowledged and accepted this 30 day of March, 1998
INTERNATIONAL REMOTE IMAGING SYSTEMS, INC.
By MARTIN S. McDERMUT
Title VICE PRESIDENT - FINANCE AND ADMINISTRATION
CHIEF FINANCIAL OFFICER
<PAGE> 1
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Annual Report on Form 10-K for the
period ended December 31, 1997, and to the incorporation by reference in the
Registration Statements on Forms S-8 (File Nos. 2-77496, 33-10631, 33-56772,
33-82560, 333-19265, 333-31391 and 333-31393) and Forms S-3 (File No's.
333-02001 and 333-27189) of our report dated March 20, 1998, (except Note 8 as
to which the date is March 30, 1998) on our audits of the consolidated balance
sheets of International Remote Imaging Systems, Inc. and subsidiaries as of
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the years in the three-year period ended December
31, 1997.
/s/ Coopers & Lybrand L.L.P.
Los Angeles, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,470,861
<SECURITIES> 25,000
<RECEIVABLES> 5,587,118
<ALLOWANCES> 267,579
<INVENTORY> 3,739,483
<CURRENT-ASSETS> 11,808,655
<PP&E> 6,070,364
<DEPRECIATION> 4,222,618
<TOTAL-ASSETS> 32,734,577
<CURRENT-LIABILITIES> 10,158,702
<BONDS> 0
0
30
<COMMON> 62,597
<OTHER-SE> 14,729,714
<TOTAL-LIABILITY-AND-EQUITY> 32,734,577
<SALES> 26,892,072
<TOTAL-REVENUES> 27,495,148
<CGS> 13,751,392
<TOTAL-COSTS> 13,751,392
<OTHER-EXPENSES> 13,459,773
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,208,138
<INCOME-PRETAX> (796,288)
<INCOME-TAX> (293,000)
<INCOME-CONTINUING> (503,288)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (503,288)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATION FOR THE PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,018,028
<SECURITIES> 400,000
<RECEIVABLES> 4,867,120
<ALLOWANCES> 285,819
<INVENTORY> 4,430,353
<CURRENT-ASSETS> 12,633,934
<PP&E> 5,357,207
<DEPRECIATION> 3,638,743
<TOTAL-ASSETS> 34,877,147
<CURRENT-LIABILITIES> 10,719,261
<BONDS> 0
0
30
<COMMON> 59,913
<OTHER-SE> 13,782,840
<TOTAL-LIABILITY-AND-EQUITY> 34,877,147
<SALES> 5,353,053
<TOTAL-REVENUES> 6,201,908
<CGS> 3,260,998
<TOTAL-COSTS> 3,027,879
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 310,744
<INCOME-PRETAX> (289,904)
<INCOME-TAX> (87,829)
<INCOME-CONTINUING> (202,075)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (202,075)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1995 AND DECEMBER 31, 1996 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS THEN ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 1,511,395 3,602,535 0 1,228,504 38,259
<SECURITIES> 4,736,727 667,589 4,616,857 2,635,902 2,553,102
<RECEIVABLES> 2,897,507 5,482,699 3,982,253 4,142,726 5,868,246
<ALLOWANCES> 87,759 274,766 87,759 87,759 338,160
<INVENTORY> 2,941,021 4,838,206 3,376,332 4,097,910 4,568,550
<CURRENT-ASSETS> 14,180,434 15,416,228 14,647,451 14,259,315 14,220,471
<PP&E> 3,563,895 5,327,597 4,022,760 4,214,741 5,104,677
<DEPRECIATION> 2,568,851 3,379,884 2,676,390 2,826,820 3,152,650
<TOTAL-ASSETS> 22,202,545 37,860,245 23,533,708 23,411,335 36,933,874
<CURRENT-LIABILITIES> 2,945,958 13,502,347 4,030,836 3,368,354 17,575,325
<BONDS> 0 0 0 0 0
0 0 0 0 0
0 30 0 0 0
<COMMON> 62,924 59,118 63,750 63,778 63,897
<OTHER-SE> 18,878,618 13,705,531 19,205,079 19,762,602 0
<TOTAL-LIABILITY-AND-EQUITY> 22,202,245 37,860,245 23,533,708 23,411,335 36,933,874
<SALES> 14,392,158 20,554,131 3,904,096 8,727,551 14,270,999
<TOTAL-REVENUES> 14,488,181 20,597,054 3,925,931 8,749,386 14,313,922
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<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, 1997 (the "Annual Report") contains various forward-looking statements which
reflect the Company's current views with respect to future events and financial
results and are subject to the safe harbor created by the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but are
not limited to, the Company's views with respect to future financial results,
financing sources, capital requirements, market growth, new product
introductions and the like, and are generally identified by phrases such as
"anticipates," "believes," "estimates," "expects," "intends," "plans" and words
of similar import. 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.
This Exhibit 99 supersedes in its entirety Exhibit 99 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and Exhibit 99
to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997. Capitalized terms not otherwise defined below have been defined in the
Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
The Company has received a commitment from a financial institution for
a new loan facility (the "New Facility") to refinance its existing bank loans
which mature on April 15, 1998. As a result, the Company believes that it will
have sufficient liquidity and capital resources to fund normal operations and
pay principal and interest on outstanding debt obligations for the next year.
The commitment is subject to completion of definitive loan documentation and the
satisfaction of certain other customary closing conditions. The failure to
satisfy these conditions and consummate the New Facility would have a material
adverse effect on the Company's liquidity and capital resources.
The Company also plans to pursue equity financing to reduce
indebtedness and fund its long-term business strategy. The failure to secure
equity financing could have a material adverse effect on the Company's long-term
business strategy. In addition, any equity financing could result in dilution to
holders of Common Stock.
RECENT LOSSES
The Company incurred net losses of approximately $7.4 million and
$503,000 for the fiscal years ended December 31, 1996 and 1997, respectively.
While the majority of the losses are attributable to unusual charges such as
deferred offering costs, litigation expenses, restructuring charges and merger
related expenses, the Company attributes a significant portion of the losses to
substantial increases during 1996 in expenditures for research and development,
sales and marketing and general administration. In response, the Company
implemented a restructuring during the fourth quarter of 1996 which
significantly reduced operating expenses. However, there can be no assurance
that the Company can restore annual profitability.
<PAGE> 2
ARBITRATION
In July 1996, the Company acquired PSI from Digital Imaging
Technologies, Inc. ("DITI"). As part of the purchase price, the Company issued
to DITI a five-year warrant to purchase 875,000 shares of Common Stock at $8.00
per share. In August 1997, the Company filed a demand for arbitration against
DITI with the American Arbitration Association. The Company's demand for
arbitration alleges material breaches of the representations, warranties and
covenants in the purchase agreement governing the PSI acquisition. DITI
subsequently filed a counterclaim in the arbitration proceeding alleging that
the Company misrepresented or omitted to disclose material facts in connection
with the PSI acquisition. DITI had previously requested a reduction in the
exercise price of the warrant but elected to seek unspecified monetary damages
in the counterclaim. Although the Company does not presently anticipate any
material adverse effect as a result of this arbitration proceeding, there can be
no assurance that it will not have such an effect on the Company or result in
additional dilution to holders of the Common Stock.
DEPENDENCE ON INSTRUMENT SALES
The Company derives most of its revenues from the sale of two,
high-priced instruments - The Yellow IRIS urinalysis workstation and the
PowerGene genetic analyzer. These instruments have list prices ranging from
$20,000 to $195,000 depending on the model and configuration, and relatively
modest declines in unit sales or gross margins for either product line 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, and these firms could develop and introduce products
comparable or superior to the products sold by Company.
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 entered into a research and development
contract with Poly U/A Systems, nc. ("Poly"), a Company-sponsored research and
development entity, for development of several new products to enhance automated
urinalysis ( the "Poly Products"). The Company has an option to acquire all of
the common stock of Poly for an aggregate price of $5.1 million payable, at the
Company's discretion, in cash or shares of the Company's Common Stock.
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, if any, allocated in in-process research and
development, the Company would record a nonrecurring, non-cash (if purchased
with Common Stock) charge against then current earnings. In June 1995, the
Company exercised a similar option to acquire LDA Systems, Inc. ("LDA"), another
Company- sponsored research and development entity, in exchange for Common
Stock. At that time, it incurred a non-cash charge of $2.9 million against
earnings in 1995 for the acquisition of in-process research and development
related to The White IRIS leukocyte differential analyzer.
The Company has not reached a decision 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 that are subject to change. These factors
include (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 Common Stock at
the time the Company considers exercising the option.
<PAGE> 3
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 maters, the Company
does not have employment agreements with most of its key employees. The Company
does not maintain life insurance policies 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 Power Macintosh computer, manufactured
by Apple Computer, as the platform for its PowerGene product line. During 1997,
Apple Computer released Mac OS 8, a new version of their Mac OS operating
system, which has now been adopted on the PowerGene product line. Apple
Computer, which had suffered significant losses in the recent past, also
returned to profitability following the release of Mac OS 8 and the introduction
of a new line of Power Macintosh computers based on the PowerPC 750
microprocessor. Nevertheless, there can be no assurance that future events will
not cause delays in the development and/or timely supply of any new product
based on this platform, and such delays could affect sales of the PowerGene
product line.
DIFFICULTIES ASSOCIATED WITH INTRODUCTION OF FUTURE PRODUCTS
The commercial success of the Company's future products and systems
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 that
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.
<PAGE> 4
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.
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, or 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.
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 three 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
In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in ome 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, 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.
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Certificate of Incorporation and Bylaws of
the Company and the Delaware General Corporation Law (the "DGCL") could,
together or separately, discourage potential acquisition proposals, delay or
prevent a change in control of the Company and limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
These provisions provide, among other things, for a classified Board of
Directors, for the issuance, without further stockholder approval, of preferred
stock with rights and privileges which could be senior to the Common Stock, and
for limitations on the right of stockholders to call a special meeting of
stockholders and to take action without a meeting. The Company also is subject
to Section 203 of the DGCL which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder.
<PAGE> 5
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
assurance that the Company in the event of a product liability claim. There has
not been any indication that the Company's insurance carrier will not renew the
Company's product liability insurance at or near current premiums; however,
there can be no assurance that the Company will be able to renew product
liability insurance in the future at acceptable premiums. In addition, any
failure to comply with the FDA's Good Manufacturing Practices regulations could
have a material adverse effect on the ability of the Company to defend against
product liability lawsuits.
CURRENCY FLUCTUATIONS
The Company acquired a foreign subsidiary in the PSI Acquisition that
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 sales generated internationally.
The Company currently does not hedge the risks associated with fluctuations in
exchange rates, and 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.
