<PAGE>1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended January 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period for to
Commission file number 0-6375
AMERICAN CYTOGENETICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-2701324
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6440 Coldwater Canyon Avenue, North Hollywood, California 91606
(Address of principal executive offices)
Registrant's Telephone number: (818) 766-1286
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve (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
ninety (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. [ ]
As of May 1, 1996, the aggregate market value of the voting stock (based
upon the average of the closing bid and asked prices of such shares in
the over-the-counter market as reported by the National Association of
Securities Dealers, Inc. Electronic Bulletin Board) held by non-
affiliates of the Registrant was approximately $310,000.
The number of shares outstanding of the Registrant's Common Stock, as of
May 1, 1996 was 4,481,023.
<PAGE>2
PART I
ITEM 1. BUSINESS
The Company
American Cytogenetics, Inc. ("ACI", the "Registrant" or the
"Company") provides disease-specific laboratory testing services,
principally in the areas of cervical cancer and certain sexually
transmitted diseases. Services are provided through ACI's
wholly-owned subsidiary, Cancer Screening Services, Inc. ("CSS"),
located in North Hollywood, California. The Company's business
strategy includes expanding its capacity to provide gynecological
cytology services throughout the country and to utilize the
Company's experience to diversify into related areas of
oncological and female-oriented healthcare.
Gynecological cytology testing to detect cervical cancer and
other diseases involves a technique commonly referred to as the
"Pap smear", named for Dr. George Papanicolaou, the developer of
the technique. The Centers for Disease Control estimate that
approximately sixty million Pap smears are performed annually in
the United States. According to the United States Department of
Health and Human Services, the dramatic reduction in mortality
from cervical cancer since the introduction of the Pap test in
the early 1950s represents "one of the greatest successes in
cancer control."
CSS, incorporated in California in 1968, provides laboratory
analysis of Pap smears to healthcare providers throughout the
United States. For the fiscal year ended January 31, 1996, CSS
processed more than 350,000 Pap tests, making it one of the
largest laboratories of its type in the country.
The Pap testing process has remained virtually unchanged for
more than 30 years. Specimens are obtained from women by
physicians and other primary care providers, usually during the
course of a routine gynecological examination. Cellular material
is placed on a glass slide and sprayed with a fixative prior to
transport to the laboratory. Due to the nature of the specimen
and test turnaround requirements, it is possible to transport
specimens to the laboratory using the Postal Service and other
commercial postal carriers. The majority of specimens processed
by CSS are received through the mail in specially designed
prepaid mailers. Other specimens are transported by company-
employed and outside couriers.
The Company's laboratory is operated so as to process large
volumes of Pap smears with an emphasis on both quality control
and efficiency. Specimens are processed using a modified
Papanicolaou technique and microscopically analyzed by licensed
cytotechnologists. All cytotechnologists employed by CSS are
certified by the American Society of Clinical Pathology ("ASCP").
All specimens identified as "abnormal" are reviewed by a
technical supervisor, a Board-certified Pathologist, prior to
reporting results. A random sample of ten percent of specimens
<PAGE>3
identified as "normal" is routinely subjected to re-screening,
pursuant to applicable regulations. Results are reported to
ordering physicians by phone, courier and/or mail.
The Company's laboratory maintains licensure by various
federal and state agencies, including the United States
Department of Health and Human Services, the California
Department of Health and the New York Department of Health
Services. As a New York licensed laboratory, CSS participates in
on-site inspection and proficiency testing programs for cytology
testing, recognized as one of the most rigorous such programs in
the industry. CSS also voluntarily participates in the
proficiency testing and inspection program conducted by the
College of American Pathologists ("CAP"), an independent
nongovernmental organization which offers a voluntary
accreditation program. CSS has been accredited by CAP since
1986. In the current fiscal year, CSS also successfully
participated in an unannounced laboratory inspection conducted
under the auspices of the Health Care Financing Administration,
which included re-examination of more than 500 previously
analyzed cases, selected at random.
In addition to Pap smear analysis, CSS also provides
laboratory testing services for certain sexually transmitted
diseases ("STDs"), primarily including Chlamydia Trachomatis
("Chlamydia"). Chlamydia, a serious but usually non-fatal STD,
is often asymptomatic. It is detectable using a variety of
laboratory techniques, including Direct Fluorescent Assay
("DFA"), Enzyme-linked Immunospecific Assay ("EIA") and DNA Probe
testing. CSS offers all three procedures. As with the Pap
smear, specimens are transportable through the mail.
Additional services offered include Histopathology (tissue)
testing, in which a variety of specimens are processed for
analysis by Pathologists. Specimens received for analysis
include cervical and endocervical biopsies, often taken in
conjunction with "positive" Pap test findings.
CSS markets its services to physicians in private practice,
agencies providing reproductive health services (Planned
Parenthood, Family Planning Associates, etc.) and state and
county public health agencies (see below: "Competition"). The
Company had sales of approximately $1,050,000, $1,280,000 and
$1,390,000 to the County of Los Angeles during fiscal years 1996,
1995 and 1994. No other single customer was responsible for more
than ten percent (10%) of the Company's consolidated sales for
those periods.
The Pap testing business is subject to some measure of
seasonality, primarily due to the elective nature of screening
tests, which are primarily associated with routine gynecological
examinations. Test volume per client may also be affected by
such factors as weather and other regional phenomena. The
Company's clients are located throughout the United States.
Consequently, the laboratory experiences periodic increases and
decreases in test volume per client during certain months of the
<PAGE>4
year.
ACI owns three additional subsidiaries, Cancer Screening
Services of Missouri, Inc. ("CSS/M"), Diagenetic Laboratories,
Inc. and Astra-Med Laboratories, Inc., all of which are inactive.
ACI, incorporated in Delaware, is a majority owned subsidiary of
Infotechnology, Inc. ("Infotech") and its wholly-owned
subsidiary, Questech Capital Corporation ("Questech"). On March
5, 1991, both Infotech and Questech filed for reorganization
under Chapter 11 of the Bankruptcy Code.
In fiscal year 1995, the Company established CSS/M in order
to capitalize on that state's higher test-per-day standards and
lower cost of living and to recruit cytotechnologists from other
parts of the country. Primarily as a result of a decline in test
volume from the Company's largest customer in the summer of 1995,
the Company ceased operations at CSS/M in November. The Company
intends to pursue other opportunities to expand its capacity at
other locations in order to compete more effectively for low
priced reproductive health and public health agency business.
The Registrant has also been pursuing a variety of business
combinations in order to improve its financial condition and
expand its service offerings. In December, 1995, the Registrant
executed a non-binding letter of intent with Nu-Tech Bio-Med,
Inc. ("Nu-Tech") whereby Nu-Tech would acquire a control position
in the Company by purchasing all of the common and preferred
shares currently owned by Infotech and its subsidiaries as well
as additional newly issued stock sufficient to bring its position
to 80 percent of the outstanding common stock of the Company.
Nu-Tech is in the business of providing laboratory testing
services, principally in the area of chemosensitivity testing for
patients undergoing chemotherapy for certain tumors.
Competition
Analysis of Pap smears is performed in the majority of the
nation's hospital-based and independent clinical laboratories.
The Company's laboratories fall into a subcategory of independent
laboratories that offer a limited menu of disease-specific
services. As such, they are often referred to as "specialty"
laboratories.
Competition for Pap testing business is intense, highly
fragmented and varies by the type of client being served.
Physicians in private practice tend to prefer full-service
clinical laboratories that can perform all or most of the tests
they order. Physicians also require high service levels,
including courier pick-up of specimens and rapid turnaround of
test results. There are currently about 900 independent clinical
laboratories operating in California, the majority of which
provide a full range of tests. Some of these laboratories are
associated with large national chains and, as such, have
substantially greater financial resources than the Company.
<PAGE>5
While the Company's laboratory is at a competitive disadvantage
with respect to scope of tests offered, the Company believes that
other service factors, including reporting of results within 48
hours of pick-up, are comparable to or better than its
competitors.
Reproductive health agencies and certain public health
agencies tend to order large volumes of Pap tests and prefer
specialty laboratories that typically offer lower prices with
high volume capabilities. The Company's laboratory competes for
business from such agencies throughout the United States.
Competitors include cytology specialty laboratories located in
states where regulatory and other factors enable laboratories to
operate at lower production costs than California-based
laboratories (see below: "Regulation"). CSS is one of the oldest
and largest cytology specialty laboratories in the country. As
such, it competes for both private physician and public agency
business on the basis of its reputation for quality and service.
Regulation
Medical laboratories are subject to extensive federal, state
and local legislation and regulation. CSS is licensed to provide
laboratory testing services by the United States Department of
Health and Human Services as well as by numerous states,
including California and New York.
The principal federal regulation covering laboratory
services is the Clinical Laboratory Improvement Amendments of
1988 ("CLIA '88"). CLIA '88, among other things, provides
extensive control over the provision of cytology testing
services. These regulations cover all such laboratories
nationwide. In addition, CSS is subject to California laws
governing the provision of cytology testing. California law
limits the number of slides a cytotechnologist can analyze to 80
in any 24-hour period, compared to 100 per day under CLIA '88.
This places California-based laboratories at a productivity
disadvantage compared to laboratories in other states where
federal limits apply.
Reimbursement for clinical tests provided for Medicare and
Medicaid eligible patients is also subject to state and federal
regulation. Recent cost cutting in these programs has not
adversely affected CSS's test volumes or revenues. However,
notwithstanding the fact that CSS is not dependent on revenues
generated from such patients, there is no guarantee that future
regulatory changes will not have a negative impact on CSS's
business. Additionally, federal legislators periodically propose
changes in the manner in which health care is delivered and
reimbursed. Management is unable to predict at this time the
probable outcome or impact of such changes, should they occur.
Compliance with federal, state and local provisions
regarding the discharge of materials into the environment, or
otherwise relating to the protection of the environment, is not
expected to have any material effect on the capital expenditures,
<PAGE>6
earnings or competitive position of the Registrant and its active
subsidiary.
Malpractice Insurance
The Company's laboratories, in the ordinary course of
business, are subject on occasion to legal claims alleging
improper reporting or misreading of specimens. The Company
believes such claims are adequately covered by claims-made
policies provided by commercial insurance carriers, subject to a
$25,000 deductible. Policy limits are periodically reviewed by
management and the Company's insurance broker. However,
management can give no assurance that, at some future date, a
claim might not be initiated that is in excess of insurance
coverage or that the Company may be unable to obtain coverage.
Employees
As of May 1, 1996, the Registrant and CSS employed
approximately 30 full-time and 40 part time employees at its
North Hollywood, California facility. None of the employees are
represented by a union or subject to collective bargaining
agreements. The Company considers its relationships with its
employees to be good.
ITEM 2. PROPERTIES
The Registrant owns no real estate. CSS leases
approximately 12,000 square feet of laboratory and office space
at 6440 Coldwater Canyon Avenue, North Hollywood, California.
The lease, which expires in July 1999, provides for monthly
payments that increase annually over the term of the lease.
Management believes that current facilities are adequate to meet
immediate needs.
ITEM 3. LEGAL PROCEEDINGS
On August 11, 1992, a complaint was filed, Mary Lou Back v.
American Cytogenetics, et al., Case No. BC061917, in the Superior
Court of California for the County of Los Angeles, against the
Company, Cancer Screening Services ("CSS"), Earl Brian, Alice
Hendricks, Liston Witherill, Allan Tessler, Gary Prince, and
Dwight Geduldig. Each of the individually named defendants,
except Allan Tessler, are members of the Board of Directors of
the Company. The complaint alleges that Ms. Back, who was
employed as President and Chief Executive Officer of the Company
and CSS from May 1990 to January 1992, was wrongfully terminated
in violation of public policy and various other reasons. The
complaint seeks damages in an amount in excess of $200,000 plus
<PAGE>6
punitive damages and indemnification from Internal Revenue
Service ("IRS") assessments against Back for taxes not paid by
CSS. In October 1993, the court granted the Company's motion to
dismiss Back's claim for indemnification and on March 22, 1994
the court granted the Company's motion for summary adjudication
of Back's remaining claims. Back's subsequent request for
reconsideration of the summary adjudication order has been
denied. Back has filed a Notice of Appeal. The Company has
vigorously defended the action and is unable to predict the
outcome at this time.
The Company's laboratories, in the ordinary course of
business, are subject on occasion to legal claims alleging
improper reporting or misreading of specimens. The Company
believes such claims are adequately covered by claims-made
policies provided by commercial insurance carriers, subject to a
$25,000 deductible. Policy limits are periodically reviewed by
management and the Company's insurance broker. However,
management can give no assurance that, at some future date, a
claim might not be initiated that is in excess of insurance
coverage.
Except for these described actions, there are no material pending
legal proceedings to which the Company or its subsidiary is
presently a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders of
the Company during the fourth quarter of the fiscal year ended
January 31, 1996.
<PAGE>8<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON AND PREFERRED EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
Until July 12, 1992, the Common Stock was traded in the
over-the-counter market on the National Association of Securities
Dealers, Inc. Automated Quotation System ("Nasdaq") (symbol:
ACYT). On August 30, 1991, Nasdaq revised its maintenance
standards with an effective date of March 2, 1992. In May 1992,
Nasdaq informed the Company that the Company did not meet the
revised maintenance requirements, including capital and surplus,
as well as bid price requirements, for continued listing on
Nasdaq. Nasdaq granted the Company an exception to the listing
requirements until June 30, 1992. The Company was not able to
meet the revised maintenance requirements. Nasdaq removed the
Company from its listing on July 13, 1992.
The following table sets forth the range of the high and
low bid quotations for the Common Stock during the last two
fiscal years. Both fiscal years are as reported by the National
Association of Securities Dealers Over the Counter Bulletin
Board.
<TABLE>
<CAPTION>
Fiscal Year 1996 Fiscal Year 1995
High Low High Low
<S> <C> <C> <C> <C>
First Quarter 1/32 1/50 5/16 1/8
(2/1 to 4/30)
Second Quarter 1/32 1/50 5/16 1/8
(5/1 to 7/31)
Third Quarter 1/20 1/100 1/4 1/16
(8/1 to 10/31)
Fourth Quarter 1/20 1/50 1/8 1/32
(11/1 to 1/31)
</TABLE>
During fiscal year 1996, there was no established trading market
for the Company's Preferred Stock.
(b) As of May 1, 1996, there were 471 holders of record of
Common Stock and 173 holders of record of Preferred Stock.
(c) Dividends
The Registrant has not declared cash dividends on Common
Stock during the last five fiscal years. Each share of 9%
cumulative Preferred Stock gives holders voting rights equivalent
to those holders of the Company's Common Stock. The Company has
the right to redeem all or part of its outstanding preferred
shares at any time at their par value of $10 per share plus
dividends in arrears. Cumulative undeclared dividends in arrears
at January 31, 1996 on the Preferred Stock aggregated $227,974,
or $7.58 per share.
<PAGE>9
Because dividends are in arrears, the holders of Preferred
Stock, pursuant to provision of the issuance of the Preferred
Stock, have the right to elect a majority of the Board of
Directors.
<PAGE>10<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following schedule is a summary of selected financial
data for the Registrant.
<TABLE>
<CAPTION>
As of and for the Years Ended January 31,
(000's Omitted, except per share amounts)
1996 1995 1994 1993 1992
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues $4,682 $5,454 $5,280 $5,697 $6,417
Net Income (Loss) (484) (205) 16 (909) (382)
Net Loss
per Common Share (.11) (.05) 0 (.28) (.12)
Dividends on
Common Shares 0 0 0 0 0
Balance Sheet Data:
Current Assets 739 962 1,111 776 1,098
Current
Liabilities 1,591 1,235 1,141 961 827
Working Capital (852) (273) (30) (185) 271
Total Assets 1,124 1,339 1,250 900 1,599
Long-Term Debt,
net of Current
Portion 604 690 490 542 534
Capital
Deficiency (1,095) (611) (406) (629) 238
</TABLE>
The selected financial data set forth above with respect to each
of the fiscal years in the five year period ended January 31,
1996, have been derived from the Company's consolidated financial
statements. Included in fiscal year 1993 results is the write
off of approximately $222,000 of goodwill. The selected
financial data should be read in conjunction with the Company's
audited consolidated financial statements included in the
Company's Annual Reports on Form 10-K. See Note 2 of the
accompanying Notes to the Consolidated Financial Statements
regarding the Company's ability to continue as a going concern.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<PAGE>11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Registrant's revenues are derived from the sale of
testing services for gynecological cytology (Pap testing),
certain sexually transmitted diseases (primarily Chlamydia
trachomatis) and histopathology testing. As in years past, the
majority of the Registrant's revenues (approximately 69%) are
derived from the sales of Pap tests. While this represents a
lower percentage than in the past, Pap testing remains the
Registrant's major business focus.
More specifically, the Registrant's primary marketing focus
has been and continues to be on publicly financed (either
directly or through tax exemptions) reproductive health agencies
and organizations. The purchasing ability of such agencies and
organizations is generally dictated by their ability to
appropriate or otherwise generate funding. As such, there is a
high degree of price sensitivity in this marketplace. Management
believes that price sensitivity will continue to be a driving
factor for the foreseeable future.
The Registrant's ability to continue to compete successfully
for this business is dependent to a large extent on the ability
to control costs, particularly labor costs. In fiscal year 1991,
regulations were enacted in the State of California that limited
the number of cytology slides that a cytotechnologist could
analyze in a 24-hour period. These limits were lower than those
for other states. As a result, labor costs, which comprise the
largest single cost element in Pap test processing, increased
substantially, with a concomitant negative impact on the
Registrant's ability to compete in its historical market.
The Registrant has undertaken and continues to undertake a
number of efforts intended to maintain its competitive position
in this market. These include cost containment in its California
facility through staff restructuring and wage and salary
controls, expanding capacity in lower cost areas of the country
in order to reduce processing costs and increase volume and
implementing new laboratory automation. Specifically, in fiscal
year 1995, management established a cytology testing laboratory
in Missouri, where daily test limitations are higher and wage
levels are lower than in California. Primarily as a result of a
reduction in test volume from its largest customer in the Fall of
1995, the Company ceased operations at the Missouri facility in
November of the current fiscal year. Tests being processed at
the Missouri facility are now being processed at the California
facility. Additionally, the Registrant is in the process of
implementing a new laboratory information system to improve test
reporting and billing, as well as management reporting and client
services. Management believes that these activities will have a
positive impact on the Registrant's competitiveness and
<PAGE>12
profitability.
The Registrant has also undertaken efforts to increase
penetration in the private physician sector of the market.
California law requires Pap tests to be billed by the laboratory
performing the test directly to the patient or third party payor,
rather than to the ordering physician. This results in higher
unit pricing and operating margins for these tests.
Historically, Pap specialty laboratories have been at a
competitive disadvantage in this marketplace for a variety of
reasons. Among these is the current trend involving the growth
of managed care programs in California and elsewhere. Under some
managed care plans, laboratories receive capitated payments from
the insurer based on the membership participation of associated
physicians. Insurers tend to prefer large, full service
laboratories when entering into these agreements. To the extent
that these plans continue to proliferate, this will negatively
impact on the competitiveness of laboratories like those of the
Registrant in this market.
Comparison of Fiscal Year 1996 with 1995
Results of Operations
In fiscal year 1996, net revenues decreased approximately
14% from the prior year. This was the result of an approximate
11% decrease in total tests performed, and a decrease of
approximately 3% in average net fees. This decrease was
primarily in Pap testing volume (15%), which, for the current
fiscal year, comprised approximately 69% of all tests performed,
down from 73% in the prior year. The primary source of the
decrease in both tests and pricing was the Company's largest
client, the Los Angeles County Department of Health. In the
summer of 1995, the County announced that it was facing a "budget
crisis," and that this problem could result in the closure of
County run hospitals and clinics. In September, test volume from
County facilities declined by approximately 65% from prior
monthly averages. This decline also resulted in lower average
fees for remaining tests. Volumes had recovered to approximately
60% of normal by the end of the fiscal year, as a result of the
provision of state and federal "bailout" funds and the closure of
some clinics. The Company's contract with the County expires on
June 30, 1997. Publicly reported announcements indicate that the
County is re-assessing the structure of its health care delivery
system. Management is unable to predict the impact of these
activities on its business at this time.
Total operating expenses declined by approximately 10% from
the prior year. Production expenses declined by approximately
13%, reflecting the drop in test volume and other cost re-
structuring. As a percentage of sales, production expenses
declined to 69% from 71% of sales. Selling expenses declined by
21% due to lower costs associated with marketing to public sector
accounts. General and administrative expenses increased by 4%
reflecting cost cutting efforts offset by increased insurance and
facilities expenses and by delays in implementing new automation.
<PAGE>13
Interest expense increased by $42,000 or 77% due to increased
levels of debt which financed the new computer system hardware
and assets purchased from Cytology Laboratories, Inc.
Comparison of Fiscal Year 1995 with 1994
Results of Operations
In fiscal year 1995 the Company's net revenues increased
approximately 3% over the prior year. This was the result of an
approximate 9% increase in total tests performed, offset by a
decrease of approximately 6% in average net fees. These changes
were primarily the result of a significant increase in Chlamydia
testing volume (141%), which, for the current fiscal year,
comprised approximately 25% of all tests performed. Chlamydia
testing results in a lower net fee than any of the Company's
other testing services. It is expected that reduction in average
fees will continue in the future from renewed marketing efforts
to the lower priced publicly financed segment of the market which
the Company will target as a result of opening the Company's
Missouri facility. These reduced fees produce lower gross
margins (approximately 31% in the prior fiscal year compared to
the current 30%); however, with the addition of a new testing
facility and increased capacities and continued cost reductions,
larger total margins are expected.
Production expenses increased by 7% due to the processing of
more tests in the current fiscal year. Management believes that
production costs on a per test basis will continue to decline as
continued cost reductions, such as the opening of the Missouri
laboratory, are realized.
Selling and marketing expenses decreased by approximately 6%
due to reduced compensation expense resulting from the reduced
staffing necessary to market and service the Company's current
client mix which is largely publicly financed.
General and administrative expenses increased by
approximately 6% due to an increase in insurance premiums and
reserves provided for malpractice litigation (resulting in a 7%
increase in total general administrative expenses). In addition,
there was an increase in compensation related to additional
staffing brought on in fiscal year 1995 to assist in the handling
of billing services directly to third parties, such as Medicaid,
Medicare and private insurance companies (3% increase). These
increases were partially offset by a decrease in legal expense
(3%) due to reduced legal efforts in the suit brought against the
Company by a former president. The court granted a summary
adjudication in favor of the Company in March 1994. See Note 8
of the Notes to the Consolidated Financial Statements. Also
contributing to the decrease (2%) was a reduction in consulting
expense due to the reversal of previously recorded but unpaid
charges from a related party. See Note 9 of the Notes to the
Consolidated Financial Statements.
The increase in total operating expenses of approximately
<PAGE>14
4% resulted primarily from the 9% increase in total test volume.
Production expenses as a percentage of sales increased slightly
while selling, general and administrative expenses remained
relatively constant and declined slightly as a percentage of
sales. Additional factors included in the increase in production
expenses as well as general and administrative expenses include
approximately $125,000 of start-up costs associated with the
establishment of a new processing facility in fiscal year 1995.
Interest expense decreased by 36% due to reduced interest on
the obligation to the IRS on payroll taxes not paid in fiscal
year 1992 for which an informal installment agreement and
repayment plan has been established with the IRS.
Other income decreased by $120,000 in fiscal year 1995 due
to a one-time reversal in fiscal year 1994 of a provision for
lease settlement costs. As a result of the settlement, the
Company revised its loss estimate and recorded a $120,000 gain.
(See Note 14 of the accompanying Notes to the Consolidated
Financial Statements).
Due to the factors mentioned above, the Company recorded a net
loss of $205,000 in fiscal year 1995 versus net income of $16,000
in fiscal year 1994. The Company's historical losses and the non
payment of payroll withholding taxes have severely affected the
Company's financial condition. See Liquidity and Capital
Resources below.
Liquidity and Capital Resources
Working capital of the Company decreased approximately
$579,000 from a deficit of $273,000 at January 31, 1995 to a
deficit of $852,000 at January 31, 1996. The decrease results
primarily from the loss from operations and the increase in cash
overdraft along with the repayment of debt.
The Company has incurred losses from operations for the past
three fiscal years, has negative working capital of $852,000 and
a capital deficiency of $1,095,000. The Company has also been
slow in paying its accounts payable and other obligations. In
addition, the Internal Revenue Service ("IRS") has established a
lien against the assets of the Company for repayment of overdue
payroll taxes and related penalties and interest. On May 12,
1992, the Company entered into an informal installment agreement
with the IRS for repayment of these amounts. (See Note 5 of the
accompanying Notes to the Consolidated Financial Statements).
These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The
Company's independent certified public accountants have included
an explanatory paragraph in their report with respect to this
matter.
In the past, the Company received infusions of working
capital from Infotech and Questech to meet liquidity needs, when
<PAGE>15
necessary. Due to the financial difficulties experienced by
these major shareholders the Company had not been able to utilize
Infotech and Questech as working capital resources in the past
five fiscal years. However, subsequent to the end of fiscal year
1996 the Company borrowed $250,000, on a short term basis, to
fund operational cash flow shortages from Questech. No
assurances can be given that Questech will be available to
advance cash to the Company in the future.
The Company has entered into a letter of intent with Nu-Tech
Bio-Med, Inc. ("NTBM") wherein NTBM would buy newly issued shares
of the Company for $300,000. The letter of intent also indicates
that NTBM will purchase all existing shares of the Company's
common and preferred stock owned by Infotech and Questech. As a
result NTBM would become the new majority shareholder of the
Company owing 80% and 60% of the common and preferred stock,
respectively. No assurance can be given that such transaction
will occur in the future as the transaction requires the
completion of due diligence procedures and consent of the
Company, Infotech, Questech and NTBM.
The regulatory environment in California since 1990 limits
the number of tests that a cytotechnologist could process in a
24-hour period. As a result of California regulations being more
stringent than those of other states, the Company has been at a
competitive disadvantage in its traditional primary market.
Management's response to this situation has been to seek
opportunities to establish and/or acquire laboratories in those
states with more favorable cost and productivity structures.
Further, the Company's history of losses and the IRS lien have
inhibited the Company's borrowing ability to address cash flow
shortages and to modernize its aging laboratory information
system. In response to this situation, management has pursued
and continues to pursue financing through the sale of stock and
other alternatives. In the current fiscal year, the Company has
implemented key aspects of its overall plan by (1) establishing
its Missouri laboratory and (2) entering into an agreement to
obtain a new laboratory information system. However, as a result
of a reduction in test volume from its largest customer during
fiscal year 1996 the Company ceased operations in its Missouri
facility. Tests being processed in the Missouri facility are now
being processed in the California facility. Management continues
to pursue cost reductions as well as to renegotiate a more
favorable settlement of the IRS obligation.
The continuation of the Company as a going concern is
dependent upon its ability to implement management's plans as
discussed above. See Note 2 of the accompanying Notes to
Consolidated Financial Statements.
During fiscal year 1996 accounts receivable decreased by
approximately $190,000 before provisions for uncollectible
amounts due to decreases in receivables caused by reduced fiscal
year 1996 sales and the implementation of the Company's new
laboratory information system which shortened aging of the
receivables by allowing the Company to automate the billing of
<PAGE>16
these charges. In fiscal year 1996 other current liabilities and
accounts payable increased a total of approximately $138,000 due
to the Company's hampered cash flow due to losses from operations
and cash used to repay long-term debt.
Capital expenditures were approximately $109,000 in fiscal
year 1996, compared with $146,000 in fiscal year 1995 and $86,000
in fiscal year 1994. Expenditures in fiscal year 1996 were for
computer hardware associated with the new laboratory information
system. The hardware acquired was largely financed by a
capitalized lease for $100,095. In fiscal year 1995 the Company
entered into a contract for software development which, as later
amended, required payments of $105,000, of which all has been
paid. Expenditures in fiscal year 1994 were primarily for
specimen collecting equipment and delivery vehicles.
The Company has committed to acquire a new laboratory
information system. The contract for the software portion, as
amended, has largely been paid for from operations and from the
funds generated in the sale of stock. Management has secured an
outside source to finance the hardware necessary for the system
and took delivery of all hardware necessary in February 1995.
On May 12, 1992, the Company established an informal
installment agreement with the IRS which allows the Company to
repay an approximately $525,000 obligation over a 7-year period.
The IRS has established a lien against the Company's assets for
repayment of this liability. The Company, under the terms of the
agreement, is obligated to make payments of $10,000 per month.
During fiscal year 1995, the Company was unable to make most of
the monthly payments on this obligation. The IRS has not
instigated any further action against the Company, and the
Company resumed payments in December 1994. See Note 5 of the
accompanying Notes to Consolidated Financial Statements.
Funds from financing activities in fiscal year 1994 resulted
from the Company raising in a private placement $378,733. Such
amount is net of offering costs of $80,078 and before a reserve
of $72,500 for future registration costs. See Note 7 of the
accompanying Notes to the Consolidated Financial Statements.
At January 31, 1996, the Company had net operating loss
carryforwards for federal income tax return purposes of
approximately $2,700,000 to offset future taxable income,
expiring at various dates from 1997 through 2011. At January 31,
1996, the Company has net operating loss carryforwards for State
of California income tax return purposes of approximately
$700,000 to offset future taxable income expiring at various
dates from 1997 through 2000. Additional limitations on the use
of carryforwards may arise if certain ownership changes occur.
The tax benefit of these net operating loss carryfowards has not
been recognized in the Company's financial statements since it is
not possible at this time to determine that the realization of
the deferred tax asset is more likely than not.
<PAGE>17
Impact of Inflation and Changing Regulations
Regulations implemented by the state and federal governments
which limit the number of Pap smears that cytotechnologists may
review per day have greatly increased the demand for
cytotechnologists. These changes are of continued significance
to the Company as the screening services offered by the Company
are heavily concentrated in this area. The increased demand for
cytotechnologists has had an adverse effect on the costs of
performing such services. The Company instituted certain price
increases to partially offset the increased costs. However,
these increases are dependent upon the Company's negotiations
with its clients and can have an adverse effect on the volume of
tests the Company performs. The effect of these regulations can
be further mitigated by the Company to the extent the Company is
able to fully utilize existing cytotechnologists and attract
additional cytotechnologists at lower pay levels. Further
regulations restricting the cytotechnologists' workload could
have an adverse effect on the Company's operations; however,
management is not aware of any pending regulations at this time.
Revenues subject to reimbursement rates which are regulated
by both federal and individual state authorities are subject to
adjustment for changing regulations, inflation and costs incurred
in rendering the services. The reimbursement rates may also be
affected by cost containment legislation, competition, third
party payor changes or other governmental administrative controls
or limitations. If and until such changes are made, it cannot be
ascertained what impact they may have on the Company's revenues
and earnings.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to
Be Disposed of" (SFAS No. 121) issued by the Financial Accounting
Standards Board is effective for financial statements for fiscal
years beginning After December 15, 1995. The new Standard
established new guidelines regarding impairment losses on long-
lived assets, which include plant and equipment, certain
identifiable assets and goodwill, that should be recognized and
how impairment losses should be measured. The Company does not
expect adoption to have a material effect on its financial
position or results of operations.
Statement of Accounting Standards No.123, "Accounting for Stock-
Based Compensation" (SFAS No.123) issued by the Financial
Accounting Standards Board (FASB) is effective for specific
transactions entered into after December 15, 1995, while the
disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value
method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods and services from
non employees in exchange for equity instruments. At the present
<PAGE>18
time, the Company has not determined if it will change accounting
policy for stock based compensation or only provide the required
financial statement disclosures. As such the impact on the
Company's financial position and results of operations is
currently unknown. The Company does not expect adoption to have
a material effect on its financial position or results of
operations.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Consolidated Financial Statements and Schedules required
by this Item 8 are set forth as indicated in Item 14(a)(1) and
(2) and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None<PAGE>
<PAGE>19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table contains information as of May 1, 1996,
as to each director and executive officer of the Registrant:
<TABLE>
<CAPTION>
Position with Registrant, Principal
Name Age Occupation and Public Directorships
<S> <C> <C>
Dwight Geduldig 72 Director of the Registrant since
February 1991. Member of the
Compensation Committee of Board of
Directors of Registrant. Chairman
of the Board of Directors of
Hadron, Inc. from May 1992 to
October 1993. President and Chief
Executive Officer of Hadron, Inc.
from February 1992 to October 1993.
Independent consultant from July
1989 to January 1992. Western
Director of American Hospital
Association from September 1982 to
1988. From February 1988 to 1989,
Senior Vice President of Corporate
Affairs of UPI. Former bureau
manager of UPI and a news executive
on three major San Francisco Bay
Area newspapers for ten years.
Director of Infotech from 1981 to
1993. Director of Legislation of
the Washington Office of the
American Hospital Association from
1981 to 1982. Former member of
the minority professional staff
United States Senate Committee on
Labor and Human Resources.
Alice Hendricks 48 Director of the Registrant since
September 1991. Member of the
Audit and Executive Committee of
the Board of Directors of the
Registrant. Committee Vice
President, Executive Producer and
partner in SBK Pictures, a
television and film production
company from 1980-1990.
Independent film and television
production consultant from 1990-
1994. Currently founding partner
and President of 2 Rivers
Productions, Inc.
<PAGE>20
Eric W. Hoffman 36 Chief Financial Officer of the
Registrant since December 1992.
Corporate Secretary of the
Registrant since February 1994.
Corporate Controller of the
Registrant from May 1992 to
December 1992. Chief Accountant of
Infotech from September 1987
through December 1992. Controller
of Questech from September 1987
through December 1992. Chief
Financial Officer of Advanced
Corporate Services, Inc. ("ACS")
from October 1987 through December
1992. Prior to 1987, worked as an
accountant for various companies.
Andrew M. Razo 45 Director of the Registrant since
February 1994. Member of the Audit
Committee of the Board of Directors
of the Registrant. President, CEO
and Chairman of A. M. Razo &
Company Capital Partners, Inc.
since 1989. Chief Executive
Officer and Chairman of Sun Harbor
Financial.
Liston Witherill 70 Director of the Registrant since
September 1991. Member of the
Audit and Executive Committee of
the Board of Directors of the
Registrant. President of
Witherill, St. Clair and
Associates since April 1990. Held
various positions with Nu-Med
Medical, Inc. from 1979 to present
including Senior Vice President,
President, and Director.
Stan Yakatan 53 Director of the Registrant since
February 1994. Member of the
Compensation Committee of the Board
of Directors of the Registrant.
Chairman, CEO, and President of
Unisyn Technologies since 1989.
Chief Operating Officer and
President of New Brunswick
Scientific from 1986 to 1989.
Director of General Biometrics.
Edward M. Young 49 President, Chief Executive Officer
of the Registrant since January
1992. Chief Financial Officer of
the Registrant from January 1992 to
<PAGE>21
December 1992. Director of the
Registrant since December 1992.
Chairman of the Board Directors of
the Registrant since May 1993.
Member of the Executive Committee
of the Board of Directors of the
Registrant. Independent management
consultant from March 1990 to
January 1992. President and Chief
Executive Officer of the Registrant
from September 1986 to September
1989. Executive Vice President and
Chief Operating Officer of the
Registrant from February 1986 to
September 1986. President of the
Center for Health and Social
Services Research from 1983 to
1986. Associate Director of the
University of Southern California
Center for Health Services Research
from 1980 to 1983. Director of
Work Recovery, Inc. since January
1996.
</TABLE>
The directors serve until their successors are duly elected
and qualified. The Company has not held an annual meeting in the
last eight years. Mr. Yakatan and Mr. Razo were designated by A.
M. Razo & Company Capital Partners, Inc. and elected to the Board
of Directors pursuant to an agreement with the Company and A. M.
Razo & Company Capital Partners, Inc. Such agreement related to
the introduction to the Company of investors which participated
in the private offering of the Company's Common Stock. See Note
7 of the accompanying Notes to the Consolidated Financial
Statements.
In March 1991, FNN, Infotech and its subsidiary, Questech
filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. UPI Filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in August 1991. Directors and officers of the
Company have served as officers and directors of Infotech,
Questech, FNN, UPI and Hadron, Inc. Infotech owns approximately
13% of the common stock of Hadron, Inc. as of January 31, 1996.
<PAGE>22<PAGE>
Item 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
Summary Compensation
The following table sets forth information regarding
executive compensation for the three year period ended January
31, 1995, to the Registrant's Chief Executive Officer. No other
officers compensation exceeds $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Fiscal Base Awards
Name and Principal Position Year Salary Bonus Options(#)
<S> <C> <C> <C> <C>
Edward M. Young 1996 $111,000 0
Chief Executive 1995 $115,000 0
Officer, Chairman 1994 $110,000 25,000 0
and President
<?TABLE>
During fiscal year 1996, several key employees voluntarily took a
temporary non-refundable pay cut due to cash flow shortages.
Accordingly Mr. Young's salary for fiscal year 1996 was less than
that amount stipulated in his employment agreement.
Option Grants
No options were granted in fiscal year 1996.
Option Exercises
The following table sets forth information with respect to
the exercise of stock options during fiscal year 1996 by each of
the Named Officers and the value of unexercised options held by
each of them as of the end of fiscal year 1996.
<PAGE>23
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1996 Fiscal Year and Fiscal
Year-End Option Values
Shares Year-End(#)
Acquired Value
Name on Exercise(#) Realized
<S> <C> <C>
Edward M. Young 0 N/A
</TABLE>
<TABLE>
<CAPTION>
Value of
Unexercised
Number of In-The-Money
Unexercised Options
Options at Fiscal at Fiscal
Year-End(#) Year-End
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
<S> <C> <C>
Edward M. Young 400,000/0 $0/$0
</TABLE>
Long-Term Incentive Compensation
The Company currently has no long-term incentive
compensation plans.
Pension Plan Compensation
The Registrant has a 401(k) plan. Approximately 35
employees participate in this contributory plan. The Company's
contributions relating to the 401(k) plan for fiscal year 1996
were approximately $4,600.
Compensation of Directors
All non-management directors were reimbursed for out-of-
pocket travel expenses to attend Board meetings. Since the
beginning of fiscal year 1993, non-management directors are
entitled to their choice of $2,000 or 10,000 shares of the
Company's unregistered common stock for annual services as a
Board Member. Currently four directors are due fees for four
years of service, two former directors are due fees for two years
and one year of service and one director is due fees for one year
of service. In addition, non-management directors receive $200
per Board Meeting.
Edward M. Young, a director of the Company, received 54,000
shares of the Company's unregistered common stock in fiscal year
1993 as partial payment for a bonus earned for fiscal year 1990.
Alice Hendricks, a director of the Company, received 18,667
shares of the Company's unregistered common stock and $1,000 in
fiscal year 1993 for management services rendered in fiscal year
1992.
<PAGE>24
Employment Contracts and Change in Control Arrangements
Edward M. Young, the Company's President, Chief Executive
Officer and Chairman entered into an employment agreement with
the Company that terminates upon his death, incapacity or
misconduct. The contract may also be terminated by either Mr.
Young or the Company with 90 days notice. The agreement provides
for his employment as President and Chief Executive Officer for a
base salary of $115,000 annually and annual bonuses of up to 40%
of the base salary dependent on the achievement of certain
objectives. The agreement also grants Mr. Young 400,000 options.
See above Compensation of Executive Officers. The Company is
obligated to pay severance to Mr. Young or his heirs of up to 12
months base pay, depending on the cause for termination of the
agreement.
The Company did not adjust or amend any of the exercise
prices of stock options during fiscal year 1996.
The Registrant has a non-qualified stock option plan whereby
key employees and directors are granted options to purchase
shares of common stock. The granting of options is intended to
assist the Registrant in securing and retaining key employees by
allowing them to participate in the ownership and growth of the
Registrant. The Registrant is authorized under the Plan to issue
shares pursuant to the exercise of options with respect to a
maximum of 1,000,000 shares of the Registrant's $.01 par value
common stock and that the option exercise price be not less than
100% of the fair market value per share of the Registrant's
common stock on the date of grant. The shares to be issued under
the Plan will be currently authorized but unissued shares. (See
Note 6 of the accompanying Notes to the Consolidated Financial
Statements). No options were granted or exercised in fiscal year
1996.
The Registrant has a 401(k) plan. Approximately 35
employees participate in this contributory plan. The Company's
contributions relating to the 401(k) plan for fiscal year 1996
were approximately $4,600.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee to the Board of Directors of the
Registrant is made up of two directors, Dwight Geduldig and
Stanley Yakatan.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee believes that executive
compensation should be competitive and consistent with that
provided to other executives in for-profit health care companies
to assist the Company in attracting and retaining qualified
<PAGE>25
executives critical to the Company's long-term success.
When evaluating the compensation of the Named Officers the
Compensation Committee takes into account compensation that
should be commensurate with that paid to executives of other
comparably sized companies in the Company's industry based upon
the individuals experience and past and potential contribution to
the Company. The Committee reviews information regarding
executive salary and benefit levels for comparable companies
through various sources.
In addition to base salaries, the Committee has established
target incentive opportunities. Target goals reflect the
Company's performance expectations and support the attainment of
the Company's strategic, operational and financial goals. In
addition, the Committee believes that stock ownership by key
employees, including the executive officer, provides valuable
incentives for such persons who will benefit as the stock price
increases. To facilitate these objectives, options have been
granted to certain employees through the Company's stock option
plan.
During fiscal year 1996, 1995 and 1994, the President,
Chairman, and Chief executive Officer (Edward M. Young) was paid
pursuant an employment contract, which details these
philosophies. The Committee elected to award Mr. Young a cash
bonus of $25,000 for the fiscal year 1994 performance of the
Company.
Compensation Committee Dwight Geduldig
Stan Yakatan
<PAGE>26
<PAGE>
Performance Graph
Set forth below is a graph comparing cumulative total
stockholder return on the Company's Common Stock, the Nasdaq
Market Index and a Peer Group Index from January 31, 1991 through
January 31, 1996. Total return is based on an assumed investment
of $100 on January 31, 1991 and reinvestment of dividends through
January 31, 1996. The Peer Group Index consists of approximately
thirty medical laboratories (with SIC Code 8071). The returns of
each component issuer of the Peer Group have been weighted
according to each respective issuer's stock market
capitalization.
The Company's Preferred Stock has no established trading
market. The Company's Common Stock was de-listed from Nasdaq in
July 1992. The trading volumes of the Company's Common Stock
over the past five fiscal years have been extremely limited and
sporadic (approximately 100,000 shares per year). Management
believes that, due to these factors, a Common Stock price
performance graph may be misleading. In the Annual Report on
Form 10-K for the fiscal year ended January 31, 1993 the Company
did not include a performance graph.
<PAGE>27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following tables set forth certain information as of May
1, 1996, with respect to persons known by management to be the
beneficial owners of more than five percent of the common stock
or of the Registrant's preferred stock, par value $10 per share,
and with respect to certain officers and directors and all
officers and directors of the Registrant as a group.
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth the ownership at May 1, 1996 of
all persons who, to the knowledge of the Company, owned
beneficially more than 5% of Registrant's common stock or
preferred stock. Except to the extent indicated in the
footnotes, each of the stockholders listed below has sole voting
and investment power with respect to the shares listed opposite
such shareholder's name.
<TABLE>
<CAPTION>
Title of Name and Address Amount and Nature Percent of
Class of Beneficial Owner of Beneficial Owner Class
<S> <C> <C> <C>
Common Infotechnology, Inc. 733,597 Direct 16.4%
120 Wall Street 183,625 Indirect (1) 4.1%
New York, NY 10005
Questech Capital Corp. 1,491,720 Direct 33.3%
120 Wall Street
New York, NY 10005
Advanced Corporate 183,625 Direct 4.1%
Services, Inc.
9990 Lee Highway
Fairfax, VA 22030
Andrew M. Razo 604,518 Direct (2)(3)(4) 12.0%
Edward M. Young 459,000 Direct (5) 9.4%
Preferred Questech Capital Corp. 18,009 Direct 59.9%
</TABLE>
(1) Held by Advanced Corporate Services, Inc., an indirect
majority owned subsidiary of Infotech.
(2) Includes 31,922 shares owned by AMR Corp. of which Mr. Razo
is the owner.
(3) Includes option to purchase 556,133 shares, at $.50 per
share, by A.M. Razo & Company Capital Partners, Inc. of
which Mr. Razo is a Director.
(4) Includes 10,000 shares due for services as a Director.
(5) Includes 400,000 shares which may be acquired upon exercise
of presently exercisable options.
<PAGE>28
(b) Security Ownership of Management
The following table sets forth, as of May 1, 1995, the number of
shares of common stock beneficially owned by each director of the
Company and by all directors and officers as a group.
<TABLE>
<CAPTION>
Title Name and Address of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership(1) of Class
<S> <C> <C> <C>
Common Dwight M. Geduldig 45,000 (2) 1.0%
Alice H. Hendricks 63,667 (2) 1.4%
Eric W. Hoffman 75,000 (3) 1.6%
Andrew M. Razo 604,518 (4)(5) 12.0%
Liston Witherill 45,000 (2) 1.0%
Stanley Yakatan 70,000 (6) 1.6%
Edward M. Young 459,000 (7) 9.4%
All Executive Officers
and Directors as Group
(7 persons) 1,362,185 (8) 24.1%
</TABLE>
(1) All shares are held directly by the named individual
unless otherwise indicated.
(2) Includes 40,000 shares due for services as director of
the Registrant.
(3) Includes 75,000 shares which may be acquired upon
exercise of presently exercisable options.
(4) Includes 10,000 shares due for services as director of
the Registrant.
(5) Includes 31,922 shares and options (556,133 shares)
owned by AMR Corp., of which Mr. Razo is the owner and
A.M. Razo & Company Capital Partners, Inc. of which Mr.
Razo is the owner and majority shareholder, officer and
director, respectively.
(6) Includes 20,000 shares due for services as director of
the Registrant.
(7) Includes 400,000 shares which may be acquired upon
exercise of presently exercisable options.
(8) Includes 1,031,133 shares which may be acquired upon
exercise of presently exercisable options and 150,000
due for services as directors.
(c) The Registrant knows of no arrangements, including any
pledge by any person of Securities of the Registrant or any of
its parents, the operation of which may at subsequent date result
in a change in control of the Registrant, except for the right of
the Preferred Stock holders to elect a majority to the Board of
Directors due to the fact that Preferred dividends are in
arrears.
<PAGE>29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal year 1993, the Company recorded approximately
$12,000 of charges from Infotech for travel expenses incurred
prior to fiscal year 1993. As of January 31, 1995, approximately
$2,000 of such amount is included in the Company's due to
affiliates balance.
The Company was also charged approximately $6,000 for
equipment purchases and $2,000 for legal services in fiscal years
1994 and 1993, respectively, by Telecommunications Industries,
Inc. which is majority owned by Infotech.
In fiscal year 1993, the Company also recorded approximately
$21,000 of charges for management and financial services received
from an affiliate of Infotech, Advanced Corporate Services, Inc.
(ACS), which owns approximately 4% of the outstanding shares of
the common stock of the Company, and a wholly owned subsidiary of
Telecommunications Industries, Inc. These and other charges
from prior fiscal years totalling approximately $57,000 were
forgiven during fiscal year 1995.
Since the beginning of fiscal year 1993 non-management
directors earn, for each full fiscal year of service, their
choice of $2,000 or 10,000 shares of unregistered common stock of
the Company. Non-Management directors also earn $200 per each
meeting attended.
As of May 1, 1995, Infotech (a publicly held business
development company registered under the Investment Company Act
of 1940) is the beneficial owner, directly and indirectly, of
approximately 20% of the outstanding shares of the Company's
common stock. Questech, which was a wholly-owned subsidiary,
owns approximately 33% of the common and 60% of the Preferred
stock of the Company. Both Infotech and Questech filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code on
March 5, 1991.
<PAGE>30
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K
Page in
Form 10-K
(a) (1) Financial Statements
Report of Independent Certified
Public Accountants 32
Consolidated Balance Sheets at
January 31, 1996 and 1995 33
Consolidated Statements of Operations
for each of the three years in the
period ended January 31, 1996 34
Consolidated Statements of Capital
Deficiency for each of
the three years in the period
ended January 31, 1996 35
Consolidated Statements of Cash Flows
for each of the three years in the
period ended January 31, 1996 35
Notes to Consolidated Financial
Statements 38
(2) Financial Statement Schedules as of and
for each of the three years in the period
ended January 31, 1996
II - Valuation and Qualifying Accounts 49
Other schedules are omitted because they are not applicable
or the required information is not present in amounts sufficient
to require submission of the schedules, or the required
information is included in the Consolidated Financial Statements
or Notes thereto.
(3) Exhibits - See "Index to Exhibits" 50
<PAGE>31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN CYTOGENETICS, INC.
Dated: May 15, 1996 By /s/ Edward M. Young
Edward M. Young, President,
Chief Executive Officer, and
Chairman of the Board
By /s/ Eric W. Hoffman
Eric W. Hoffman
Chief Financial 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.
/s/ Dwight M. Geduldig Director Dated: May 15, 1996
Dwight M. Geduldig
/s/ Alice H. Hendricks Director Dated: May 15, 1996
Alice H. Hendricks
/s/ Andrew M. Razo Director Dated: May 15, 1996
Andrew M. Razo
/s/ Liston Witherill Director Dated: May 15, 1996
Liston Witherill
/s/ Stanley Yakatan Director Dated: May 15, 1996
Stanley Yakatan
<PAGE>32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Cytogenetics, Inc.
We have audited the accompanying consolidated financial statements of
American Cytogenetics, Inc. and subsidiaries as of January 31, 1996
and 1995 and the related consolidated statements of operations,
capital deficiency and cash flows for each of the three years in the period
ended January 31, 1996. We have also audited the schedule listed in the
accompanying index for each of the three years in the period ended January
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standard. Those standards require that we plan and perform audits to
obtain reasonable assurance about whether the financial statements and
schedule are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting that amounts and
disclosures in the financial statements and schedule. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. 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 American Cytogenetics, Inc. and subsidiaries as of January 31,
1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
January 31, 1996, in conformity with generally accepted accounting
principles.
Also in our opinion, the schedule as of January 31, 1996 and for each
of the three years in the period ended January 31, 1996 presents fairly,
in all material respects, the information set forth therein.
The accompanying consolidated financial statements and schedule have
been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial
statements, the Company has suffered recurring losses from operations
and has negative working capital of $852,060 and a net capital
deficiency of $1,095,262. The Company has also been slow and is
delinquent in paying its accounts payable and other obligations. These
factors raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements and schedule do not
include any adjustments that might result from the outcome of this
uncertainty.
BDO Seidman, LLP
Los Angeles, California
May 1, 1996
<PAGE>33<PAGE>
AMERICAN CYTOGENETICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Balance Sheets, January 31, 1996 and 1995
ASSETS (Note 5) NOTES 1996 1995
CURRENT ASSETS:
<S> <C> <C> <C>
Cash and cash equivalents 1 $ 19,503 $ 35,279
Receivables: 1,12
Trade, net of allowance for
doubtful accounts and contractual
allowances of $215,248 and $405,208
in 1996 and 1995 585,607 775,568
Supplies 1 48,042 49,020
Prepaid expenses 85,388 101,889
---------- ----------
Total current assets 738,540 961,756
EQUIPMENT AND IMPROVEMENTS, AT COST,
NET OF ACCUMULATED DEPRECIATION
AND AMORTIZATION 1,3 253,154 211,679
CUSTOMER LIST, NET OF AMORTIZATION OF
$38,471 AND $7,694 IN 1996 AND
1995 115,416 146,193
DEPOSITS AND OTHER ASSETS 17,008 18,933
--------- --------
TOTAL ASSETS $1,124,118 $1,338,561
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets, January 31, 1996 and 1995 (continued)
LIABILITIES AND
CAPITAL DEFICIENCY NOTES 1996 1995
<S> <C> <C> <C>
CURRENT LIABILITIES:
Cash overdraft 83,509 0
Accounts Payable and short term debt 743,867 557,462
Short-term debt 5,000 0
Current portion of long-term debt
and IRS obligation 5 87,455 68,429
Current portion of capital leases 5 43,647 0
Due to affiliates 9 109,098 42,619
Other current liabilities 4 518,024 566,335
------------ -----------
Total current liabilities 1,590,600 1,234,845
LONG-TERM DEBT AND IRS OBLIGATION,
LESS CURRENT PORTION 5 603,780 690,105
OTHER LIABILITIES 13 25,000 25,000
------------ ------------
TOTAL LIABILITIES 2,219,380 1,949,950
COMMITMENTS AND CONTINGENCIES 2,8,11,13
CAPITAL DEFICIENCY 6,7
Preferred stock, $10 par value -
authorized 300,000 shares;
32,988 shares issued (liquidation
value $528,854 and $501,868
in 1996 and 1995) 329,880 329,880
Common stock, $.01 par value -
authorized 20,000,000 shares;
4,540,499 shares issued 45,405 45,405
Additional paid-in capital 3,803,227 3,803,227
Accumulated deficit (5,196,928) (4,713,055)
Less treasury stock, at cost:
Preferred, 2,900 shares (12,292) (12,292)
Common, 59,476 shares (64,554) (64,554)
------------ -----------
NET CAPITAL DEFICIENCY (1,095,262) (611,389)
------------ ----------
TOTAL LIABILITIES
AND CAPITAL DEFICIENCY $1,124,118 $1,338,561
======= =======
</TABLE>
<PAGE>34
<PAGE>
AMERICAN CYTOGENETICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1996
NOTES 1996 1995 1994
<S> <C> <C> <C> <C>
Revenues 1,12 $4,681,897 $5,453,641 $5,280,135
Costs and expenses:
Production 3,359,012 3,876,701 3,624,573
Selling and marketing 276,762 349,832 371,449
General and administrative 1,434,665 1,378,514 1,303,537
------------ ------------ -----------
Total costs and expenses 5,070,439 5,605,047 5,299,559
------------ ------------ -----------
Operating loss (388,542) (151,406) (19,424)
Interest expense (95,331) (53,792) (84,229)
Other income 14 120,000
------------ ------------ -----------
Net income (loss) (483,873) (205,198) 16,347
======= ====== ======
Preferred dividend requirements 27,079 27,079 27,079
------------ ------------ -----------
Net loss applicable to common shares $(510,952) $(232,277) $ (10,732)
======= ======= ======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 4,481,023 4,481,023 3,851,419
======= ======= =======
NET LOSS PER
COMMON SHARE 1 $ (0.11) $ (0.05) $ 0.00
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>35
AMERICAN CYTOGENETICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1996
Preferred Stock Capital Stock
Shares Amount Shares Amount
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
Balance,
January 31, 1993 32,988 329,880 3,444,800 34,448
Issuance of shares in private
placement for cash, net of
offering expenses (Note 7) 1,223,494 12,235
including 111,227 shares and
$33,368 to a related party (Note 9)
Redemption of shares (note 15) (127,795) (1,278)
Net Income
Balance,
January 31, 1994 32,988 329,880 4,540,499 45,405
Net loss
Balance
January 31, 1995 32,988 329,880 4,540,499 45,405
Net loss
Balance,
January 31, 1996 32,988 $329,880 4,540,499 $45,405
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1996
(continued)
Paid-In Accumulated
Capital Deficit
----------- ---------------
<S> <C> <C>
Balance,
Janaury 31, 1993 3,607,953 (4,524,204)
Issuance of shares in private
placement for cash, net of
offering expenses (Note 7) 293,996
including 111,227 shares and
$33,368 to a related party (Note 9)
Redemption of shares (note 15) (98,722)
Net Income 16,347
Balance,
January 31, 1994 3,803,227 (4,507,857)
Net loss (205,198)
Balance
January 31, 1995 3,803,227 (4,713,055)
Net loss (483,873)
Balance,
January 31, 1996 $3,803,227 ($5,196,928)
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1996
(continued)
---------Treasury Stock-------------
Preferred Stock Capital Stock
Shares Amount Shares Amount Total
-------- --------- ----------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Balance,
Janaury 31, 1993 (2,900) (12,292) (59,476) (64,554) (628,769)
Issuance of shares in private
placement for cash, net of
offering expenses (Note 7) 306,231
including 111,227 shares and
$33,368 to a related party (Note 9)
Redemption of shares (note 15) (100,000)
Net Income 16,347
Balance,
Janaury 31, 1994 (2,900) (12,292) (59,476) (64,554) (406,191)
Net loss (205,198)
Balance
Janaury 31, 1995 (2,900) (12,292) (59,476) (64,554) (611,389)
Net loss (483,873)
Balance,
Janaury 31, 1996 (2,900) ($12,292) (59,476) ($64,554) ($1,095,262)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>36
AMERICAN CYTOGENETICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1996
1996 1995 1994
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(483,873) $(205,198) $ 16,347
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 98,591 64,772 66,060
Provision for losses on trade
accounts receivable 47,007 164,589 152,390
Write off of goodwill
Interest costs 19,800 41,251
Gain on settlement of lease (120,000)
Changes in operating assets and liabilities:
Trade receivables 142,954 (184,368) (235,799)
Supplies 978 14,380 (21,660)
Other assets 18,426 (57,741) 11,966
Accounts payable 186,405 48,571 44,445
Due to affiliates 66,479 (45,167) 6,246
IRS obligation (60,729) (5,142) (25,492)
Other liabilities (48,311) 109,200 95,429
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (12,273) (54,853) (10,068)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and improvements (9,194) (126,467) (85,702)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in cash overdraft 83,509 (61,574)
Increase in borrowing from bank 35,048
Increase in borrowing from affiliate 5,000
Repayment of debt (26,370) (16,509) (3,088)
Payment of capital lease obligations (56,448) (12,531) (15,644)
Proceeds from sale of common stock 378,733
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 5,691 (29,040) 333,475
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (15,776) (210,360) 237,705
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 35,279 245,639 7,934
---------- ---------- ---------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 19,503 $ 35,279 $245,639
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>37
AMERICAN CYTOGENETICS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JANUARY 31, 1996
(Continued)
1996 1995 1994
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 95,331 $ 12,541 $ 95,735
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Offering costs related to private
placement of Common Stock $ 72,500
Reversal of accrued liability as part
of settlement of lease $120,000
Purchase of assets, including customer
list, with long-term debt $173,887
Purchase of computer hardware with
capitalized lease $100,095
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>38
AMERICAN CYTOGENETICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ACTIVITIES
Principles of Consolidation - The consolidated financial statements
include the accounts of American Cytogenetics, Inc. ("the Company"), and
its wholly-owned subsidiaries, Cancer Screening Services ("CSS"), Cancer
Screening Services (Missouri) ("CSSM"), Diagenetic Laboratories, Inc. and
Astra-Med Laboratories, Inc., the latter two of which are inactive. CSSM
was formed in October 1994 to acquire certain assets of Cytology
Laboratories, Inc. for long-term debt. All significant intercompany
accounts and balances have been eliminated in consolidation.
The Company's principal shareholder is Questech Capital Corporation
("Questech"), which was wholly-owned by Infotechnology, Inc.
("Infotech"). Infotech beneficially owns approximately 20% of the common
stock of the Company. Questech owns 33% of the common and 60% of the
preferred stock of the Company. On March 5, 1991, both Infotech and
Questech filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code.
Business Activities - The Company is engaged in the operation of
clinical laboratories that primarily prepare and screen microscopic
slides and prepare cytopathology reports in connection with the early
detection of cancer and other diseases. The Company's customers are
located throughout the United States.
Supplies - Supplies are valued at the lower of cost ("first-in, first-
out") or market.
Equipment and Improvements - Equipment and improvements are carried at
cost and are depreciated on a straight-line basis over estimated useful
lives or terms of leases in the case of leasehold improvements, ranging
from 2 to 10 years.
Customer List - Customer list is carried at cost and is amortized over
its estimated useful life, which is 5 years.
Income Taxes - The Company uses Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes." Under SFAS
109, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Income (Loss) per Common Share - Income (loss) per common share is
computed by dividing the net income or loss for each year, adjusted for
required preferred stock dividends, by the weighted average number of
common shares outstanding. Income (loss) per common share does not
provide for the effects of shares issuable contingent upon the exercise
of stock options because the effect would be immaterial or antidilutive.
Cash Equivalents - The Company considers all highly liquid instruments
purchased with original maturity dates of three months or less to be cash
<PAGE>39
equivalents.
Revenue Recognition - Revenue is recognized when services are rendered
and is recorded net of contractual allowances. The Company derives a
portion of its business from Federal and State medical assistance
programs. Approximately 4% of total gross revenues for each of the
fiscal years 1996, 1995 and 1994 was derived from such programs. The
Company provides an allowance for the difference between the Company's
standard charges and expected reimbursement from these programs.
Financial Statement Presentation - Certain reclassifications have been
made to the fiscal 1995 and 1994 financial statements to conform to the
current year's presentation.
Use of Estimates - The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that effect the
reported amounts of assets, liabilities, revenues and expenses at the
date and for the periods that the financial statements are prepared.
Actual results could differ from those estimates.
New Accounting Pronouncements - Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of" (SFAS No. 121) issued by the
Financial Accounting Standards Board is effective for financial
statements for fiscal years beginning after December 15, 1995. The new
Standard established new guidelines regarding impairment losses on long-
lived assets, which include plant and equipment, certain identifiable
assets and goodwill, that should be recognized and how impairment losses
should be measured. The Company does not expect adoption to have a
material effect on its financial position or results of operations.
Statement of Accounting Standards No.123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) issued by the Financial Accounting Standards
Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later
than December 15, 1995. The new standard establishes a fair value method
of accounting for stock-based compensation plans and for transactions in
which an entity acquires goods and services from non employees in
exchange for equity instruments. At the present time, the Company has
not determined if it will change accounting policy for stock based
compensation or only provide the required financial statement
disclosures. As such the impact on the Company's financial position and
results of operations is currently unknown. The Company does not expect
adoption to have a material effect on its financial position or results
of operations.
Disclosure about Fair Value of Financial Instruments - The following
disclosure of the estimated fair value of financial instruments is made
<PAGE>40
in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts
have been determined by the Company, using available market information
and appropriate valuation methodologies. However, considerable judgment
is required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount that the Company could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
Cash and Equivalents - The carrying value of cash and equivalents
approximates fair value due to short maturities of these instruments.
Receivables - The carrying amounts of the receivables approximate fair
value due to the short maturity of these instruments.
Due to Affiliates - Management was not able to practicably estimate fair
value of the amounts due to affiliates due to the related party nature of
these amounts owed and the lack of comparable market rates and terms for
similar unsecured debt between affiliated companies (See Note 9).
Long-term Debt - The carrying amount of long-term debt approximates fair
value based on current rates offered to the Company for debt with similar
collateral, if any and maturities.
The fair value estimates presented herein are based on pertinent
information to management as of January 31, 1996. Although management is
not aware of any factors that would significantly affect the estimated
fair value amounts, such amounts have not been comprehensively revalued
for purposes of these financial statements since that date, and current
estimates of fair value may differ significantly from the amounts
presented herein.
2. GOING CONCERN
The Company has incurred losses from operations for the past three years,
has negative net working capital of $852,060 and a capital deficiency of
$1,095,262. The Company has also been slow and is delinquent in paying
its accounts payable and other obligations. In addition, the Internal
Revenue Services ("IRS") has established a lien against the assets of the
Company for repayment of overdue payroll taxes and related penalties and
interest. In addition, the Company has been slow in making employee
contribution payments to its 401(k) savings plan. (See Note 13). These
factors raise substantial doubt about the Company's ability to continue
as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of
these uncertainties.
In the past, the Company received infusions of working
capital from Infotech and Questech to meet liquidity needs, when
necessary. Due to the financial difficulties experienced by
these major shareholders the Company had not been able to utilize
Infotech and Questech as working capital resources in the past
five fiscal years. However, subsequent to the end of fiscal year
1996 the Company borrowed $250,000, on a short term basis, to
fund operational cash flow shortages from Questech. No
assurances can be given that Questech will be available to
advance cash to the Company in the future.
In addition, as a result of California regulations being more stringent
than those of other states, the Company has been at a competitive
disadvantage in its traditional primary market. Management's response to
<PAGE>41
this situation has been to seek opportunities to establish and/or acquire
laboratories in states with more favorable cost and productivity
structures. Further, the Company's history of losses and the IRS lien
have inhibited the Company's borrowing ability to address cash flow
shortages and to modernize its aging laboratory information system. In
response to this situation, management has pursued and continues to
pursue financing through the sale of stock and other alternatives. In
fiscal year 1995, the Company has implemented key aspects of its overall
plans by (1) establishing its Missouri laboratory and (2) entering into
an agreement to obtain a new laboratory information system. However, as a
result of a reduction in test volume from its largest customer during
fiscal year 1996 the Company ceased operations in its Missouri facility.
Tests being processed by the Missouri facility are now being processed by
the California facility. Management continues to pursue cost reductions
as well as to renegotiate a more favorable settlement of the IRS
obligation.
The Company's contract with the County expires on June 30, 1997.
Publicly reported announcements indicate that the County is re-assessing
the structure of its health acre delivery system. Management is unable
to predict the impact of these activities on its business at this time.
The continuation of the Company as a going concern is dependent upon its
ability to implement management's plans.
In December 1995 the Company entered into a letter of intent among Nu-
Tech Bio-Med, Inc. ("NTBM") and the Company's controlling shareholder,
Infotechnology, Inc. ("Infotech") and two of its subsidiaries, Questech
Capital Corporation ("Questech") and Advanced Corporate Services, Inc.
("ACS"). Pursuant to the letter of intent the Company, subject to the
completion of a definitive agreement, will sell shares of previously
unissued common stock of the Company to NTBM for $300,000. In addition,
Infotech, Questech and ACS will sell their ownership of the Company's
common and preferred stock to NTBM for a combination of cash and NTBM
common stock. Upon completion of the transaction, NTBM will become the
controlling shareholder of the Company's common and preferred stock
owning 80% and 60% respectively. No assurance can be given that such
transaction will occur in the future as the transaction requires the
completion of due diligence procedures and consent of the Company,
Infotech, Questech, ACS and NTBM.
<PAGE>42
3. EQUIPMENT AND IMPROVEMENTS
<TABLE>
<CAPTION>
Equipment and improvements consist of the following:
.... January 31, ....
1996 1995
<S> <C> <C>
Furniture and equipment, including
$161,934 relating to capital leases $501,196 $391,907
Purchased software 120,361 120,361
Leasehold improvements 39,725 39,725
----------- -----------
661,282 551,993
Less accumulated depreciation and
amortization, including $66,844
relating to capital leases 408,128 340,314
----------- -----------
$253,154 $211,679
====== ======
</TABLE>
4. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
.... January 31, ....
1996 1995
<S> <C> <C>
Accrued payroll $104,846 $129,369
Accrued vacation 78,640 88,004
Accrued bonus payable 42,613 67,613
Fringe benefits & deferrals 111,155 69,839
Accrued registration costs 46,694 46,694
Accrued malpractice expenses 49,064 50,500
Other 85,012 114,316
--------- -----------
$518,024 $566,335
====== ======
</TABLE>
<PAGE>43<PAGE>
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, INCLUDING AMOUNT
DUE TO
THE INTERNAL REVENUE SERVICE ("IRS")
<TABLE>
<CAPTION>
Long-term debt and capital lease obligations, including amount due to the
IRS, consist of the following:
.... January 31, ....
1996 1995
<S> <C> <C>
Settlement with the IRS, payable in monthly
installments of $10,000, through May 2000
with an effective interest rate of 12% $505,379 $566,108
Equipment loans payable to a bank in monthly
installments and bearing interest at 5.75%
to 6.75% 0 16,619
Capitalized lease obligation, payable in monthly
installments and bearing interest at 16%,
through June 1996 43,647 0
Obligations to the prior owner of certain
assets purchased payable monthly, based on
certain gross receipts, as defined
through December 1999 185,856 175,807
----------- -----------
Total 734,882 758,534
Less current portion 131,102 68,429
---------- -----------
Long-term debt and capital lease obligations,
including amount due to the IRS $603,780 $690,105
====== ======
</TABLE>
Aggregate maturities of the above debt and amount due to the IRS per fiscal
year through maturity are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $203,754
1998 174,900
1999 196,500
2000 192,975
2001 120,000
thereafter 81,931
-----------
Total minimum payments $970,060
Less interest portion (235,178)
-----------
$734,882
======
</TABLE>
On May 12, 1992, the Company negotiated an informal installment agreement
with the IRS on a payment plan for $525,000 of unpaid payroll taxes,
interest and penalties. The IRS has established a lien against the
Company's assets for repayment of this liability.
<PAGE>44<PAGE>
6. CAPITAL DEFICIENCY
Preferred Stock - Each share of 9% cumulative preferred stock gives
holders voting rights equivalent to those holders of the Company's common
stock. The Company has the right to redeem all or part of its outstanding
preferred shares at any time at their par value of $10 per share plus
dividends in arrears. Cumulative undeclared dividends in arrears at
January 31, 1996 aggregated $227,974, or $7.58 per share. The holders of
Preferred Stock have the right to elect a majority to the Board of
Directors because Preferred Stock dividends are in arrears.
Common Stock Options - Pursuant to the 1989 Stock Option Plan on February
9, 1989, the Board of Directors approved the issuance of options to
purchase an aggregate of 93,000 shares of common stock of the Company at
the then fair value for employees of the Company. These options vested
over a three-year period beginning February 9, 1989, are exercisable at
$.625 per share, and expire five years from the date of vesting or sixty
(60) days from termination of employment. As of January 31, 1996, 82,000
of such options were cancelled, and options for 11,000 shares are
outstanding and exercisable.
Pursuant to the 1989 Stock Option Plan on December 11, 1989, the Board of
Directors approved the issuance of options to purchase an aggregate of
42,000 shares of common stock at the then fair market value for employees
of the Company. Options vest over a three-year period beginning December
11, 1989, expire ten years from date of grant or sixty (60) days from
termination of employment, and are exercisable at $.875 per share. At
January 31, 1996, 21,000 of such options were canceled and 21,000 options
are outstanding and exercisable.
Pursuant to the 1989 Stock Option Plan on December 14, 1992, the Board of
Directors approved the issuance of options to purchase an aggregate of
475,000 shares of common stock at the then fair market value for employees
of the Company, (400,000 of such options were issued to the President of
the Company consistent with his employment agreement). Options vest over
a two year period, expire eight years from the date of grant or 90 to 240
days from termination of employment, and are exercisable at $.375 per
share. At January 31, 1996, 475,000 of these options were outstanding and
exercisable.
In summary, pursuant to the 1989 Stock Option Plan at January 31, 1996,
507,000 options were outstanding and exercisable at prices from $.375 to
$.875 per share.
7. SALE OF STOCK
In July 1993, the Company issued 930,160 unregistered previously unissued
shares of its common stock for proceeds of $286,733, net of finders fees
and legal costs amounting to $62,078. Two members of the Company's Board
of Directors were designated by the finder corporation. In addition,
subsequent to that date, the Company received an additional $92,000, net
<PAGE>45
of finders fees and legal costs of $18,000, under similar terms for 293,334
shares of unregistered common stock. The Company has accrued approximately
$47,000 for estimated charges associated with registration of these
aforementioned issued shares. Such amount is recorded as a reduction to
the proceeds in additional paid-in capital. As part of the sales, options
were issued to A M Razo and Company Capital Partners, Inc., of which Mr.
Andrew Razo, a director of the Company, is a majority shareholder, officer
and director, for the purchase of up to an additional 556,133 unregistered
shares of common stock at a price of $0.50 per share.
8. LEGAL PROCEEDINGS
The Company's laboratories, in the ordinary course of business, are subject
on occasion to legal claims alleging improper reporting or misdiagnosing
of specimens. The Company believes such claims are adequately covered by
claims made insurance provided by a commercial insurance carrier, subject
to a deductible per occurrence, and has accrued an adequate amount for
retained risk.
On August 11, 1992, a complaint was filed, Mary Lou Back v. American
Cytogenetics, et al., Case No. BC061917, in the Superior Court of
California for the County of Los Angeles, against the Company, Cancer
Screening Services ("CSS"), Earl Brian, Alice Hendricks, Liston Witherill,
Allan Tessler, Gary Prince, and Dwight Geduldig. Each of the individually
named defendants, except Allan Tessler, are members of the Board of
Directors of the Company. The complaint alleges that Ms. Back, who was
employed as President and Chief Executive Officer of the Company and CSS
from May 1990 to January 1992, was wrongfully terminated in violation of
public policy and various other reasons. The complaint seeks damages in
an amount in excess of $200,000 plus punitive damages and indemnification
from Internal Revenue Service ("IRS") assessments against Back for taxes
not paid by CSS. In October 1993 the Court granted the Company's motion
to dismiss Back's claim for indemnification and on March 22, 1994 the Court
granted the Company's motion for summary adjudication of Back's remaining
claims. Back's subsequent request for reconsideration of the summary
adjudication order has been denied. Back has filed a Notice of Appeal.
The Company has vigorously defended the action and is unable to predict the
outcome at this time.
9. RELATED PARTY TRANSACTIONS
The Company was charged approximately $6,000 for equipment purchases and
$2,000 for legal services during fiscal years 1995 and 1994 by an Infotech
investee, Telecommunications Industries, Inc. (TII), which is majority
owned by Infotech. Further, during fiscal year 1996, an unrelated party
purchased approximately $100,000 of computer hardware from TII. This
equipment was leased to the Company under a capitalized lease at 16% with
monthly payments for 16 months.
The Company was also charged approximately $21,000 in fiscal year 1993 by
an Infotech investee, Advanced Corporate Services (ACS), which owns
<PAGE>46
approximately 4% of the outstanding shares of the common stock of the
Company for management and financial services. These and other charges
from prior fiscal years totaling approximately $57,000 were forgiven during
fiscal year 1995.
In fiscal year 1996 and 1995, the Company was charged a total of $4,000 and
$16,000, respectively, from Fiscal Management, Inc. ("FMI") and Price
Associates, two companies majority owned by Gary A. Prince, a former
director of the Company, for financial services. Eric Hoffman, an officer
of the Company, was at one time in the past an officer and part owner of
FMI. As of January 31, 1995, $2,000 due was included in the Company's due
to affiliates balance.
During fiscal year 1996 and 1995 the Company paid to A. M. Razo &
Associates Capital Partners, Inc. (AMR) $11,006 and $5,000, respectively,
for assistance in locating financing for the Company. Andrew M. Razo, a
director of the Company, is an owner and officer of AMR.
At January 31, 1996, 1995 and 1994 directors and officers were due
approximately $41,200, $33,200 and $28,000 for directors fees.
10. INCOME TAXES
At January 31, 1996, the Company has net operating loss carryforwards of
approximately $2,700,000 and $700,000 for federal and State income tax
purposes which expire at various dates through 2011 and 2000, respectively.
Additional limitations on the use of carryfowards may arise if certain
ownership changes occur. The loss carryfowards and certain other temporary
differences give rise to a deferred tax asset of $1,148,000. This asset
has a 100% valuation allowance as the Company cannot determine if it more
likely than not the deferred tax asset will be realized.
11. COMMITMENTS
The Company is obligated under operating leases for office, laboratory
facilities, and office equipment. The leases expire through fiscal 2001
and have purchase or renewal options in some instances. Rent expense under
operating leases amounted to $138,939, $143,352, and $182,155 in fiscal
years 1996, 1995, and 1994, respectively. Future minimum lease payments
at January 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year:
1997 164,580
1998 178,980
1999 189,480
2000 95,280
2001 11,715
--------
Total minimum payments $640,035
======
</TABLE>
In addition, to its lease obligations, the Company has an employment
agreement with its President and Chief Executive Officer, Edward M. Young.
The agreement with Mr. Young terminates upon his death, incapacity or
<PAGE>47
misconduct. The contract also may be terminated by either Mr. Young or the
Company with 90 days notice. The agreement provides for a base salary of
$115,000 annually and annual bonuses of up to 40% of the base salary
dependent on the achievement of certain objectives. The agreement also
grants Mr. Young 400,000 options. The Company is obligated to pay
severance to Mr. Young or his heirs of up to 12 months base pay, depending
on the cause for termination of the agreement.
12. SIGNIFICANT CUSTOMERS AND TRADE RECEIVABLES COMPOSITION
The Company had sales of approximately $1,050,000, $1,280,000 and
$1,390,000 to a single customer during fiscal years 1996, 1995, and 1994.
The Company had sales of approximately $0, $490,000 and $550,000 to another
single customer during fiscal years 1996, 1995 and 1994, respectively.
This customer's annual contract with the Company terminated in December
1994 and was not renewed. No other single customer was responsible for
more than 10% of the Company's consolidated sales for these periods. The
Company's contract with its largest customer expires on June 30, 1997.
Publicly reported announcements indicate that the County is re-assessing
the structure of its health acre delivery system. Management is unable to
predict the impact of these activities on its business at this time.
Trade receivables, net of allowance for doubtful accounts and contractual
allowances of $215,248 and $405,208 in fiscal years 1996 and 1995 consist
of the following:
<TABLE>
<CAPTION>
... January 31, ...
1996 1995
<S> <C> <C>
Health care providers $420,850 $461,926
Patients and insurance companies 131,062 217,921
Medicare, Medicaid, and
other 3rd party payers 33,695 93,136
Other 0 2,585
----------- -----------
$585,607 $775,568
====== ======
</TABLE>
13. SAVINGS PLAN
The Company has a voluntary 401(k) savings plan covering substantially all
employees. Payments to the plan trust of the employees' contributions have
been delinquent and at times were made beyond the time allowed by the plan
or federal law. Due to limited cash flows, the Company utilized the
employees deferred compensation for a short period. The Company's 401(k)
plan is under review by the Department of Labor and the IRS. Management
is cooperating in these reviews and does not expect the result will affect
the financial condition of the Company. The Company at times has elected
to contribute on behalf of all eligible participants an amount equal to
twenty-five percent of their first one thousand dollars contributed per
plan year. All participants are fully vested after five years of service.
The Company contributions were approximately $4,600, $4,400, and $6,500 in
fiscal years 1996, 1995 and 1994, respectively.
<PAGE>48
14. GAIN ON LEASE SETTLEMENT
The Company was party to a 7-year lease beginning in January 1989 for which
it ceased making payments to the lessor during May 1992. In fiscal year
1993, the Company recorded a loss estimate of $150,000 representing the
estimated amount to ultimately settle the lease. The Company successfully
negotiated a settlement agreement with the lessor outside of the terms of
the lease agreement in July 1993. As a part of the settlement agreement,
the lessor released the Company from all obligation of past and future rent
due under the lease in return for a payment of $30,000. The lessor also
returned approximately 128,000 shares of the Company's unregistered common
stock which was held in escrow as collateral pursuant to the lease
agreement. As a result of the settlement, the Company revised its loss
estimate and recorded a $120,000 gain in fiscal year 1994.
15. SUBSEQUENT EVENTS
In March 1996, the Company signed a Note and Security Agreement with
Questech Capital Corporation ("Questech"), a majority shareholder of the
Company's common and preferred stock, allowing advances to the Company of
up to $250,000. Between March and April 1996, the Company had received
advances totaling $250,000 pursuant to the agreement to fund operations of
the Company. The Note and Security Agreement is secured by all the assets
of the Company, requires monthly interest payments at 12% annual interest
and is due and payable on September 30, 1996.
<PAGE>49
<PAGE>
AMERICAN CYTOGENETICS, INC. AND SUBSIDIARIES SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER DEDUCTIONS AT END
TYPE OF PERIOD EXPENSES ACCOUNTS (A) DESCRIBE (B) OF PERIOD
- ------- --------------- -------------- -------------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts and
contractual allowances on
trade accounts receivable
1996 $405,208 $ 47,007 $869,447 $1,106,414 $215,248
1995 $254,809 $164,589 $852,474 $ 866,664 $405,208
1994 $255,011 $152,390 $471,479 $ 624,071 $254,809
</TABLE>
(A) Includes contractual discounts charged directly against revenue.
(B) Includes uncollectible accounts written off and contractual discounts
taken.
<PAGE>50
INDEX TO EXHIBITS
Page
No. Reference
3.1 Articles of Incorporation and
By-laws (incorporated by reference
to the Registrant's Annual Report
on Form 10-K for the fiscal year
ended January 31, 1983).
10.1 Lease agreement , dated July 27,
1984, between CSS and the Estate
of Herman J. Cohen, Deceased, on
property located at 6440 Coldwater
Canyon Avenue, North Hollywood,
California (incorporated by reference
to the Registrant's Annual Report
on Form 10-K for the fiscal year
ended January 31, 1985).
10.2 Agreement, dated January 2, 1989,
between Registrant and Advanced
Corporate Services, Inc. (incorporated
by reference to the Registrant's
Annual Report on Form 10-K for the
fiscal year ended January 31, 1989).
10.3 Lease agreement, dated January 13,
1989 , among Garret Mountain Office
Center Associates I and Registrant,
on property located at Three Garret
Mountain Plaza, West Paterson, New
Jersey (incorporated by reference
to the Registrant's Annual Report
on Form 10-K for the fiscal year ended
January 31, 1989).
10.4 Escrow agreement, Dated March 17,
1989, among Registrant, Garret
Mountain Office Center Associates-I,
and Midlantic National Bank (incorp-
rated by reference to the Registrant's
Annual Report on From 10-K for the
fiscal year ended January 31, 1989).
10.5 Registrant's promissory note dated
June 22, 1989 payable to TransWorld
Bank (incorporated by reference to the
Registrant's Annual Report on
Form 10-K for the fiscal year ended
January 31, 1991).
<PAGE>51
INDEX TO EXHIBITS
Page
No. Reference
10.6 Registrant's promissory note dated
November 18, 1989, payable to
TransWorld Bank (incorporated by
reference to the Registrant's Annual
Report on Form 10-K for the fiscal
year ended January 31, 1990).
10.7 Employment agreements between the
and Mary L. Back and Gordon H. Miller
(incorporated by reference
to the Registrant's Annual Report
on Form 10-K for the fiscal year
ended January 31, 1990).
10.8 Registration Statement on Form S-8
(no. 33-14838) of the Registrant
(incorporated by reference to the
Registration Statement.
22.1 Subsidiaries of the Registrant 52
24.2 Consent of Independent Accountants 53
<PAGE>52
Exhibit 22.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Name Incorporation Ownership
<S> <C> <C>
Astra-Med Laboratories, Inc. California 100%
Cancer Screening Services, Inc. California 100%
Cancer Screening
Services (Missouri), Inc. Missouri 100%
Diagenetic Laboratories, Inc. New York 100%
</TABLE>
<PAGE> 53
Exhibit 24.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American Cytogenetics, Inc.
We consent to the incorporation by reference of our report, which includes an
explanatory paragraph disclosing that there is substantial doubt about the
Company's ability to continue as a going concern, dated May 1, 1996, on our
audit of the consolidated financial statements and the financial statement
schedule of American Cytogenetics, Inc. included in this Annual Report on
Form 10-K, into the Company's previously filed registration statement on
Form S-8 (Registration No. 33-42108).
BDO Seidman, LLP
Los Angeles, California
May 14, 1996
